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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of the Securities Exchange Act of 1934
CETEK TECHNOLOGIES, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 14-1716025
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
19 Commerce Street
Poughkeepsie, New York 12603
(Address of principal executive offices)
(914) 452-3510
(Issuer's telephone number, including area code)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
- ------------------- ------------------------------
Not applicable Not applicable
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $0.001 per share
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ITEM 1. Description of Business
Introduction General
Introduction
Cetek Technologies, Inc. (the "Company") is engaged in the operation of a
contract machine shop and the development of materials as ceramics. The Company
has derived substantially all its revenues from contract manufacturing.
Nevertheless, its main focus since 1993 has been directed towards the research
and development of an improved manufacturing process for advanced ceramics and
other materials. The Company has developed a unique formulation and technique
(the "Cetek Process"). This process among other things eliminates much of the
"machining" currently required to manufacture advanced ceramics and other
materials and substantially reduces the cost of manufacturing. With its
"Process", the Company estimates that the overall cost to manufacture advanced
ceramics may be reduced by as much as forty percent. At present, the Company
intends to exploit an underutilized market of small and medium-sized orders. The
Company is seeking to obtain additional capital to establish full scale
production and marketing capabilities. The Company based on numerous tests
believes the process is commercially feasible but has not produced and sold
products utilizing the Cetek process in commercial quantities. The Company's
success is dependent upon its ability to obtain additional capital and the
commercial acceptance of products manufactured with the Cetek Process.
The Company was incorporated in May 1994 in Delaware in order to effectuate
a change in domicile of its parent, Darcy Corporation ("Darcy"). In July 1994,
the Company entered into an Agreement and Plan of Merger with Darcy pursuant to
which Darcy was merged with and into the Company. At the time of the merger,
Darcy was a holding company which had one wholly owned subsidiary, Cetek
Corporation, a New York Corporation ("CETEK"). Darcy had previously acquired all
of the issued and outstanding shares of capital stock of Cetek in a share
exchange, pursuant to which Darcy issued an aggregate of 13,845,000 of its
common stock to the holders of all the issued and outstanding shares of stock of
Cetek (approximately 91% of the outstanding Darcy shares, post acquisition). As
a result, the Company is a holding company which conducts its business through
its wholly owned subsidiary, Cetek. Unless otherwise indicated by the context,
the term "Company" shall include the Company and Cetek.
The Company's executive offices and manufacturing facility are located at
19 Commerce Street, Poughkeepsie, New York 12603, telephone (914) 452-3510.
Contract Manufacturing
The Company has operated a machine shop and raw materials business since
1988, handling general precision machining, sheet metal fabrication and welding,
electronic manufacturing and testing, and general design of components and
systems.
The Company as contract machine fabricators completes orders for original
equipment manufacturers and others. Generally these machine products consist of
cabinets for various electronic and electrical products. The Company completes
the manufacturing in accordance with the specifications of its customer. Upon
completion the products are shipped to the customer or other parties for
assembly by the client. The Company has a full array of equipment as drill
presses to fulfill its contracts which are obtained by an officer of the
Company. The Company does not maintain a separate sales force for this purpose.
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The equipment and personnel of the Company's machine shop are also utilized
internally for equipment utilized in the Company's proposed ceramic processing.
Since 1997 the Company has maintained business relations with two major
clients. The Company's relationships with these clients have accounted for
approximately 80% of the Company's sales to date.
Ceramic Industry Background
Ceramics have been used by man for centuries in the form of bricks, tile,
and glass. In recent years, the processing methods have dramatically improved,
creating a new generation of advanced ceramic material which is lighter,
stronger and more durable than its metal counterparts. Advanced ceramic
materials can be broadly categorized as electronic ceramics and structural
ceramics. Electronic ceramics are used as substrates in computers, medical
equipment, communication equipment and consumer products. Structural ceramics
used in aerospace defense design, bioceramics and environmental products, heat
engines, wear parts and cutting tools. Due to its ability to withstand harsh
temperatures and environments, structural ceramics, for example, have been used
to build car engines, and in military aircraft and helicopters as form of
bullet-proof window protection.
