Schimatic Technlgs, Inc - Recent Material Event
<![CDATA[SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
(A Development Stage Enterprise)
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TABLE OF CONTENTS
Item Description Pages
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Special Introductory Notes........................................................................................1
Part I
Item 1 Description of Business................................................................................2
Item 2 Description of Property................................................................................4
Item 3 Legal Proceedings......................................................................................5
Item 4 Submission of Matters to a Vote of Security Holders....................................................6
Part II
Item 5 Market for Common Equity and Related Stockholder Matters...............................................7
Item 6 Management's Discussion and Analysis or Plan of Operation.............................................10
Item 7 Financial Statements..................................................................................13
Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................13
Item 8A Controls and Procedures...............................................................................14
Item 8B Other Information.....................................................................................14
Part III
Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the
Exchange Act..........................................................................................15
Item 10 Executive Compensation................................................................................16
Item 11 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters........18
Item 12 Certain Relationships and Related Transactions........................................................19
Item 13 Exhibits and Reports on Form 8-K......................................................................20
Item 14 Controls and Procedures...............................................................................21
Signatures............................................................................................22
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ii
SPECIAL INTRODUCTORY NOTES
Forward-Looking Information
This Annual Report on Form 10-KSB includes forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. These statements are based on our beliefs and assumptions, and on
information currently available to us. The words "anticipated," "believe,"
"expect," "plan," "intended," "seek," "estimate," "project," "could," "may," and
similar expressions are intended to identify forward-looking statements. These
statements include, among others, information regarding future operations,
future capital expenditures, and future net cash flow. Such statements reflect
our current views with respect to future events and financial performance and
involves risks and uncertainties, including general economic and business
conditions, changes in foreign, political, social and economic conditions,
regulatory initiatives and compliance with governmental regulations, the ability
to achieve further market penetration and additional customers, and various
other matters, many of which are beyond our control. Our future results and
stockholder values may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results and values are beyond our ability to control or predict. Investors are
cautioned not to put undue reliance on any forward-looking statements. For these
statements, we claim the protection of the safe harbor for forward-looking
statements contained in Section 21E of the Securities Exchange Act.
Filing of Delinquent Reports
This delinquent report is filed for the year ended December 31, 2004,
and is one of several reports for subsequent periods that we are filing under
Section 13 of the Securities Exchange Act after their respective due dates. The
requirement to file the associated quarterly reports for this period has been
waived by the Securities and Exchange Commission. The unaudited quarterly data
that would normally be included in the required quarterly reports is contained
herein, at the end of Item 7 Financial Statements. This report contains
information for the period to which this report relates, but does not contain
all information covering periods subsequent to the report period. For
information covering other periods, please see the applicable reports for such
period.
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Schimatic Cash Transactions Network.com, Inc. (the "Company") was
originally incorporated in the State of Florida under the name of Apple Tree
Capital Corp. on October 4, 1996. Apple Tree Capital Corp. never had any assets
or commenced operations.
On November 12, 1998, Apple Tree simultaneously acquired Schimatic
Technologies, Inc. and R&D Technology Inc., two privately held Nevada
Corporations. On this date Apple Tree Capital Corp's name was changed to
Schimatic Technologies, Inc.
Schimatic Technologies, Inc. had been organized principally based on a
business model for the future development of a freestanding Internet kiosk
capable of economical domestic and international funds transfers. R&D
Technology, Inc. had been organized based on a business model for the future
development of technology for the three-dimensional, virtual reality
presentation of products in freestanding Internet kiosks for online shopping.
In January 1999, Schimatic Technologies, Inc. changed its name to
Schimatic Cash Transactions Network.com, Inc.
In September 1999, Schimatic Cash Transactions Network.com, Inc.
acquired the business and assets of IC One, Inc., a developer of smart-card
technologies. The acquisition of IC One was treated as a reverse acquisition
under the purchase method of accounting in which the combination was reported as
a recapitalization of IC One. IC One is treated as the continuing entity for
accounting purposes, and the historical financial statements presented,
including the statement of stockholders' equity, are those of IC One. IC One was
deemed the acquirer and successor company. The key assets acquired with IC One
were patents and pending patents in the United States and other countries.
With the acquisition of IC One, we commenced efforts to complete
commercialization of smart-card-based loyalty programs and ancillary services
and products as described in this document.
Products and Services Development
Our products and services are designed to operate in conjunction with a
variety of business applications, the largest being the retail payments
industry. This industry is comprised of retail merchants and the infrastructure
of banks and other financial institutions, and card associations and technology
suppliers that enable them to process payment transactions.
We anticipate that our software will be used to support these major
business sectors:
o Technology suppliers provide the centralized systems and
services to process the electronic payment transactions.
Large issuing banks frequently process their own charge card
and electronic payments transactions, while smaller banks
and other financial institutions outsource processing. Large
processors have established market dominance through
consolidation and subsequent economies of scale. Merchants
pay fees to the banks for the privilege of accepting credit
cards.
o Retail merchants and product manufacturers use discounts,
points programs and other incentives to differentiate
themselves from their competitors and to increase loyalty in
the form of repeat spending or to initiate the initial
purchase of a specific product or service. These programs
are typically tied to the amount or frequency of customer
spending, with the most prominent ones directly tied to a
credit or debit card. Additionally, many other segments of
the payments industry, such as the hospitality and travel
industries, have programs designed to award points for each
dollar spent that can be redeemed for free or upgraded goods
or services.
o Loyalty consultants or advertising agencies would use the
technology to implement incentive programs. The incentive
programs are used to increase spend for existing consumers
as well as to capture new consumers.
2
We believe that the retail industry, as well as various other segments,
is in the initial stages of adopting smart cards and wireless devices to replace
the magnetic stripe cards that have existed in the marketplace for nearly 30
years. As this transition occurs, we believe there is an opportunity to market
our loyalty program software to the various organizations that comprise the
industry. We anticipate the majority of our revenue will come from marketing our
software to the organizations that provide the loyalty system infrastructure as
an adjunct to the electronic payments process. This includes banks and other
financial institutions, third-party payment processors, card associations,
coalition loyalty scheme operators, consultants and other software suppliers. In
some cases, we expect that our customers may also include retail merchants or
other businesses that wish to sponsor their own loyalty programs.
The electronic payment industry is very mature, and because our
software is compatible with existing magnetic stripe card technology as well as
smart cards, we believe our software and intellectual property provide a
potential solution for those wishing to migrate from magnetic-stripe cards to
smart cards or other smart devices in order to grant loyalty rewards and
incentives.
The ability of smart cards to store data or value makes them
particularly suited to loyalty programs that track and provide incentives to
repeat customers. Stored value is more convenient and safer than cash. When
combined with a software and hardware system for processing loyalty
transactions, the smart cards and other devices provide an opportunity to
develop loyalty programs that provide users with immediate, dynamically updated
incentives.
In addition to the payments industry, we anticipate significant and
increased demand for more powerful and effective smart-card-based loyalty
programs in other industries such as gaming, transit, identification, access and
health care. We are actively seeking to introduce our intellectual property in
these other markets.
We believe that we are able to offer services that fill these needs for
all of the aforementioned industry segments.
Strategic Alliances
We have developed and will continue to seek strategic relationships
with industry participants that may provide an alternate channel to deliver our
products and services by expanding our market reach and creating incentives
through revenue or technology sharing with strategic partners. We have
established the following strategic alliances.
Airos Group
We entered into an agreement with Airos Group to complete the current
software development and integration services on the Ingenico terminal for
Scotiabank. Airos Group's primary focus is system integration, software
development, and quality assurance for the financial services industry with a
focus on smart card and payment terminals. Airos Group has provided integration
and development services to a variety of clients. In 2003, we replaced the above
agreement with a new agreement to complete the development of all product
components, including the card, terminal and host processing, plus integration
and customization services.
Thomas Jackson Performance Management, Inc.
In September 2003, the Company granted Thomas Jackson Performance
Management, Inc., an unaffiliated company, the exclusive right to act as its
authorized sales agent in the United States, Canada, Mexico, Japan and
Australia. The sales rights will become nonexclusive after two years in any
country in which Thomas Jackson does not meet the agreed sales minimum. The
agreement will remain in force as long as Thomas Jackson meets specified minimum
sales volume requirements in the above countries.
Intellectual Property
Our intellectual property consists of software applications and a
system built around our process and methodology patents and includes application
software for loyalty programs that reside on cards or other portable electronic
devices and the terminals for the processing of loyalty and payments. We also
have a centralized processing system for loyalty program management and
accounting that can be used for our own loyalty customers and licensed to other
electronic payment processors that offer loyalty programs.
3
Patents
We have U.S. Patent No. 5806045, issued on September 8, 1998, with
prior patent filings dating back to February 1994. Since that time, the patent
has also been issued in Australia (Patent No. 703349, October 1999), Mexico
(Patent No. 96/03161, November 2000), Japan (Patent No. 3416141, April 2003),
and Canada (Patent No. 2182596, April 2004). We refer to these patents issued or
pending collectively as the "Patents."
The Patents are entitled: "Method and System for Allocating and
Redeeming Incentive Credits between a Portable Device and a Base Device," and
cover processes or methodologies associated with storing and redeeming loyalty
credits and incentives on a portable device and interacting with a base device
to calculate the amount of loyalty units to be credited or redeemed.
Trademarks, Copyrights and Trade Secrets
We also rely on the protections afforded our intellectual property
under copyright, trademark and trade secret laws. We market or may market
products or services under the following trademarks:
o E-LLEGIANCE(TM) for our smart-card-based loyalty
applications;
o LOYALTY CENTRAL(TM) for our loyalty program management,
transaction processing and accounting centralized processing
services;
o LOYALTYCENTRAL.COM(TM) for our loyalty program management
user interface; and
o SMART BANK(R) for specialized products services for
marketing to the financial services and banking industries.
