UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2005.
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-30563
DELTA MUTUAL, INC.
(Name of small business issuer in its charter)
DELAWARE 14-1818394
--------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 North Branch Street, Sellersville, Pennsylvania 18960
(Address of principal executive offices) (Zip Code)
---------------------------------------------
(Former Address)
(215) 258-2800
(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK (par value $0.0001 per share)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to the filing requirements for the past 90 days. Yes |X| No |_|
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Issuer's revenue for its fiscal year ended December 31, 2005: $20,000.
Aggregate market value of the voting and non-voting common shares held by
non-affiliates of the registrant as of March 30, 2006: $4,780,155 (See Item 5)
Number of shares outstanding of registrant's Common Stock, par value
$.0001, as of March 30, 2006: 40,034,629 shares of Common Stock (See Item 11)
Documents incorporated by reference: NONE
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
PART I
NOTE REGARDING FORWARD LOOKING STATEMENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report contains historical information as well as
forward-looking statements. Statements looking forward in time are included in
this Annual Report pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Such statements involve known and
unknown risks and uncertainties that may cause our actual results in future
periods to be materially different from any future performance suggested herein.
We wish to caution readers that in addition to the important factors described
elsewhere in this Form 10-KSB, the following forward-looking statements, among
others, sometimes have affected, and in the future could affect, our actual
results and could cause our actual consolidated results during 2006, and beyond,
to differ materially from those expressed in any forward-looking statements made
by or on our behalf.
Forward-looking statements include, but are not limited to, statements
under the following headings; (i) "Business Plan," about the development of
certain projects and business opportunities and the Company's attempts to
convert these plans and opportunities into operating businesses that generate
revenues and profits; (ii) "Business Plan," about the intentions of the Company
to fund its businesses and operations by borrowings and the successful placement
of debt and equity financings; (iii) "Results of Operations"; (iv) "Liquidity
and Capital Resources," about the Company's plan to raise additional capital;
and (v) "Liquidity and Capital Resources," about the contingent nature of the
consummation of any agreements with its contracting, joint venture and
partnership parties.
ITEM 1. DESCRIPTION OF BUSINESS
Unless the context otherwise requires, the terms "the Company," "we," "our" and
"us" refers to Delta Mutual, Inc., and, as the context requires, its
consolidated subsidiaries.
GENERAL
We were incorporated under the name Delta Mutual, Inc. on November 17, 1999, in
the State of Delaware. We have established business operations focused on
providing environmental and construction technologies and services to specific
geographic reporting segments in the Far East, the Middle East, the United
States and Puerto Rico.
Our offices are located at 111 North Branch Street, Sellersville, PA 18960. Our
telephone number is (215) 258-2800. Our common stock is quoted on the
Over-the-Counter Electronic Bulletin Board under the symbol "DLTM".
Prior Operations
At the time of the Company's formation, prior Company management intended to
provide mortgage services through the Internet to borrowers with substandard
credit. However, from inception through December 31, 2002, prior to initiating
our current plan of operations, we were only able to raise a limited amount of
capital through the sale of our common stock. These funds were not sufficient to
capitalize any of our planned business activities in that period.
4
In April 2001, Kelcon, Inc. ("Kelcon"), a company newly organized for the
purpose by Kenneth A. Martin, acquired a controlling interest in us with a view
to acquiring the assets of another company. The Agreement of Sale with that
company was later terminated, and in November 2002, Kelcon contracted for the
sale of its 450,000 shares of our common stock to Mr. Gary T. Robinson, a New
York businessman, who paid a portion of the purchase price for these shares. We
have viewed this transaction as representing a change in control of the Company.
On June 11, 2003, Mr. Robinson resigned as Chief Executive Officer and Mr. Peter
F. Russo was appointed to that office. On November 28, 2003, Mr. Robinson
resigned as a director.
Business Plan
Since the change in control, new Company management has embarked upon a new
mission and strategic direction, through the establishment of a joint venture
and two limited partnerships. This structure is primarily for the establishment
of business operations focused on providing construction and environmental
technologies and services to specific geographic business reporting segments in
the Far East, the Middle East, the United States and Puerto Rico.
In conjunction with our local partners, we have identified and utilized local
in-country technology holders that enable the Company to procure equipment to
our specifications at considerable savings and take advantage of local service
and technical support.
We have entered into strategic alliance agreements with several United
States-based entities with more advanced technologies in the environmental field
to support our activities in the Middle East and Far East. We are not utilizing
at present any U.S. licensed technologies, but are using technology from a local
technology holder for our oil recovery operations in Indonesia.
Our environmental remediation operations are carried out through
Delta-Envirotech, Inc., a joint venture company formed in January 2004, with Hi
Tech Consulting and Construction, Inc., to provide environmental technology
services for certain business sectors located in the Far East and the Middle
East. We have operating control of, and a forty-five percent ownership interest
in, Delta-Envirotech.
Far East (Indonesia)
During 2004, the Company expended the effort for structuring its activities to
enter the Indonesia market. Through our subsidiary, Delta-Envirotech, Inc., a
local joint venture was established with our joint venture partner PT. Triyudha
to conduct the recovery and processing operations for oil sludge. In March,
2005, our joint venture partner entered into a multi-year agreement with
Pertamina, the state-owned oil company in Indonesia, for the processing of oil
sludge from refineries. On February 23, 2006, our joint venture partner received
the executed contract dated February 6, 2006 with Pertamina, which provides for
the payment of $100 per ton for the processing of approximately 3,000 metric
tons of oil sludge from designated oil sludge pools with a completion date of
not later than April 21, 2006. Our Indonesia joint venture company, PT.
Triyudha-Envirotech, began operations on December 15, 2005 by initiating the
processing of oil sludge for separation and recovery with equipment that was
manufactured in Indonesia. These operations allowed the Company to record its
first revenue in December 2005.
Our joint venture's new processing facility, located in Indramayu, Java, at the
Balongan Refinery, is comprised of sludge and water treatment holding tanks, a
centrifuge processing unit, an oil recovery tank, a water discharge pipeline
into the refinery waste water treatment facility and a self contained electrical
generator. All equipment was procured locally. The sludge is treated with
approved chemical emulsifiers that assist in breaking down the sludge. The
treated liquid is heated and enters into the centrifuge unit and is subjected to
approximately 500 G's of force, which separates the sludge into its components.
The separated oil rises to the top where it is recovered into an oil holding
tank. The water is sent via pipeline back to the refinery's water treatment
system for re-use. All environmental approvals necessary to operate the
permanent processing installation have been received. The facility, which
commenced production on December 15, 2005, can process up to 200 metric tons of
oil sludge per day, depending on the density of the sludge. We anticipate
expanding our activities over the course of 2006 by processing additional sludge
pools and oil storage tanks.
5
Middle East
On January 22, 2004, Delta-Envirotech, Inc., our environmental remediation
joint venture subsidiary, entered into a strategic alliance with ZAFF
International, Ltd., a technology company located in Saudi Arabia. The strategic
alliance states that the two companies will jointly pursue projects related to
mandated soil and water reclamation in the Middle East. In November 2004, ZAFF
International, Ltd., Delta's strategic partner, received its operating license
from the Saudi Arabia environmental authorities to employ all soil, refinery
waste and waste water technologies held by Delta for environmental recovery
projects. We are advised that ZAFF International, Ltd. is one of the first
companies to be granted a multi-technology environmental license in Saudi
Arabia.
Saudi Arabia has considerable new construction requirements for energy efficient
housing. In August 2005, we reached a working agreement with SaFarCu, a private
Saudi Arabia company, to provide a turn-key factory to manufacture insulating
concrete wall forming (ICF) products for their building industry. In August
2005, an additional working agreement with Saudi Gulf Environmental Protection
Company (SEPCO), a private Saudi Arabia company, was reached on the structure of
our proposed operation to provide technology and equipment, on a turn-key basis,
to recover silver from used x-ray film. We are proceeding to document this
latter working agreement in definitive form. We anticipate a new project related
to ICF or environmental recovery will begin in 2006.
United States
On August 26, 2005, we acquired, through a wholly-owned subsidiary, certain
intellectual property and filed a patent application for a new insulating
concrete wall forming (ICF) system. The innovative and patent pending design of
the system allows for integrated attachment strips molded into the inner and
outer surfaces and superior "R" Value of the block itself. In addition to the
patent filing, the Company engaged a technical consultant and a business
development consultant to further the design and development of the Company's
ICF products. The business development consultant is entitled to incentive
compensation based on the sales volume of ICF products.
The new environmentally-friendly system, known as Delta Wall, was introduced at
the International Builders Show in Orlando, Florida, in January 2006. Along with
interest from United States builders, several international builders and
representatives of foreign housing authorities expressed interest in the system.
The Company believes that the Delta Wall system affords builders cost savings
for durable construction, and homeowners energy savings in hot or cold climates.
We anticipate beginning production of the new product in 2006.
Puerto Rico
The Company has formed majority owned joint ventures in Puerto Rico to manage
the construction and related activities required to build low-income homes in
Puerto Rico under the Section 124 low income housing program. In December 2003,
the Company secured from certain local property owners the purchase rights to 36
acres that are designated Section 124 eligible, in the City of Aguadilla.
Approximately 270 low-income homes are planned for construction on this
property, in a project called "Brisas del Atlantico." The necessary applications
for building permits were submitted for approval and a real estate agency was
hired to sell the homes planned for construction.
On June 28, 2005, the Company received notification from the property owners
that the Planning Board of Puerto Rico (Junta de Planification de Puerto Rico)
notified them that the Brisas del Atlantico project was not approved because the
36-acre tract is located in a area zoned rural/agricultural, and that housing
development is not included in the current master development plan for that
area. On July 6, 2005, the property owners submitted a formal request to the
Planning Board to reconsider its June 28 decision.
6
In September 2005, the Planning Board notified the property owners that, upon
reconsideration, it reaffirmed its decision to deny the original application.
Based on that action, an administrative appeal was submitted to the Tribunal de
Circuito de Apelaciones (Appellate Tribunal) on October 21, 2005 to eliminate
the Planning Board's objection based on the current zoning of the property. On
March 2, 2006, the Company was informed that the Appellate Tribunal, on January
19, 2006, after review of an incomplete file from the Planning Board, upheld the
decision of the Planning Board.
As a result of the Appellate Tribunal's determination, the property owners filed
a motion requesting a review of the decision by the Supreme Court of Puerto
Rico.
In December 2004, we secured the rights to an additional 40 acre tract located
in Guayanilla for a second Section 124 project. This tract of land is part of a
150 acre development that will also include other residential properties,
commercial/retail buildings and a hotel. The master plan for this entire project
is still under preparation by the project's developer. We formed a second
majority owned joint venture in Puerto Rico in December 2004, to manage
construction and related activities required to build approximately 300
additional homes on this property under the Section 124 low income housing
program.
COMPETITION
Until we have successfully obtained the full amount of debt or equity financing
required to fund our projected business operations, it is difficult to compete
with large, well-capitalized companies for environmental remediation
governmental or private sector contracts. Many of these contracts require
significant up-front expenditures on behalf of the firm awarded the contract.
There are many established environmental remediation companies that have
significantly greater financial and personnel resources and technical expertise
than we do. There are well-capitalized environmental services and technology
companies as well as highly capitalized housing development companies in our
target marketplaces that will continue to retain their dominance and competitive
advantages over us.
Our planned housing construction activities in Puerto Rico also face intense
competition from larger, better-financed developers and construction companies.
Our new environmentally-friendly wall forming system faces competition from
established companies and various technologies that have been used in the
industry for many years.
EMPLOYEES
Currently, we have five employees: Peter F. Russo, President and Chief Executive
Officer; Martin G. Chilek, Senior Vice President and Chief Financial Officer;
Jerome Kindrachuk, Vice President-International; John Latza, Vice
President-Puerto Rico Operations/President, Delta Technologies, Inc. and Judith
Dallas, Director, Administration. Assuming that we obtain the necessary funding
to operate our planned businesses, we will hire several additional personnel to
support our projected business operations.
RISK FACTORS
Our business is subject to numerous risk factors, including the following:
MINIMAL REVENUE AND MINIMAL ASSETS.
We had minimal revenue in 2005, and no revenue in prior years. The Company's
ability to continue as a going concern is dependent upon its ability to obtain
funds to meet its obligations on a timely basis, obtain additional financing or
refinancing as may be required, and ultimately to attain profitability. There
are no assurances that the Company will be able to obtain any additional
financing or, if it is able to obtain additional financing, that such financing
will be on favorable terms. The inability to obtain additional financing when
needed would have a material adverse effect on operating results.
7
WE HAVE NOT OPERATED PROFITABLY SINCE INCEPTION, AND WE EXPECT TO INCUR LOSSES
IN THE FUTURE. WE WILL BE REQUIRED TO RAISE SUBSTANTIAL AMOUNTS OF CAPITAL.
Our operations have only generated minimal revenue and they are not profitable.
We have incurred net operating losses from the formation of our company through
December 31, 2005, of $6,320,239 and expect that we will continue to incur
operating losses in the future. In 2005, we generated revenue of $20,000,
incurred operating expenses of $ 2,023,561 and had a net loss of $ 2,580,440. As
of March 30, 2006, we had approximately $20,000 of cash on hand to fund
operations. There is no assurance that we will operate profitably in the future.
Failure to achieve or maintain profitability may materially and adversely affect
the future value of our common stock.
We will have to obtain significant additional capital to continue development of
our proposed business. There is no assurance that we will be able to obtain
sufficient capital to develop our proposed environmental remediation and housing
businesses and market our services successfully.
WE HAVE BEEN THE SUBJECT OF A GOING CONCERN OPINION FROM OUR INDEPENDENT
AUDITORS, WHICH MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS UNLESS WE
OBTAIN ADDITIONAL FUNDING.
Our independent auditors have added an explanatory paragraph to their audit
opinion, issued in connection with our financial statements, which states that
our ability to continue as a going concern is uncertain due to our continued
operating losses, the excess of our liabilities over our assets and uncertain
conditions we face in our day-to-day operations. Our financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION FOR OUR PROPOSED
ENVIRONMENTAL REMEDIATION OPERATIONS.
Each aspect of our proposed environmental remediation business is subject to
significant environmental regulations by foreign governments. No assurances can
be given that such environmental laws or regulations, or that future changes in
environmental laws, regulations, or interpretations currently applicable to the
Company or changes in the nature of the Company's operations, will not adversely
impact our proposed operations or have a material adverse effect on the
financial condition, operations and liquidity of the Company.
OUR BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH OUR OFFSHORE OPERATIONS IN
INDONESIA.
We have commenced energy and waste recovery operations in Indonesia for the
processing of oil sludge from refineries. Our joint venture partner has received
all environmental approvals necessary to operate the permanent processing
installation. Adverse changes in governmental permits, approvals, laws or
regulations in Indonesia could harm our business, as could our failure to
receive from Pertamina further contracts for processing sludge in our processing
facility.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO POLITICAL, ECONOMIC AND CURRENCY
RISKS.
With regard to our operations outside of the United States in Indonesia, we are
subject to the risks of doing business abroad, including,
o Currency fluctuations;
o Changes in tariffs and taxes; and
o Political and economic instability.
8
Changes in currency exchange rates may affect the relative costs at which we are
able to process sludge in Indonesia, and may affect the cost of certain items
required in our processing operation, thus possibly adversely affecting our
profitability.
There are inherent risks of conducting business internationally. Language
barriers, foreign laws and tariff and taxation issues all have a potential
negative effect on our ability to transact business in the Far East. Changes in
tariffs or taxes applicable to our joint venture in Indonesia may adversely
affect its profitability. Political instability may increase the difficulties
and costs of doing business in Indonesia. We may be subject to the jurisdiction
of the government and/or private litigants in foreign countries where we
transact business, and may be forced to expend funds to contest legal matters in
those countries in disputes with those governments or with customers or
suppliers.
THE APPLICATION FOR RESIDENTIAL ZONING FOR OUR FIRST PROJECT IN PUERTO RICO HAS
BEEN DENIED AND THAT DECISION IS BEING APPEALED IN COURT.
The Planning Board of Puerto Rico did not approve the landowners' application
for the low-cost residential Brisas del Atlantico project, and in September
2005, the Planning Board notified the property owners that, upon
reconsideration, it reaffirmed its decision to deny the original application.
The property owners filed an administrative appeal with the Appellate Tribunal,
which on January 19, 2006, upheld the decision of the Planning Board. The
property owners have filed a motion for "Certiorari" for review of the
administrative decisions with the Supreme Court of Puerto Rico. Obtaining
approval of this project will be difficult, and there is no assurance that such
approval will be obtained.
AS A HOUSING DEVELOPER WE FACE ECONOMIC AND MARKET RISKS.
Many factors which are beyond our control will affect our proposed business as a
developer of housing, including, among others, general economic and real estate
market conditions, competitive factors, the availability and cost of borrowed
funds, real estate tax rates, federal and state income tax laws, operating
expenses (including maintenance and insurance), energy costs, government
regulations, including delays in acquiring or our inability to acquire required
permits, and potential liability under and changes in environmental and other
laws, as well as the successful management of the properties.
Our success as a developer of housing will also be subject to certain additional
risks including, but not limited to, (i) competition for existing and future
projects from other developers in the areas of our developed properties, (ii)
adverse changes in mortgage interest or terms of governmental financing, (iii)
possible adverse changes in general economic conditions and adverse local
conditions, such as competitive over-bidding, a decrease in employment or
adverse changes in real estate zoning laws, and (iv) other circumstances over
which we may have little or no control.
AS A SUPPLIER OF BUILDING PRODUCTS WE FACE ECONOMIC AND TECHNOLOGY RISKS.
The market for suppliers of building materials is very competitive. Our success
as a supplier of building materials will be subject to many factors that are
beyond our control including, among others, our successful marketing of our
products to construction firms in the various regions where we would operate,
general economic conditions in the construction industry and real estate market
conditions, technological developments by competitors, the availability and cost
of borrowed funds, government building codes and regulations, and compliance
with and potential liability under environmental and other laws.
OUR MARKETS ARE VERY COMPETITIVE.