Advanced ceramics are expected to continue their growth well into the next
century. It is estimated that the electronic ceramics will continue to hold the
largest market share of the U.S. advanced ceramics materials, while substantial
growth will occur in the structural ceramics market.
Cetek Process
Through years of research in the advanced ceramics field, the Company
developed a new formulation and manufacturing process which substantially
reduces the need for "machining", the standard industry procedure used to smooth
ceramic pieces after they are fired. Ceramic products are made from a mixture or
slurry which is then sintered or hardened in a high temperature furnace. Prior
to the Company's process, there were limitations to size of ceramic pieces and
high breakage. The finished product required smoothing which lead to additional
breakage. Because the Company's technique can produce wide products and does not
require the "smoothing" process, the production time is significantly reduced.
The finished product is flat, smooth, and of a higher quality than those
currently available. Moreover, the yield is significantly enhanced, so that the
costs are similarly reduced.
The Company's process may be utilized to produce multilayered substrate.
Usually substrate does not consist of one layer but several.
Ceramic products have been used as substrate or the basis upon which
electric circuits are attached for various electronic components.
Generally ceramic manufacturers produce the substrates for the customer
specifications. Either the ceramic contractor or the customer attaches or sets
plugs or pins where the components wiring is attached to the substrate for a
completed product. The Company intends to acquire the equipment necessary for
the plugs at a future stage of is development.
While the current industry procedure produces a small ceramic product that
is irregular in shape and prone to breakage, the Company uses its unique
formulation and specially designed equipment to produce a smooth and large
ceramic surface. The finished substrate product can then be divided into smaller
pieces, readily available for the consumer.
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Furthermore, the process allows the ceramic to retain its ceramic layer,
which layer is vital for allowing circuitry to adhere to the substrate surface.
The Company believes the final result is a product superior to those currently
available on the market.
The Company has been exploring a high-heat sintering process with the state
government aid. The sintering process is the process by which the ceramic
material is placed into a furnace, fired and "hardened" into its usable form.
With the use of high heat to sinter the ceramic, a transparent, bullet-proof
material is created. This ceramic material has been developed for use in
windows, military aircraft, supersonics and helicopters. Additionally, the
Company has found that the high heat further reduces the cost of production.
With the use of special equipment, the Company is developing a process for
silicon carbide ceramics for structural components in car valve seats and
engines. Ceramic materials have been used in these products due to its ability
to withstand an engine's high temperatures. Further, a lighter engine may be
created with ceramics, thereby decreasing the car's overall weight. Studies to
date have confirmed that the use of ceramic parts results in reduced emissions.
The Company has developed product made from the Cetek Process for flat
panel display. The Company has submitted its materials to a manufacturer for
testing. According to industry standards, the lamination of the circuitry to the
substrate should withstand breakage of the substrate. The test results indicated
that only the Company's product conformed to such standard. The Company
regularly submits its products to Alfred University for outside analysis.
Proposed Marketing and Sales
The Company believes that the current needs of the ceramic industry are
being served by a handful of large companies and several small companies. The
Company further believes that there is a large number of ceramic product
purchasers whose requirements are not adequately addressed by these companies.
Accordingly, the Company intends to serve the middle range and market its
products by manufacturing and selling several products. For example, where an
order for 500 substrate pieces would be considered to small for the larger
manufacturers to fill and too large for the smaller manufacturers, the Company's
plant would be able to fill such an order at a more reasonable price.
The Company will actively market its special ceramic material to be used in
the Smart Display. With the increased interest in the development of flat panel
display, the industry has attracted heavy federal investment. According to a
December 1997 report by The Industrial Physicist magazine, Motorola, which has
invested significantly into development of its own version of the Smart Display,
estimated the market value of the flat panel display business at 16 billion that
year and predicted sales will reach 30 billion by 2002. The Company believes its
entry into the FPD market will be at costs competitive with those of the larger
manufacturers, i.e., Sony and Motorola, and could therefore seek to market its
materials to such manufacturers.