Research and Development Program
We incurred expenses of approximately $1,900,000 during 2004. The
payments for such services were satisfied primarily through the issuance of
either stock or stock options.
Competition
Many of our existing competitors, as well as a number of potential new
competitors have longer operating histories, greater name recognition, larger
customer bases, and significantly greater financial, technical and marketing
resources than we have. Such competitors may be able to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies, and make more
attractive offers to potential employees and distribution partners. We believe
that we can compete effectively, because we will offer our clients certain
capabilities that are protected by our patents that our competition cannot offer
without infringing our patents. However, patents can be difficult to defend and
there can be no assurance that our competitors will not develop products and
services that are equal or superior to ours, or that we can achieve greater
market acceptance than our competitors.
Employees
On December 31, 2004 we had four employees including officers. One was
located in the Las Vegas, Nevada Office and three in Salt Lake City, Utah.
ITEM 2. DESCRIPTION OF PROPERTY
We rent our principal executive office located at 330 East Warm Springs
Road, Las Vegas, Nevada, 89119 on a month-to-month basis, for rent of
approximately $12,000 per year. These facilities are adequate for our
foreseeable needs. During 2004 we also had an office located in Salt Lake City,
Utah.
4
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings, and to our
knowledge, no such legal proceedings have been threatened against us, except as
follows:
Quint Star Management
On August 30, 1999, Quint Star Management, Inc. initiated an action in
the Third Judicial District Court, Salt Lake City, Utah, against IC One, Inc.,
Arthur D. Bennett and Peter J. Bennee, for unpaid rent and related charges, plus
costs and attorney's fees, under the lease on our former principal executive
offices in Salt Lake City, Utah. Quint Star Management, Inc. vs. IC One, Inc.,
Arthur D. Bennett, and Peter Bennee (case no. 990908764EV). Following the entry
of judgment against IC One for $50,541 on December 7, 2000, IC One reached a
payment arrangement under which we are obligated to pay $5,000 per month, plus
ongoing obligations under the lease. The settlement obligation is guaranteed by
the parent, Schimatic Cash Transactions Network.com, Inc., and is secured by the
equipment, inventory, accounts and chattel paper of both the parent and IC One.
We are currently in default in our obligations under this agreement. Upon the
expiration of the lease, an amended judgment of $222,765 (a provision has been
provided for in the financial statements) was entered to reflect the additional
unpaid rent, interest and attorneys' fees.
Marilyn Grish
On September 18, 2001, we were served with a summons and complaint for
an action filed by Marilyn Grish in the Third Judicial District Court, Salt Lake
County, Utah, for breach of an independent contractor's contract and seeking
unspecified damages. On October 12, 2001, the Company filed an answer and a
counterclaim against Ms. Grish and intended to defend this matter vigorously.
Ms. Grish had taken no further action in this case and the court indicated that,
unless Ms. Grish certified she was ready for trial by August 4, 2004, the case
would be dismissed. Accordingly, the case was dismissed on August 4, 2004.
Eximsoft International, LLC and Eximsoft Technologies Pvt. Ltd.
In October 2001, IC One, Inc. entered into a settlement agreement with
Eximsoft International, LLC and Eximsoft Technologies Pvt. Ltd. to resolve
claims by the Eximsoft entities that IC One had contracted and received computer
software development and programming services and had failed to pay as agreed.
IC One agreed to pay $30,000 and provided Eximsoft with a confession of judgment
that could be filed in the Third District Court in Salt Lake City, Utah, in the
event that IC One failed to make the agreed payments. IC One paid the agreed
$30,000 and the original confession of judgment was returned by Eximsoft to us
in November 2003.
Greg Morrison
On April 4, 2003, Greg Morrison initiated an action against Smart Chip
Technologies, L.L.C., in the Third Judicial District Court for Salt Lake County,
Utah, civil no. 03 090 7550, for unpaid wages in the amount of $7,948, unpaid
reimbursement expenses totaling $11,868, interest on those amounts from the date
of termination, court costs and attorney's fees. We agreed to pay Mr. Morrison a
total of $7,500 to resolve this matter. The Company's final payment under this
agreement was made prior to July 31, 2004, and this matter has been dismissed.
PR Newswire Association, Inc. vs. Smart Chip Technologies, L.L.C.
On May 21, 2003, PR Newswire Association, Inc. initiated an action
against the Company in the Superior Court of New Jersey, Hudson County for
unpaid amounts owed for services provided in the amount of approximately $4,000.
On July 18, 2003, a judgment was entered against the Company (a provision of
$4,000 has been provided for in the financial statements at December 31, 2004).
The Company is currently in default of the judgment and would be liable to pay
interest from the date of judgment until paid in full.
5
James E. Biorge
We are reviewing, with the advice of legal counsel, whether we have
legal claims that may be asserted against James E. Biorge, a founder and officer
and director of IC One at the time it was acquired in September 1999. At the
time of such acquisition, we set aside in a special trust approximately 7.8
million shares of common stock to be used to resolve claims that may be asserted
against IC One by persons claiming an interest in or claim against IC One as a
successor-in-interest to the assets, operations and liabilities of CardOne,
which Mr. Biorge had also been instrumental in founding and which had been
involved in the initial development of the intellectual properties subsequently
acquired by IC One before IC One was acquired by us. We believe that all or a
portion of the 7.8 million shares then reserved to satisfy such claims, all of
which have subsequently been used for such purpose, should properly be the
responsibility of Mr. Biorge. In 1999 we advised Mr. Biorge that we intended to
assert a claim against him to hold him responsible for the 7.8 million shares to
satisfy CardOne related liabilities as well as other damages and that we would
offset our claims against shares to be issued to him, reserving the right to
seek such further damages. After we made such assertions in 1999, Mr. Biorge
refused to accept certificates for 11,503,138 shares of our common stock to
which he otherwise may have been entitled to receive in exchange for his stock
in IC One and those shares have been cancelled. We do not believe that it is
probable that Mr. Biorge will assert any claim against us for the shares
cancelled or other damages. If he does, we intend to assert and pursue
vigorously offsetting defenses and believe that there is a reasonable
possibility that the outcome of any claim, if asserted, would not be unfavorable
to us. We may pursue claims against Mr. Biorge and seek damages in addition to
cancellation of the shares
Internal Revenue Service and Withholding Taxes
Our wholly owned subsidiary, IC One, Inc., has received notification
from the Internal Revenue Service that IC One has an unpaid liability for
employment taxes and amounts withheld from employees' wages for the periods from
July 1, 1999, through September 30, 2001. IC One erroneously filed an employer
tax report for the quarter ended September 30, 2001, even though it did not have
any employees and paid no payroll after June 30, 2001. Accordingly, IC One was
not required to make federal tax deposits for the periods after June 30, 2001.
The Internal Revenue Service has filed tax liens against the Company with
respect to such amounts outstanding. As of December 31, 2004, the aggregate
amount owed by IC One, together with applicable penalties and interest, for the
period from July 1, 1999, through June 30, 2001, was approximately $1,277,000.
The Company is attempting to negotiate with the Internal Revenue Service
regarding payment of the amounts owed by IC One.
The total amount of unpaid employment taxes owed by the Company was
approximately $1,277,000 (including interest and penalties of approximately
$325,000). The Company continues to work with the Internal Revenue Service via
the appeals process to resolve its outstanding liability. The Company does not
believe that the liability will hinder the progress of the Company.
Utah State Tax Commission
The State of Utah has filed tax liens of approximately $53,000 as of
December 31, 2004, for unpaid employee withholding taxes and related amounts.
California Employment Development Department
The State of California has filed tax liens against us for unpaid
employee withholding taxes and related amounts aggregating approximately $65,000
as of December 31, 2004.
Nebraska Department of Revenue
The State of Nebraska has filed tax liens against us for unpaid
employee withholding taxes and related amounts aggregating approximately $5,000
as of December 31, 2004.
Other Creditors
From time to time, we are threatened by creditors to initiate
litigation to collect amounts owed by us and reported in our financial
statements. In cases in which litigation is threatened or initiated, we seek to
negotiate a settlement or forbearance agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the
fiscal year ended December 31, 2004.
6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since November 1998, our common stock has been traded in the
over-the-counter market and was quoted on the Over-the-Counter Electronic
Bulletin Board until March 2000. Thereafter, it has been quoted in the Pink
Sheets published by Pink Sheets, LLC, under the symbol SCTN. The trading volume
of the common stock is limited. This limited trading volume creates the
potential for significant changes in the trading price of the common stock as a
result of relatively minor changes in the supply and demand. It is likely that
trading prices and volumes for the common stock will fluctuate in the future,
without regard to our business activities.
The following table sets forth the high and low closing bid quotations
for our common stock as reported on the Over-the-Counter Electronic Bulletin
Board or Pink Sheets, as appropriate, for the periods indicated, based on
interdealer bid quotations, without markup, markdown, commissions or
adjustments, which may not reflect actual transactions:
High Low
---- ---
2004
Quarter ended December 31 ............. $0.090 $0.060
Quarter ended September 30 ............ 0.120 0.070
Quarter ended June 30 ................. 0.180 0.090
Quarter ended March 31 ................ 0.190 0.120
2003
Quarter ended December 31 ............. $0.175 $0.055
Quarter ended September 30 ............ 0.170 0.029
Quarter ended June 30 ................. 0.090 0.045
Quarter ended March 31 ................ 0.065 0.045
2002
Quarter ended December 31 ............. $0.094 $0.040
Quarter ended September 30 ............ 0.111 0.051
Quarter ended June 30 ................. 0.133 0.055
Quarter ended March 31 ................ 0.200 0.110
As of December 31, 2004, we had approximately 1,000 stockholders of
record. We are unable to estimate the number of beneficial owners of our shares.
