SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC. (A Development Stage Enterprise) <TABLE> <CAPTION> TABLE OF CONTENTS Item Description Pages <S> <C> <C> 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.............................................11 Item 7 Financial Statements..................................................................................13 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................14 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................................................................................17 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......................................................................19 Item 14 Principal Accountant Fees and Services................................................................20 Signatures............................................................................................21 </TABLE> 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, 2005, 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 are 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 $1,600,000 during 2005. 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, 2005 we had three employees including officers. Two were located in the Las Vegas, Nevada Office and one in Oakville, Ontario, Canada. 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. 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. 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. 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, 2005, 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 $1,335,575. 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 $1,335,575 (including interest and penalties of approximately $383,090). 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. 5 Utah State Tax Commission The State of Utah has filed tax liens of approximately $57,000 as of December 31, 2005, 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 $74,874 as of December 31, 2005. Nebraska Department of Revenue The State of Nebraska has filed tax liens against us for unpaid employee withholding taxes and related amounts aggregating approximately $5,500 as of December 31, 2005. 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, 2005. 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 ---- --- 2005 Quarter ended December 31 .................... $0.080 $0.040 Quarter ended September 30.................... 0.080 0.030 Quarter ended June 30......................... 0.070 0.040 Quarter ended March 31........................ 0.090 0.050 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 As of December 31, 2005, 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, 2005, 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: <TABLE> <CAPTION> 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)) ------------- ------------------- ------- ------------------------ (a) (b) (c) ------------------- ------- ------------------------ <S> <C> <C> <C> Equity compensation plans approved by stockholders... -- -- Equity compensation plans not approved by security holders 41,682,829 $ 0.09 -- ----------- Total......... 41,682,829 $ 0.09 -- =========== </TABLE> As of December 31, 2005, we had outstanding options granted to various current and former employees, consultants and others, including executive officers and directors, to purchase an aggregate of 41,682,829 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 $1,556,125 in accrued and past due salaries and consulting fees as of December 31, 2005, into an aggregate of 22,212,917 shares of common stock at such time as they may deem appropriate. Recent Sales of Unregistered Securities During the year ended December 31, 2005, 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 <TABLE> <CAPTION> Transaction Number ----------- ------ <S> <C> Common Stock Outstanding at December 31, 2004 165,714,436 Satisfy Indebtedness............................................... 4,185,158 Between March and October 2005, we issued an aggregate of 4,185,158 shares of common stock to 23 parties, each of whom was an accredited investor, in satisfaction of $497,385 in indebtedness, or 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 $0.04 and $0.08 per share. Issuance of Common Stock for Interest.............................. 22,934,690 In May 2005, we issued common stock for an aggregate of $1,884,829 in interest accruing on outstanding payables. During the period in which such stock was issued, the market price for our common stock was $0.045 per share. Financial, Development and Administrative Services................. 