The marketing and sales effort will be carried by the President and an
independent non-exclusive sales representative. The Company intends to enter
into agreements with up to six sales organizations for domestic sales and two
for international sales.
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The Company further believes that its marketing strengths lie in the fact
that the Company will offer a more valuable product due to its manufacturing
techniques and its ability to offer a complete manufacturing and service
facility in one location. Accordingly, the Company will focus towards a few
specific industries in addition to the electronic industry, including, wear
resistant parts and industrial applications, bioceramics, aerospace and defense
and environmental applications.
Nature of Company's Products and Services to be Offered
The products and services currently offered consist of (i) electronic and
structural ceramic components, and (ii) products designed and manufactured to
the customer's specifications. The Company has developed a process for
manufacturing advanced quality ceramic products which the Company believes will
cost as much as 40% less than the current industry standard.
As a supplier of electronic ceramic components, the Company intends to
market its product to the manufacturers of several products, including
insulators, substrates and IC packages, piezoelectric ceramics, ferrite magnets,
capacitors and superconductors. The Company also believes that the ceramic back
plane for the Smart Display will further be applied for use on aircraft panels,
operating room electronics and other medical applications.
As a supplier of structural ceramic components, the Company intends to
market its product for use in heat engine components, cutting tools,
wear-resistant parts and industrial applications, energy and high temperature
related applications, aerospace and defense applications, bioceramics and
environmental products.
The Company will also establish its own manufacturing facility and design,
manufacture and assemble ceramic products to the customer's specifications.
Employees
The Company currently employees ten full-time employees, none of which are
subject to employment agreements. None of the employees are members of labor
unions. Management believes that it enjoys satisfactory relations with its
employees.
Competition
The Company will compete with other manufacturers of advanced ceramic
products, many of whom have greater financial, managerial and technical
resources than the Company. In the field of advanced ceramics, the Company will
be in direct competition with large companies such as Kyocera (Japan), Coors
(US) and Phillips of the Netherlands, as well as several smaller companies. The
Company's ability to remain competitive may depend on its ability to enter into
sales and marketing arrangements. There can be no assurance that the Company
will be able to enter into such agreements and remain competitive. The machine
shop business is very competitive and the Company is an insignificant factor.
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ITEM 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis should be read in conjunction with
the Financial Statements and related footnotes.
Introduction
The Company has incurred losses since inception. However, the Company
anticipates profitable operations while it engages in the start-up of its
advanced ceramic business. During 1999, the Company seeks to phase its business
operations from general machine shop work to its advanced ceramic and substrate
manufacturing.
Statement of Operations June 30, 1999 Compared to June 30, 1998
- Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
The Company had comparable revenues for the first six month period of 1999
and 1998 ($163,940 in 1999 and $162,572 in 1998). The Company however incurred a
net loss of $280,176 in revenues during the six months ended June 1999 as
compared to a net loss of $139,595 during the six months ended June 1998. Such
loss resulted primarily from an increase in selling, general and administrative
costs from $83,000 in June 1998 to $203,175 in June 1999. The increase was
primarily due to the Company's activities in conjunction with the development of
its Cetek Process.
- Year Ended 1998 Compared to Year Ended 1997
The Company had comparable revenues for each at 1998 and 1997 ($373,884 in
1998 compared to $367,111 in 1997). The Company incurred a net loss of $250,867
during fiscal year 1998 as compared to a net loss of $346,000 in fiscal year
1997. The decrease in net loss were primarily attributable to a decline in the
cost of sales from the prior period and an absence of a loss on sale of assets
in 1998.
Liquidity
The Company had a working capital of approximately $101,000 as of June 30,
1999 as compared to a negative working capital of approximately $450,000 as of
December 31, 1998. The increase is primarily attributable to the sale of the
Company's securities in 1999.