Penny Stock Regulations
The Securities and Exchange Commission, or SEC, has promulgated rules
governing over-the-counter trading in penny stocks, defined generally as
securities trading below $5 per share that are not quoted on a securities
exchange or NASDAQ or which do not meet other substantive criteria. Under these
rules, our common stock is currently classified as a penny stock. As a penny
stock, our common stock is currently subject to rules promulgated by the SEC
that impose additional sales practice requirements on broker-dealers that sell
such securities to persons other than established customers and institutional
accredited investors. For transactions covered by the rule, the broker-dealer
must make a special suitability determination for the purchaser and receive the
purchaser's written consent to the transaction prior to sale. Further, if the
price of the stock is below $5 per share and the issuer does not have $2.0
million or more net tangible assets or is not listed on a registered national
securities exchange or NASDAQ, sales of such stock in the secondary trading
market are subject to certain additional rules promulgated by the SEC. These
rules generally require, among other things, that brokers engaged in secondary
trading of penny stocks provide customers with written disclosure documents,
monthly statements of the market value of penny stocks, disclosure of the bid
and asked prices, and disclosure of the compensation to the broker-dealer and
the salesperson working for the broker-dealer in connection with the
transaction. These rules and regulations may affect the ability of
broker-dealers to sell our common stock, thereby effectively limiting the
liquidity of our common stock. These rules may also adversely affect the ability
of persons that acquire our common stock to resell their securities in any
trading market that may exist at the time of such intended sale.
7
Dividend Policy
We have never paid cash dividends on our common stock and do not
anticipate that we will pay dividends in the foreseeable future. We intend to
use any future earnings primarily for the expansion of our business.
Transfer Agent
Our registrar and transfer agent is Standard Registrar and Transfer
Agency, 673 Bluebird N.E., Albuquerque, New Mexico 87122-1805, telephone number
(505) 828-2839.
Equity Compensation Plan Information
As of December 31, 2004, we had issued options to purchase common
stock, but had no equity compensation plan that had been approved by our
stockholders. The following table shows the options issued and issuable under
our equity compensation plans:
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Number of securities
available for future
issuance under equity
Number of securities to be Weighted average exercise compensation plans
issued upon exercise of prices of outstanding (excluding securities
Plan Category outstanding options options reflected in column (a))
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(a) (b) (c)
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Equity compensation plans
approved by stockholders... -- -- --
Equity compensation plans not
approved by security holders 48,425,299 $0.09 --
----------
Total........................ 48,425,299 $0.09 --
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As of December 31, 2004, we had outstanding options granted to various
current and former employees, consultants and others, including executive
officers and directors, to purchase an aggregate of 48,425,299 shares. The
options were granted at various exercise prices that were at or below the market
price for our common stock as of the date of grant. Such options are fully
exercisable without meeting any future vesting requirements. Such options are
not incentive stock options under the criteria established by the Internal
Revenue Service.
We have granted to current and former officers, directors and employees
the option to convert an aggregate of $1,338,925 in accrued and past due
salaries and consulting fees as of December 31, 2004, into an aggregate of
18,492,917 shares of common stock at such time as they may deem appropriate.
Recent Sales of Unregistered Securities
During the year ended December 31, 2004, we issued securities without
registration under the Securities Act of 1933 on the terms and circumstances
described in the following paragraphs.
Unless otherwise indicated, all transactions were the result of
arm's-length negotiations. Transactions involving the issuances of securities to
persons that, at the time of such transactions, were either executive officers,
directors, principal stockholders, or other affiliates are noted and were not
the result of arm's length negotiations. In each case of the issuance of
securities to affiliates, unless otherwise noted, such affiliates purchased
securities on the same terms at which securities were sold to unrelated parties
in contemporaneous transactions, and such transactions were approved unanimously
by the disinterested directors.
Certificates for all securities issued in the following transactions
bore a restrictive legend conspicuously on their face and stop-transfer
instructions were noted respecting such certificates on our stock transfer
records. The recipients acknowledged in writing that they were receiving
restricted securities and consented to a legend on the certificates issued and
stop-transfer instructions with the transfer agent.
8
Common Stock
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Transaction Number
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Common Stock Outstanding at December 31, 2003 160,468,600
Satisfy Indebtedness..................................................................... 3,249,921
In January, February and November 2004, we issued an aggregate of 3,249,921 shares of
common stock to six parties, each of whom was an accredited investor, in
satisfaction of $253,915 in indebtedness, or approximately $0.08 per share. On
the dates on which such transactions occurred during the above period, the
market price for the common stock ranged between $0.05 and $0.09 per share.
Issuance of Common Stock for Interest....................................... 456,260
In February 2004, we issued common stock for an aggregate of $65,468
in interest accruing on our outstanding Secured Convertible Promissory Notes and
other notes. During the period in which such stock was issued, the market price for
our common stock was $0.16 per share.
Financial, Development and Administrative Services.............................. 1,539,655
In January and August 2004, we issued an aggregate of 1,539,655 shares
of restricted common stock to five parties, each of whom was an accredited investor,
as payment of $183,460 in financial, development and administrative
services, or an average of approximately $0.12 per share. On the dates
on which such transactions occurred during the above period, the market
price for the common stock ranged between $0.085 and $0.15 per share.
Common Stock Outstanding at December 31, 2004 165,714,436
===========
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Issuance of Convertible Notes
At December 31, 2004, we had outstanding secured convertible notes
payable of $2,766,316 (2003: $2,701,316) bearing interest at a rate of 12%
annually and secured by the Company's intellectual property. The notes mature at
various dates extending through September 2004. We have the option to repay the
notes and interest in cash or convert them into common stock based on a
conversion price of $.05 per share or the holder can elect to convert the notes
to common stock based on the above stated conversion price. We need to raise a
cumulative amount of $4.5 million to effect a conversion of the notes; however,
the holders can convert their notes anytime. If we should force a conversion of
these notes into common stock, then the holder will receive an additional amount
equal in value to 25% of the principal amount in stock options if converted in
the first year and 50% of the principal amount in stock options if converted in
the second year, priced at $0.05 per share, that can be exercised within a five
year period in accordance with the terms and conditions of the note.
Secured Convertible Promissory Notes Payable:
Balance - December 31, 2003 $ 2,701,316
Notes issued during 2004 65,000
Ending Balance - December 31, 2004 $ 2,766,316
=========
The subscribers of the above notes were one or more of the following: a
regular employee/consultant, an existing stockholder, or a family member or
personal or business associate of an affiliate, an employee, or a then-current
stockholder. Each was able to bear the financial risk of the investment. One or
more of our executive officers negotiated each transaction. No general
solicitation was used, no commission or other remuneration was paid in
connection with such transactions, and no underwrite participated. The
recipients acknowledged in writing that the notes constituted restricted
securities and that any stock received on conversion would constitute restricted
securities and consented to a legend on the certificates to be issued and
stop-transfer instructions with the transfer agent.
9
At December 31, 2004, convertible promissory notes were convertible
into an aggregate of 55,326,325 shares of common stock. On December 31, 2004,
the balance of such notes, including accrued interest, held by David Simon and
Bernard F. McHale were convertible into 8,022,647 and 23,514,982 shares
respectively.
Uncompleted Securities Transaction with CEO America
On May 17, 2002, the Company signed an agreement with CEO America, a
wholly-owned subsidiary of Consumer Economic Opportunities, whereby CEO America
agreed to pay an initial $150,000 to the Company and a second payment of
$350,000 on June 20, 2002 for ownership of the SCTN Patents with exclusive
rights for use of the patents being retained by SCTN. The agreement was to
include a 20% equity swap of the two companies. On June 4, 2002, the Company
placed title to the patents in escrow. In connection with the agreement, the
Company placed in escrow a certificate for 30,116,134 shares of SCTN common
stock as collateral. On July 2, 2002, CEO had not delivered the balance of the
money, nor had they complied with any other conditions of the escrow agreement.
The patent title and stock certificate were to remain in escrow pending either
repayment of the original $150,000 to CEO, or until the matter is settled.
Option Grants
During the year ended December 31, 2004, we granted options to persons
who were then officers, directors or others as follows:
<TABLE>
<CAPTION>
Number
Name Expiration Date of Shares Exercise Price
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consultants, Alliance Partners (1 party) Jan 2009-Dec 2009 1,200,000 $0.07-0.17
---------
1,200,000
=========
</TABLE>
Exemptions from Registration
Each of the above transactions was effected in reliance on the
exemption from registration provided in Section 4(2) of the Securities Act of
1933 as transactions not involving any public offering. In each case, the
offering was limited and without any general solicitation, there were a limited
number of investors, and the investors were sophisticated relative to an
investment in the Company and able to bear the economic risks of their
investment. Each transaction was negotiated with an officer of the Company to
answer questions from the investors and provide additional material information
requested, to the extent it could be provided without unreasonable effort or
expense. The investors had access to material information of the kind that
registration would provide. All certificates contained a restrictive legend and
stop-transfer instructions were placed against transfer of the certificates in
the absence of registration or an available exemption.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
We caution readers that important facts and factors described in this
Management's Discussion and Analysis of Financial Condition or Plan of Operation
and elsewhere in this document sometimes have affected, and in the future could
affect, our actual results, and could cause our actual results during the
current year and beyond to differ materially from those expressed in any
forward-looking statements made by us or on our behalf.