439,719 In February, May, June and December 2005, we issued an aggregate of 439,719 shares of restricted common stock to four parties, each of whom was an accredited investor, as payment of $22,623 in financial, development and administrative services, or an average of approximately $0.05 per share. On the dates on which such transactions occurred during the above period, the market price for the common stock ranged between $0.045 and $0.065 per share. Common Stock Outstanding at December 31, 2005 193,274,003 =========== </TABLE> Issuance of Convertible Notes At December 31, 2005, we had outstanding secured convertible notes payable of $2,991,316 (2004: $2,766,316) 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. In a letter to Note holders on December 30, 2004, the Company advised all note holders that there had been a technical delay in conversion to Common Stock, and that notes would be extended on a month-by-month basis until resolution. 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. 9 Secured Convertible Promissory Notes Payable: Balance - December 31, 2004 $ 2,766,316 Notes issued during 2005 225,000 Ending Balance - December 31, 2005 $ 2,991,316 ============ 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. At December 31, 2005, convertible promissory notes were convertible into an aggregate of 59,826,325 shares of common stock. On December 31, 2005, the balance of such notes, including accrued interest, held by David Simon and Bernard F. McHale were convertible into 8,985,365 and 26,336,780 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. The shares of common stock deposited in escrow were not considered to have been issued or outstanding, and on April 19, 2005 the share certificate for 30,116,134 shares was cancelled. The $150,000 received from CEO America is recorded as a non-interest bearing liability. Option Grants During the year ended December 31, 2005, 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 2010-April 2010 400,000 $0.05-0.07 ------- 400,000 ======= </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. 10 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. 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 $19.3 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, 2005, we were authorized to issue 200.0 million shares of common stock. At December 31, 2005, we had approximately 193.3 million shares outstanding and an additional approximately 147.8 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 141.1 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, 2005, we incurred total expenses of approximately $79.5 million, including approximately $30.4 million for research and development leading to creation of our patents, software and intellectual property. The $79.5 million of total expenses includes approximately $35.7 million for the value of compensation for services paid in options or stock, $8.9 million for stock issued for interest expense, and $2.1 million for write-off of common stock subscription receivable, for a total of approximately $45.7 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 2005, we incurred total expenses of approximately $7.6 million compared to approximately $4.2 million in 2004. The increase in expenses in 2005 as compared to 2004 is principally reflected in substantial increases in interest expense of $3.0 million and general and administrative expenses of $700,000, offset by a decrease in research and development expenses of $300,000. 11 Net Loss The net loss for the year ended December 31, 2005, was approximately $7.6 million as compared to $4.2 million in the same period in 2004. The change in the net loss was due to increases in interest expense of $3.0 million and general and administrative expenses of $700,000, offset by a decrease in research and development expenses of $300,000. Basic and diluted net loss per share for the fiscal year ended December 31, 2005, was $(0.04), compared to basic and diluted net loss per share of $(0.03) for the fiscal year ended December 31, 2004. Liquidity Although we generated approximately $517,000 from financing activities, our operating activities used net cash of approximately $520,000. These activities contributed to a net working capital deficit as of December 31, 2005, of approximately $19.2 million. Net cash used in operating activities for the fiscal year ended December 31, 2005, was approximately $520,000, a decrease of approximately $389,000 over the approximately $909,000 cash used in operating activities for the fiscal year ended December 31, 2004. Capital Resources Through December 31, 2005, 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, 2005, 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, 2005, we incurred total expenses of approximately $79.5 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, 2005, 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, 2005, we have received approximately $6.7 million from the subscription and sale of common stock and convertible notes subsequently converted into common stock, $4.1 million from notes and loans payable, and $1.1 million 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, 2005, 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. 12 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. 