Virtually all of our current and potential competitors have significantly
greater financial, marketing and technical resources than we have. As a result,
they may be able to leverage a customer base, adapt more quickly to new
technologies and changes in customer requirements, or devote greater resources
to the promotion and sale of their services and products than we can.
9
WE DO NOT EXPECT TO PAY DIVIDENDS.
We have never paid dividends on our common stock. Current Company management
anticipates that any earnings generated from our operations will be used to
finance our working capital requirements, to develop services and products and
for marketing. For the foreseeable future, cash dividends will not be paid to
holders of our common stock.
VOLATILITY OF STOCK PRICE.
The market price of our common stock, as is the case for companies without
established operations, is extremely volatile due to our uncertain future
prospects and general market and economic conditions. During the two year period
ended December 31, 2005, the closing per share price of our common stock has
fluctuated from $1.09 to $0.15 per share. Our common stock currently trades in
the OTC Bulletin Board market.
"PENNY" STOCK REGULATION OF BROKER-DEALER SALES OF OUR SECURITIES.
The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions in "penny stocks." Generally, penny stocks are equity
securities with a price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on the NASDAQ system). If our
shares are traded for less than $5.00 per share, as they currently are, the
shares will be subject to the SEC's penny stock rules unless: (1) our net
tangible assets exceed $5,000,000 during our first three years of continuous
operations or $2,000,000 after our first three years of continuous operations;
or (2) we have had average revenue of at least $6,000,000 for the last three
years. The penny stock rules require a broker-dealer, prior to a transaction in
a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document prescribed by the SEC that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer's account. In addition, the penny
stock rules require that prior to a transaction in a penny stock not otherwise
exempt from those rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
requirements may have the effect of reducing the level of trading activity in
the secondary market for a stock that becomes subject to the penny stock rules.
As long as our common stock is subject to the penny stock rules, the holders of
the common stock may find it difficult to sell our common stock.
ITEM 2. DESCRIPTION OF PROPERTY.
We currently lease office space consisting of approximately 1,700 square feet in
an office building located in Sellersville, Pennsylvania. We are obligated to
pay a monthly rent of $650 as well as pay for the utilities serving the
premises. Our lease is for a period of one year from March 1, 2006 to February
28, 2007, with an additional twelve month renewal provision. We anticipate that
our current office space will accommodate our operations for the foreseeable
future. We also rented, through October 31, 2005, an office located in McLean,
Virginia consisting of approximately 150 square feet, with a monthly rental of
$1,100 under a month-to-month arrangement. This arrangement was terminated
effective October 31, 2005. We also lease an apartment in San Juan, Puerto Rico
of approximately 650 square feet. We are obligated to pay a monthly rental of
$750 as well as pay for the utilities used. Our lease is for a period of one
year from April 1, 2005 to March 31, 2006. We intend to renew the lease on a
month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS.
We settled, on February 8, 2006, the suit in the United States District Court
for the Southern District of New York against the Company, our transfer agent
and other individual parties, filed in July 2005, by Charter Capital Resources,
Inc. and Beryl Zyskind, seeking damages of $200,000 and other relief for failure
to transfer certain shares of stock owned by plaintiffs. Our transfer agent has
cancelled the certificates representing plaintiffs' collective ownership of
300,000 shares of common stock of the Company and re-issued new certificates
representing plaintiffs' ownership of the same amount of the shares without a
restrictive legend. In addition, we agreed to issue to plaintiffs, jointly, a
certificate representing plaintiffs' ownership of 225,000 restricted shares of
Delta common stock, which certificate was issued on February 14, 2006.
10
On February 27, 2006, we were served with a citation corporate filed in the
District Court in Harris County, Texas, by Equisource Ventures. The complaint
lists as defendants the Company and Burrows Consulting Group, Inc. (a Texas
corporation). The suit alleges breach of contract, misrepresentation and unjust
enrichment, and the plaintiff seeks damages for unpaid consulting retainer fees
and fees in the aggregate of $130,000, as well as exemplary damages, costs and
attorneys' fees. The Company denies any wrongdoing and will contest vigorously
the claims asserted against it. We have initially filed a motion to dismiss the
complaint based on lack of jurisdiction. The Company believes that this matter
will have no material effect upon the Company or its operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock has been quoted on the Over-the-Counter Bulletin Board operated
by the National Association of Securities Dealers, since approximately February
1, 2001. Our shares are listed under the symbol "DLTM". The quotations in the
table below reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not represent actual transactions.
High Low
----- -----
2004: 1st Quarter 1.09 0.49
2nd Quarter 0.79 0.16
3rd Quarter 0.35 0.17
4th Quarter 0.48 0.17
2005: 1st Quarter 0.69 0.28
2nd Quarter 0.96 0.23
3rd Quarter 0.45 0.28
4th Quarter 0.40 0.15
2006 1st Quarter (through
March 30, 2006) 0.32 0.10
During the last two fiscal years, no cash dividends have been declared on
Delta's common stock and current Company management does not anticipate that
dividends will be paid in the foreseeable future. As of March 30, 2006, there
were 90 record holders of our common stock.
11
RECENT SALES OF UNREGISTERED SECURITIES
- ---------------------------------------------------------------------------------------------------------------------
Date Title and Amount Purchasers Principal Total Offering
Underwriter Price/Underwriting
Discounts
- ---------------------------------------------------------------------------------------------------------------------
May 23, 2003 100,000 shares of common Private Investor NA $.50 per share/NA
stock
- ---------------------------------------------------------------------------------------------------------------------
May 23, 2003 20,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.50 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
May 23, 2003 240,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.1667 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
May 23, 2003 100,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.25 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
May 23, 2003 100,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.25 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
May 23, 2003 288,638 shares of common Licensee NA Services under License
stock issued for Agreement valued at $.139
consulting services per share/NA
- ---------------------------------------------------------------------------------------------------------------------
May 23 and 800,000 shares of common Private Investors NA Purchase of $250,000
September 5, 2003 stock principal amount note,
valued at $.3125 per
share/NA
- ---------------------------------------------------------------------------------------------------------------------
May 23, 2003 50,000 shares of common Private Investor NA Interest on loan valued at
stock, issued as payment $.275 per share/NA
of interest on
outstanding debt
- ---------------------------------------------------------------------------------------------------------------------
Date Title and Amount Purchasers Principal Total Offering
Underwriter Price/Underwriting
Discounts
- ---------------------------------------------------------------------------------------------------------------------
May 23, 2003 37,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.405 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
May 23, 2003 3,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.50 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
May 23, 2003 50,000 shares of common Private Investor NA Interest on loan valued at
stock, issued as payment $.333 per share/NA
of interest on
outstanding debt
- ---------------------------------------------------------------------------------------------------------------------
July 23, 2003 37,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.405 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
July 23, 2003 3,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.50 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
August 1, 2003 200,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.20 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
August 8, 2003 100,000 shares of common Private Investor NA $.50 per share/NA
stock
- ---------------------------------------------------------------------------------------------------------------------
August 11, 2003 50,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.4375 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
August 11, 2003 25,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.4375 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
August 11, 2003 15,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.4375 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
12
- ---------------------------------------------------------------------------------------------------------------------
Date Title and Amount Purchasers Principal Total Offering
Underwriter Price/Underwriting
Discounts
- ---------------------------------------------------------------------------------------------------------------------
August 11, 2003 10,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.4375 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
August 22, 2003 250,000 shares of common Private Investor NA $.20 per share/NA
stock
- ---------------------------------------------------------------------------------------------------------------------
November 15, 2003 100,000 shares of common Private Investor NA $.125 per share/NA
stock
- ---------------------------------------------------------------------------------------------------------------------
November 15, 2003 100,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.085 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
November 21, 2003 50,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.035 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
November 21, 2003 50,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.035 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
December 15, 2003 10,000 shares of common Consultant NA Consulting Services valued
stock issued for at $.085 per share/NA
consulting services
- ---------------------------------------------------------------------------------------------------------------------
13
- --------------------------------------------------------------------------------------------------------------------
Date Title and Amount Purchaser Principal Total Offering
Underwriter Price/Underwriting
Discounts
- ---------------------------------------------------------------------------------------------------------------------
50,000 shares of
January 14, 2004 common stock Consultant NA $.0825 per share/NA
- ---------------------------------------------------------------------------------------------------------------------
400,000 shares of
January 24, 2004 common stock Private Investor NA $.125 per share/NA
- ---------------------------------------------------------------------------------------------------------------------
February 11, 2004 400,000 shares of Private Investor NA $.125 per share/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
200,000 shares of Private Investor
February 18, 2004 common stock NA $.125 per share/NA
- ---------------------------------------------------------------------------------------------------------------------
155,000 shares of Consultant
February 25, 2004 common stock NA $.16 per share/NA
- ---------------------------------------------------------------------------------------------------------------------
200,000 shares of Consultant
February 25, 2004 common stock NA $.10 per share/NA
- ---------------------------------------------------------------------------------------------------------------------
100,000 shares of Private Investor
February 26, 2004 common stock NA $.125 per share/NA
- ---------------------------------------------------------------------------------------------------------------------
140,000 shares of Private Investor
February 27, 2004 common stock NA $.137 per share/NA
- ---------------------------------------------------------------------------------------------------------------------
March 2, 2004 200,000 shares of Consultant NA $.25 per share/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
30,000 shares of
March 31, 2004 common stock Vendor NA $.30 per share/NA
- ---------------------------------------------------------------------------------------------------------------------
50,000 shares of
March 31, 2004 common stock Consultant NA $.0825 per share/NA
- ---------------------------------------------------------------------------------------------------------------------
200,000 shares of
April 14, 2004 common stock Private Investor NA $.125/NA
- ---------------------------------------------------------------------------------------------------------------------
400,000 shares of
April 16, 2004 common stock Consultant NA $.18/NA
- ---------------------------------------------------------------------------------------------------------------------
200,000 shares of
April 16, 2004 common stock Consultant NA $.18/NA
- ---------------------------------------------------------------------------------------------------------------------
100,000 shares of
May 5, 2004 common stock Employee NA $.14/NA
- ---------------------------------------------------------------------------------------------------------------------
60,000 shares of
May 5, 2004 common stock Employee NA $.14/NA
- ---------------------------------------------------------------------------------------------------------------------
25,000 shares of
May 5, 2004 common stock Employee NA $.14/NA
- ---------------------------------------------------------------------------------------------------------------------
35,000 shares of
May 5, 2004 common stock Private Investor NA $.125/NA
- ---------------------------------------------------------------------------------------------------------------------
35,000 shares of
May 5, 2004 common stock Private Investor NA $.125/NA
- ---------------------------------------------------------------------------------------------------------------------
200,00 shares of
May 6, 2004 common stock Private Investor NA $.125/NA
- ---------------------------------------------------------------------------------------------------------------------
100,000 shares of
May 6, 2004 common stock Consultant NA $.125/NA
- ---------------------------------------------------------------------------------------------------------------------
100,000 shares of
May 11, 2004 common stock Private Investor NA $.125/NA
- ---------------------------------------------------------------------------------------------------------------------
$193,740 principal Private Investor NA $193,740/NA
amount of 4%
May 12, 2004 convertible notes due
May 12, 2006 convertible
into 1,549,920 shares
of common stock
- ---------------------------------------------------------------------------------------------------------------------
May 12, 2004 $129,160 principal Private Investor NA $129,160/NA
amount of 4%
convertible notes due
May 12, 2006 convertible
into 1,033,280 shares
of common stock
- ---------------------------------------------------------------------------------------------------------------------
May 25, 2004 60,000 shares of Private Investor NA $.125/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
14
- ---------------------------------------------------------------------------------------------------------------------
Date Title and Amount Purchaser Principal Total Offering
Underwriter Price/Underwriting
Discounts
- ---------------------------------------------------------------------------------------------------------------------
June 8, 2004 50,000 shares of Private Investor NA $.125/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
50,000 shares of
June 10, 2004 common stock Private Investor NA $.125/NA
- ---------------------------------------------------------------------------------------------------------------------
50,000 shares of
June 10,2004 common stock Private Investor NA $.125/NA
- ---------------------------------------------------------------------------------------------------------------------
30,000 shares of
June 10,2004 common stock Private Investor NA $.125/NA
- ---------------------------------------------------------------------------------------------------------------------
15,000 shares of
June 10,2004 common stock Private Investor NA $.125/NA
- ---------------------------------------------------------------------------------------------------------------------
15,000 shares of
June 10,2004 common stock Private Investor NA $.125/NA
- ---------------------------------------------------------------------------------------------------------------------
400,000 shares of
June 14, 2004 common stock Private Investor NA $.18/NA
- ---------------------------------------------------------------------------------------------------------------------
July 1, 2004 $157,000 principal Private Investor NA $157,000/NA
amount of 4%
convertible
promissory note due
December 31, 2006
convertible into
3,140,000 shares of
common stock
- ---------------------------------------------------------------------------------------------------------------------
July 16, 2004 $37,500 principal Private Investor NA $37,500/NA
amount of 4%
convertible
promissory note due
January 16, 2007
convertible into
750,000 shares of
common stock
- ---------------------------------------------------------------------------------------------------------------------
August 18, 2004 50,000 shares of Private Investor NA $.125/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
August 18, 2004 250,000 shares of Consultant NA $.125/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
AUGUST 30, 2004 100,000 shares of Private Investor NA $.125/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
August 31, 2004 200,000 shares of Private Investor NA $.125/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
September 7, 2004 100,000 shares of Consultant NA $.12/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
September 10, 2004 300,000 shares of Consultant NA $.12/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
September 16, 2004 125,000 shares of Consultant NA $.05/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
September 20, 2004 100,000 shares of Consultant NA $.12/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
September 20, 2004 $301,500 principal Private Investors NA $301,500/NA
amount of 6%
convertible
promissory notes due
September 16, 2006,
convertible into an
aggregate of
6,030,000 shares of
common stock
- ---------------------------------------------------------------------------------------------------------------------
September 20, 2004 Warrants to purchase Private Investors NA NA/NA
an aggregate of
6,030,000 shares of
common stock issued
in connection with
the sale of the 6%
convertible
promissory notes
- ---------------------------------------------------------------------------------------------------------------------
15
- ---------------------------------------------------------------------------------------------------------------------
Date Title and Amount Purchaser Principal Total Offering
Underwriter Price/Underwriting
Discounts
- ---------------------------------------------------------------------------------------------------------------------
September 23, 2004 $10,000 principal Private Investor NA $10,000/NA
amount of 6%
convertible
promissory note due
September 22, 2006,
convertible into an
aggregate of 200,000
shares of common stock
- ---------------------------------------------------------------------------------------------------------------------
September 23, 2004 Warrants to purchase Private Investor NA NA/NA
an aggregate of
200,000 share of
common stock issued
in connection with
the sale of the 6%
convertible
promissory note
- ---------------------------------------------------------------------------------------------------------------------
September 27, 2004 $20,000 principal Private Investor NA $20,000/NA
amount of 6%
convertible
promissory note due
September 26, 2006,
convertible into an
aggregate of 400,000
shares of common stock
- ---------------------------------------------------------------------------------------------------------------------
September 27, 2004 Warrants to purchase Private Investor NA NA/NA
an aggregate of
400,000 shares of
common stock issued
in connection with
the sale of the 6%
convertible
promissory note
- ---------------------------------------------------------------------------------------------------------------------
October 4, 2004 750,000 shares of Consultant NA $0.05/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
October 19, 2004 $25,000 principal Private Investor NA $25,000/NA
amount of 6%
convertible promissory
note due October 18,
2006, convertible into
an aggregate of
500,000 shares of
common stock
- ---------------------------------------------------------------------------------------------------------------------
October 19, 2004 Warrants to purchase Private investor NA NA/NA
an aggregate of
500,000 shares of
common stock issued in
connection with the
sale of the 6%
convertible promissory note
- ---------------------------------------------------------------------------------------------------------------------
October 22, 2004 250,000 shares of Consultant NA $0.1415/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
November 2, 2004 $12,500 principal Private investor NA $12,500/NA
amount of 6%
convertible promissory
note due November 1,
2006, convertible into
an aggregate of
250,000 shares of
common stock
- ---------------------------------------------------------------------------------------------------------------------
16
- ---------------------------------------------------------------------------------------------------------------------
Date Title and Amount Purchaser Principal Total Offering
Underwriter Price/Underwriting
Discounts
- ---------------------------------------------------------------------------------------------------------------------
November 1, 2004 250,000 shares of Consultant NA $0.125/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
November 2, 2004 Warrants to purchase Private investor NA NA/NA
an aggregate of
250,000 shares of
common stock issued in
connection with the
sale of the 6%
convertible promissory note
- ---------------------------------------------------------------------------------------------------------------------
November 5, 2004 $25,000 principal Private investor NA $25,000/NA
amount of 6%
convertible promissory
note due November 4,
2006, convertible into
an aggregate of
500,000 shares of common stock
- ---------------------------------------------------------------------------------------------------------------------
Date Title and Amount Purchaser Principal Total Offering
Underwriter Price/Underwriting
Discounts
- ---------------------------------------------------------------------------------------------------------------------
November 5, 2004 Warrants to purchase Private investor NA NA/NA
an aggregate of
500,000 shares of
common stock issued in
connection with the
sale of the 6%
convertible promissory note
- ---------------------------------------------------------------------------------------------------------------------
November 8, 2004 500,000 shares of
Common Stock issued Private investor NA $25,000/NA
upon conversion of a
promissory note in the
principal amount of $25,000
- ---------------------------------------------------------------------------------------------------------------------
November 9,2004 250,000 shares of Consultant NA $0.10/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
November 15, 2004 45,000 shares of Consultant NA $0.12/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
November 16, 2004 250,000 shares of Consultant NA $0.15/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