In March 1999, the Company completed a private placement of its securities
by issuing 2% Series A Senior Subordinated Convertible Debentures. Through such
placement, the Company raised $600,000 towards its working capital.
The Company however does not have sufficient working capital to sustain its
current levels of operations nor to commence operations in the ceramic industry.
The Company has not introduced its process or has it manufactured product
on a commercial basis. It has produced samples of its product, had such sample
tested by independent laboratories at the Company's expenses has provided
samples to potential customers and has acquired and converted equipment for use
for its process. The Company has estimated it needs additional funds to commence
commercial operations in order, among other things, to:
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(a) acquire additional equipment
(b) establish an independent marketing organization; and
(c) strength its balance sheet.
ITEM 3. Description of property
The Company's executive offices and facilities are located at 19 Commerce
Street, Poughkeepsie, New York where it leases approximately 20,000 square feet
pursuant to a lease that expires in October, 2001 The annual base rental for
this space, which was renovated in 1991, is approximately $90,000. The landlord,
an affiliate of the Company's chief executive officer. The landlord has agreed
to waive all payments for the rent while the Company is in default to a lender.
ITEM 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of August 15, 1999 certain information
concerning the shares of Common Stock beneficially owned by each director and
executive officer of the Company, by all officers and directors of the Company
as a group, and by each stockholder known by the Company to be a beneficial
owner of more than 5% of the outstanding shares of Common Stock.
Shares of Beneficial Ownership
Common Stock Percentage
------------ --------------------
Fayiz K. Hilal 9,162,000(1) 24.00%
Christopher G. Hilal 1,200,000 2.50
Dr. Gordon Love 30,000(2) -
Dr. Richard Spriggs 30,000(2) -
Thomas Aposporos 30,000(2) -
Dr. Ellen Tormey 20,000(2) -
Hilal Family Trust 4,000,000 10.50
John P. Hilal 1,200,000 2.50
David M. Hilal 1,200,000 2.50
Bridget M. Hilal 1,200,000 2.50
All officers and directors 10,472,000(1) 27.50
as a group (a total of 6 persons)
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(1) Includes the 4,000,000 shares of the Company's common stock owned by the
Hilal Family Trust is sole beneficial of the Trust.
(2) Represents significantly less than 1% of the issued and outstanding shares
of the Company's common stock.
ITEM 5. Directors, Executive Officers, Promoters and Control Persons
The directors and executive officers of the Company are as follows;
Name Age Position
---- --- --------
Fayiz Hilal 58 President and Chairman of the Board
John Hilal 30 Vice President of Operations, Director
[Dr. Gordon Love 64 Vice President of Strategic Planning,
Technical Director, Director]
Dr. Richard Spriggs 64 Director
Thomas C. Aposporos 45 Director
Dr. Ellen Tormey 38 Director
All of the Company's executive officers intend to devote their full
business time to the affairs of the Company.
All directors shall serve for a term of one year or until their respective
successors have been duly elected.
FAYIZ HILAL. Mr. Hilal is the founder of Cetek Technologies, Inc. and has
served as its President and Chairman of the Board since its inception. Prior to
establishing the Company, Mr. Hilal served as Chairman and Chief Executive
Officer of Tatron, Inc., an organization which he established in 1976 which
specialized in custom engineering and technical design services. In addition,
Mr. Hilal held senior level technical management positions with Honeywell, Inc.,
Chemical Rubber and I.B.M. Corporation. As a President with Metronic Labs. Inc.,
Mr. Hilal is credited as being one of the developers of the world's first hand
held calculators. Mr. Hilal received his graduate degree in engineering from the
University of Minnesota in 1966.
JOHN HILAL. Mr. Hilal has served as Vice President of Manufacturing and
Director of the Company since 1996. Mr. Hilal received his undergraduate degree
in Business and Marketing/Engineering? from the University of Notre Dame in
1994.