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 $27,040,000 is provided. As of December 31, 2005, the Company has approximately $67,600,000 of federal net operating losses available to offset future taxable income, which if not utilized will expire in 2025. 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. 13 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, 2004 contained an expression of substantial doubt regarding our ability to continue as a going concern. 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, 2005: Name Age Title --------------- --- ------------------------------------- Miki Radivojsa 38 President, CEO, Chairman of the Board of Directors David J Simon 59 Director Bernard F. McHale 70 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 Miki Radivojsa, CEO of Airos Group, the Company's development partner, joined the Company as our Chairman and CEO on August 17, 2005. Miki Radivojsa has built a profitable and growing software development company and brings more than 16 years of business and technical leadership experience in banking, payments, chip, telecommunications, and embedded development. He has led the development and deployment of more than 100 successful software projects for a broad range of banking and payment applications including EMV, VISACASH, Mondex, Proton, other smart card and POS applications, in addition to the construction of Smart Chip Technologies' end-to-end loyalty, pre-paid stored value, and gift card product suite. Mr. Radivojsa and the Airos Group were developers of the EMV pilot in Barrie, Canada, representing the world's first multi-application smart card implementation. David J. Simon has been a director since November 1998 and chairman of the board from May 1999 until August 2005. 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, and from August 2003 until August 2005. 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 six 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 30 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. 15 Compliance with Section 16(a) of the Exchange Act We are aware that officers, directors and beneficial owners of 10% or more of our outstanding stock have not filed the required Forms 3, 4 and 5 pursuant to Section 16(a) of the Securities Exchange Act of 1934 following effectiveness of our registration statement on Form 10-SB on or about June 12, 2000. There are individuals who were directors, officers or beneficial owners of 10% or more of any class of equity securities during 2005 and who, therefore, were required to file initial reports of stock ownership on Form 3. We believe that none of such individuals filed an initial report of stock ownership on Form 3 within 10 days after becoming subject to such reporting obligation under Section 16(a) of the Securities Exchange Act. The table also sets forth the delinquent filings of reports of changes in beneficial ownership on Form 4 during 2005, to the best of our knowledge: <TABLE> <CAPTION> Number of Number of Reporting Person Position and Dates During 2005 Required Forms 4 Transactions ---------------- ------------------------------ ---------------- ------------ <S> <C> <C> <C> David J. Simon Chairman of the Board (Jan - Aug) -- -- Executive Officer (Jan - Aug) Director (Aug - Dec) Bernard F. McHale Director (Jan - Dec) -- -- Executive Officer (Jan - Feb) Principal Stockholder (Jan - Dec) Miki Radivojsa Director (Aug - Dec) -- -- Executive Officer (Aug - Dec) Airos Group Inc Principal Stockholder (Jan - Dec) 2 2 </TABLE> To the best of our knowledge, no officer, director or beneficial owner has filed a Form 5 as a remedial filing, nor have there been any Form 5 filings from any of the above-mentioned individuals for any other disclosure purpose. Code of Ethics Due to its limited operations, the Company has not yet adopted a Code of Ethics. 16 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 2005. No other executive officer or other person received annual salary and bonus of $100,000 or more during 2005. Accordingly, the summary compensation table does not include compensation of any other executive officer or other person: <TABLE> <CAPTION> Long Term Compensation ------------------------------------------------------ Annual Compensation Awards Payouts ----------------------------------------- --------------------------- --------------------- Other Restricted Securities All Other Year Annual Stock Underlying LTIP Compen- Name and Ended Compen- Awards Options/ Payouts sation Principal Position Dec 31 Salary($) Bonus($) sation($) (shares) SARs(#) ($) ($) ------------------ ------ --------- -------- --------- -------- ------- --- --- <S> <C> <C> <C> <C> <C> <C> <C> <C> David J. Simon 2005 $ 90,000 $ -- $ -- -- -- $ -- $ -- President (CEO)(1) 2004 $ 120,000 $ -- $ -- -- -- $ -- $ -- 2003 $ 150,000 $ -- $ -- -- -- $ -- $ -- Miki Radijvosa 2005 $ -- $ -- $ -- -- -- $ -- $ -- (CEO)(2) 2004 $ -- $ -- $ -- -- -- $ -- $ -- 2003 $ -- $ -- $ -- -- -- $ -- $ -- </TABLE> ------------- (1) Served as chief executive officer from December 2004 until August 2005, 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 executive officer commencing August 2005 without compensation. 