November 19, 2004 403,951 shares of Private Investor NA $20,000/NA
common stock issued
upon conversion of a
promissory note in the
principal amount of $20,000
(including accrued interest)
- ---------------------------------------------------------------------------------------------------------------------
November 23, 2004 502,887 shares of Private Investor NA $25,000/NA
common stock issued
upon conversion of a
promissory note in the
principal amount of $25,000
(including accrued interest)
- ---------------------------------------------------------------------------------------------------------------------
November 25, 2004 $50,000 principal Private Investor NA $50,000/NA
amount of 6% (settlement)
convertible promissory
notes due November 24,
2006, convertible into
an aggregate of 1,00000
shares of common stock
- ---------------------------------------------------------------------------------------------------------------------
November 25, 2004 Warrants to purchase an Private Investor NA NA/NA
aggregate of 1,000,000 (settlement)
shares of common stock
issued in connection
with the sale of the 6%
convertible promissory notes
- ---------------------------------------------------------------------------------------------------------------------
November 26, 2004 412,000 shares of Private Investor NA $0.17/NA
common stock (settlement)
- ---------------------------------------------------------------------------------------------------------------------
17
- ---------------------------------------------------------------------------------------------------------------------
Date Title and Amount Purchaser Principal Total Offering
Underwriter Price/Underwriting
Discounts
- ---------------------------------------------------------------------------------------------------------------------
December 6, 2004 150,000 shares of Private Investor NA $.10 per share/NA
common stock issued
upon exercise of
outstanding common
stock purchase warrant
- ---------------------------------------------------------------------------------------------------------------------
December 7, 2004 200,000 shares of Private Investor NA $.10 per share/NA
common stock issued
upon exercise of
outstanding common
stock purchase warrant
- ---------------------------------------------------------------------------------------------------------------------
December 13, 2004 150,000 shares of Private Investor NA $.10 per share/NA
common stock issued
upon exercise of
outstanding common
stock purchase warrant
- ---------------------------------------------------------------------------------------------------------------------
December 15, 2004 54,055 shares of Private Investor NA $.185 per share/NA
common stock
- ---------------------------------------------------------------------------------------------------------------------
December 22, 2004 300,000 shares of Private Investor NA $.10 per share/NA
common stock issued
upon exercise of
outstanding common
stock purchase warrant
- ---------------------------------------------------------------------------------------------------------------------
18
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
Date Title and Amount Purchasers Principal Total Offering
Underwriter Price/Underwriting Discounts
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
January 3, 2005 252,542 shares of common Private Investor NA $12,627/NA
stock issued upon
conversion of a promissory
note in the principal
amount of $12,500
(including accrued
interest)
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
January 7, 2005 500,000 shares of common Private Investor NA $25,000/NA
stock issued upon the
partial conversion of a
promissory note in the
principal amount of
$157,000
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
January 25, 2005 300,000 shares of common Private Investor NA $30,000/NA
stock issued upon the
exercise of outstanding
common stock purchase
warrant
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
February 15, 2005 45,000 shares of common Consultant NA $19,125/NA
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
March 9, 2005 5,000 shares of common Consultant NA $1,500/NA
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
April 20, 2005 206,954 shares of common Private Investor NA $10,348/NA
stock issued upon
conversion of a promissory
note in the principal
amount of $10,000
(including accrued
interest)
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
April 22, 2005 14,000 shares of common Consultant NA $9,240/NA
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
April 22, 2005 100,000 shares of common Consultant NA $66,000/NA
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
April 27, 2005 285,000 shares of common Private Investor NA $85,500/$5,557.50
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
April 28, 2005 285,000 shares of common Private Investor NA $85,500/$5,557.50
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
May 4, 2005 166,667 shares of common Private investors NA $50,000/$3,250
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
May 23, 2005 45,000 shares of common Consultant NA $20,700/NA
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
May 23, 2005 520,090 shares of common Private Investor NA $26,005/NA
stock issued upon the
partial conversion of a
promissory note in the
principal amount of
$50,000 (including accrued
interest)
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
May 24, 2005 5,000 shares of common Consultant NA $3,000/NA
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
June 9, 2005 10,000 shares of common Financial NA $6,300/NA
stock Consultant
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
June 24, 2005 125,000 shares of common Private Investor NA $37,500/$4,500
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
June 24, 2005 125,000 shares of common Private Investor NA $37,500/$4,500
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
June 24, 2005 250,000 shares of common Private Investor NA $75,000/$9,000
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
August 3, 2005 670,000 shares of common T&T Asset NA $201,000/NA
stock Management, a
financial
consultant
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
August 17, 2005 1,616,667 shares of common Private Investor NA $485,000/$97,000
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
August 23, 2005 760,000 shares of common T&T Asset NA $319,200/NA
stock Management, a
financial
consultant
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
19
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
Date Title and Amount Purchasers Principal Total Offering
Underwriter Price/Underwriting Discounts
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
August 26, 2005 581,000 shares of common Consultant NA $250,000/NA
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
August 26, 2005 116,279 shares of common Purchase of IP NA $50,000/NA
stock rights
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
August 26, 2005 100,000 shares of common Purchase of IP NA $43,000/NA
stock rights
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
August 30, 2005 211,185 shares of common Private Investor NA $10,559/NA
stock issued upon the
conversion of a promissory
note in the principal
amount of $10,000
(including accrued
interest)
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
August 31, 2005 200,000 shares of common Private Investor NA $20,000/NA
stock issued upon the
exercise of outstanding
common stock purchase
warrant
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
September 27, 848,806 shares of common Private Investor NA $42,440/NA
2005 stock issued upon the
conversion of a promissory
note in the principal
amount of $40,000
(including accrued
interest)
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
September 27, 1,061,008 shares of common Private Investor NA $53,050/NA
2005 stock issued upon the
conversion of a promissory
note in the principal
amount of $50,000
(including accrued
interest)
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
September 27, 424,769 shares of common Private Investor NA $21,238/NA
2005 stock issued upon the
conversion of a promissory
note in the principal
amount of $20,531.36
(including accrued
interest)
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
September 27, 45,000 shares of common Consultant NA $20,250/NA
2005 stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
October 10, 2005 7,500 shares of common Consultant NA $3,100/NA
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
October 13, 2005 1,666,667 shares of common Private Investor NA $250,000/$50,000
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
November 17, 2005 855,498 shares of common Private Investor NA $42,775/NA
stock issued upon the
conversion of a promissory
note in the principal
amount of $40,000
(including accrued
interest)
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
November 23, 2005 3,125,000 shares of common Private Investor NA $250,000/$36,800
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
December 12, 2005 45,000 shares of common Consultant NA $12,870/NA
stock
- ------------------ ---------------------------- ------------------ ------------------- ------------------------------
The issuances of common stock to consultants are viewed as exempt from
registration under the Securities Act of 1933, as amended ("Securities Act"),
under section 4(2) thereof, as transactions not involving any public offering.
The private placements of the Company's common sock to individual U.S.
investors, and the offerings of notes, convertible notes and common stock
warrants to U.S. investors, are viewed as exempt under the provisions of Rule
506 of Regulation D under the Securities Act. In 2004, the issuance of certain
notes, convertible notes and common stock warrants to foreign investors, and in
2005, the issuances of common stock in April, June, August, October and November
to European investors and placement agents, are viewed as exempt from
registration under Regulation S of the Securities Act.
20
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and notes thereto
and the other financial information included elsewhere in this report.
Certain statements contained in this report, including, without limitation,
statements containing the words "believes," "anticipates," "expects" and words
of similar import, constitute "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks and uncertainties. Our actual results
may differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including our ability to create, sustain, manage
or forecast our growth; our ability to attract and retain key personnel; changes
in our business strategy or development plans; competition; business
disruptions; adverse publicity; and international, national and local general
economic and market conditions.
GENERAL
We were incorporated in the State of Delaware on November 17, 1999 and will
require additional capital to execute our planned business operations.
RESULTS OF OPERATIONS
During the fiscal year ended December 31, 2005, we incurred a net loss of
$2,580,440, because we had minimal revenue to offset operating expenses. The
loss in fiscal 2005 was primarily attributable to general and administrative
expenses of approximately $1,848,000 including consulting and professional fees
in the approximate amount of $478,100 and an increase in compensatory element of
stock options of $150,000. In addition, we had an increase in accretion of
convertible debt of approximately $281,000, and an increase in interest expense
of about $102,000. From inception (November 17, 1999) to December 31, 2005, we
had a net loss of $6,320,239.
The Independent Auditors' Report and Note 1 of the Notes to Consolidated
Financial Statements accompanying this report state that substantial doubt has
been raised about our ability to continue as a going concern. Our present
business operations do not generate any revenue with which to cover our
expenses. We will have to raise capital through the placement of our securities
in order to remain viable. We are continuing to incur management and
administrative costs, professional fees and other expenses. If we are unable to
raise capital we will be unable to fund our plan of operations. Because we will
continue to incur net losses, we may have to cease operations entirely. This
factor, among others, raises substantial doubt about our ability to continue as
a going concern.
Our ability to continue as a going concern is dependent upon our ability to
obtain funds to meet our obligations on a timely basis, obtain additional
financing or refinancing as may be required, and ultimately to attain
profitability. There are no assurances that we will be able to obtain any
additional financing or, if we are able to obtain additional financing, that
such financing will be on terms favorable to us. The inability to obtain
additional financing when needed would have a material adverse effect on our
operating results.
2005 COMPARED TO 2004
The net loss increased from approximately $1,950,000 in 2004 to approximately
$2,580,000 for the twelve months ended December 31, 2005.
21
The items of significant increase in the year ended December 31, 2005 over the
prior year were an increase in compensatory element stock options of $150,000; a
write-off of a long term asset of $170,000; the accretion of convertible debt of
approximately $423,000 compared to approximately $142,000 in 2004; an increase
in interest expense from approximately $28,000 in 2004 to approximately $130,000
in 2005; and a loss of about $24,000 from the minority interest share in
subsidiaries compared to a gain of approximately $101,600 in 2004. There was a
writedown in a joint venture of about $34,000 in 2004 and no corresponding loss
in 2005.
PLAN OF OPERATION
The Company has established a joint venture subsidiary and two limited
partnerships, primarily to establish business operations focused on providing
environmental and construction technologies and services in the Far East, the
Middle East, the United States and Puerto Rico.
Our environmental remediation operations are carried out through
Delta-Envirotech, Inc., a joint venture company formed in January 2004, with Hi
Tech Consulting and Construction, Inc., to provide environmental technology
services for certain business segments located in the Far East and the Middle
East. We have operating control of, and a forty-five percent ownership interest
in, Delta-Envirotech.
Although we have entered into strategic alliance agreements with several United
States-based entities with technologies in the environmental technology field to
support the Company's worldwide activities and have these technologies
available, in the Far East we are currently utilizing in-country technology.
We intend to expand on our operations in the Far East. Additional capital is
required to pursue this expansion as well as our planned operations in Saudi
Arabia and the United States. Upon receipt of re-zoning approval, final
government agency endorsements and applicable building permits in Puerto Rico,
we believe that we will be in a position to finance the housing project there
through local institutions.
Far East (Indonesia)
In Indonesia we have set up a local joint venture company established to
commence energy and waste recovery operations. The joint venture company, PT.
Triyudha-Envirotech, began operations on December 15, 2005, pursuant to a
contract with Pertamina, processing approximately 3,000 metric tons of oil
sludge from designated oil sludge pools with a completion date of not later than
April 21, 2006.
Middle East
On January 22, 2004, we entered into a strategic alliance agreement between our
environmental remediation joint venture, Delta-Envirotech, Inc., and ZAFF
International, Ltd., to jointly pursue soil and water reclamation projects in
the Middle East. In November 2004, ZAFF International, Ltd. received its
operating license from the Saudi Arabia environmental authorities to employ all
soil, refinery waste and waste water technologies held by Delta for
environmental recovery projects. In August, 2005, we reached a working agreement
to provide a turn-key factory to manufacture insulating concrete form (ICF)
products for the building industry in Saudi Arabia and a working agreement on
our proposed operation to provide technology and equipment, on a turn-key basis,
to recover silver from used x-ray film. We anticipate a new project to begin in
2006.
United States
On August 26, 2005, we acquired, through a wholly-owned subsidiary, certain
intellectual property and filed a patent application for a new insulating
concrete wall forming (ICF) system. The innovative and patent pending design of
the system allows for integrated attachment strips molded into the inner and
outer surfaces and superior "R" Value of the block itself. In addition to the
patent filing, the Company engaged a technical consultant and a business
development consultant to further the design and development of the Company's
ICF products. We anticipate beginning production of the new product in 2006.
22
Puerto Rico
Our plans to proceed, through majority owned joint ventures in Puerto Rico, with
construction and related activities required to build low income homes in Puerto
Rico under the Section 124 low income housing program, have been delayed as a
result of the failure to date to obtain required zoning approval. In December
2003, the Company secured, from the property owners, the purchase rights to 36
acres that are designated Section 124 eligible, in the City of Aguadilla.
Approximately 270 low income homes are planned for construction on this
property, in a project called "Brisas del Atlantico." The Planning Board of
Puerto Rico did not approve the land owners' application for the low-cost
residential Brisas del Atlantico project, and in September 2005, the Planning
Board notified the property owners that, upon reconsideration, it reaffirmed its
decision to deny the original application. An administrative appeal was filed
with the Appellate Tribunal, which on January 19, 2006, upheld the decision of
the Planning Board. Based on the decision of the Appellate Tribunal, the
Company, decided to write off its design costs associated with the project as of
December 31, 2005.
As a result of the Appellate Tribunal's determination, the property owners filed
a motion requesting a review of the decision by the Supreme Court of Puerto
Rico.
In December, 2004, we secured the rights to an additional 40 acre tract located
in Guayanilla for our second Section 124 project. This tract of land is part of
a 150 acre development that will also include other residential properties,
commercial/retail buildings and a hotel. The master plan for this entire project
is still under development by the project's developer. We formed a second
majority owned joint venture in Puerto Rico in December 2004, to manage
construction and related activities required to build approximately 300
additional homes on this property under the Section 124 low income housing
program.
FUNDING
We are currently dependent on equity investments or borrowing from private
investors to pay our operating expenses. There are no assurances that such
investors will continue to advance funds or invest in the Company's securities.
In the event we are unable to obtain additional capital or funding we may be
unable to pursue our business plans. We anticipate that we will be required to
raise capital in the approximate amount of $1,500,000 in the next 12 months in
order to continue to fund our limited operations and to finance our planned
business operations.
LIQUIDITY
We have generated minimal revenue from our current operations. We must rely
primarily on private placements of Company stock or debt to pay operating
expenses.
At December 31, 2005 we had a working capital deficit of $ 1,488,436. The
increase in our working capital deficit as compared with 2004 is a result of the
net loss incurred during the year ended December 31, 2005, a decrease in
refundable deposits, higher accrued expenses, increase in accretion of
convertible debt and notes payable. Since we have minimal sources of revenue,
our working capital deficit will continue to increase as we incur additional
operating expenses. Presently, although we have some minimal revenues, we are
dependent upon loans from private investors and private placements of our stock
for funding.
In 2005, to provide financing for our activities, we raised $1,139,835 of equity
capital, through the sale of 9,075,001 shares of common stock. In addition, in
April 2005, we borrowed $210,655 from three lenders pursuant to 8% term notes
due October 2, 2005. The maturity dates of the three notes, pursuant to note
modification agreements entered into in September and December of 2005, and in
March 2006, have been extended until June 2006. In March 2005, we borrowed
$71,731 from a stockholder pursuant to a 6% term note due in three equal
installments in June, September and December 2005. This note was subsequently
amended to extend the final installment payment until February 2006 and has been
paid in full by the company.
23
ASSETS
At December 31, 2005, we had total assets of $870,108, compared to total assets
of $441,444 at December 31, 2004. The increase in assets as of December 31, 2005
was due to an increase in prepaid expenses, fixed assets and the capitalized
costs for the intellectual property related to our patent-pending wall forming
system, classified as other assets.
CRITICAL ACCOUNTING ISSUES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of the financial statements requires
the Company to make estimates and judgments that affect the reported amount of
assets, liabilities, and expenses, and related disclosures of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to intangible assets, income taxes and contingencies and
litigation. The Company bases its estimates on historical experience and on
various assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions. As a result of this review in connection with the preparation of our
financial statements for the year ended December 31, 2005, the Company decided
to write off $170,000 of preacquisition costs as of December 31, 2005.
Other Matters
Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
on Financial Accounting Standards ("SFAS") No. 154, "Accounting Changes and
Error Correction" - a replacement of APB Opinion No. 20 and FASB statement No.
3. This statement applies to all voluntary changes in accounting principles. It
also applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
This statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. The statement also carries forward the guidance in APB Opinion No. 20
requiring justification of a change in accounting principle on the basis of
preferability. This statement is effective for accounting changes and
corrections made in fiscal years beginning after December 31, 2005. The adoption
of SFAS 154 is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, an amendment of APB Opinion No.
29, "Exchange of Nonmonetary Assets". SFAS No. 153 amends APB Opinion 29 by
eliminating the exception under APB No. 29 for nonmonetary assets of similar
productive assets and replaces it with a general exception for exchanges on
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flow of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
fiscal year beginning after June 15, 2005. The adoption of SFAS No. 153 is not
expected to have a material effect on the Company consolidated financial
position or results of operations.
In December 2004, the FASB staff issued FASB Staff Position ("FSP") FAS 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" to provide guidance on the application of Statement 109 to
the provision within the American Jobs Creations Act of 2004 (the "Act") that
provides tax relief to U.S. domestic manufacturers. The FSP states that the
manufacturers, deduction provided for under the Act should be accounted for as a
special deduction in accordance with Statement 109 and not as a tax rate
reduction. The FSP is effective upon issuance. The adoption of FAS 109-1 did not
have a material effect on the Company's results of operations or financial
position.
24
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment"
(revised), that will require compensation costs related to share-based payment
transactions to be recognized in the financial statements. With limited
exceptions, the amount of compensation cost will be measured based on the
grant-date fair value of the equity or liability instruments issued. In
addition, liability awards will be re-measured each reporting period.
Compensation cost will be recognized over the period that an employee provides
service in exchange for the reward. SFAS No. 123(R) is effective as to the
Company as of the beginning of the Company's 2006 fiscal year. The Company will
account for the compensation costs prospectively at the time of adoption. The
adoption of SFAS 123(R) is expected to have a material effect on the Company's
results of operations.