As indicated in the Report of Independent Registered Public Accounting
Firm accompanying the financial statements in this report, we have suffered
recurring losses since inception, had significant negative cash flows from
operations, and have a net capital deficiency that raises substantial doubt
about our ability to continue as a going concern.
10
Management is actively seeking additional equity or a combination of
equity and debt financing from new stockholders and/or lenders. In the past, we
have relied on issuing stock for outside services and for compensation to fund
our operating shortfalls; however, there is no assurance that we can continue to
fund a significant portion of our operating needs in this manner. In addition, a
significant portion of the $13.8 million in current liabilities is more than a
year past due. We are attempting to negotiate settlements of some of these debts
and continue to seek forbearance on others; however, there is no guarantee that
we will be successful in continuing to do so. Should we fail to obtain financing
on terms acceptable to us or negotiate settlements on past due debts, or fail in
obtaining forbearance, we may be forced by creditors to take other actions
including seeking protection under bankruptcy proceedings. There can be no
assurance that funding will be available on acceptable terms, if at all, or that
such funds, if raised, would enable us to achieve and maintain profitable
operations.
Limitation on our Ability to Issue Common Stock to Obtain Funding
As of December 31, 2004, we were authorized to issue 200.0 million
shares of common stock. At December 31, 2004, we had approximately 165.7 million
shares outstanding and an additional approximately 137.6 million shares issuable
upon the conversion of stock options, convertible debt and deferred
compensation. As a result, we would exceed the authorized capitalization amount
by approximately 103.3 million shares. In addition, the number of shares
issuable on the conversion of convertible debt continues to increase as interest
continues to accrue.
We would be unable to issue all of the common stock that we are
contractually obligated to issue if all persons holding stock options,
convertible debt and deferred compensation were to exercise their rights, in
which case such persons may seek to compel us to purchase outstanding common
stock in the open market or otherwise in order to deliver shares in accordance
with our obligations or may seek money damages or other relief from us.
Results of Operations
Development Stage Company
We have been in the development stage during the period since
inception, February 26, 1997. From our inception through December 31, 2004, we
incurred total expenses of approximately $71.8 million, including approximately
$28.8 million for research and development leading to creation of our patents,
software and intellectual property. The $71.8 million of total expenses includes
approximately $35.7 million for the value of compensation for services paid in
options or stock, $7.0 million for stock issued for interest expense, and $2.1
million for write-off of common stock subscription receivable, for a total of
approximately $43.7 million funded through the issuance of options and common
stock. The balance of the expenses was funded through the sale of securities and
through increases in liabilities.
During 2004, we incurred total expenses of approximately $4.2 million
compared to approximately $3.8 million in 2003. The increase in expenses in 2004
as compared to 2003 is principally reflected in substantial increases in
research and development expenses to approximately $1.9 million in 2004, as
compared to approximately $457,000 in 2003, offset by decreases in general and
administrative expenses. The year 2004 expenses include noncash expenses of
$65,000 for interest expense funded through issuance of common stock in 2004, as
compared to approximately $726,000 paid with the issuance of common stock in
2003.
Net Loss
The net loss for the year ended December 31, 2004, was approximately
$4.2 million as compared to $3.8 million in the same period in 2003. The change
in the net loss was due to increases in research and development and interest
expenses, which were offset by decreases in general and administrative expenses.
Basic and diluted net loss per share for the fiscal year ended December
31, 2004, was $(0.03), compared to basic and diluted net loss per share of
$(0.03) for the fiscal year ended December 31, 2003.
11
Liquidity
Although we generated approximately $881,000 from financing activities,
our operating activities used net cash of approximately $909,000. These
activities contributed to a net working capital deficit as of December 31, 2004,
of approximately $13.8 million.
Net cash used in operating activities for the fiscal year ended
December 31, 2004, was approximately $909,000, an increase of approximately
$125,000 over the approximately $784,000 cash used in operating activities for
the fiscal year ended December 31, 2003.
Capital Resources
Through December 31, 2004, we do not currently have any material
commitments for capital expenditures other than those expenditures incurred in
the ordinary course of business.
From inception to December 31, 2004, our operating and investing
activities have used substantially more cash than they have generated. Because
we will continue to need substantial amounts of working capital to fund the
growth of our business, we expect to continue to experience significant negative
operating and investing cash flows for the foreseeable future. This estimate is
a forward-looking statement that involves risks and uncertainties. We will need
to raise additional capital in the future to meet our ongoing operating and
investing cash requirements. We may not be able to find additional financing on
favorable terms or at all. If we raise additional funds through the issuance of
securities, these securities may have rights, preferences or privileges senior
to those of our common stock, and our stockholders may experience additional
dilution to their equity ownership. We have a history of losses, have never been
profitable, and may never achieve profitability.
We have not generated any revenues and do not anticipate generating
revenues until some time in the future. We do not know when we will achieve
profitability. We expect to continue to incur losses for the foreseeable future
and we may never be profitable. If we do achieve profitability in any period, we
cannot be certain that we will sustain or increase such profitability on a
quarterly or annual basis. From inception through December 31, 2004, we incurred
total expenses of approximately $71.8 million. The independent auditors' report
accompanying the financial statements included in this report includes an
explanatory paragraph stating that the accumulated deficit and a working capital
deficiency raise substantial doubt about our ability to continue as a going
concern. (See Note 2, Going Concern, of the Notes to Consolidated Financial
Statements). The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
From inception to December 31, 2004, we have funded our capital
requirements and our business operations primarily with funds provided from the
issuance of common stock and stock options and from borrowings, and the sale of
common stock. From inception to December 31, 2004, we have received
approximately $6.4 million from the subscription and sale of common stock and
convertible notes subsequently converted into common stock, $3.5 million from
notes and loans payable, and $896,000 from amounts due to employees. We will
require additional financing to support our operations until we become
profitable. Such sources of financing could include capital infusions,
additional equity financing, or debt offerings. Management believed that as of
December 31, 2004, we would need approximately $5.0 million in equity or debt
financing to achieve revenues at a level to cover operating costs. Management is
actively pursuing obtaining additional funds. There can be no assurance that
additional funding will be available on acceptable terms, if at all, or that
such funds if raised, would enable us to achieve and maintain profitable
operations. If we are not able to obtain sufficient additional funds from
investors, we may be unable to sustain our operations.
Contingencies
As discussed above, we would be unable to issue all of the common stock
that we are contractually obligated to issue if all persons holding stock
options, convertible debt and deferred compensation were to exercise their
rights, in which case such persons may seek to compel us to purchase outstanding
common stock in the open market or otherwise in order to deliver shares in
accordance with our obligations or may seek money damages or other relief from
us. We do not have the financial resources to either purchase stock from others
to fulfill our obligations or to pay damages. In addition, we believe that the
persons holding stock options, convertible debt and deferred compensation to
whom we may become obligated to issue additional shares of common stock,
including David J. Simon and Bernard F. McHale, executive officers, directors
and principal stockholders, may beneficially own a sufficient number of shares
to approve such a proposal without the consent of any other stockholders.
12
Application of Critical Accounting Policies
Research and development expenses consist primarily of compensation,
benefits and related expenses for personnel engaged in research and development
activities, outside contract and consulting expenses, material and supplies and
personnel costs to maintain our technology.
General and administrative expenses consist of compensation, benefits
and related expenses for personnel engaged in general management, finance and
administrative positions. They also include expenses for financial advisory,
legal and accounting fees, advisory board expenses, insurance and other
expenses.
Sales and marketing expenses consist of compensation, benefits and
related expenses for personnel engaged in sales, marketing, and related business
development activities. These expenses also include consultants, printing of
promotional materials, travel and general corporate expenses.
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109"). SFAS
No. 109 requires the recognition of deferred tax assets and liabilities for both
the expected impact of differences between the financial statements and tax
basis of assets and liabilities, and for the expected future tax benefit to be
derived primarily from tax loss carryforwards. The Company has established a
valuation allowance related to the benefits of net operating losses for which
utilization in future periods is uncertain. The Company believes it is more
likely than not that the Company will not realize the benefits of these
deductible differences in the near future and therefore a full valuation
allowance of approximately $24,000,000 is provided.
As of December 31, 2004, the Company has approximately $60,000,000 of
federal net operating losses available to offset future taxable income, which if
not utilized will expire in 2024. No provision for income taxes has been
recorded in the financial statements as a result of continued losses. Any
benefit for income taxes as a result of utilization of net operating losses may
be limited as a result of change in control.
Off-balance sheet arrangements
None.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements, including the auditors' report, are included
beginning at page F-1 immediately following the signature page of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On May 18, 2007, Schwartz Levitsky Feldman LLP ("SLF") were appointed
as our new independent auditors, commencing with the audit for the years ending
December 31, 2003, 2004, 2005 and 2006. Effective May 18, 2007, we dismissed
Marcum & Kliegman LLP ("MKLLP") as our independent auditors, which action was
approved by our board of directors.
During the four most recent fiscal years and the interim period
preceding the engagement of SLF, we have not consulted with SLF regarding
either: (i) the application of accounting principles to a specified transaction,
either completed or proposed; or the type of audit opinion that might be
rendered on our financial statements, and either a written report or oral advice
was not provided to us by SLF that was an important factor considered by us in
reaching a decision as to an accounting, auditing or financial reporting issue;
or (ii) any matter that was either the subject of a "disagreement" or event
identified in response to Paragraph (a)(1)(iv) of Item 304, as those terms are
used in Item 304(a)(1)(iv) of Regulations S-B and S-K and the related
instructions to Item 304 of Regulations S-B and S-K.