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 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 three year agreement commencing July 7, 2004 to serve as director and treasurer at compensation of $2,500 per month as the Company's cash flow permits. Option Grants in 2005 No options were granted to any of the executive officers named in the summary compensation table above. 17 Aggregate Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values The following table sets forth information with respect to the exercise/exercisability of options and stock appreciation rights during the last completed fiscal year by the executive officers named in the above summary compensation table and the fiscal year-end values of unexercised options and stock appreciation rights: <TABLE> <CAPTION> (a) (b) (c) (d) (e) Number of Securities Value of Unexercised Underlying In-the-Money Unexercised Options/SARs at FY at FY End (#) End ($) Shares Acquired Value Realized ($) Exercisable/ Exercisable/ Name on Exercise (#) Unexercisable Unexercisable ---- --------------- ------------------ ------------- ------------- <S> <C> <C> <C> <C> David J. Simon -- -- 17,062,813/-- --/-- President (CEO) Director Compensation </TABLE> During 2005, 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, 2005, there were no options issued to board members. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth, as of December 31, 2005, 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 193,274,003 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 23,867,032 Rights 48,986,747 Total 14.4% Common Stock Bernard McHale 24,783,327 Direct 7757 Foredawn Dr. - Options Las Vegas, NV 89123 32,206,780 Rights 56,990,107 Total 16.7% Common Stock Airos Group Inc. 34,896,638 Direct 482 South Service Road, Suite 103 2,900,000 Options Oakville, Ontario, Canada L6J 2X6 - Rights 37,796,638 Total 11.1% Common Stock Executives as a Group (2 persons) 28,741,166 Direct 21,161,876 Options 56,073,812 Rights 105,976,854 Total 31.1% </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, 2005, the outstanding principal balance of such notes, including accrued interest, was convertible into 8,985,365 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, 2005, the outstanding principal balance of such notes, including accrued interest, was convertible into 26,336,780 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. Effective January 2005 the deferred interest rate was increased to 8% and effective April 2005 it was further increased to 10%. ITEM 13. EXHIBITS (a) Exhibits: <TABLE> <CAPTION> Exhibit Number Title of Document Location --------- -------------------------------------------------------------------------------- --------------- Item 3. Articles of Incorporation and ByLaws --------- -------------------------------------------------------------------------------- --------------- <S> <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) --------- -------------------------------------------------------------------------------- --------------- Item 10. Material Contracts --------- -------------------------------------------------------------------------------- --------------- 10.01 Employment Agreement with Verlo Howell effective May 17, 2005 This filing </TABLE> 19 <TABLE> <CAPTION> Exhibit Number Title of Document Location --------- -------------------------------------------------------------------------------- --------------- Item 31 Section 302 Certifications --------- -------------------------------------------------------------------------------- --------------- <S> <C> <C> 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, 2005. 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, 2005 and December 31, 2004. Fee Category 2005 2004 -------------------------------------------------------------------------------- Audit Fees $15,800 $15,800 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. 20 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: February 6, 2008 /s/ Miki Radivojsa -------------------------------- Miki Radivojsa, President and Chief Executive Officer Dated: February 6, 2008 /s/ Bernard F. McHale -------------------------------- Bernard F. McHale Treasurer (Chief Financial Officer) 21 PART II Item 7. FINANCIAL STATEMENTS FORM 10-KSB SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC. (A Development Stage Enterprise) CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2005 AND 2004 Together With Report of Independent Registered Public Accounting Firm (Amounts expressed in US Dollars) TABLE OF CONTENTS Report of Independent Registered Public Accounting Firm .....................F-2 Consolidated Balance Sheets as of December 31, 2005 and 2004.................F-3 Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2005 and 2004...................................F-4 Consolidated Statements of Changes in Stockholders' Deficiency for the Period from Inception (February 26, 1997) through