FOREIGN CURRENCY TRANSLATION
The functional currency for some foreign operations is the local currency.
Assets and liabilities of foreign operations are translated at balance sheet
date rates of exchange and income, expense and cash flow items are translated at
the average exchange rate for the period. Translation adjustments in future
periods will be recorded in Other Comprehensive Income. The translation gains or
losses were not material for the year ended December 31, 2005.
GOODWILL AND OTHER INTANGIBLES
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 specifies the financial accounting and reporting for
acquired goodwill and other intangible assets. Goodwill and intangible assets
that have indefinite useful lives are not amortized but rather they are tested
at least annually for impairment unless certain impairment indications are
identified.
Quantitative and Qualitative Disclosures About Market Risk
Fair Value of Financial Instruments - The following disclosure of the estimated
fair value of financial instruments is made in accordance with the requirements
of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments". The estimated fair values of financial
instruments have been determined by the Company using available market
information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange.
The Company has not entered into, and does not expect to enter into, financial
instruments for trading or hedging purposes. The Company does not currently
anticipate entering into interest rate swaps and/or similar instruments.
The Company's carrying values of cash, marketable securities, accounts
receivable, accounts payable and accrued expenses are a reasonable approximation
of their fair value.
ITEM 7. FINANCIAL STATEMENTS.
The Company's Financial Statements and Notes to Financial Statements are
attached hereto as Exhibit A and incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with the Company's independent
auditors during the last two years.
25
ITEM 8A. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures:
Based on their evaluation as of the close of the fiscal year covered by this
report, Peter F. Russo, our Chief Executive Officer, and Martin G. Chilek, our
Chief Financial Officer, have concluded that the Company's disclosure controls
and procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in this Annual Report on Form 10-KSB. There have been no changes in the
Company's internal controls or in other factors which could significantly affect
internal controls subsequent to the date the Company carried out its evaluation.
Limitations on the effectiveness of controls:
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues, if any,
within a company have been detected.
ITEM 8B. OTHER INFORMATION.
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
DIRECTORS AND EXECUTIVE OFFICERS
As of the date of this report, the executive officers and director of Delta
Mutual, Inc. were as follows:
NAME AGE TITLE(S)
- ---------- -------- ------------
Peter F. Russo 63 President, CEO, Assistant Secretary
and Director
Martin G. Chilek 55 Sr. Vice President, Chief
Financial Officer, Treasurer and
Secretary
Jerome Kindrachuk 61 Vice President--International
Peter F. Russo joined the Company on March 11, 2003 as President and a director,
and was elected Chief Executive Officer in June 2003. Mr. Russo had been an
independent consultant to several private businesses during the period from
August 2001 until he joined the Company. In that capacity, he developed business
and operating strategies and plans for a start-up, new concept modular housing
company focused on the affordable housing market. In that assignment, he
developed proposals for low-income housing projects under the federal Section 42
tax credit program in Philadelphia, Baltimore and Washington D.C. In another
assignment, Mr. Russo was instrumental in structuring a new U.S. holding company
with affiliated real estate service operations in Europe. From June 2000 to July
2001, Mr. Russo served as President and Chief Operating Officer for Bartram
Healthcare Financial Services, Inc., a start-up healthcare services company
providing financial systems and services.
Martin G. Chilek joined the Company as Vice President, CFO, Treasurer and
Assistant Secretary in January 2004. He was promoted to Senior Vice President
and elected Secretary in March 2006. Prior to joining the Company, from June
2003 to December 2003, he was an independent consultant providing transitional
management, strategic planning and financial management services to privately
held and public companies. During the past five years, Mr. Chilek also served as
Vice President-Operations of MicroTech Leasing Corporation from October 2000
through May 2003.
26
Jerome Kindrachuk joined the Company in July 2003 as Vice President-Finance and
Administration and in January 2004 was appointed as Vice President-
International and an officer of the Company. Prior to joining the Company, Mr.
Kindrachuk served, from March 2002 to September 2002, as director of finance for
CEVA International, Inc., a company that provided environmental services and
technologies to countries in Central and Eastern Europe. From October 2002 to
June 2003, Mr. Kindrachuk was a consultant to the Company for market penetration
strategies in Eastern Europe. During the past five years, he also served as
Chief Executive Officer of Winner Automotive Group from February 2000 to
February 2002.
Our directors are elected by the stockholders and our officers are appointed by
our board of directors. Our officers hold office until their successors are
elected and qualified. Vacancies in our board are filled by the board itself.
There are currently two vacancies on our board of directors.
We do not have an audit committee, although we intend to establish such a
committee, with an independent "financial expert" member as defined in the rules
of the Securities and Exchange Commission.
There are no family relationships between any of our executive officers and/or
directors.
We have a corporate code of conduct and a corporate disclosure policy in place,
which provide for internal procedures concerning the reporting and disclosure of
corporate matters that are material to our business and to our stockholders. Our
corporate code of conduct includes a code of ethics for our officers and
employees as to workplace conduct, dealings with customers, compliance with
laws, improper payments, conflicts of interest, insider trading, company
confidential information, and behavior with honesty and integrity. Our corporate
disclosure policy includes guidelines for publicly disseminating financial and
other material developments to the investing public.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Number Transactions Known Failures
Of late Not Timely To File a
Name and principal position Reports Reported Required Form
- --------------------------- ----------- ------------ --------------
Peter F. Russo, President & CEO
Martin G. Chilek, Sr. Vice President
& CFO
Jerome Kindrachuk, Vice President 2
ITEM 10. EXECUTIVE COMPENSATION
Annual Compensation Awards Payouts
- ------------------------------------------------- -------------------------- -----------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other Restricted Securities
and Year Annual Stock Underlying LTIP All Other
Principal Salary Bonus Comp. Awards Options/ Payouts Comp.
Position (1) ($) ($) ($) ($) SARs(#) ($) ($)
- ------------- ---- ------- ----- ------ ---------- ---------- ------ --------
Peter F. 2005 $79,200 $12,260 -
Russo (2) 2004 $57,588 $ 9,000 -
President & CEO 2003 $31,800 $ 6,000 $31,938
Martin G. 2005 $82,100 $12,260
Chilek 2004 $64,700 $16,000
Chief Financial
Officer
Jerome 2005 $73,000 $ 12,260 -
Kindrachuk (3) 2004 $42,738 $ 9,000 $13,612
Vice President 2003 $ - $ - $53,226
27
(1) Fiscal years ended December 31, 2005, 2004 and 2003.
(2) The other compensation for Peter F. Russo was fees for consulting work
completed prior to his employment.
(3) The other compensation in 2004 and 2003 for Jerome Kindrachuk was fees for
consulting work completed prior to his employment.
None of our officers or directors received any compensation for services from
our date of inception (November 17, 1999) to December 31, 2002.
EMPLOYMENT AGREEMENTS
On March 11, 2003, we entered into a contract with Peter F. Russo to serve as
President. It provided for three years' employment from March 11, 2003, at a
salary of $10,000 per month through June 30, 2003, and $15,000 per month
thereafter, payable in bi-monthly installments, plus benefits. On September 20,
2004 the contract was amended to adjust the salary to $6,500 per month effective
January 1, 2004. Certain benefits were also eliminated effective the same dates.
On February 28, 2006, we entered into a new employment agreement with Mr. Russo.
This agreement was effective March 11, 2006, for a term of three years. The
agreement provides for a base salary of $180,000 per year, but until the Board
of Directors determines that the financial condition of the Company permits the
payment of that salary, the minimum salary to be paid to Mr. Russo is $6,500 per
month. The agreement contains provisions for discharge for "cause", including
disability, in which cases no further compensation or benefits would be payable
under the agreement. If a termination is other than for death or "cause", the
base salary is continued for six months following the termination of employment,
or up to the time Mr. Russo commences other full time employment. The agreement
also contains a provision for additional compensation to Mr. Russo if his
employment is terminated without "cause" due to a change in control.
On May 23, 2005, we entered into an executive employment agreement with Mr.
Chilek. This agreement was effective June 1, 2005, for an initial term of three
years, and the term is automatically extended for additional one year periods if
neither party gives notice of termination at least 90 days prior to the end of
the initial term or any current additional one year term. The agreement provides
for a base salary of $132,000 per year, but until the Board of Directors
determines that the financial condition of the Company permits the payment of
that salary, the minimum salary to be paid to Mr. Chilek is $6,000 per month.
The agreement contains provisions for discharge for "cause", including
disability, in which cases no further compensation or benefits would be payable
under the agreement. If a termination is other than for death or "cause", or the
Company elects not to renew the Agreement, the base salary is continued for six
months following the termination of employment, or up to the time Mr. Chilek
commences other full time employment. The agreement also contains a provision
for additional compensation to Mr. Chilek if his employment is terminated
without "cause" due to change in control.
We also have an employment contract with Jerome Kindrachuk, effective July 2003
prior to Mr. Kindrachuk's appointment as an officer of the Company. It provides
for three years' employment from July 1, 2003, at a salary of $10,000 per month,
payable in bi-monthly installments, plus benefits. An amendment was made to the
contract to reduce compensation to $6,000 per month effective January 1, 2004,
until the Board of Directors determines that the financial condition of the
Company permits the payment of that salary.
28
DIRECTORS' COMPENSATION
We do not compensate directors in their capacity as such nor do we compensate
our directors for attendance at meetings. We do reimburse our officers and
directors for reasonable expenses incurred in the performance of their duties.
COMPENSATION PLANS
STOCK OPTION PLANS
In December 2001, the Company's stockholders approved a stock option plan
entitled the 2001 Employee Stock Option Plan (the "2001 Plan"), pursuant to
which 2,000,000 shares of common stock were reserved for issuance, and in August
2004, our stockholders approved the 2004 Stock Option Plan (the "2004 Plan"),
pursuant to which 10,000,000 shares of common stock were reserved for issuance.
As of December 31, 2005, all shares under the 2001 Plan had been issued; at that
date, 2,000,000 shares were available for the grant of options under the 2004
Plan.
The 2004 Plan authorizes the Board of Directors (the "Board"), or a committee
comprised of non-employee directors ("Committee"), to grant, over a 10-year
period, options to purchase up to 10,000,000 shares of the Company's common
stock. Persons eligible to receive options under the Plan include key employees
and directors who are also employees of the Company or any subsidiary, and
consultants to the Company or any subsidiary, as determined by the Board or
Committee. The persons to be granted options under the Plan and the number and
purchase price of the shares represented by each option, the time or times at
which the options may be exercised, and the terms and provisions of each option
(which need not be uniform for all options) will be determined by the Board or
Committee. The purchase price per share may not be less than 100% of the fair
market value of the Company's stock at the time of grant. The purchase price may
be paid in cash or common stock of the Company held for at least six months with
a market value equal to that of the shares being acquired or, in the discretion
of the board or committee, any combination of these. Options granted under the
Plan may be in the form of "incentive stock options" which qualify as such under
Section 422 of the Internal Revenue Code or non-qualified stock options which do
not meet the criteria for incentive stock options under Section 422. The tax
treatment afforded stock options qualifying as incentive stock options is
generally more favorable to employees than that afforded to non-qualified stock
options, in that the exercise of an incentive stock option does not require the
optionee to recognize income for federal income tax purposes at the time of
exercise. (The difference between the exercise price of the incentive stock
option and the fair market value of the stock at the time of purchase is,
however, an item of tax preference which may require payment of an alternative
minimum tax.)
Options granted under the Plan are, generally, transferable only by will or by
the laws of descent and distribution, and may be exercised during the lifetime
of the optionee only by the optionee or by his legal representative in the event
of his disability. In its sole discretion, however, the Board or Committee may
permit an optionee to make certain transfers of non-qualified stock options,
provided that the transfers are to "family members" and are not for value, as
defined in the General Instructions to Form S-8 under the Securities Act of
1933.
The term of each option cannot be more than 10 years from the date of grant, and
options can be exercised only during the participant's employment with the
Company or one of its subsidiaries. If any option expires or is terminated prior
to its exercise in full and prior to the termination of the Plan, the shares
subject to such unexercised option will be available for the grant of new
options under the Plan. Further, any shares used as full or partial payment by
an optionee upon exercise of an option may subsequently be used by the Company
to satisfy other options granted under the Plan, subject to the limitation on
the total number of shares authorized to be issued under the Plan.
The Plan permits an outstanding option to be exercised after termination of
employment only to the extent that the option was exercisable on the date of
termination but in no event beyond the original term of the option (i) within
one year by the estate or rightful heir(s) of the optionee if the optionee's
employment is terminated due to the optionee's death; (ii) within one year after
the date of such termination if the termination is due to the optionee's
Disability (as defined in the Plan); or (iii) within three months after the date
of such termination if the termination was due to the optionee's Retirement (as
defined in the Plan) or was for reasons other than death or Disability and other
than "for cause" (as defined in the Plan). Upon termination of an optionee's
employment "for cause," any unexercised options held by the optionee will be
forfeited.
29
Unexercised options will terminate in the event of the Company's dissolution,
liquidation, or sale of all or substantially all of its assets. In the event of
our merger with another corporation, the option would be assumed or an
equivalent option substituted by the successor corporation or, if such successor
corporation does not agree to assume the option or substitute an equivalent
option, the Board can provide for the option holder to have the right to
exercise the option as to all of the optioned shares, including shares as to
which the option would not otherwise be exercisable. The number of shares
subject to options and the option prices will be appropriately adjusted in the
event of changes in our outstanding common stock by reason of stock dividends,
recapitalizations, mergers, consolidations, stock splits and combinations of
shares, and the like. The Board may at any time terminate or modify the Plan
except, that without further approval of the stockholders, the Board may not
make any changes to the Plan which would materially increase the number of
shares that may be issued under the Plan, materially modify the eligibility
requirements for participation in the Plan, or require stockholder approval
under the Delaware General Corporation Law, the Exchange Act, or the Internal
Revenue Code.
The 2004 Plan gives the Board the power to issue a restricted stock award to an
Employee representing shares of Common Stock that are issued subject to such
restrictions on transfer and other incidents of ownership and such forfeiture
conditions as the Board may determine ("Restricted Shares"). In connection with
issuance of any Restricted Shares, the Board may (but shall not be obligated to)
require the payment of a specified purchase price (which price may be less than
Fair Market Value as defined in the Plan).
OTHER PLANS
We have not adopted any other deferred compensation, pension, profit sharing,
stock option plan or programs for the benefit of our officers or employees.
During the second quarter of 2003, the Company established a health insurance
benefit plan that is offered to all employees. During the third quarter of 2004,
the Company made a dental insurance plan available to all employees.
Option/SAR Grants in Last Fiscal Year
Individual Grants
- --------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of Percent of Exercise or
Securities Total Base Price Expiration
Name Underlying Options/SARSs ($/Sh) Date
Options/SARS Granted to
Granted Employee in
Fiscal Year
- ----------------------------------------------------------------------------------------------------------
Peter F. Russo - - - -
- ----------------------------------------------------------------------------------------------------------
Martin G. Chilek - - - -
- ----------------------------------------------------------------------------------------------------------
Jerome Kindrachuk - - - -
- ----------------------------------------------------------------------------------------------------------
The following table summarizes the number and value of unexercised options held
by our executive officers as of December 31, 2005.
30
FISCAL YEAR-END OPTION VALUES
- ----------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money Option/
Options/SARS At SARs at Fiscal
Fiscal Year-End (#) Year-End ($)
Shares Acquired on Exercisable/ Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable Unexercisable
- --------------------------- -------------------- --------------------- ------------------------ ----------------------
Peter F. Russo - - 2,500,000/0 825,000/0
800,000/1,700,000 264,000/561,000
Martin G. Chilek - - 1,750,000/0 577,500/0
800,000/950,000 264,000/313,500
Jerome Kindrachuk - - 750,000/0 247,500/0
500,000/250,000 165,000/82,500
The above value has been calculated based on closing price of the common stock
as quoted on the OTC Bulletin Board on December 31, 2005.
No officer or director exercised any options in the fiscal year ended December
31, 2005.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth information, as of March 30, 2006, with respect
to the beneficial ownership of the Company's Common Stock by each person known
by the Company to be the beneficial owner of more than five percent (5%) of the
outstanding Common Stock and by directors and officers of the Company, both
individually and as a group:
Name and Address of Beneficial Owner Number of Shares Owned Percentage**
Beneficially
Peter F. Russo (1) 2,600,000 6.11%
Martin G. Chilek (2) 1,850,000 4.43%
Jerome A. Kindrachuk (3) 750,000 1.84%
All Officers and Directors as a Group 5,200,000 11.55%
T&T Asset Management (4) 2,980,498 7.35%
Elvir Balic (5) 2,275,000 5.68%
Nice Holdings, Ltd. (6) 2,400,000 5.66%
Neil Berman (7) 5,399,920 11.99%
Mirus Opportunistic Fund (8) 5,950,000 14.86%
** Based on 40,034,629 shares outstanding on March 30, 2006.
- ----------------
(1) In addition to 100,000 shares owned directly, Mr. Russo holds options
expiring November 19, 2009 to purchase an aggregate of 2,500,000 shares of
common stock at an exercise price of $0.25 per share. Mr. Russo's address is c/o
Delta Mutual, Inc., 111 North Branch Street, Sellersville, Pennsylvania 18960.
31
(2) In addition to 100,000 shares owned directly, Mr. Chilek holds options
expiring November 19, 2009 to purchase an aggregate of 1,750,000 shares of
common stock at an exercise price of $0.25 share. Mr. Chilek's address is c/o
Delta Mutual, Inc., 111 North Branch Street, Sellersville, Pennsylvania 18960.
(3) Mr. Kindrachuk holds options expiring November 19, 2009 to purchase an
aggregate of 750,000 shares of common stock at an exercise price of $0.25 per
share. Mr. Kindrachuk's address is c/o Delta Mutual, Inc., 111 North Branch
Street, Sellersville, Pennsylvania 18960.