The report of SLF on our financial statements for the fiscal year ended
December 31, 2003 contained an expression of substantial doubt regarding our
ability to continue as a going concern.
13
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the periods covered by this report, the Company
conducted an evaluation, under the supervision and with the participation of the
principal executive officer and principal financial officer, of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this
evaluation, the principal executive officer and principal financial officer have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time period specified in Securities and Exchange
Commission's rules and forms.
Changes in Internal Controls Over Financial Reporting
None.
ITEM 8B. OTHER INFORMATION
None.
14
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
Our bylaws provide for a board of from one to seven directors to be
elected at each annual meeting of stockholders, with each director to serve
until the next annual meeting and until such director's successor is elected and
qualified. Officers are elected and serve at the pleasure of the board of
directors.
The following table sets forth the name, age and position of each of
our directors and executive officers at December 31, 2004:
Name Age Title
---- --- -----
David J Simon 58 President, CEO, Chairman of the Board of Directors
Bernard F. McHale 69 Director and CFO
Executive officers are elected by the board of directors and serve
until their successors are duly elected and qualify, subject to earlier removal
by the board of directors. Directors are elected at the annual meeting of
stockholders to serve for their term and until their successors are duly elected
and qualify, or until their earlier resignation, removal from office, or death.
The remaining directors may fill any vacancy in the board of directors for an
unexpired term.
Business Experience of Executive Officers and Directors
David J. Simon has been a director since November 1998 and chairman of
the board since May 1999. He served as chief executive officer from May 1999
until July 1999, from November 1999 until March 1, 2000, from May 15, 2002,
until June 10, 2002, from August 2003 until December 2004. He served as
president and chief executive officer for R & D Technology, Inc., a Nevada
company that he helped found, from its inception August 31, 1998, until we
acquired it in November 1998. In all of Mr. Simon's employment in the past five
years, he was involved in the architecture, design, development, maintenance and
management of computer programs, software applications and systems. His career,
including as an employee and as a consultant, has been involved with computing
technology and spanned many diverse industries including banking, healthcare,
manufacturing, stock exchange and telecommunications.
Bernard (Mac) F. McHale is the chief financial officer, treasurer and a
director. Mr. McHale has been a director since May 2002. He began his financial
services professional career 29 years ago after concluding a 20-year career in
the U.S. Navy, during which he earned his B.A. in Business Management and
Finance. Mr. McHale has been actively involved in managing his own financial
services company, Mid-America CAPITAL Group, in Las Vegas, Nevada, from December
1995 through April of 2002, until he became actively involved in the Company as
our director, treasurer and interim chief executive officer, until assuming the
position of chief financial officer in August of 2003.
Dependence on Key Management
Our performance depends substantially on the continued services and
performance of our senior management. The loss of services of one or more of
these employees could have a material adverse effect on our business. There can
be no assurance that we will be successful in attracting and retaining such
personnel. Competition for such personnel is intense.
Compliance with Section 16(a) of the Exchange Act
We believe all forms required to be filed under Section 16 of the
Exchange Act have been timely filed.
Code of Ethics
Due to its limited operations, the Company has not yet adopted a Code
of Ethics.
15
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation
The following table shows the compensation paid or accrued by us for
the last three fiscal years for each person serving as our chief executive
officer during 2004. No other executive officer or other person received annual
salary and bonus of $100,000 or more during 2004. Accordingly, the summary
compensation table does not include compensation of any other executive officer
or other person:
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Other Restricted Securities All Other
Year Annual Stock Underlying LTIP Compen-
Name and Ended Compen- Awards Options/ Payouts sation
Principal Position Dec 31 Salary($) Bonus($) sation($) (shares) SARs(#) ($) ($)
------------------ ------ --------- -------- --------- -------- ------- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David J. Simon 2004 $120,000 $ -- $ -- -- -- $ -- $ --
President (CEO)(1) 2003 $150,000 $ -- $ -- -- -- $ -- $ --
2002 $150,000 $ -- $ -- -- 15,007,813 $ -- $ --
Joseph Diamond 2004 $100,000 $ -- $ -- -- -- $ -- $ --
(CFO) (CEO)(2) 2003 $ -- $ -- $ -- -- -- $ -- $ --
2002 $ -- $ -- $ -- -- -- $ -- $ --
</TABLE>
-----------------
(1) Served as chief executive officer from December 2004, as well as in previous
periods. On July 31, 2002, Mr. Simon agreed to defer payment of $90,625 in
previously accrued salary until such time as we have sufficient funds. Further,
$45,250 and $75,000 of the compensation to Mr. Simon in 2001 and 2000,
respectively, was deferred and paid through the issuance in 2001 of options to
purchase 2,055,000 shares at $0.10 per share. On July 7, 2004, Mr. Simon agreed
to convert accrued salaries from August 1, 2002 through June 30, 2004 to
5,750,000 shares and the $90,625 previously accrued to stock at 70% of the
closing market price as of the date of the agreement.
(2) Served as chief financial officer during February - December 2004 and as
chief executive officer during November and December 2004, at salary of $10,000
per month, payable as $5,000 in cash and the remainder in stock options at $0.15
per share.
Employment and other Agreements
Mr. Simon was paid a salary of $150,000 per year under an employment
agreement beginning August 2002 that provides for 40% of Mr. Simon's pay to be
deferred until we are financially able to pay the full amount and possible
conversion of unpaid amounts into stock options at $0.05 per share at the
election of Mr. Simon. Under the agreement we granted Mr. Simon options to
purchase 12,000,000 shares of stock at $0.05 per share payable by a non-recourse
note and agreed to pay Mr. Simon up to his base salary in the event of
involuntary termination without cause or in the event of a change of control
after which Mr. Simon does not continue his employment, defined to include a
merger or consolidation in which an entity acquires in excess of 20% of the
Company, a sale of all or substantially all of our assets, and other events.
Under an addendum to Mr. Simon's employment agreement effective July 1, 2004,
Mr. Simon's salary was reduced to $90,000.
Mr. McHale was engaged under a 12-month agreement beginning August 1,
2003 to serve as chief financial officer at $96,000 per year. The agreement
allows us to defer paying the consulting fees if we do not have available funds
to pay the amount. To date, all of such consulting fees due Mr. McHale have been
accrued by us, but not paid. Mr. McHale's contract allows for possible
conversion of unpaid amounts into stock at $0.05 per share at his election.
Commencing July 7, 2004 Mr. McHale entered into a new three year employment
agreement with the Company and his salary was reduced to $2,500 per month.
Mr. Diamond was engaged under a 12-month contractor agreement beginning
March 15, 2004 to serve as chief financial officer at $10,000 per month payable
as $5,000 cash and the remainder in stock options at $0.15 per share. The cash
payments were to be made as the company's cash flow permitted. Any payments
outstanding over 30 days could be converted at the option of the contractor into
options at $0.15 per share.
16
Option Grants in 2004
No options were granted to any of the executive officers named in the
summary compensation table above.
Aggregate Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
The following table sets forth information with respect to the
exercise/exercisability of options and stock appreciation rights during the last
completed fiscal year by the executive officers named in the above summary
compensation table and the fiscal year-end values of unexercised options and
stock appreciation rights:
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options/SARs at FY
at FY End (#) End ($)
Shares Acquired Value Realized ($) Exercisable/ Exercisable/
Name on Exercise (#) Unexercisable Unexercisable
---- --------------- ------------------ ------------- -------------
<S> <C> <C> <C> <C>
David J. Simon -- -- 17,062,813/-- --/--
President (CEO)
</TABLE>
Director Compensation
During 2004, members of our board of directors who were not employees
received no cash compensation for services as a director or for attendance at or
participation in meetings. In the year ended December 31, 2004, there were no
options issued to board members.
17
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of December 31, 2004, the name,
stockholdings and address of each person who owns of record, or was known by us
to own beneficially, 5% or more of the 165,714,436 shares of common stock then
issued and outstanding. Unless otherwise indicated, all shares consist of common
stock and all such shares are owned beneficially and of record by the named
person or group.
<TABLE>
<CAPTION>
Amount and Nature
Title of Class Name and Address of Beneficial Owner of Beneficial Ownership Percent of Class (1)
<S> <C> <C> <C> <C>
Common Stock David Simon 3,957,839 Direct
330 E. Warm Springs Road 21,161,876 (2) Options
Las Vegas, NV 89119 19,784,314 Rights
44,904,029 Total 14.8%
Common Stock Bernard McHale 24,783,327 Direct
7757 Foredawn Dr. - Options
Las Vegas, NV 89123 28,784,982 Rights
53,568,309 Total 17.7%
Common Stock Airos Group Inc. 10,961,948 Direct
482 South Service Road, Suite 103 2,500,000 Options
Oakville, Ontario, Canada L6J 2X6 - Rights
13,461,948 Total 4.4%
Common Stock Executives as a Group (2 persons) 28,741,166 Direct
21,161,876 Options
48,569,296 Rights
98,472,338 Total 32.5%
</TABLE>
(1) The percent of class is calculated on the basis of the amount of outstanding
securities, plus for each person or group, any securities that person or group
has the right to acquire within 60 days pursuant to options, conversion or other
rights.
(2) Consists of options to purchase 17,062,813 shares in Mr. Simon's name and
4,099,063 in the name of Elaine Beavon-Simon
18
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 2002 we issued David Simon, an executive officer and
director, a secured convertible promissory note for $310,462, with interest at
12%, as evidence of our obligation to repay him un-reimbursed expenses incurred
by him on our behalf and cash advances to us. As of December 31, 2004, the
outstanding principal balance of such notes, including accrued interest, was
convertible into 8,022,647 shares of common stock.