December 31, 2005............................................................F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004..................................................F-16 Notes to Consolidated Financial Statements..................................F-18 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, 2005 and 2004 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, 2005 and 2004, and the results of its operations and its cash flows for the years ended December 31, 2005 and 2004 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 F-2 SCHIMATIC CASH TRANSACTIONS NETWORK.COM, INC. (A Development Stage Enterprise) Consolidated Balance Sheets As of December 31, 2005 and 2004 (Amounts expressed in US Dollars) <TABLE> <CAPTION> 2005 2004 $ $ ASSETS ------ CURRENT ASSETS: <S> <C> <C> Cash 11,542 14,086 Prepaid Expenses and other 42,499 58,571 ----------- ----------- TOTAL CURRENT ASSETS 54,041 72,657 ----------- ----------- TOTAL ASSETS 54,041 72,657 =========== =========== LIABILITIES AND SHAREHOLDERS' DEFICIENCY ---------------------------------------- CURRENT LIABILITIES: Accounts payable - Vendor 1,963,800 1,709,400 Accounts payable - other 7,166,788 4,425,895 Accrued wages and payroll taxes (note 14) 1,499,196 1,439,795 Deferred compensation (note 7) 4,205,411 2,074,276 Loans - CEO America (note 6) 150,000 150,000 Amounts owed to employees and officers (notes 3 and 4) 1,314,331 1,097,273 Short term loans (note 12) 500 197,885 Convertible notes payable (including amounts owed to officers $1,220,462 prior year $1,220,462 (note 5)) 2,991,316 2,766,316 ----------- ----------- TOTAL CURRENT LIABILITIES 19,291,342 13,860,840 ----------- ----------- COMMITMENTS AND CONTINGENCIES (notes 13, 14, 16, 18 and 19) SHAREHOLDERS' DEFICIENCY (note 9): Common stock - $.001 par value; 200,000,000 shares authorized; 193,274,003 shares issued and outstanding 193,274 165,714 (2004: 165,714,436) Additional paid-in capital 60,006,504 57,616,113 Common stock subscription receivable (175,000) (250,000) Common stock subscribed 200,000 500,000 Deficit accumulated during the development stage (79,462,079) (71,820,010) ----------- ----------- TOTAL SHAREHOLDERS' DEFICIENCY (19,237,301) (13,788,183) ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY 54,041 72,657 =========== =========== 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, 2005 and 2004 and the Period from Inception (February 26, 1997) to December 31, 2005 (Amounts expressed in US Dollars) <TABLE> <CAPTION> For the Period For the Years Ended From Inception December 31, (February 26, 1997) ----------------------------------- Through December 31, 2005 2004 2005 ---- ---- ---- $ $ $ <S> <C> <C> <C> EXPENSES: Selling, general and administrative 2,951,119 2,540,620 60,664,578 Depreciation and amortization - - 365,010 Write-off of common stock subscription receivable - - 2,125,000 Loss on impairment of intangible assets - - 703,211 Interest expense 4,690,950 1,688,548 14,673,070 ------------- ------------- ------------ TOTAL EXPENSES 7,642,069 4,229,168 78,530,869 ------------- ------------- ------------ LOSS BEFORE EXTRAORDINARY ITEM (7,642,069) (4,229,168) (78,530,869) EXTRAORDINARY ITEM - LOSS ON EXTINGUISHMENT OF DEBT - - (931,210) ------------- ------------- ------------ NET LOSS $ (7,642,069) $ (4,229,168) $(79,462,079) ============= ============= ============ NET LOSS PER SHARE, BASIC AND DILUTED $ (0.04) $ (0.03) ============= ============= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED 181,736,272 164,307,653 ============= ============= COMPREHENSIVE LOSS The components of comprehensive loss are as follows: Net loss $ (7,642,069) $ (4,229,168) Other comprehensive income (loss) foreign currency Translation - - Comprehensive Loss $ (7,642,069) $ (4,229,168) 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, 2005 (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 theseconsolidated 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 - 145,000 - - - 145,000 options 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> 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 - 103,991 - 103,991 collateralized shares Shares issued for settlements: ($0.08 per share, September) 286,267 286 22,615 - - - 22,901 ($0.05 per share, December) 30,588 31 1,498 - - - 1,529 Net loss - - - - (7,738,743) (7,738,743) BALANCE, December 31, 2002 140,290,514 140,291 55,748,366 (32,639) (22,696)(63,805,403) (7,972,081) Issuance of stock for services rendered: ($0.05 per share, February) 1,530,588 1,530 75,030 76,560 ($0.05 per share, March) 500,000 500 24,500 25,000 ($0.05 per share, June) 466,378 466 22,853 23,319 ($0.05 per share, October) 7,050 7 345 352 ($0.05 per share, November) 5,002,144 5,002 245,105 250,107 ($0.05 per share, December) 240,916 241 11,805 12,046 ($0.06 per share, December) 700,000 700 41,300 42,000 Issuance of stock in lieu of interest payments: ($0.05 per share, March) 1,625,792 1,626 84,541 86,167 ($0.05 per share, December) 12,206,425 12,207 627,387