(4) In addition to 2,480,498 shares owned directly, T&T Asset Management holds
warrants expiring March 31, 2006 to purchase 500,000 shares of common stock at
an exercise price of $0.10 per share. The address for T&T Asset Management is
Bahnhofstrasse 73, 8001, Zurich, Switzerland.
(5) The address of Elvir Balic is c/o Credit Suisse, Bahnhofstrasse 53, CH-8070,
Zurich, Switzerland.
(6) Nice Holdings, Ltd., holds notes convertible into 1,200,000 shares of common
stock at a conversion price of $0.05 per share and warrants expiring March 31,
2006 to purchase 1,200,000 shares of common stock at an exercise price of $0.10
per share. The address of Nice Holdings is 55 Zhen Nin Road, B-1904, Shanghai,
China.
(7) In addition to 380,000 shares owned directly, Mr.Berman holds notes
convertible into 1,549,920 shares of common stock at a conversion price of
$0.125 per share, notes convertible into 3,320,000 shares at a conversion price
of $0.05 per share, and warrants expiring March 31, 2006 to purchase 150,000
shares of common stock at an exercise price of $0.10 per share. Mr. Berman's
address is 21346 St. Andrews Blvd., #421, Boca Raton, Florida 33433.
(8) The address of Mirus Opportunistic Fund is c/o Julius Baer Trust Company
(Cayman) Ltd., P. O. Box 1100GT, Windward III, Regatta Office Park, Grand
Cayman.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information with respect to our common stock
issued and available to be issued under outstanding options, warrants and rights
as of December 31, 2005.
- ----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
Plan category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a))
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 8,000,000 $0.25 2,000,000
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders
- ----------------------------------------------------------------------------------------------------------------------
Total 8,000,000 $0.25 2,000,000
- ----------------------------------------------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On March 11, 2003, we entered into a contract with Peter F. Russo to serve as
President. It provides for three years' employment from March 11, 2003, at a
salary of $10,000 per month through June 30, 2003, and $15,000 per month
thereafter, payable in bi-monthly installments, plus benefits. On September 20,
2004 the contract was amended to adjust the salary to $6,500 per month effective
January 1, 2004. Certain benefits were also eliminated effective the same dates.
32
On February 28, 2006, we entered into a new employment agreement with Mr. Russo.
This agreement was effective March 11, 2006, for a term of three years. The
agreement provides for a base salary of $180,000 per year, but until the Board
of Directors determines that the financial condition of the Company permits the
payment of that salary, the minimum salary to be paid to Mr. Russo is $6,500 per
month. The agreement contains provisions for discharge for "cause", including
disability, in which cases no further compensation or benefits would be payable
under the agreement. If a termination is other than for death or "cause", the
base salary is continued for six months following the termination of employment,
or up to the time Mr. Russo commences other full time employment. The agreement
also contains a provision for additional compensation to Mr. Russo if his
employment is terminated without "cause" due to a change in control.
On May 23, 2005, we entered into an executive employment agreement with Martin
G. Chilek, who is our Senior Vice President, Treasurer and Chief Financial
Officer. This agreement was effective June 1, 2005, for an initial term of three
years, and the term is automatically extended for additional one year periods if
neither party gives notice of termination at least 90 days prior to the end of
the initial term or any current additional one year term. The agreement provides
for a base salary of $132,000 per year, but until the Board of Directors
determines that the financial condition of the Company permits the payment of
that salary, the minimum salary to be paid to Mr. Chilek is $6,000 per month.
The agreement contains provisions for discharge for "cause", including
disability, in which cases no further compensation or benefits would be payable
under the agreement. If a termination is other than for death or "cause", or the
Company elects not to renew the Agreement, the base salary is continued for six
months following the termination of employment, or up to the time Mr. Chilek
commences other full time employment. The agreement also contains a provision
for additional compensation to Mr. Chilek if his employment is terminated
without "cause" due to a change in control.
We also have an employment contract with Jerome Kindrachuk effective July 2003,
prior to Mr. Kindrachuk's appointment as an officer of the Company. It provides
for three years' employment from July 1, 2003, at a salary of $10,000 per month,
payable in bi-monthly installments, plus benefits. On September 22, 2004 the
contract was amended to adjust salary to $6,000 per month effective January 1,
2004, until the Board of Directors determines that the financial condition of
the Company permits the payment of that salary. Certain benefits were also
eliminated effective the same dates.
During the first quarter of 2004, the Company paid consulting fees to Jerome
Kindrachuk of $13,612 for services rendered prior to his employment. The
following officers of the Company were issued shares of common stock under the
2001 Employee Stock Option Plan as follows:
- -------------------------------------------------------------------------------------------------------------
Name Date of Issuance Number of Shs. Per Share
Valuation
- -------------------------------------------------------------------------------------------------------------
Peter F. Russo December 10, 2004 50,000 $0.18
January 21, 2005 122,600 $0.10
- -------------------------------------------------------------------------------------------------------------
Martin G. Chilek January 14, 2004 89,500 $0.078
December 10, 2004 50,000 $0.18
January 21, 2005 122,600 $0.10
- -------------------------------------------------------------------------------------------------------------
Jerome Kindrachuk December 10, 2004 50,000 $0.18
January 21, 2005 122,600 $0.10
- -------------------------------------------------------------------------------------------------------------
33
ITEM 13. EXHIBITS.
Exhibit No. Description of Exhibits
- ------------ ---------------------------------------------------------------
3.1 Articles of Incorporation of the Company, as currently in
effect, incorporated herein by reference to Exhibit 3.1 to
Amendment No. 1 to the Company's Registration Statement on Form
10-SB filed with the Commission on June 15, 2000.
3.1a Amendment to Certificate of Incorporation, filed September 1,
2004. Incorporated herein by reference to Exhibit 3.1a to the
Company's Current Report on Form 8-K, filed with the Commission
on September 3, 2004.
3.1b Form of Restatement of Certificate of Incorporation of Delta
Mutual, Inc., as amended. Incorporated herein by reference to
Exhibit 3.1b to the Company's Quarterly Report on Form 10-QSB,
filed with the Commission on November 15, 2004.
3.2 By-Laws of the Company. Incorporated herein by reference to
Exhibit 3.2 to Amendment No. 1 to the Company's Registration
Statement on Form 10-SB filed with the Commission on June 15,
2000.
3.2a Amendment to Article III, Section I of the By-Laws.
Incorporated herein by reference to the Company's quarterly
report on Form 10-QSB, filed with the Commission on November
21, 2000.
34
4.1 Delta Mutual, Inc. 2001 Employee Stock Option Plan,
incorporated herein by reference to Appendix B to the Company's
definitive Information Statement pursuant to Section 14C of the
Exchange Act, filed with the Commission on November 9, 2001.
4.2 Delta Mutual, Inc. 2001 Employee Stock Option Plan, as amended
December 1, 2003.
4.2a Delta Mutual, Inc. 2004 Stock Option Plan. Incorporated herein
by reference to Exhibit B to the Company's Definitive Proxy
Statement, filed with the Commission on June 16, 2004.
4.3 Form of 6% Convertible Promissory Notes of the Company due
2006. Incorporated by reference to Exhibit 4.3 to the Company's
Current Report on Form 8-K, filed with the Commission on
September 24, 2004.
4.4 Form of Warrants to purchase shares of Common Stock, of the
Company issued to the purchasers of the Company's 6%
Convertible Promissory Notes. Incorporated by reference to
Exhibit 4.4 to the Company's Current Report on Form 8-K, filed
with the Commission on September 24, 2004.
4.5 4% Convertible Promissory Note of the Company due May 2006
issued in the principal amount of $129,160 on May 12, 2004.
Incorporated herein by reference to Exhibit 4.5 to the
Company's Quarterly Report on Form 10-QSB, filed with the
Commission on November 15, 2004.
4.6 Convertible Promissory Note of the Company due May 2006 issued
in the principal amount of $193,740 on May 12, 2004.
Incorporated herein by reference to Exhibit 4.6 to the
Company's Quarterly Report on Form 10-QSB, filed with the
Commission on November 15, 2004.
4.7 4% Convertible Promissory Note "A" of the Company due December
2006 issued in the principal amount of $157,000 on July 1,
2004. Incorporated herein by reference to Exhibit 4.7 to the
Company's Quarterly Report on Form 10-QSB, filed with the
Commission on November 15, 2004.
4.8 4% Convertible Promissory Note "B" of the Company due January
2007 issued in the principal amount of $37,500 on July 16,
2004. Incorporated herein by reference to Exhibit 4.8 to the
Company's Quarterly Report on Form 10-QSB, filed with the
Commission on November 15, 2004.
35
4.9 6% Promissory note of the Company due December 2005 issued in
the principal amount of $71,731.29 on March 22, 2005.
Incorporated herein by reference to Exhibit 4.9 to the
Company's current report on Form 8K filed with the Commission
on March 25, 2005.
4.10 8% Promissory note of the Company due October 2, 2005 issued in
the principal amount of $210,655.04 on April 5, 2004.
Incorporated herein by reference to Exhibit 4.10 to the
Company's current report on Form 8K filed with the Commission
on April 11, 2005.
10.1 Agreement of Sale with Enterprises Solutions, Inc. dated May
11, 2001, and amendments. Incorporated herein by reference to
Exhibit 10.2 to the Company's current report on Form 8-K, filed
with the Commission on May 23, 2001.
10.2 Promissory note from Enterprises Solutions, Inc. dated October
31, 2001. Incorporated by reference to Exhibit 10.3 to the
Company's annual report on Form 10-KSB, filed with the
Commission on April 16, 2002.
10.3 Promissory Note to Rosanne Solomon dated November 27, 2001.
Incorporated herein by reference to Exhibit 10.1 to Amendment
No. 3 to the Company's registration statement on Form S-4,filed
with the Commission on November 30, 2001.
10.4 License Agreement with Enterprises Solutions, Inc. dated
December 11, 2001. Incorporated by reference to Exhibit 10.5 to
the Company's annual report on Form 10-KSB, filed with the
Commission on April 16, 2002.
10.5 Employment Agreement between Kenneth A. Martin and the Company.
Incorporated by reference to Exhibit 10.6 to the Company's
annual report on Form 10-KSB, filed with the Commission on
April 16, 2002.
10.6 Agreement, dated January 13, 2003, between the Company and
Kenneth A. Martin. Incorporated by reference to Exhibit 10.7 to
the Company's registration statement on Form S-8, filed with
the Commission on February 13, 2003.
36
10.7 Agreement, dated February 3, 2003, between the Company and
Peter F. Russo. Incorporated by reference to Exhibit 10.8 to
the Company's registration statement on Form S-8, filed with
the Commission on February 13, 2003.
10.8 Agreement, dated February 4, 2003, between the Company and J.
Dapray Muir. Incorporated by reference to Exhibit 10.9 to the
Company's registration statement on Form S-8, filed with the
Commission on February 13, 2003.
10.9 Executive Employment Agreement, effective March 11, 2003, by
and between the Company and Peter F. Russo. Incorporated herein
by reference to Exhibit 10.8 to the Company's Annual Report on
Form 10-KSB, filed with the Commission on April 14, 2003.
10.10 Consulting Agreement, effective February 28, 2003, between
M.U.R.G., LLC and Delta Mutual, Inc. Incorporated herein by
reference to Exhibit 10.9 to the Company's Annual Report on
Form 10-KSB, filed with the Commission on April 14, 2003.
10.11 Agreement, March 31, 2003, between the Company and Burrows
Consulting Inc. Incorporated herein by reference to Exhibit
10.3 to the Company's current report on Form 8-K, filed with
the Commission on April 25, 2003.
10.12 License Agreement with Joseph Friedman and Sons, International,
Inc., dated April 2, 2003. Incorporated herein by reference to
Exhibit 10.7 to the Company's Annual Report on Form 10-KSB,
filed with the Commission on April 14, 2003.
10.13 Agreement, dated July 1, 2003, between the Company and Gary T.
Robinson. Incorporated herein by reference to Exhibit 10.10 to
the Company's registration statement on Form S-8, filed with
the Commission on August 20, 2003.
10.14 Agreement, dated August 29, 2003, between the Company and
Burrows Consulting Inc. Incorporated herein reference to
Exhibit 10.10 to the Company's current report on Form 8-K,
filed with the Commission on September 4, 2003.
37
10.15 Strategic Alliance Agreement, dated September 10, 2003, between
Delta-Envirotech, Inc. and ZAFF International Ltd. Incorporated
herein by reference to Exhibit 99.2 to the Company's current
report on Form 8-K, filed with the Commission on January 22,
2004.
10.16 Agreement, dated January 14, 2004, by and between Delta Mutual,
Inc. and Hi Tech Consulting and Construction, Inc. Incorporated
herein by reference to Exhibit 10.16 to the Company's Annual
Report on Form 10-KSB, filed with the Commission on April 6,
2004.
10.17 Agreement to Purchase Stock, dated January 14, 2004, between
Delta Mutual, Inc. and Hi Tech Consulting and Construction,
Inc., as sellers, and Ali Razmara, as purchaser. Incorporated
herein by reference to Exhibit 10.17 to the Company's Annual
Report on Form 10-KSB, filed with the Commission on April 6,
2004.
10.18 Consulting Agreement, dated as of March 21, 2004, between
Delta Mutual, Inc. and Clark Street Capital. Incorporated
herein by reference to Exhibit 10.18 to the Company's Quarterly
Report on Form 10-QSB, filed May 19, 2004.
10.19 Consulting Services Agreement, dated as of April 16, 2004,
between Delta Mutual, Inc. and Basic Investors, Inc.
Incorporated herein by reference to Exhibit 10.19 to the
Company's Quarterly Report on Form 10-QSB, filed May 19, 2004.
10.20 Memorandum of Understanding, dated as of March 17, 2004, by and
between Delta-Envirotech, Inc., PT Faryan Nusantara and
Crescent Aeronautical Technology. Incorporated herein by
reference to Exhibit 10.20 to the Company's Quarterly Report on
Form 10-QSB, filed May 19, 2004.
10.21 Agreement, dated April 5, 2004, Trans Indies Realty Investment
Corporation and Delta Developers Corp. Incorporated herein by
reference to Exhibit 10.21 to the Company's Quarterly Report on
Form 10-QSB, filed August 12, 2004.
38
10.22 Term Sheet, dated May 12, 2004, among Delta Mutual, Inc., Neil
Berman and Ivano Angelastri. Incorporated herein by reference
to Exhibit 10.22 to the Company's Quarterly Report on Form
10-QSB, filed August 12, 2004.
10.23 Term Sheet, dated July 1, 2004, between Delta Mutual, Inc. and
Neil Berman. Incorporated herein by reference to Exhibit 10.23
to the Company's Quarterly Report on Form 10-QSB, filed August
12, 2004.
10.24 Settlement Agreement and Mutual General Releases, dated
November 26, 2004, between the Company and Joseph Friedman and
Sons International, Inc. Incorporated herein by reference to
Exhibit 10.24 to the Company's Current Report on Form 8-K,
filed with the Commission on December 2, 2004.
10.26 Executive Employment Agreement, dated May 23, 2005, between
Delta Mutual, Inc. and Martin G. Chilek. Incorporated herein
by reference to Exhibit 10.26 to the Company's Current Report
on Form 8-K, filed with the Commission on May 25, 2005.
10.27 Investment Banking Agreement, dated June 17, 2005, between
Delta Mutual, Inc. and T&T Vermoegensverwaltungs AG.
Incorporated herein by reference to Exhibit 10.27 to the
Company's Current Report on Form 8-K, filed with the
Commission on June 30, 2005.
10.27a Addendum, dated August 3, 2005, to Investment Banking
Agreement, dated June 17, 2005, by and between Delta Mutual,
Inc. and T&T Vermoegensverwaltungs AG. Incorporated herein by
reference to Exhibit 10.27a to the Company's Amended Current
Report on Form 8-K, filed with the Commission on August 18,
2005.
10.28 Purchase Agreement, dated August 26, 2005, by and between
Delta Technologies, Inc., as Buyer, and Richard F. Straub, Jr.
and John M. Latza, as Sellers. Incorporated herein by
reference to Exhibit 10.28 to the Company's Current Report on
Form 8-K, filed with the Commission on August 31, 2005.
10.29 Consulting Services Agreement, dated August 26, 2005, by and
between Delta Mutual, Inc. and Juan Bautista Rodriguez Pagan.
Incorporated herein by reference to Exhibit 10.29 to the
Company's Current Report on Form 8-K, filed with the
Commission on August 31, 2005.
10.30 Consulting Services Agreement, dated August 26, 2005, by and
between Delta Technologies, Inc. and Richard F. Straub, Jr.
Incorporated herein by reference to Exhibit 10.30 to the
Company's Current Report on Form 8-K, filed with the
Commission on August 31, 2005.
10.31 Service Order, dated February 6, 2006, between Pertamina and
PT. Triyudha. Incorporated herein by reference to Exhibit
10.31 to the Company's Current Report on Form 8-K, filed with
the Commission on February 27, 2006.
10.32 Executive Employment Agreement, dated February 28, 2006,
between Delta Mutual, Inc. and Peter F. Russo. Incorporated
herein by reference to Exhibit 10.32 to the Company's Current
Report on Form 8-K, filed with the Commission on March 1,
2006.
39
10.33 Form of 8% Term Notes issued April 5, 2005 by Delta Mutual,
Inc., in the aggregate principal amount of $210,655, filed
herewith.
10.33a Form of First Amendment, dated September 30, 2005, to Delta
Mutual, Inc. 8% Term Notes issued April 5, 2005, filed
herewith.
10.33b Form of Second Amendment, dated December 19, 2005, to Delta
Mutual, Inc. 8% Term Notes issued April 5, 2005, filed
herewith.
10.33c Form of Third Amendment, dated March 20, 2006, to Delta Mutual,
Inc. 8% Term Notes issued April 5, 2005, filed herewith.
14. Delta Mutual, Inc. Code of Conduct and Business Ethics.
Incorporated herein by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-KSB, filed with the
Commission on April 14, 2005.