[DR. GORDON LOVE. Dr. Love is a director and was Vice President of
Strategic Planning, Technical Director and Director of the Company.
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Dr. Love served as Vice President of Technology at Sprague Electric Company. Dr.
Love received his B.S. degree in Metallurgy from Case-Western Reserve University
in 1958 and his M.S. degree and PhD in Metallurgy from Carnegie-Mellon
University in 1960 and 1963, respectively.]
DR. RICHARD SPRIGGS. Dr. Spriggs has served as a director of the Company
since 1993. From 1987 to the present, he has served as and continues to serve as
a John F. McMahon professor of ceramic technology at the New York State College
of Ceramics at Alfred University. Prior thereto, Dr. Spriggs served nine years
as a staff officer and staff director of the National Research Counsel at the
National Academy of Sciences. Dr. Spriggs received his B.S. degree in Ceramics
from Pennsylvania State University and his M.S. and PhD degrees in Ceramic
Engineering from the University of Illinois.
DR. ELLEN TORMEY. Dr. Tormey has served as a Director of the Company since
November, 1995. She is currently a Senior Engineer with David Sarnoff Research
Center. From 1991 to 1995, she was a Principal Engineer with Ceramics Process
Systems Corporation. From 1989 to 1990, Dr. Tormey was Manager of Laminated
Product R&D Group. Prior thereto, Dr. Tormey held management positions with
several companies, as well as spending three years as Senior Engineer with
Digital Equipment Corporation. Dr. Tormey received her B.S. degree in Ceramic
Engineering from Alfred University in 1976 and her PhD in Ceramic Science from
the Massachusetts Institute of Technology in 1982.
THOMAS C. APOSPOROS. Mr. Aposporos has served as a director of the company
since 1995. Mr. Aposporos is the principal in Aposporos & Son, a commercial real
estate brokerage firm. He also serves as chairman of Progressive Bank, Inc.
PSBK-NASDQ and as a director of Progressive's subsidiary, Pawling Savings Bank.
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Executive officers are
elected annually by the Board of Directors to hold office until the first
meeting of the Board following the next annual meeting of stockholders and until
their successors are chosen and qualified.
ITEM 6. Executive Compensation
Mr. Fayiz Hilal, Chief Executive Officer of the Company, has not received
any compensation during the last three fiscal years.
ITEM 7. Certain Relationships and Transactions
During the years ended December 31, 1998, 1997 and 1996, Mr. Fayiz Hilal,
the Company's president and principal shareholder advanced the Company $38,292,
$27,200 and $167,000 and interest was accrued in the amount of $7,565 and $5,500
for the periods ending June 30, 1999 and 1998 and $12,643, $11,375 and $2,606,
respectively. The note payable to Mr. Hilal at December 31, 1998 was $232,792.
The Company had transactions with an affiliated entity of Mr. Hilal for the
year ended December 31, 1996. The Company sold to the affiliated entity, as part
of a sub-contracting agreement, finished goods in the amount $26,224 and paid
sales commissions of $1,836 for the year ended December 31, 1996.
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The Company leases its executive office space and manufacturing facility
under a lease from Mr. Hilal on a month-to-month basis. Mr. Hilal has waived all
rent payments until debt obligations to the U.S. Small Business Administration,
Dutchess County Economic Development Corp. have been paid in full, in accordance
with the terms of the loans.
ITEM 8. Description of Securities
General
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $.001 per share, and 1,000,000 shares of Preferred
Stock, par value $.001 per share.
Common Stock
Each share of Common Stock entitles the holder to one vote on all matters
submitted to a vote of the shareholders. The holders of Common Stock are
entitled to receive dividends, when, as and if declared by the Board of
Directors, in its discretion, from funds legally available therefore. The
Company does not currently intend to declare to pay cash dividends in the
foreseeable future, but rather intends to retain any future earnings to finance
the expansion of its businesses. Upon liquidation or dissolution of the Company,
the holders of Common Stock are entitled to share ratably in the assets of the
Company, if any, legally available for distribution to shareholders after the
payment of all debts and liabilities of the Company and the liquidation
preference of any outstanding Preferred Stock.