Prior to becoming a director in May 2002, Bernard F. McHale purchased
on the same terms as sold to unaffiliated parties an aggregate of $180,000 in
common stock in the year 2000, $145,000 in a convertible promissory note that
was converted into stock in the year 2001, and an additional $910,000 in
principal amount of Limited Recourse Convertible Promissory Notes in the years
2001-2002, which were converted into the same principal amount of Secured
Recourse Convertible Promissory Notes on September 30, 2002. As of December 31,
2004, the outstanding principal balance of such notes, including accrued
interest, was convertible into 23,514,982 shares of common stock.
In April 2003, we entered into a Development Agreement with Airos Group
Inc. to complete the development of all product components, including the card,
terminal and host processing, plus integration and customization services. The
fees are payable on a deferred basis until revenues begin. Airos Group Inc.
earned 6% per month in company stock, restricted by SEC Rule 144, for all fees
deferred until product revenues begin up to a maximum of $2,000,000 worth of
stock issued. In November 2003, we amended our agreement with Airos Group Inc.
to change the terms of our agreement to five years and adjust the rate of
reimbursement to various Airos personnel. We agreed to issue Airos 12,800,000
shares of restricted common stock, with 11,300,000 issuable immediately and the
balance issuable on the execution of the first qualified customer order through
Thomas Jackson Performance Management, Inc. Airos agreed to purchase 2,000,000
shares of restricted common stock at $0.30 per share, for a total of $600,000,
payable pursuant to the terms of promissory note in 24 consecutive monthly
installments of $25,000, commencing November 2003.
19
ITEM 13. EXHIBITS
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Title of Document Location
---------- ----------------------------------------------------------------------------- ---------
Item 3. Articles of Incorporation and ByLaws
---------- ----------------------------------------------------------------------------- ---------
<C> <C> <C>
3.01 Articles of Incorporation of Apple Tree Capital Corp., filed October 4, 1996 Incorporated by
Reference(2)
3.02 Articles of Amendment to Apple Tree Capital Corp. (name change to Schimatic Incorporated by
Technologies, Inc.) filed November 13, 1998 Reference(1)
3.03 Articles of Amendment to Schimatic Technologies, Inc. (name change to Incorporated by
SCHIMATIC Cash Transactions Network.com, Inc.) filed January 15, 1999 Reference(2)
3.04 Bylaws of SCHIMATIC Cash Transactions Network.com, Inc. dated Incorporated by
January 15, 1999 Reference(2)
3.05 Articles of Amendment to Articles of Incorporation of SCHIMATIC Cash Incorporated by
Transactions Network.com, Inc. dated June 30, 1999, filed June 26, 2000 Reference(3)
</TABLE>
Item 10. Material Contracts
<TABLE>
<CAPTION>
<S> <C> <C>
10.01 Employment Agreement with Joe Diamond dated February 15, 2004 This filing
10.02 Addendum 2 to the Beavon Employment Agreement dated May 1, 2004 This filing
10.03 Addendum 2 to the Simon Employment Agreement dated May 1, 2004 This filing
10.04 Employment Agreement with Bernard McHale dated July 7, 2004 This filing
10.05 Addendum 3 to the Beavon Employment Agreement dated July 7, 2004 This filing
10.06 Addendum 3 to the Simon Employment Agreement dated July 7, 2004 This filing
10.07 Employment Agreement with Joe Diamond dated July 7, 2004 This filing
10.08 Settlement Agreement with Bernard McHale dated July 7, 2004 This filing
10.09 Addendum 4 to the Beavon Employment Agreement dated November 11, 2004 This filing
10.10 Addendum 4 to the Simon Employment Agreement dated November 11, 2004 This filing
10.11 Addendum 5 to the Beavon Employment Agreement dated December 18, 2004 This filing
10.12 Addendum 5 to the Simon Employment Agreement dated December 18, 2004 This filing
10.13 Addendum to the McHale Settlement Agreement dated December 18 2004 This filing
</TABLE>
20
<TABLE>
<CAPTION>
Exhibit
Number Title of Document Location
---------- ----------------------------------------------------------------------------- ---------
<S> <C> <C>
Item 31 Section 302 Certifications
------------------------------------------------------------------------------------------
31.01 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 This filing
31.02 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 This filing
Item 32 Section 1350 Certifications
------------------------------------------------------------------------------------------
32.01 Certification of Chief Executive Officer Pursuant to Section 906 of the This filing
Sarbanes-Oxley Act of 2002
32.02 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 This filing
-------------------------------------
</TABLE>
(1) Incorporated by reference from Amendment No. 3 to Form 10-SB/A filed on
September 10, 2001.
(2) Incorporated by reference from Amendment No. 2 to Form 10-SB/A filed on
April 13, 2000.
(3) Incorporated by reference from Amendment No. 5 to Form 10-SB/A filed on
February 14, 2002.
(b) Reports on Form 8-K:
We did not report any items on Form 8-K during the year ended
December 31, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees billed to the Company by its principal
accountants during the fiscal years ended December 31, 2004 and December 31,
2003.
Fee Category 2004 2003
--------------------------------------------------------------------
Audit Fees $15,800 $52,000
Audit-Related Fees $ 0 $ 0
Tax Fees $ 0 $ 0
All Other Fees $ 0 $ 0
Audit Fees consists of fees for professional services provided by our
principal accountants for the audit of the Company's annual financial statement
and reviews of the quarterly financial statements included in the Company's
statutory and regulatory filings.
The Company does not have an Audit Committee, therefore, there is no
Audit Committee policy with respect to pre-approval of audit and non-audit
services of independent auditors. All services provided by our principal
accountant are performed in accordance with a written engagement letter between
us and the principal accountant. The Company approves all professional services
undertaken by the principal accountant prior to their execution.
21
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, this report has been signed below on the registrant and in the
capacities and on the dates indicated.
SCHIMATIC Cash Transactions Network.com, Inc.
Dated: January 31, 2008 /s/ Miki Radivojsa
------------------------------------
Miki Radivojsa, President and
Chief Executive Officer
Dated: January 31, 2008 /s/ Bernard F. McHale
------------------------------------
Bernard F. McHale
Treasurer (Chief Financial Officer)
22
PART II - FINANCIAL STATEMENTS
Item 7. SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
(A Development Stage Enterprise)
FORM 10-KSB
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
(A Development Stage Enterprise)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004 AND 2003
Together With Report of Independent Registered Public Accounting Firm
(Amounts expressed in US Dollars)
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Report of Independent Registered Public Accounting Firm ........................................................F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003....................................................F-3
Consolidated Statements of Operations and Comprehensive Loss for the years ended
December 31, 2004 and 2003......................................................................................F-4
Consolidated Statements of Changes in Stockholders' Deficiency
for the Period from Inception (February 26, 1997) through December 31, 2004.....................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2004 and 2003.....................................................................................F-15
Notes to Consolidated Financial Statements.....................................................................F-17
Unaudited Quarterly Reports
First Quarter 2004.......................................................................................F-44
Second Quarter 2004......................................................................................F-57
Third Quarter 2004.......................................................................................F-70
</TABLE>
F-1
Schwartz Levitsky Feldman llp
CHARTERED ACCOUNTANTS
LICENSED PUBLIC ACCOUNTANTS
TORONTO o MONTREAL
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Schimatic Cash Transactions Network.Com, Inc.
(A Development Stage Enterprise)
We have audited the accompanying consolidated balance sheets of Schimatic
Cash Transactions Network.Com, Inc. (the "Company") (a development stage
enterprise) as at December 31, 2004 and 2003 and the related consolidated
statements of operations, cash flows and shareholders' deficiency for the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
The consolidated financial statements of the company as of December 31, 2002
and for the period from February 26, 1997 (Date of Inception) through
December 31, 2002, were audited by other auditors, whose reports, dated
August 31, 2003 and August 28, 2001, expressed unqualified opinions on those
statements and included explanatory paragraphs regarding the Company's
ability to continue as a going concern. The consolidated financial
statements reflect cumulative total assets of $29,808 as of December 31,
2002 and cumulative expenses of $63,805,403 for the period from inception to
December 31, 2002. Those statements were audited by other auditors, whose
reports have been furnished to us, and our opinion, insofar as it relates to
the cumulative financial information from inception to December 31, 2002, is
based solely on the reports of the other auditors.