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(1) Aggregate fees for the last two years:
2005 2004
---- ----
$ 99,000 $75,116
(2) Audit related fees: 2005 2004
---- ----
$ 91,500 $72,704
(3) Tax fees:
2005 2004
---- ----
$ 7,500 $ 5,000
(4) All other fees: NA
(5) Audit committee pre-approval processes, percentages of services approved by
audit committee, percentage of hours spent on audit engagement by persons other
than principal accountant's full time employees: NA
40
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DELTA MUTUAL, INC.
Dated: April 3, 2006
By:/s/ Peter F. Russo
------------------------------
Peter F. Russo
President, Chief Executive Officer and Director
By:/s/ Martin G. Chilek
------------------------------
Martin G. Chilek
Senior Vice President and Chief Financial Officer
Principal Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ----------------- ----------------- ---------------
/s/ Peter F. Russo
- ---------------------
Peter F. Russo President April 3, 2006
and Director
41
DELTA MUTUAL, INC. AND CONSOLIDATED SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm F-1
Financial Statements:
Consolidated Balance Sheet as of December 31, 2005 F-2
Consolidated Statements of Operations for the years ended
December 31, 2005 and 2004 F-3
Consolidated Statements of Stockholders' Deficiency as of
December 31, 2005 and 2004 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2005 and 2004 F-6
Notes to Consolidated Financial Statements F-8
42
{LETTERHEAD OF WIENER, GOODMAN & COMPANY, P.C.)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Delta Mutual Inc.
We have audited the accompanying consolidated balance sheet of Delta Mutual,
Inc. and subsidiaries ("Delta" or the "Company") as of December 31, 2005, and
the related consolidated statements of operations, stockholders deficiency and
cash flows for each of the two years in the period ended December 31, 2005.
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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Delta Mutual, Inc. and subsidiaries
as of December 31, 2005 and 2004, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. Since a change in control, new
Company management has embarked upon a new mission and strategic direction
intending to establish a series of subsidiaries and joint ventures, primarily
for the establishment of business operations focusing upon providing
technologies and services in the environmental remediation industry and
utilizing certain construction technologies to participate in selected housing
development projects. As more fully explained in Note 1 to the financial
statements, the Company has a deficiency in net assets at December 31, 2005,
incurred losses from operations since inception and needs to obtain additional
financing to meet its obligations on a timely basis and to fulfill its proposed
activities and ultimately achieve a level of sales adequate to support its cost
structure.
These uncertainties raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans are also described in Note 1.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties should the
Company be unable to continue as a going concern.
/s/ WIENER, GOODMAN & COMPANY, P.C.
- -----------------------------------
WIENER, GOODMAN & COMPANY, P.C.
Eatontown, New Jersey
March 29, 2006
43
DELTA MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31,
2005
-----------
Current Assets:
Cash $ 67,042
Accounts receivable 20,000
Prepaid expenses 204,849
-----------
Total Current Assets 291,891
Property and equipment - net 436,199
Intangible assets 140,617
Other assets 1,401
-----------
TOTAL ASSETS
$ 870,108
===========
LIABILITIES AND STOCKHOLDERS'
DEFICIENCY
Current Liabilities:
Accounts payable $ 327,822
Accrued expenses 670,424
Accretion of convertible debt 547,516
Loan from stockholder 23,910
Notes payable 210,655
-----------
Total Current Liabilities 1,780,327
Long Term Liabilities:
Accretion of convertible debt 18,041
-----------
TOTAL LIABILITIES 1,798,368
-----------
Minority interest in consolidated subsidiaries 257,400
-----------
44
Commitments and contingencies --
Stockholders' Deficiency:
Common stock $0.0001 par value - authorized
100,000,000 shares; 35,321,598
outstanding 3,532
Additional paid-in capital 5,441,047
Accumulated deficit (6,320,239)
Subscription receivable (10,000)
Deferred stock-based compensation (300,000)
-----------
Total Stockholders' Deficiency (1,185,660)
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIENCY $ 870,108
===========
See Notes to Consolidated Financial Statements
45
DELTA MUTUAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------------
2005 2004
------------ ------------
Revenue $ 20,000 $ --
------------ ------------
Costs and Expenses
Costs of sales
6,000 --
General and administrative
Expenses 1,847,561 1,848,078
Impairment of long term asset 170,000 --
------------ ------------
2,023,561 1,848,078
------------ ------------
Loss from operations (2,003,561) (1,848,078)
Accretion of interest expense -
convertible debt (423,357) (142,200)
Writedown/loss from joint ventures -- (33,799)
Interest expense (130,292) (27,966)
------------ ------------
Loss before minority interest (2,552,710) (2,052,043)
Minority interest share of (income)
loss of consolidated subsidiaries (23,230) 101,644
Benefit from income taxes -- --
------------ ------------
Net loss $ (2,580,440) $ (1,950,399)
============ ============
Loss per common share-
basic and diluted $ (0.10) $ (0.14)
============ ============
Weighted average number of
common shares outstanding-
basic and diluted 25,128,690 14,250,963
============ ============
See Notes to Consolidated Financial Statements
46
DELTA MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Number of Deferred Stock
Common Common Paid In Accumulated Subscription Based
Shares Stock Capital Deficit Receivable Compensation Total
------ ----- ------- ------- ---------- ------------ -----
Beginning Balance January 1, 2004 9,361,688 $ 936 $ 1,231,574 $(1,789,400) $ -- $ -- $ (556,890)
Issuance of common stock for settlement
agreement (valued at $0.17 per share) 412,000 41 69,999 -- -- -- 70,040
Issuance of common stock for
services (valued at $0.05 - $0.30 per share) 3,840,000 384 457,791 -- -- -- 458,175
Sale of common stock 2,544,055 254 275,996 -- -- -- 276,250
Issuance of common stock for repayment
and conversion for debt and interest expense
(valued at $0.05 - $0.137 per share) 2,636,328 264 246,178 -- -- -- 246,442
Issuance of common stock awards from the
Company's 2001 stock option plan
(valued at $0.078 - $0.18 per share) 339,500 34 51,966 -- -- -- 52,000
Beneficial conversion feature of
convertible debt -- -- 891,400 -- -- -- 891,400
Net (loss) -- -- -- (1,950,399) -- -- (1,950,399)
----------- -------- ----------- ----------- ------ ------ ----------
Balance at December 31, 2004 19,133,571 1,913 3,224,904 (3,739,799) -- -- (512,982)
47
DELTA MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
Deferred Stock
Number of Common Paid in Accumulated Subscription Based
Common Shares Stock Capital Deficit Receivable Compensation Total
------------- -------- ----------- ----------- ------------ -------------- -----------
Beginning Balance January 1,
2005 19,133,571 1,913 3,224,904 (3,739,799) -- -- (512,982)
Issuance of common stock for
conversion of debt 4,650,000 465 (465) -- -- -- --
Issuance of common stock for interest
(valued at $0.05 per share) 230,852 24 11,518 -- -- -- 11,542
Issuance of common stock for
services (valued at $0.27 -
$0.66 per share) 902,895 90 411,995 -- -- -- 412,085
Issuance of common stock for
intellectual property (valued at $0.43
per share) 216,279 22 92,978 -- -- -- 93,000
Sale of common stock 9,075,001 907 1,138,928 -- -- -- 1,139,835
Issuance of common stock upon exercise
of common stock warrants
(valued at $0.10 per share) 500,000 50 49,950 -- (10,000) -- 40,000
Issuance of common stock awards from the
Company's 2001 stock option
plan
(valued at $0.10 per share) 613,000 61 61,239 -- -- -- 61,300
Deferred compensation expense -- -- 450,000 -- -- (300,000) 150,000
Net (loss) -- -- -- (2,580,440) -- -- (2,580,440)
------------- -------- ----------- ----------- ------------ -------------- -----------
Balance at December 31, 2005 35,321,598 $ 3,532 $ 5,441,047 $(6,320,239) $ (10,000) $ (300,000) $(1,185,660)
============= ======== =========== =========== ============ ============== ===========
48
DELTA MUTUAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------
2005 2004
----------- -----------
Cash flows from operating
activities:
Net loss $(2,580,440) $(1,950,399)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 9,406 2,137
Bad debt -- 47,521
Non-cash employee compensation 61,300 52,000
Non-cash compensation and interest 423,627 528,215
Accretion of convertible debt 423,357 142,200
Writedown/loss from joint ventures -- 33,799
Compensatory element of option Issuance 150,000 --
Impairment of long term asset 170,000 --
Minority interest in income (losses)
of consolidated subsidiaries 23,230 (101,644)
Changes in operating assets
and liabilities 218,371 (106,253)
----------- -----------
Net cash used in operating activities (1,101,149) (1,352,424)
----------- -----------
Cash flows from investing activities:
Acquisition of intellectual
property rights (50,000) --
Purchase of fixed assets (360,999) (3,793)
----------- -----------
Net cash used in
investing activities (410,999) (3,793)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 1,139,835 276,250
Proceeds from exercise of warrants 40,000 --
Proceeds from loans 282,385 --
Repayment of loan (47,820) --
Repayment for former officer
and stockholder -- (56,364)
Repayment to related parties -- (10,000)
Proceeds from convertible debt -- 961,400
Payments to minority interests (96,504) --
Proceeds from minority interest 147,514 284,654
----------- -----------
Net cash provided by
financing activities 1,465,410 1,455,940
----------- -----------
Net increase (decrease) in cash (46,738) 99,723
Cash - Beginning of period 113,780 14,057
----------- -----------
Cash - End of period $ 67,042 $ 113,780
=========== ===========
49
DELTA MUTUAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years Ended Dec 31,
-------------------------
2005 2004
--------- ---------
Supplementary information:
Cash paid during year for:
Interest $ 10,445 $ 12,328
========= =========
Income taxes $ -- $ --
========= =========
Changes in operating assets and
liabilities consists of:
(Increase) in accounts receivable (20,000) --
(Increase) in loans receivable -- (51,221)
(Increase) decrease in prepaid expenses (204,809) 3,922
Decrease in deposits 74,000 (119,500)
(Increase) in other assets -- (173,584)
Increase in accounts payable
and accrued expenses 369,180 234,130
--------- ---------
$ 218,371 $(106,253)
========= =========
Non-cash financing activities:
Issuance of common stock for debt $ 232,500 $ 46,442
========= =========
Issuance of common stock for intellectual
property rights $ 93,000 $ --
========= =========
See Notes to Consolidated Financial Statements
50
DELTA MUTUAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Delta Mutual, Inc. and subsidiaries ("Delta" or the "Company") are engaged in
providing environmental and construction technologies and services to certain
geographic reporting segments in the Far East, the Middle East, the United
States and Puerto Rico.
Basis of Presentation
The Company's financial statements for the year ended December 31, 2005 have
been prepared on a going concern basis which contemplates the realization of
assets and settlement of liabilities and commitments in the normal course of
business. Management recognizes that the Company's continued existence is
dependent upon its ability to obtain needed working capital through additional
equity and/or debt financing and revenue to cover expenses as the Company
continues to incur losses.
The Company's business is subject to most of the risks inherent in the
establishment of a new business enterprise. The likelihood of success of the
Company must be considered in light of the expenses, difficulties, delays and
unanticipated challenges encountered in connection with the formation of a new
business, raising operating and development capital, and the marketing of a new
product. There is no assurance the Company will ultimately achieve a profitable
level of operations.
The Company presently does not have sufficient liquid assets to finance its
anticipated funding needs and obligations. The Company's continued existence is
dependent upon its ability to obtain needed working capital through additional
equity and/or debt financing and achieve a level of sales adequate to support
its cost structure. Management is actively seeking additional capital to ensure
the continuation of its development activities and complete the proposed joint
ventures. However, there is no assurance that additional capital will be
obtained or that the joint ventures will be profitable. These uncertainties
raise substantial doubt about the ability of the Company to continue as a going
concern. The accompanying financial statements do not include any adjustments
that might result from the outcome of these uncertainties should the Company be
unable to continue as a going concern.
Far East (Indonesia)
Through its subsidiary, Delta-Envirotech, Inc., a local joint venture was
established with an Indonesian joint venture partner, PT. Triyudha, to conduct
oil sludge processing operations from refineries. On February 23, 2006, the
joint venture partner received the executed contract dated February 6, 2006 with
Pertamina, which provides payment of $100 per ton for processing approximately
3,000 metric tons of oil sludge, with a completion date of not later than April
21, 2006. The Indonesia joint venture company, PT. Triyudha-Envirotech, began
operations on December 15, 2005. These operations allowed the Company to record
its first revenue in December 2005.
51
Middle East
On January 2004, the Company's Delta-Envirotech subsidiary, entered into a
strategic alliance with ZAFF International, Ltd., a technology company in Saudi
Arabia, to pursue soil and water reclamation projects in Saudi Arabia and other
areas in the Middle East. In November, 2004, ZAFF International, Ltd. received
its operating license from the Saudi Arabia environmental authorities to employ
all soil, refinery waste and waste water technologies held by Delta for
environmental projects in that country. In August 2005, Delta-Envirotech reached
a working agreement with SaFarCu, a private Saudi Arabia company, to provide a
turn-key factory to manufacture insulating concrete wall forming (ICF) products
for the building industry. In August 2005, an additional working agreement was
reached with Saudi Gulf Environmental Protection Company (SEPCO), a private
Saudi Arabia company, on the structure of a proposed operation to recover silver
from used x-ray film.
United States
On August 26, 2005, the Company acquired, through a wholly-owned subsidiary,
intellectual property and filed a patent application for a new insulating
concrete wall forming (ICF) system. In addition to the patent filing, the
Company engaged a technical consultant and a business development consultant to
further the design and development of the Company's ICF products.
Puerto Rico
In December 2003, the Company formed a majority owned joint venture in Puerto
Rico to build low income homes under the Puerto Rico Section 124 low income
housing program, and secured the rights to 36 acres, that have been designated
Section 124 eligible, in the City of Aguadilla. In March 2004,the application
for construction of approximately 270 homes was submitted for approval and a
real estate agency was hired to sell the homes planned for construction. On June
28, 2005, the Company received notification from the property owners that the
Planning Board of Puerto Rico notified them that the Brisas del Atlantico
project was not approved because the 36-acre tract is located in a area zoned
rural/agricultural, and that housing development is not included in the current
master development plan for that area. In July 2005, the property owners
submitted a formal request to the Planning Board to reconsider its June 28
decision. In September 2005, the Planning Board notified the property owners
that, upon reconsideration, it reaffirmed its decision to deny the original
application. Based on that action, an administrative appeal was submitted to the
Tribunal de Circuito de Apelaciones (Appellate Tribunal) on October 21, 2005 to
eliminate the Planning Board's objection based on the current zoning of the
property. On March 2, 2006, the Company was informed that the Appellate Tribunal
upheld the decision of the Planning Board. Based on the Appellate Tribunal's
decision, the Company decided to write off $170,000 of design costs associated
with the Brisas del Atlantico project as of December 31, 2005.
As a result of the Appellate Tribunal's determination, the property owners filed
a motion requesting a review of that decision by the Supreme Court of Puerto
Rico.
In December 2004, the Company formed a second joint venture, and secured the
rights to a 40-acre tract to build approximately 300 homes as part of a 150-acre
development located in Guayanilla for a second Section 124 project. The master
plan for this entire project is currently being prepared by the project's
developer.
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the accounts of all
majority-owned subsidiaries where its ownership is more than 50 percent of
common stock. The consolidated statements also include the accounts of any
Variable Interest Entities ("VIEs") where the Company is deemed to be the
primary beneficiary, regardless of its ownership percentage. All significant
intercompany balances and transactions with consolidated subsidiaries are
eliminated in the consolidated financial statements. Where the Company's
ownership interest is less than 100 percent, the minority ownership interests
are reported in the consolidated balance sheets as a liability. The minority
ownership interest of the Company's earnings or loss, net of tax, is classified
as "Minority interest in earnings of consolidated subsidiaries" in the
consolidated statements of operations.
INVESTMENTS
Long-term investments between 20% and 50% in associated companies are accounted
for under the equity method and are included in other assets on the Company's
balance sheet at December 31, 2005. Investments in associated companies where
the Company has a controlling interest and exercises significant influence are
consolidated with the Company's operations unless otherwise disclosed.
52
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those
estimates.
LOSS PER SHARE
Basic and diluted loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding during the year. Potential
common shares are excluded from the loss per share calculation because the
effect would be antidilutive. Potential common shares relate to the convertible
debt, stock options and common stock purchase warrants. As of December 31, 2005,
there were 9,303,200 potential common shares related to convertible debt,
8,000,000 potential common shares related to stock options and 7,580,000
potential common shares related to common stock purchase warrants issued by the
Company. As of December 31, 2004 there were 13,953,200 potential common shares
related to convertible debt, 6,500,000 potential common shares related to stock
options and 8,080,000 potential common shares related to common stock purchase
warrants issued by the Company.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the guidance contained in SEC
Staff Accounting Bulletin No. 104 "Revenue Recognition Financial Statements"
(SAB No. 104). Revenue is recognized from the Company's environmental
remediation operation as the services are performed over the life of the
remediation contracts.
PREACQUISITION COSTS
The Company accounts for costs incurred prior to the date of acquisition of a
parcel of real property as preacquisition costs. Preacquisition costs are
capitalized if the property was acquired or the acquisition of the property is
probable. Capitalized preacquisition costs in excess of recoverable amounts are
charged to expense.
EVALUATION OF LONG-LIVED ASSETS
The Company reviews property and equipment and intellectual property costs for
impairment whenever events or changes in circumstances indicate the carrying
value may not be recoverable in accordance with guidance in Statement of
Financial Accounting Standards (SFAS) No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." If the carrying value of the long-lived asset
exceeds the undiscounted amount of the related estimated future cash flows, the
asset would be adjusted to its fair value and an impairment loss would be
charged to operations in the period identified.
DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation is provided for by the
straight-line method over the estimated useful lives of the related assets.
STOCK OPTION PLAN
The Company accounts for equity-based compensation issued to employees in
accordance with Accounting Principles Board ("APB") Opinion No. 25 "Accounting
for Stock Issued to Employees." APB No. 25 requires the use of intrinsic value
method, which measures compensation cost as the excess, if any, of the quoted
market price of the stock at the measurement date over the amount an employee
must pay to acquire the stock. The Company makes disclosures of pro forma net
loss and net loss per share as if the fair-value-based method of accounting had
been applied as required by SFAS No.123 (R), "Accounting for Stock-Based
Compensation."