The Common Stock has no preemptive rights and no subscription, redemption
or conversion privileges. The Common Stock does not have cumulative voting
rights, which means that the holders of a majority of the outstanding shares of
Common Stock voting for the election of directors can elect all members of the
Board of Directors. A majority vote is also sufficient for other actions that
require the vote or concurrence of shareholders. All of the outstanding shares
of Common Stock are and the share to be sold in this Offering will be, when
issued and paid for, fully paid and nonassessable.
Preferred Stock
The Board of Directors has the authority to issue up to 1,000,000 shares of
Preferred Stock in one or more series and to fix the number of shares
constituting any such series, the voting powers, designation, preferences and
relative participation, option or other special rights and qualifications,
limitations or restrictions thereof, including the dividend rights and dividend
rate, terms of redemption (including sinking fund provisions), redemption price
or prices, conversion rights and liquidation preferences of the shares
constituting any series, without any further vote or action by the shareholders.
Transfer Agent
The transfer agent for the Company's Common Stock is Jersey Transfer and
Trust Co. located at 201 Bloomfield Avenue, P.O. Box 36, Verona, New Jersey
07044.
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PART II
ITEM 1. Market For Common Equity and Other Related Stockholder Matters
Our common stock is currently quoted on the OTC Bulletin Board under the
symbol "CETK".
Set forth below are the high and low closing bid quotations for our common
stock for the periods indicated as reflected on the electronic bulletin board.
Such quotations reflect interdealer prices without retail mark-up, mark-down or
commissions, and may not reflect actual transactions.
Period Ending High Asked Low Bid
------------- ---------- -------
June 30, 1999 $0.1600 $0.0600
March 31, 1999 0.3700 0.0600
December 31, 1998 0.0625 0.0300
September 30, 1998 0.1300 0.1300
June 30, 1998 0.4300 0.3125
March 31, 1998 * *
December 31, 1997 * *
September 30, 1997 * *
June 30, 1997 * *
March 31, 1997 0.1250 0.1250
* no quote
As of August 15, 1999, there were approximately 120 recordholders of the
our common stock, although we believe that there are more than five hundred
beneficial owners of our common stock. There are no shares of preferred stock
currently outstanding.
ITEM 2. Legal Proceedings
Management of the Company is not aware of any legal proceedings, threatened
pending legal proceedings, to which the Company is a party or to which the
property of the Company is subject as a defendant.
ITEM 3. Changes in and Disagreements with Accountants
None of the events described in Item 304 of Regulation S-B has occurred
within the past twenty-four months.
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ITEM 4. Recent Sales of Unregistered Securities
The following sets forth information relating to all unregistered
securities of the Company sold by it in the last 3 years.
During 1998 the Company issued approximately 7,240,381 shares for cash,
satisfying of debt or revenues. These shares were issued pursuant to an
exception pursuant to Section 4(2) of the Securities Act of 1933 (the "Act") or
Rule 504 thereunder.
During 1999 the Company issued and sold 8,297,818 shares. In March and
April 1999, the Company sold $600,000 of convertible notes ("Notes"). The Notes
were convertible to common stock based on a discounted market price at the time
of conversion. Pursuant to these Notes, the Company issued 7,189,025 shares of
its common stock to the Noteholders. The Notes and shares were issued in a
transaction exempt from the registration requirements of the Securities Act of
1933 pursuant to Rule 504 or Section 4(2), thereof.