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 audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Schimatic Cash Transactions
Network.Com, Inc. as of December 31, 2004 and 2003, and the results of its
operations and its cash flows for the years ended December 31, 2004 and 2003
and for the period from inception to December 31, 2004 in accordance with
generally accepted accounting principles in the United States of America.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company is in the development stage,
and has incurred net losses since inception. Additionally, the Company has a
net working capital deficiency and shareholders' deficiency. These
conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
"SCHWARTZ LEVITSKY FELDMAN LLP"
Toronto, Ontario, Canada Chartered Accountants
September 24, 2007 Licensed Public Accountants
1167 Caledonia Road
Toronto, Ontario M6A 2X1
Tel: 416 785 5353
Fax: 416 785 5663
F-2
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
(A Development Stage Enterprise)
Consolidated Balance Sheets
As of December 31, 2004 and 2003
(Amounts expressed in US Dollars)
<TABLE>
<CAPTION>
2004 2003
$ $
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash 14,086 42,570
Prepaid Expenses and other 58,571 24,885
----------- -----------
TOTAL CURRENT ASSETS 72,657 67,455
----------- -----------
TOTAL ASSETS 72,657 67,455
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable - Vendor 1,709,400 1,455,000
Accounts payable - other 4,425,895 2,603,400
Accrued wages and payroll taxes (note 14) 1,439,795 1,361,408
Deferred compensation (note 7) 2,074,276 1,216,686
Loans - CEO America (note 6) 150,000 150,000
Amounts owed to employees and officers (notes 3 and 4) 1,097,273 783,777
Short term loans (note 12) 197,885 124,315
Convertible notes payable (including amounts owed to officers
$1,220,462 prior year $1,220,462 (note 5)) 2,766,316 2,701,316
----------- -----------
TOTAL CURRENT LIABILITIES 13,860,840 10,395,902
----------- -----------
COMMITMENTS AND CONTINGENCIES (notes 13, 14, 18 and 19)
SHAREHOLDERS' DEFICIENCY (note 9):
Common stock - $.001 par value; 200,000,000 shares
authorized; 165,714,436 shares issued and outstanding 165,714 160,469
(2003: 160,468,600)
Additional paid-in capital 57,616,113 57,026,926
Common stock subscription receivable (250,000) (525,000)
Common stock subscribed 500,000 600,000
Deficit accumulated during the development stage (71,820,010) (67,590,842)
----------- -----------
TOTAL SHAREHOLDERS' DEFICIENCY (13,788,183) (10,328,447)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY 72,657 67,455
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
(A Development Stage Enterprise)
Consolidated Statements of Operations and Comprehensive Loss
Years Ended December 31, 2004 and 2003 and the Period from Inception (February
26, 1997) to December 31, 2004
(Amounts expressed in US Dollars)
<TABLE>
<CAPTION>
For the Period
For the Years Ended From Inception
December 31, (February 26, 1997)
----------------------------------- Through December 31,
2004 2003 2004
---- ---- ----
$ $ $
<S> <C> <C> <C>
EXPENSES:
Selling, general and administrative 2,540,620 2,258,565 57,713,548
Depreciation and amortization - - 365,010
Write-off of common stock subscription
receivable - 32,639 2,125,000
Loss on impairment of intangible assets - 27,665 703,211
Interest expense 1,688,548 1,466,570 9,982,031
------------- ------------- ------------
TOTAL EXPENSES 4,229,168 3,785,439 70,888,800
------------- ------------- ------------
LOSS BEFORE EXTRAORDINARY ITEM (4,229,168) (3,785,439) (70,888,800)
EXTRAORDINARY ITEM - LOSS ON
EXTINGUISHMENT OF DEBT - - (931,210)
------------- ------------- ------------
NET LOSS $ (4,229,168) $ (3,785,439) $(71,820,010)
============= ============= ============
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.03) $ (0.03)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 164,307,653 151,308,986
============= =============
COMPREHENSIVE LOSS
The components of comprehensive loss are as follows:
Net loss $ (4,229,168) $ (3,785,439)
Other comprehensive income (loss) foreign currency
Translation - -
Comprehensive Loss $ (4,229,168) $ (3,785,439)
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC.
(A Development Stage Enterprise)
Consolidated Statements of Changes in Stockholders' Deficiency
For the Period from Inception (February 26, 1997) Through December 31, 2004
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
Deficit
Common Common Accumulated
Common Stock Additional Stock Stock Deferred During the
Number of Paid-in Subscription to be Compen- Development
Shares Amount Capital Receivable Issued sation Stage Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - February 26, 1997
(Inception) - $ - $ - $ - - - $ - $ -
Issuance of common stock for cash:
($1.32 per share, March) 35,676 36 46,964 - - - - 47,000
($0.92 per share, April) 10,032 10 9,207 - - - - 9,217
($0.75 per share, June) 28,085 28 20,972 - - - - 21,000
($0.71 per share, July) 452,223 452 322,434 - - - - 322,886
($0.69 per share, August) 695,447 695 477,005 - - - - 477,700
($0.68 per share, September) 42,128 42 28,487 - - - - 28,529
($0.81 per share, November) 32,715 33 26,517 - - - - 26,550
Issuance of common stock for legal,
financial, development and
administrative services
($1.32 per share, March) 759 1 999 - - - - 1,000
($0.92 per share, April) 379,528 380 349,620 - - - - 350,000
($0.92 per share, May) 12,870,501 12,871 11,811,512 - - - - 11,824,383
($0.71 per share, July) 3,779,301 3,779 2,684,854 - - - - 2,688,633
($0.69 per share, August) 1,479,869 1,480 1,012,322 - - - - 1,013,802
($0.68 per share, September) 263,471 263 178,162 - - - - 178,425
($0.81 per share, November) 74,957 75 61,150 - - - - 61,225
Net loss - - - - - - (17,349,205) (17,349,205)
Balance - December 31, 1997 20,144,692 20,145 17,030,205 0 0 0 17,349,205) (298,855)
Issuance of common stock for cash:
($2.63 per share, January) 94,882 95 249,905 - - - - 250,000
($0.87 per share, February) 108,469 108 94,342 - - - - 94,450
The accompanying notes are an integral part of these consolidated financial statements.
F-5
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($0.69 per share, March) 176,131 176 122,094 - - - - 122,270
($0.70 per share, April) 206,944 207 144,026 - - - - 144,233
($0.67 per share, May) 471,374 471 317,029 - - - - 317,500
($2.45 per share, June) 26,567 27 64,973 - - - - 65,000
($1.24 per share, July) 19,356 19 23,981 - - - - 24,000
($2.63 per share, August) 1,898 2 4,998 - - - - 5,000
($0.68 per share, September) 284,393 284 194,383 - - - - 194,667
($0.66 per share, October) 68,315 68 44,932 - - - - 45,000
($0.65 per share, November) 523,935 524 338,874 - - - - 339,398
($0.66 per share, December) 37,953 38 24,962 - - - - 25,000
Issuance of common stock for notes
($0.69 per share, July) 1,897,639 1,898 1,298,102 (1,300,000) - - - -
Issuance of common stock for legal,
financial, development and
administrative services:
($0.69 per share, March) 3,795 4 2,631 - - - - 2,635
($0.70 per share, April) 67,708 68 47,122 - - - - 47,190
($0.67 per share, May) 340,057 340 228,710 - - - - 229,050
($2.45 per share, June) 379,528 380 928,191 - - - - 928,571
($1.24 per share, July) 815,985 816 1,010,949 - - - - 1,011,765
($0.68 per share, September) 152,388 152 104,158 - - - - 104,310
($0.66 per share, October) 15,181 15 9,985 - - - - 10,000
($0.65 per share, November) 51,616 52 33,384 - - - - 33,436
Net loss - - - (5,448,335) (5,448,335)
Balance - December 31, 1998 25,888,806 25,889 22,317,936 (1,300,000) 0 0 (22,797,540) (1,753,715)
Issuance of common stock in exchange 18,597,792 18,597 777,516 - - - - 796,113
Issuance of common stock for cash:
($0.66 per share, January) 713,512 713 469,287 - - - - 470,000
($0.68 per share, February) 129,799 130 87,870 - - - - 88,000
($0.66 per share, March) 151,811 152 99,848 - - - - 100,000
($0.68 per share, April) 179,137 179 120,821 - - - - 121,000
($0.66 per share, May) 38,712 39 25,461 - - - - 25,500
The accompanying notes are an integral part of these consolidated financial statements.
F-6
<CAPTION>
<S> <C> <C> <C> <C> <C> <C><C> <C>
($0.23 per share, July) 1,009,905 1,010 232,874 - - - 233,884
($0.66 per share, September) 325,557 325 214,124 - - - 214,449
Issuance of common stock for:
Computer services ($2.34 per
share, September) 11,357 11 26,572 - - - 26,583
Shareholder's loan ($2.75 per
share, November) 175,000 175 481,075 - - - 481,250
Investment in real estate joint
venture ($1.00 per share,
December) 420,000 420 419,580 - 114000 (114,000) 420,000
Issuance of common stock for notes
($1.32 per share, July) 759,056 759 999,241 (1,000,000) - -
Issuance of common stock for
software 174,583 175 114,825 - 115,000
($0.66 per share, August)
Issuance of common stock for legal,
financial, development and
administrative services:
($0.68 per share, February) 1,968,326 1,968 1,332,506 - 1,334,474
($0.68 per share, April) 1,913,579 1,914 1,290,633 - 1,292,547
($0.66 per share, May) 57,157 57 37,593 - 37,650
($0.66 per share, September) 1,500,860 1,501 986,242 - 987,743
Net loss - - - - (7,894,949) (7,894,949)
BALANCE - December 31, 1999 54,014,949 54,014 30,034,004 (2,300,000) 114,000 0 (30,806,489) (2,904,471)
Issuance of common stock for cash:
($0.60 and $1.00 per share, January) 120,733 121 82,320 - - - - 82,441
($0.60 and $1.00 per share, February) 653,466 653 399,427 - - - - 400,080
($0.60 and $1.00 per share, March) 508,567 508 413,393 - - - - 413,901
($0.60 and $1.00 per share, April) 512,081 512 355,138 - - - - 355,650
($0.60 per share, May) 475,834 476 285,024 - - - - 285,500
($0.21 and $0.60 per share, June) 761,667 762 132,838 - - - - 133,600
($0.21 per share, July) 160,000 160 95,840 - - - - 96,000
($0.60 per share, August) 108,667 109 65,091 - - - - 65,200
The accompanying notes are an integral part of these consolidated financial statements.