53
The Company grants stock options to employees with exercise prices at fair
market value at the date of the grant. The Company can grant non-statutory
options to non-employees at prices below fair market value. The Company
continued to account for stock-based employee compensation under recognition and
measurement principal of APB Opinion No. 25 and related interpretations through
December 31, 2005. Thereafter, the Company will account for stock-based
compensation under SFAS No. 123 (R). The Company will account for the
compensation costs prospectively at the time of adoption.
The Company has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation cost for the Company's stock option plan been determined based on
the fair market value at the date of the grant of awards in 2005 and 2004,
consistent with the provisions of SFAS No. 123, the Company's net loss and loss
per share would have been increased to the pro forma amounts included below:
For the years ended
ended Dec. 31,
-----------------------------
2005 2004
----------- -----------
Net loss-as reported $(2,580,440) $(1,950,399)
Deduct: Total stock-based
employee compensation
expense determined
under the fair value
based method for all
awards, net of taxes 585,000 585,000
----------- -----------
Net loss-pro forma $(3,165,440) $(2,535,399)
=========== ===========
Loss per common share
basic and diluted -
as reported $ (0.10) $ (0.14)
Loss per common share
basic and diluted-
pro forma $ (0.13) $ (0.18)
The fair value of each option grant is estimated on the date of the grant
using Black- Scholes option-pricing model with the following
weighted-average assumptions used for grants made in 2005 and 2004,
respectively: dividends yield of 0%, expected volatility of 165% and 116%,
respectively, risk free interest rate of 5% and expected life of 5 years.
During the years ended December 31, 2005 and 2004, 1,500,000 and 6,500,000
options were granted, respectively.
The Company is also authorized to issue shares of stock to its employees
from its 2001 Employee Stock Option Plan (the "2001 Plan"). The Company
expenses the issuance of stock awards in accordance with SFAS No. 123.
Shares issued from the 2001 Plan were expensed at the time of issuance, as
the stock issued to the employees had no restrictions on sale. The Company
issued stock awards of 613,000, and 339,500 shares, to five employees,
from the 2001 Plan during the years ended December 31, 2005 and 2004,
respectively. The shares were issued at fair market value as compensation
to employees. The Company recorded compensation expense of $61,300 and
$52,000 in the Company's statement of operations for the years ended
December 31, 2005 and 2004, respectively. The shares issued are
non-forfeitable by the recipients.
STOCK-BASED COMPENSATION
The Company issues shares of its common stock to non-employees as stock based
compensation. The Company accounts for the services and interest expense using
the fair market value of the consideration issued. There are no restrictions and
the shares are non-forfeitable. For the years ended December 31, 2005 and 2004,
the Company issued 902,895 and 3,840,000 common shares, respectively, and
recorded expense of $412,085 and $458,175, respectively, in connection with the
issuance of these shares. In 2004, the Company issued 412,000 common shares and
recorded $70,040 in settlement expenses in connection with the termination of a
license agreement.
54
The Company also granted 8,880,000 warrants to the various lenders to acquire
the Company's common stock during the year ended December 31, 2004. The warrants
are exercisable at a price per share of $0.10, which was below the fair market
value at the time of the grant. The warrants may be exercised any time after
issuance and expire March 31, 2006. During the years ended December 31, 2005 and
2004; 500,000 and 800,000 warrants were exercised, respectively. These shares
were accounted for in accordance with EITF 00-19 and EITF 00-27. See Note 7 to
Consolidated Financial Statements.
INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
under which deferred taxes are recognized by applying enacted tax rates
applicable to future years to the differences between financial statement
carrying amounts and the tax basis of reported assets and liabilities. The
principal item giving rise to deferred taxes are future tax benefits of certain
net operating loss carryforwards.
FOREIGN CURRENCY TRANSLATION
The functional currency for some foreign operations is the local currency.
Assets and liabilities of foreign operations are translated at balance sheet
date rates of exchange and income, expense and cash flow items are translated at
the average exchange rate for the period. Translation adjustments in future
periods will be recorded in Other Comprehensive Income. The translation gains or
losses were not material for the year ended December 31, 2005.
INTANGIBLES
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 specifies the financial accounting and reporting for
acquired goodwill and other intangible assets. Goodwill and intangible assets
that have indefinite useful lives are not amortized but rather they are tested
at least annually for impairment unless certain impairment indications are
identified.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For financial instruments including cash, accounts payable, accrued expenses,
and convertible debt, it was assumed that the carrying amount approximated fair
value because of the short maturities of such instruments.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts to conform to
the current year presentation.
NEW FINANCIAL ACCOUNTING STANDARDS
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154, "Accounting Changes and Error Correction" - a replacement of APB Opinion
No. 20 and FASB statement No. 3. This statement applies to all voluntary changes
in accounting principles. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. This statement requires retrospective
application to prior periods' financial statements of changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. The statement also carries
forward the guidance in APB Opinion No. 20 requiring justification of a change
in accounting principle on the basis of preferability. This statement is
effective for accounting changes and corrections made in fiscal years beginning
after December 31, 2005. The adoption of SFAS 154 is not expected to have a
material effect on the Company's consolidated financial position or results of
operations.
55
In December 2004, the FASB issued SFAS No. 153, an amendment of APB Opinion No.
29, "Exchange of Nonmonetary Assets". SFAS No. 153 amends APB Opinion 29 by
eliminating the exception under APB No. 29 for nonmonetary assets of similar
productive assets and replaces it with a general exception for exchanges on
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flow of the entity are expected to
change significantly as a result of the exchange. SFAS No. 153 is effective for
fiscal years beginning after June 15, 2005. The adoption of SFAS No. 153 is not
expected to have a material effect on the Company consolidated financial
position or results of operations.
In December 2004, the FASB staff issued FASB Staff Position ("FSP") FAS 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" to provide guidance on the application of Statement 109 to
the provision within the American Jobs Creations Act of 2004 (the "Act") that
provides tax relief to U.S. domestic manufacturers. The FSP states that the
manufacturers, deduction provided for under the Act should be accounted for as a
special deduction in accordance with Statement 109 and not as a tax rate
reduction. The FSP is effective upon issuance. The adoption of FAS 109- 1 did
not have a material effect on the Company's results of operations or financial
position.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment", that
will require compensation costs related to share-based payment transactions to
be recognized in the financial statements. With limited exceptions, the amount
of compensation cost will be measured based on the grant-date fair value of the
equity or liability instruments issued. In addition, liability awards will be
re-measured each reporting period. Compensation cost will be recognized over the
period that an employee provides service in exchange for the reward. SFAS No.
123(R) is effective as to the Company as of the beginning of the Company's 2006
fiscal year. The Company will account for the compensation costs prospectively
at the time of adoption. The adoption of SFAS 123(R) is expected to have a
material effect on the Company's results of operations.
2. PROPERTY AND EQUIPMENT
December 31, 2005
------------------
Equipment $ 365,777
Deposits on land 70,700
Leasehold improvements 7,807
------------------
444,284
Less accumulated
Depreciation (8,085)
------------------
$ 436,199
==================
Depreciation expense for the years ended December 31, 2005 and 2004,
amounted to $4,189 and $2,137, respectively.
3. INTANGIBLE ASSETS
Intellectual property costs are intellectual property included in a patent
application. If the patent is not issued, the Company will write-off the
unamortized amounts immediately. Other intangibles are being amortized over 10
years. Amortization expense was $5,217, and $0, for the years ended December 31,
2005 and 2004, respectively. Other intangible assets consist of the following:
56
December 31, 2005
Gross Carrying Accumulated
Amount Amortization
--------------- --------------
Intellectual property costs $ 143,000 $ 2,383
Organization Costs 2,834 2,834
--------------- --------------
$ 145,834 $ 5,217
=============== ==============
Estimated amortization expense for intangible assets for the next five
years is as follows:
Estimated
Year Ending Amortization
December 31, Expense
-------------- -------------
2006 $ 14,300
2007 14,300
2008 14,300
2009 14,300
2010 14,300
4. IMPAIRMENT LOSS
During the year ended December 31, 2005, the Company wrote off $170,000 of
preacquisition costs related to the design work for the Puerto Rico low
income housing project known as "Brisas del Atlantico."
5. INVESTMENT IN JOINT VENTURES
a) In December 2003, the Company formed a joint venture project to develop
government sponsored, Section 124, low income housing in the Commonwealth
of Puerto Rico. The Company became the general partner and the 75%
majority owner of a limited partnership, Delta Development Partners, LP,
that holds the 85% majority share of Delta Developers Corp., a Puerto Rico
corporation, formed to manage the construction and related activities
required to build approximately 270 low income homes under Section 124.
The operations of the joint venture have been consolidated with the
Company for the years ended December 31, 2005 and 2004, respectively.
During the year ended December 31, 2004, Neil Berman, a stockholder of the
Company, purchased a 25% interest in Delta Development Partners, LP for
$148,000.
On October 6, 2004, the Company entered into a second joint venture
agreement to develop government sponsored, Section 124 low income housing
in the Commonwealth of Puerto Rico. The Company became the general partner
and majority owner of a limited partnership, Delta Development Partners
II, LP, that holds the 85% majority share of Delta Developers Guayanilla
Corp., a Puerto Rico corporation formed to manage the construction and
related activities required to build approximately 300 low income homes
under Section 124. The operations of the joint venture have been
consolidated with the Company since October 6, 2004.
During the period October 6, 2004 through December 31, 2004, Ebony
Finance, Ltd. and T&T Asset Management, stockholders of the Company,
purchased a 4% interest from the existing partners in Delta Development
Partners II, LP for $40,000.
b) On January 14, 2004, the Company entered into a joint venture agreement
forming Delta-Envirotech, Inc. for the purpose of providing environmental
technologies and services to markets in the Middle East. The joint venture
company is based in Virginia and focuses on participating in foreign
government sponsored pollution remediation projects. Upon formation, David
Razmara was named President and became an employee of Delta-Envirotech.
57
On January 22, 2004, the Company announced the conclusion of a strategic
alliance agreement Between Delta-Envirotech, Inc. and ZAFF International,
Ltd., an advanced technology company located in Saudi Arabia. The
strategic alliance states that the two companies will jointly pursue
projects related to soil and water reclamation projects in the Middle
East.
On July 14, 2004, the Company and Hi-Tech, pursuant to an agreement to
purchase stock dated January 14, 2004, each sold 75 shares of the joint
venture to a third party, representing a ten percent (10%) interest for
$2. The Company and Hi-Tech each own forty-five percent (45%) of the joint
venture.
The operations of the joint venture have been consolidated with the
Company for the years ended December 31, 2005 and 2004. Delta-Envirotech,
Inc. meets the definition of a Variable Interest Entity as defined in
Financial Accounting Standards Board Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities" requiring the primary
beneficiaries of a variable interest entity to consolidate that entity.
The primary beneficiary of a variable interest entity is the party that
absorbs the majority of the expected losses of the entity or receives a
majority of the entity's expected residual return, or both, as a result of
ownership, contractual or other financial interest in the entity.
c) On May 1, 2003, the Company entered into a joint venture in Romania,
forming a new Company, Delta TP Mediu, SRL. The joint venture, of which
the Company owns 10%, was organized to primarily pursue the sourcing,
treatment and processing of hydrocarbon based and other industrial
residuals and, where possible, to create alternative fuels and raw
materials for industrial use, primarily in Romania. The Company invested
$33,800 in the joint venture, consisting of $18,800 in cash and issuance
of 100,000 shares of the Company's common stock valued at $15,000. The
Company made a strategic decision to minimize its activities in Eastern
Europe and the investment has been written down to $1 and a charge taken
against operations during the year ended December 31, 2004.
d) Minority interests primarily consist of ownership interest in
Delta-Envirotech, Inc.; Delta Development Partners, L.P.; Delta
Development Partners II, L.P.; PT Triyudha - Envirotech; Delta Developers
Corp. and Delta Developers Guayanilla Corp. The income and losses from
operations of these entities and their respective minority interests have
been reflected in the Company's statement of operations for the years
ended December 31, 2005 and 2004. There are excess losses not absorbed by
the minority interests due to limitations of their capital contributions.
In future periods, the profits first attributable to the minority
interests will be first absorbed against any unused losses until the
losses are fully absorbed. The amount on the Company's balance sheet
represents the minority interests as of December 31, 2005 and 2004.
The following represents a schedule of minority interests as of December
31, 2005
2005
-----------
Delta Development Partners L.P. $ 137,541
Delta Development Partners II, L.P. 39,857
Delta Developers Guayanilla, Corp. --
Delta-Envirotech, Inc. --
PT Triyudha - Envirotech 80,002
Delta Developers Corp. --
-----------
$ 257,400
===========
6. NOTES PAYABLE
On April 5, 2005, the Company issued 8% term notes to private investors in
the amount of $210,655, with the principal and interest due at maturity on
October 2, 2005. The maturity dates of these notes, pursuant to note
modification agreements, have been extended until June 2006. Interest
expense for the year ended December 31, 2005 amounted to $12,466. As of
December 31, 2005 accrued interest of $4,155 is included in accrued
interest expense on the Company's consolidated balance sheet.
58
7. CONVERTIBLE DEBT
During the year ended December 31, 2004, the Company issued convertible
notes in the principal amounts of $961,400. The convertible notes bear
interest at rates from 4% to 6% and mature at various dates between May
12, 2006 and January 16, 2007. Theses notes are convertible into common
stock at a conversion price of $0.05 to $0.125 per share. A portion of
these convertible notes, in the principal amount of $440,000, have an
initial conversion price of $0.05 per share subject to adjustment if the
Company issues common stock at a price below $0.05 per share. On September
16, 2004, the Company's board of directors resolved to prohibit the
issuance of shares of common stock at a price below $0.05 per share for as
long as any of the $440,000 convertible notes are outstanding.
In connection with the issuance of the $440,000 convertible notes, the
Company issued 8,880,000 common stock purchase warrants at an exercise
price of $0.10 per share. The warrants expire March 31, 2006.
The Company accounted for the warrants and the convertible debt with
detachable warrants in accordance with Emerging Issues Task Force 00-27
and 00-19 and SFAS No. 33. The Company performed calculations allocating
the proceeds of convertible debt with detachable warrants to each
respective security at their fair values. The Company used the conversion
value of the convertible debt and calculated fair value of the warrants
using the Black-Scholes valuation model for its estimate of fair value.
The Company compared the allocated proceeds of the convertible debt to the
difference between its conversion value and face amount. The calculated
fair value of the convertible debt of $722,855 was recorded as the value
of the Beneficial Conversion Feature and accordingly credited to
Additional Paid-in Capital. The value of the warrants of $235,545 was
recorded as a reduction of the convertible debt. The convertible debt was
recorded at zero. The convertible debt will be accreted to its current
face value of $658,900, after 2004 and 2005 conversions, under the
interest method per APB No. 21 until it is either converted or matures. As
of December 31, 2005, the accretion amounted to $565,557, of which
$547,516 is current.
During the year ended December 31, 2005 and 2004, the note holders
converted $232,500 and $70,000 into 4,650,000 and 1,400,000 shares of
common stock, respectively. At December 31, 2005, the Company's
outstanding convertible notes were convertible into 9,303,200 shares of
common stock.
The following table shows the maturities by year of total face amount of
the long-term convertible debt obligations at December 31, 2005:
2006 $ 621,400
2007 37,500
-----------
$658,900
===========
For the year ended December 31, 2005 and 2004, the Company recorded
interest expense of $130,292 and $27,966, respectively. As of December 31,
2005, accrued interest of $47,767 is included in accrued expenses on the
Company's consolidated balance sheet.
8. ACCRUED EXPENSES
59
Accrued expenses consist of the following:
December 31, 2005
-----------------
Professional fees $ 94,498
Interest expense 47,767
Payroll expense 236,820
Payroll expense - officers 205,698
Payroll tax expense 26,841
Office 28,800
Marketing 30,000
-----------------
$ 670,424
9. LOANS FROM RELATED PARTIES
a) On January 7, 2003, the Company borrowed $15,000 from Michael Pisani
("Pisani"), a stockholder of the Company. Pisani received 50,000 shares of
the Company's common stock which represented the payment of interest
accruing on the unpaid principal balance through January 27, 2003, the
maturity date. The Company recorded interest expense of $15,000, the fair
market value at the date of issuance, in 2003 for the issuance of the
shares.
The Company did not pay the outstanding balance on the maturity date and
was required to pay monthly interest of one (1%) percent to Pisani. On
April 7, 2003, the Company repaid Pisani $5,000 against the outstanding
balance. In May 2003, the note was amended. Subsequently, a dispute arose
between the parties about the validity of the amendment. In March 2004,
the Company repaid the principal and interest due under the terms of the
amended note. For the years ended December 31, 2005 and 2004, the Company
recorded interest expense of $-0- and $1,599, respectively.
b) On May 15, 2003, the Company borrowed $12,000 from Michael Fasci
("Fasci"), a stockholder of the Company. Fasci received 50,000 common
shares (valued at fair market value) of the Company's common stock which
represented the payment of interest through May 26, 2003, the Maturity
date. The Company recorded interest expense of $13,750 for the three
months ended March 31, 2004. On February 27, 2004 the Company issued
140,000 shares of common stock (valued at fair market value) in repayment
of the loan, interest, penalty and expenses amounting to $19,100.
c) On December 30, 2003, the Company borrowed $50,000 from Edward Tuccio
("Tuccio"), a stockholder of the Company. The note was due December 29,
2004, with interest at 6% per annum. On February 11, 2004, the Company
issued Tuccio 400,000 common shares of common stock (valued at fair market
value) which represented the full payment of this loan plus interest
amounting to $168 for the year ended December 31, 2004.
d) On December 11, 2003, the Company borrowed $50,000 from Neil Jones
("Jones"), a stockholder of the Company. The note was due December 16,
2004 with interest at 6% per annum. On January 24, 2004, the Company
issued Jones 400,000 shares of common stock (valued at fair market value)
which represented the full payment of this loan plus interest. The Company
recorded interest expense of $112 for the year ended December 31, 2004.
e) On March 22, 2005, the Company borrowed $71,731 from Neil Berman. The
loan bears interest at 6% per annum with the principal and interest due in
three equal installments on June 21, September 19, and December 20, 2005.