ITEM 5. Indemnification of Directors and Officers
The Certification of Incorporation of the Company provides with respect to
the indemnification of directors and officers that the Company shall indemnify
to the fullest extent permitted by Sections 102(b)(7) and 145 of the Delaware
General Corporation Law, as amended from time to time, each person that such
Sections grant the Company the power to indemnify. Article Seventh of the
Certificate of Incorporation of the Company also provides that no director shall
be liable to the corporation or any of its stockholders for monetary damages for
breach of fiduciary duty as a director, except with respect to (1) a breach of
the director's duty of loyalty to the corporation or its stockholders, (2) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) liability under Section 174 of the Delaware
General Corporation Law or (4) a transaction from which the director derived an
improper personal benefit, it being the intention of the foregoing provision to
eliminate the liability of the corporation's directors to the corporation or its
stockholders to the fullest extent permitted by Section 102(b)(7) of Delaware
General Corporation Law, as amended from time to time.
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CETEK TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 1998
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report 1 - 2
Financial Statements:
Consolidated Balance Sheets, December 31, 1998
and 1997 and June 30, 1999 (Unaudited) 3
Consolidated Statements of Operations, Years
Ended December 31, 1998, 1997 and 1996 and
Six Months Ended June 30, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Stockholders' Equity
(Deficiency), Years Ended December 31, 1998,
1997 and 1996 and Six Months Ended
June 30, 1999 and 1998 (Unaudited) 5 - 6
Consolidated Statements of Cash Flows, Years
Ended December 31, 1998, 1997 and 1996 and
Six Months Ended June 30, 1999 and 1998 (Unaudited) 7 - 9
Notes to Consolidated Financial Statements 10 - 19
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Cetek Technologies, Inc.
Poughkeepsie, New York
We have audited the accompanying consolidated balance sheet of Cetek
Technologies, Inc. and its subsidiary (the "Company"), as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
(deficiency), and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
tandards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Cetek Technologies, Inc. and
ts subsidiary at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
-1-
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The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has recurring losses from operations, is in
default on its loan obligations, has accumulated stockholders' deficit and a
working capital deficit. This raises substantial doubt about its ability to
ontinue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
WIENER, GOODMAN & COMPANY P.C.
Certified Public Accountant
April 28, 1999 except for Note 1,
which is as of August 26, 1999
-2-
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CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
December 31, June 30,
--------------------------- 1999
1998 1997 (Unaudited)
---- ---- -----------
<S> <C> <C> <C>
Current Assets:
Cash $ 17,350 $ 4,691 $ 266,128
Marketable Securities - - 501,530
Accounts receivable 54,298 59,128 23,286
Inventory 53,036 8,991 73,652
Prepaid expenses - 3,696 44,564
----------- --------- -----------
Total Current Assets 124,684 76,506 909,160
Property and equipment - net 270,350 362,528 395,643
Other assets 7,130 9,684 5,853
----------- --------- -----------
TOTAL ASSETS $ 402,164 $ 448,718 $ 1,310,656
=========== ========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
Current Liabilities:
Short-term debt $ 108,000 $ 136,000 $ 348,000
Current portion of long-term debt 67,823 187,105 77,671
Current maturities of capitalized
lease obligations 137,123 137,123 141,168
Accounts payable 48,164 99,884 71,157
Accrued expenses 213,017 127,716 170,241
----------- --------- -----------
Total Current Liabilities 574,127 687,828 808,237
Long term Capital Lease obligations -- -- 45,298
Long term debt 95,248 -- 67,228
Note payable to officer 232,792 194,500 232,792
----------- --------- -----------
Total Liabilities 902,167 882,328 1,153,555
----------- --------- -----------
Stockholders' Equity (Deficiency):