F-7
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($0.40 per share, September) 110,062 110 43,915 - - - - 44,025
($0.40 per share, October) 25,000 25 9,975 - - - - 10,000
($0.40 per share, November) 100,000 100 39,900 - - - - 40,000
Issuance of common stock for cash
received in 1999 ($0.54 per share,
January) 211,669 212 113,788 - (114,000)
Issuance of common stock for debt
and interest:
($1.50 per share, April) 1,122,918 1,123 1,683,254 - - - - 1,684,377
($0.60 per share, October) 2,632 3 1,576 - - - - 1,579
($0.43 per share, November) 55,814 56 23,944 - - - - 24,000
($0.40 per share, December) 77,083 77 30,756 - - - - 30,833
Issuance of common stock for
financial and development
services:
($2.66 per share, February) 22,768 23 60,449 - - - - 60,472
($2.50 per share, March) 139,988 140 349,830 - - - - 349,970
($1.97 per share, April) 28,527 29 56,066 - - - - 56,095
($1.43 per share, May) 3,000 3 4,287 - - - - 4,290
($1.94 per share, June) 90,700 91 175,485 - - - - 175,576
($1.42 per share, July) 28,640 29 40,642 - - - - 40,671
($0.98 per share, August) 16,114 16 15,842 - - - - 15,858
($0.66 per share, September) 40,067 40 26,398 - - - - 26,438
($0.64 per share, October) 58,397 58 37,278 - - - - 37,336
($0.40 per share, November) 21,155 21 8,441 - - - - 8,462
Issuance of common stock for legal
services
($0.35 per share, November) 500,000 500 174,500 - - - - 175,000
Issuance of common stock for
investment in Real estate
joint venture:
($2.00 per share, March) 28,432 28 56,836 - - - - 56,864
($0.33 per share, October) 101,975 102 33,550 - - - - 33,652
Issuance of common stock to IC One
shareholders, January 119,905 120 (120) - - - -
Cancellation of shares of common
stock issued in exchange,
January (286,267) (286) 286 - - - -
The accompanying notes are an integral part of these consolidated financial statements.
F-8
<CAPTION>
<S> <C> <C> <C> <C> <C> <C><C> <C>
Issuance of common stock for equipment
($1.00 per share, January) 8,000 8 7,992 - - - - 8,000
Issuance of common stock to
settle CardOne potential claims
($1.05 per share, August) 294,180 294 308,595 - - - - 308,889
Stock option compensation:
January - - 29,588 - - - - 29,588
February - - 29,588 - - - - 29,588
March - - 29,588 - - - - 29,588
April - - 407,476 - - - - 407,476
May - - 815,726 - - - - 815,726
June - - 109,334 - - - - 109,334
July - - 109,335 - - - - 109,335
August - - 109,335 - - - - 109,335
September - - 1,599,960 - - - - 1,599,960
October - - 109,335 - - - - 109,335
November - - 109,335 - - - - 109,335
December - - 109,335 - - - - 109,335
Net loss - - - - - (10,485,935) (10,485,935)
BALANCE, December 31, 2000 60,236,723 60,237 38,734,475 (2,300,000) 0 0 (41,292,424) (4,797,712)
Issuance of common stock for
financial, development and
administrative services:
($0.25 per share, February) 21,386 21 5,326 - 5,347
($0.22 per share, March) 622,916 623 141,075 - 141,698
($0.15 per share, April) 402,210 402 58,017 - 58,419
($0.18 per share, May) 55,000 55 9,570 - 9,625
($0.19 per share, June) 62,115 62 11,740 - 11,802
($0.19 per share, July) 1,101,580 1,102 204,601 - 205,703
($0.16 per share, August) 270,047 270 44,118 - 44,388
($0.13 per share, September) 68,348 68 9,134 - 9,202
($0.20 per share, October) 286,406 287 57,717 - 58,004
($0.20 per share, November) 308,189 308 59,789 - 60,097
($0.23 per share, December) 395,400 395 89,297 - 89,692
The accompanying notes are an integral part of these consolidated financial statements.
F-9
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cancellation of common
stock issued for financial
services ($1.50 per share,
December) (55,000) (55) (82,445) - (82,500)
Issuance of common stock for
directors' fees
($1.29 per share, March) 335,000 335 432,365 - 432,700
Adjustment to issuance of
common stock:
February 76,527 77 (77) -
October 35,655 36 (36) -
Settlement of subscription notes
receivable:
July - - - 1,225,000 1,225,000
December - - - 75,000 75,000
Issuance of common stock for debt:
($0.02 per share, October) 1,385,710 1,386 23,614 - 25,000
$2.74 per share, November) 105,128 105 287,895 - 288,000
Issuance of common stock for
interest:
($0.18 per share, January) 400,000 400 73,134 - 73,534
($0.18 per share, February) 400,000 400 73,133 - 73,533
($0.18 per share, March) 419,394 419 76,314 - 76,733
($0.21 per share, April) 548,160 548 113,652 - 114,200
($0.21 per share, May) 559,589 560 115,640 - 116,200
($0.20 per share, June) 835,145 835 164,965 - 165,800
($0.15 per share, July) 1,459,568 1,460 222,340 - 223,800
$0.15 per share, August) 1,677,982 1,678 253,792 - 255,470
($0.15 per share, September) 1,793,356 1,793 268,677 - 270,470
($0.15 per share, October) 1,335,406 1,335 304,473 - 305,808
$0.19 per share, November) 1,709,659 1,710 323,125 - 324,835
($0.63 per share, December) 339,398 339 180,273 - 180,612
Valuation adjustment for
collateralized shares - - - 863,370 863,370
Adjustment for variable option
accounting - - 55,160 - 55,160
Adjustment to issuance of common
stock for stock options, August (24,000) (24) 24 -
Loans payable shareholder, at $0.13
per share, July 1,992,187 1,992 253,008 - 255,000
Stock options granted for wages, July - - 919,197 - 919,197
The accompanying notes are an integral part of these consolidated financial statements.
F-10
<CAPTION>
<S> <C> <C> <C> <C> <C> <C><C> <C>
Issuance of additional stock for sale
of common stock for cash in
2000, December 250,000 250 (250) -
Stock option compensation:
January - - 360,757 - 360,757
February - - 333,674 - 333,674
March - - 326,903 - 326,903
April - - 316,732 - 316,732
May - - 316,732 - 316,732
June - - 316,732 - 316,732
July - - 3,477,119 - 3,477,119
August - - 316,731 - 316,731
September - - 324,131 - 324,131
Issuance of common stock to - -
Card One:
($0.21 per share, July) 3,341,974 3,342 698,473 - 701,815
($0.16 per share, August) 3,944,986 3,945 627,253 - 631,198
($0.12 per share, September) 8,060 8 959 - 967
Net loss - - - - (14,774,236) (14,774,236)
BALANCE, December 31, 2001 86,704,204 86,704 50,899,028 (136,630) 0 0 (56,066,660) (5,217,558)
Issuance of common stock for
debt:
($0.37 per share, May) 114,308 114 41,723 - - - 41,837
($0.37 per share, July) 18,180 18 6,636 - - - 6,654
($0.37 per share, September) 24,645 25 8,995 - - - 9,020
Issuance of common stock for
interest:
($0.12 per share, January) 3,679,936 3,680 419,513 - - - 423,193
($0.11 per share, February) 3,947,206 3,947 430,245 - - - 434,192
($0.12 per share, March) 3,690,397 3,690 439,157 - - - 442,847
($0.06 per share, April) 7,380,795 7,381 435,467 - - - 442,848
($0.08 per share, May) 5,094,311 5,094 427,922 - - - 433,016
($0.08 per share, June) 5,273,031 5,273 427,116 - - - 432,389
($0.06 per share, July) 7,848,393 7,849 423,812 - - - 431,661
($0.08 per share, August) 5,743,000 5,743 424,982 - - 430,725
The accompanying notes are an integral part of these consolidated financial statements.
F-11
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($0.07 per share, September) 6,759,204 6,759 422,299 - - - 429,058
($0.07 per share, October) 140,000 140 8,960 - - - 9,100
($0.08 per share, November) 113,750 114 8,986 - - - 9,100
($0.04 per share, December 211,628 212 8,889 - - - 9,101
Issuance of common stock for
financial, development and
administrative services:
($0.19 per share, March) 200,000 200 37,800 - - - 38,000
($0.08 per share, July) 200,000 200 16,040 - - - 16,240
($0.18 per share, August) 452,429 453 79,225 - - - 79,678
($0.06 per share, September) 120,000 120 7,440 - - - 7,560
($0.07 per share, November) 1,263,242 1,263 80,847 - - - 82,110
($0.05 per share, December) 480,000 480 21,120 - - - 21,600
($0.06 per share, December) 700,000 700 41,800 - - - 42,500
Cancellation of common stock
issued for directors' fees:
($1.29 per share, April) (110,000) (110) (141,790) - - - (141,900)
($1.29 per share, June) (75,000) (75) (96,675) - - - (96,750)
Compensation for consultants - 328,665 - - - 328,665
Accrued compensation
converted into options - 145,000 - - - 145,000
Stock option compensation:
March - 233,579 - - (22,919) - 210,660
April - 790 - - - 790
May - 790 - - - 790
June - 791 - - - 791
July - 72,479 - - - 72,479
August - 7,712 - - - 7,712
September - 15,680 - - - 15,680
October - 790 - - - 790
November - 790 - - - 790
December - 37,650 - - (6,890) - 30,760
Amortization of deferred option
compensation:
January - - - -
February - - - -
The accompanying notes are an integral part of these consolidated financial statements.
F-12
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March - - - -
April - - - 790 - 790
May - - - 790 - 790
June - - - 791 - 791
July - - - 790 - 790
August - - - 790 - 790
September - - - 791 - 791
October - - - 790 - 790
November - - - 790 - 790
December - - - 791 - 791
Valuation adjustment for
collateralized shares - 103,991 - 103,991
Shares issued for settlements:
($0.08 per share, September) 286,267 286 22,615 - - - 22,901
($0.05 per share, December) 30,5]]> |