On May 6, 2005, the Company paid the first installment consisting of
$23,910 principal and $1,105 interest. On September 19, 2005, the Company
paid the second installment consisting of $23,910 principal and $1,029
interest. The note was amended on December 16, 2005 to extend the final
installment payment until February 20, 2006. On February 3, 2006, the
Company made the final payment consisting of $23,910 of principal and
$1,563 of accrued interest. Interest expense for the year ended December
31, 2005 amounted to $3,349. As of December 31, 2005, accrued interest of
$1,215 is included in accrued expenses on the Company's balance sheet.
60
10. STOCKHOLDERS DEFICIENCY
During the years ended December 31, 2005 and 2004, the Company issued shares of
common stock for services or repayment of debt valued at fair market value of
the consideration issued at the time of issuance.
a) For the year ended December 31, 2005, the Company issued 4,650,000 shares
of common stock upon the conversion of convertible notes in the principal
amount of $232,500 and issued 230,852 shares of common stock for payment
of accrued interest of $11,545, valued at $0.05 per share. For the year
ended December 31, 2004, the Company issued 1,229,500 shares of common
stock for repayment of debt in the principal amount of $176,100, valued at
$0.078 - $0.25 per share; issued 1,400,000 shares of common stock upon the
conversion of convertible notes in the principal amount of $70,000; and
issued 6,828 shares of common stock for payment of accrued interest in the
amount of $342, valued at $0.05 per share.
b) For the year ended December 31, 2005, the Company issued 902,895 shares of
common stock for services valued at $412,085 at a price per share of $0.27
- $0.66. For the year ended December 31, 2004 the Company issued 3,840,000
shares of common stock for services valued at $485,175, at a price per
share of $0.05 - $0.30.
c) For the year ended December 31, 2005, the Company issued 216,279 shares of
common stock for the acquisition of intellectual property rights, valued
at $93,000 or $0.43 per share.
d) For the year ended December 31, 2005, the Company sold 7,645,001 shares of
common stock and issued 1,430,000 shares of common stock as associated
commissions for net proceeds of $1,139,835. For the year ended December
31, 2004, the Company sold 1,744,055 shares of common stock for $196,250,
valued at $0.125 per share.
e) For the year ended December 31, 2005, the Company issued 500,000 shares of
common stock upon the exercise of the Company's common stock purchase
warrants for $50,000, of which $10,000 is included in subscription
receivable. For the year ended December 31, 2004, the Company issued
800,000 shares of common stock upon the exercise of the Company's common
stock purchase warrants for $80,000, valued at $0.10 per share.
f) For the year ended December 31, 2005, the Company issued, to five
employees, 613,000 shares of common stock, in the aggregate, from the
Company's 2001 Employee Stock Option Plan (the "Plan"), for $61, 300,
valued at $0.10 per share. For the year ended December 31, 2004, the
Company issued, to five employees, 339,500 shares of common stock from the
Plan for $52,000, valued at $0.078 - $0.18 per share.
g) For the year ended December 31, 2004, the Company issued 412,000 shares of
common stock in settlement of a licensing agreement for $70,040, valued at
$0.17 per share.
11. LEGAL PROCEEDINGS
On February 8, 2006, the Company settled the suit in the United States
District Court for the Southern District of New York against the Company,
its transfer agent and other individual parties, filed in July 2005 by
Charter Capital Resources, Inc. and Beryl Zyskind, seeking damages of
$200,000 and other relief for failure of the defendants to transfer
certain shares of stock owned by plaintiffs. As part of the settlement
agreement, the Company issued the plaintiffs 225,000 shares of common
stock, valued at $42,750, and included the settlement expense in the
Company's statement of operations for the year ended December 31, 2005.
On February 27, 2006, the Company was served with a citation corporate
filed in the District Court in Harris County, Texas, by Equisource
Ventures. The complaint lists as defendants the Company and Burrows
Consulting Group, Inc. (a Texas corporation). The suit alleges breach of
contract, misrepresentation and unjust enrichment, and the plaintiff seeks
damages for unpaid consulting retainer fees and fees in the aggregate of
$130,000, as well as exemplary damages, costs and attorneys' fees. The
Company denies any wrong doing and will contest vigorously the claims
asserted against it. The Company has filed a motion to dismiss the
complaint based on lack of jurisdiction. The Company believes that this
matter will have no material effect upon the Company or its operations.
12. BUSINESS SEGMENT INFORMATION
The Company operates in four reportable segments. The segments are
geographic and include the Far East (Indonesia), the Middle East, North
America (United States) and Puerto Rico. The primary criteria by which
financial performance is evaluated and resources allocated are revenues
and operating income. The following is a summary of key financial data:
2005 2004
----------------------------
Total Revenues:
North America $ -- --
Indonesia 20,000 --
Middle East -- --
Puerto Rico -- --
------------ ------------
$ 20,000 --
============ ============
Loss from Operations:
North America $ (1,579,446) $ (1,572,583)
Indonesia (123,998) --
Middle East (27,500) (52,191)
Puerto Rico (272,617) (223,304)
------------ ------------
$ (2,003,561) $ (1,848,078)
============ ============
Identifiable Assets:
North America $ 1,982,608
Indonesia 378,002
Middle East --
Puerto Rico 750,921
Less intergeographic eliminations (2,241,423)
------------
$ 870,108
============
Capital Expenditures:
North America $ 1,500
Indonesia 359,499
Middle East --
Puerto Rico --
------------
$ 360,999
============
Depreciation and Amortization:
North America $ 7,908 $ 2,137
Indonesia 1,498 --
Middle East -- --
Puerto Rico -- --
------------ ------------
$ 9,406 $ 2,137
============ ============
61
13. INCOME TAXES
The liability method, prescribed by SFAS No. 109, "Accounting for Income
Taxes", is used by the Company in accounting for income taxes. Under This
method, deferred tax assets and liabilities are based on differences
between financial reporting and tax basis of assets and liabilities and
are measured using the enacted tax rates and laws that are expected to be
in effect when the differences are expected to reverse.
During the year ended December 31, 2005, the Company recorded a deferred
tax asset associated with its net operating loss ("NOL") carryforwards of
approximately $6,320,000 that was fully offset by a valuation allowance
due to the determination that it was more likely than not that the Company
would be unable to utilize these benefits in the foreseeable future. The
Company's NOL carryforward expires beginning in 2010 through 2017.
There is no provision for income taxes for the years ended December 31,
2005 and 2004 as there was no taxable income in either year.
The types of temporary differences between tax basis of assets and
liabilities and their financial reporting amounts that give rise to the
deferred tax liability and deferred tax asset and their approximate tax
effects are as follows:
December 31, 2005 December 31, 2004
-------------------------------- -------------------------------
Temporary Tax Temporary Tax
Difference Effect Difference Effect
-------------- -------------- -------------- --------------
Gross deferred
tax asset $ 6,320,000 $ 2,148,800 $ 3,740,000 $ 1,272,000
resulting from
net operating
loss carryforward
Valuation allowance $ (6,320,000) $ (2,148,800) (3,740,000) (1,272,000)
-------------- -------------- -------------- --------------
Net deferred income
tax asset
$ -- $ -- $ -- $ --
============== ============== ============== ==============
The reconciliation of the effective income tax rate to the federal
statutory rate is as follows:
62
For the Year Ended
December 31,
---------------------
2005 2004
-------- --------
Federal income tax rate 34% 34%
Valuation allowance on net
operating loss carryforward (34)% (34)%
Effective income tax rate 0% 0%
======== ========
14. STOCK OPTION PLANS
In December 2001, the Company's stockholders approved a stock option plan
entitled the 2001 Employee Stock Option Plan (the "2001 Plan"), pursuant
to which 2,000,000 shares of common stock were reserved for issuance. In
August 2004, the Company's stockholders approved the 2004 Stock Option
Plan (the "2004 Plan"), pursuant to which 10,000,000 shares of common
stock were reserved for issuance. As of December 31, 2005, all shares
under the 2001 Plan had been issued, and 2,000,000 shares of common stock
remained available for issuance under the 2004 Plan.
The 1,500,000 options granted in 2005 were to a non-employee. The fair
value of the option grant was $450,000, of which $150,000 was expensed
during the year ended December 31, 2005. Deferred stock-based compensation
expense of $300,000 associated with the non-vested options issued in 2005
is reported within stockholders' deficiency in the Company's consolidated
balance sheet.
A summary of the status of the Company's options and stock awards under
the Plans as of December 31, 2005 and 2004, and changes during the years
then ended, is presented below:
2005 2004
------------------------------- -------------------------------
Weighted- Weighted- Weighted- Weighted-
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
-------------- -------------- -------------- --------------
Options out-
standing, begin-
ning of year 6,500,000 $ 0.25 -- $ --
Options granted 1,500,000 $ 0.25 6,500,000 $ 0.25
Options exercised -- $ -- -- $ --
Stock awards granted 613,000 $ 0.10 339,500 $ 0.153
Stock awards issued (613,000) $ (0.10) (339,500) $ (0.153)
Options cancelled/expired -- $ -- -- --
-------------- -------------- -------------- --------------
Options out-
standing, end
of year 8,000,000 $ 0.25 6,500,000 $ 0.25
============== ============== ============== ==============
Options price
range at end
of year $ 0.25 $ 0.25
Options price
range for
exercised
shares -- --
Options available
for grant at end
of year 2,000,000 3,500,000
============== ============== ============== ==============
Weighted-
average fair
value of options
granted during the
year $ 0.25 $ 0.25
63
The following table summarizes information about fixed price stock options
outstanding December 31, 2005.
Weighted-
Number Out- Average Weighted- Number Weighted-
Range of standing at Remaining Average Exercisable Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 2005 Life Price 2005 Price
- -------- ------------ ----------- --------- ----------- ---------
$0.25 8,000,000 3 $0.25 3,700,000 $0.25
A summary of the status of the Company's Stock Purchase Warrants as of
December 31, 2005, and changes during the year is then presented below:
2005 2004
--------------------------------- --------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
-------------- --------------- ----------- -----------
Warrants out-
standing, beginning of
year 8,080,000 $ 0.10 -- $ --
Warrants granted -- $ -- 8,880,000 $ 0.10
Warrants exercised (500,000) $ 0.10 (800,000) $ 0.10
Warrants cancelled/
expired -- $ -- -- $ --
------------ --------------- ----------- -----------
The following table summarizes information about fixed price warrants
outstanding at December 31, 2005.
Weighted-
Number Out- Average Weighted- Number Weighted-
Range of standing at Remaining Average Exercisable Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 2005 Life Price 2005 Price
- -------- ------------ ----------- --------- ----------- ---------
$0.25 8,000,000 3 $0.25 3,700,000 $0.25
Weighted-
Number Out- Average Weighted- Number Weighted-
Range of standing at Remaining Average Exercisable Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 2005 Life Price 2005 Price
- -------- ------------ ----------- --------- ----------- ---------
$0.10 7,580,000 1 $0.10 7,580,000 $0.10
64
15. COMMITMENTS AND CONTINGENCIES
a. Executive Employment Agreements
The Company has employment agreements with its three officers.
On February 28, 2006, the Company entered into a new employment agreement
with Mr. Russo effective March 11, 2006, for a term of three years. The
minimum salary to be paid to Mr. Russo is $6,500 per month. The agreement
contains provisions for discharge for "cause", including disability, in
which cases no further compensation or benefits would be payable under the
agreement. If a termination is other than for death or "cause", the base
salary is continued for six months following the termination of
employment. The agreement also contains a provision for additional
compensation to Mr. Russo if his employment is terminated without "cause"
due to a change in control. For the year ending December 31, 2005, the
Company had accrued salary liability to Mr. Russo of $117,436 which is
included in accrued expenses on the Company's balance sheet.
On May 23, 2005, the Company entered into an executive employment
agreement with Mr. Chilek, effective June 1, 2005, for an initial term of
three years, and the term is automatically extended for additional one
year periods if neither party gives notice prior to the end of the initial
term or any current additional one year term. The minimum salary to be
paid to Mr. Chilek is $6,000 per month. The agreement contains provisions
for discharge for "cause", including disability, in which cases no further
compensation or benefits would be payable under the agreement. If a
termination is other than for death or "cause", or the Company elects not
to renew the Agreement, the base salary is continued for six months
following the termination of employment. The agreement also contains a
provision for additional compensation to Mr. Chilek if his employment is
terminated without "cause" due to change in control. For the year ended
December 31, 2005, the Company had no accrued salary liability to him.
Effective July 1, 2003, the Company entered into an employment agreement
with Mr. Kindrachuk, for three years with a renewal provision at the
Company's option. The minimum salary to be paid Mr. Kindrachuk is $6,000
per month. For the year ending December 31, 2005, the Company had accrued
salary liability to Mr. Kindrachuk of $88,262, which is included in
accrued expenses on the Company's balance sheet.
b. License Agreement
In April 2003, the Company entered into a License Agreement, as amended,
(the "License Agreement") with Joseph Friedman and Sons International,
Inc. ("Friedman") where the Company licensed certain environmental
technologies to Friedman in the territory of the Former Soviet Union. The
Company terminated the License Agreement in March 2004 and a dispute arose
about Friedman's rights upon termination.
Effective November 26, 2004, the Company entered into a settlement
agreement and mutual general release with Friedman. Under the settlement
agreement, the Company issued Friedman a $50,000 principal amount 6%
convertible promissory note, due November 24, 2006, initially convertible
into 1,000,000 shares of common stock; warrants to purchase an additional
1,000,000 shares of common stock and 412,000 shares of common stock in
settlement of any and all claims.
During the year ended December 31, 2004, the Company recorded an expense
for the common stock, valued at $70,040, issued in connection with the
terminated license agreement.
c. Financing Agreements
On June 17, 2005, the Company entered into an investment banking agreement
with T&T Vermoegensverwaltungs AG ("T&T") pursuant to which T&T agreed to
use best efforts to raise up to $3,500,000 before the end of 2005 for a
placement fee of 12%. The agreement was amended on August 3, 2005, to
increase the placement fee to 20% if certain conditions were met, and add
1,430,000 shares of common stock to the placement fee. This agreement
expired, according to its terms, on December 17, 2005. For the year ended
December 31, 2005, T&T received $201,800 in placement fees plus 1,430,000
shares of restricted common stock, valued at $520,200, all of which is
netted against the proceeds from the sale of common stock.
65
d. Consulting Agreements
On August 26, 2005, the Company entered into a consulting agreement with
Juan B. Rodriguez Pagan ("Rodriguez") to provide certain services and
assistance to the Company in developing its construction and building
materials businesses. The Company agreed to pay Rodriguez 48 monthly
payments of $6,000 over the four-year term of the agreement and issue him
shares of common stock upon his execution of the agreement and at
subsequent intervals during the term of the agreement. In addition,
Rodriguez is entitled to a commission of 5% of the sales of Delta
Technologies, Inc. Either party may terminate the agreement upon written
notice, however, if the Company terminates the agreement, Rodriguez is
entitled to all of the remaining monthly payments he would have been
entitled to receive during the term of the agreement. For the year ended
December 31, 2005, Rodriguez received consulting fees of $26,800 and
581,395 shares of common stock valued at $250,000.
The consulting fees and $63,000 of the stock value are included on the
Company's consolidated statement of operations. The remainder of the stock
value of $187,000 is included as a prepaid expense on the Company's
consolidated balance sheet.
On August 26, 2005, Delta Technologies, Inc., a wholly-owned subsidiary of
the Company ("Technologies"), entered into a consulting agreement with
Richard F. Straub, Jr. ("Straub") for a period of three years, to provide
ongoing technical assistance and support in the production of
Technologies' insulating concrete wall forming products. Technologies
agreed to pay Straub $4,400 per month over the term of the agreement.
Technologies can terminate the agreement at any time, but only for cause
(defined, among other things, as a breach of the agreement by Straub). In
the event of termination for cause, Technologies has no further liability
to Straub. For the year ended December 31, 2005, Straub received
consulting fees of $13,485, which are included on the Company's
consolidated statement of operations.
e. Leases
The Company entered in to a lease March 1, 2003 for a business office
space. The lease required the Company to pay certain executory costs (such
as utilities and maintenance). The lease expired on February 28, 2006. The
Company entered into a new lease agreement for a period of twelve months
from March 1, 2006 to February 28, 2007, with an additional twelve month
renewal provision.
In addition, the Company had a month-to-month lease on a business office
in McLean, Virginia at a cost of $1,100 per month that began in November
2004 and was terminated on October 31, 2005.
The Company also has month to month leases of business offices in Saudi
Arabia and Indonesia at costs of $1,200 and $1,000 per month respectively.
The Company entered in to a lease agreement for a period of twelve months
from April 1, 2005 to March 31, 2006 in San Juan, Puerto Rico. The lease
also requires the Company to pay utilities.
Future minimum lease payments for the operating leases are as follows:
Year Ending
December 31,
-------------------
2006 $ 10,050
2007 1,300
2008 --
------------
$ 11,350
Rent expense was $47,100 and $29,300 for the years ended December 31, 2005
and 2004, respectively.
66
16. SUBSEQUENT EVENTS
a) During 2006, the Company sold 2,226,667 shares of common stock and
issued 54,545 shares of common stock as associated commissions, for
net proceeds of $144,000.
b) During 2006, the Company issued 1,326,819 shares of common stock for
services valued at $288,541, the fair value of the consideration
issued.
c) During 2006, the Company issued 300,000 shares of common stock upon
the conversion of convertible debt of $15,000.
d) During 2006, the Company issued 580,000 shares of common stock upon
the exercise of the Company's common stock purchase warrants, at an
exercise price $0.10. The Company received $58,000 in gross
proceeds.
e) During 2006, the Company granted 778,000 stock options to five
employees at exercise prices of $0.17 per share.