Preferred stock, par value $.001 per
share - authorized 1,000,000 shares;
none issued -- -- --
Common stock, par value $.001 per
share - authorized 150,000,000 and 50,000,000 shares;
for the period ending June 30, 1999 and December 31, 1998
and 1997 respectively outstanding 38,049,122, 22,562,279
and 15,321,898 shares 22,563 15,322 38,050
Paid-in-capital 576,601 399,368 1,503,871
(Deficit) (1,099,167) (848,300) (1,379,343)
Cumulative other comprehensive (loss) -- -- (5,477)
----------- --------- -----------
Total Stockholders' Equity
(Deficiency) (500,003) (433,610) 157,101
----------- --------- -----------
TOTAL LIABILITIES AND STOCK-
HOLDERS' EQUITY (DEFICIENCY) $ 402,164 $ 448,718 $ 1,310,656
=========== ========= ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six
Months Ended
Year Ended December 31, June 30,
------------------------------------------- ------------------------------
1998 1997 1996 1999 1998
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue: $ 373,884 $ 367,111 $ 311,709 $ 163,940 $ 162,572
----------- ----------- ----------- ----------- -----------
Cost and Expenses:
Cost of sales 366,840 429,311 291,083 183,588 175,420
Selling, general and
administrative 166,693 169,238 213,357 203,175 83,261
Research and development 19,171 15,037 35,579 29,908 8,086
Interest expense 72,047 75,368 20,991 34,452 35,400
Loss on sale of assets - 24,200 - - -
Dividend income - - - 7,007 -
----------- ----------- ----------- ----------- -----------
624,751 713,154 561,010 444,116 302,167
----------- ----------- ----------- ----------- -----------
Net (loss) $ (250,867) $ (346,043) $ (249,301) $ (280,176) $ (139,595)
=========== =========== =========== =========== ===========
(Loss) per common share -
basic $ (.01) $ (.02) $ (.02) $ (.01) $ (.01)
=========== =========== =========== =========== ===========
(Loss) per common share -
diluted $ (.01) $ (.02) $ (.02) $ (.01) $ (.01)
=========== =========== =========== =========== ===========
Weighted average number of
common shares outstanding -
basic 17,636,422 15,321,898 15,321,898 28,020,192 16,470,199
=========== =========== =========== =========== ===========
Weighted average number of
common shares outstanding -
diluted 17,636,422 15,321,898 15,321,898 28,020,192 16,470,199
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Cumulative
Common Stock Other
Shares Par Paid-In Comprehensive Comprehensive
Outstanding Value Capital Income (loss) (Deficit) Income (loss) Total
----------- ----- ------- ------------- --------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996, as
restated 15,321,898 $ 15,322 $293,568 $ - $ (252,956) $ - $ 55,934
Forgiveness of
rent obligation - - 50,000 - - - 50,000
Net (loss) - - - - (249,301) - (249,301)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December
31, 1996 as re-
stated 15,321,898 15,322 343,568 - (502,257) - (143,367)
Forgiveness of rent
obligation - - 50,000 - - - 50,000
Issuance of warrants - - 5,800 - - - 5,800
Net (loss) - - - - (346,043) - (346,043)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December
31, 1997 15,321,898 15,322 399,368 - (848,300) - (433,610)
Forgiveness of rent
obligation - - 50,000 - - - 50,000
Sale of Common Stock
(at $.0333 per share 3,224,020 3,225 104,096 - - - 107,321
Conversion of
convertible debt to
common stock
(at $.0333 per share) 46,361 46 23,137 - - - 23,183
Issuance of stock
for services, valued
at $.001 per share 3,970,000 3,970 - - - - 3,970
Net (loss) - - - - (250,867) - (250,867)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December
31, 1998 22,562,279 22,563 576,601 - (1,099,167) - (500,003)
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (Continued)
<TABLE>
<CAPTION>
Cumulative
Common Stock Other
Shares Par Paid-In Comprehensive Comprehensive
Outstanding Value Capital Income (loss) (Deficit) Income (loss) Total
----------- ----- ------- ------------- --------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Forgiveness of rent
obligation - - 25,000 - - 25,000
Sale of common stock
(at $.0544per share) 8,297,818 8,298 443,459 - - 451,757
Conversion of debenture
(at $.045 - $.0562 per
share) 7,189,025 7,189 342,811 - - 350,000
Compensation expense in
connection with sale of
common stock - - 116,000 - - 116,000
Net unrealized (losses)
on marketable securities - - - (5,477) - $ (5,477) (5,477)
Net (loss) - - - - (280,176) (280,176) (280,176)
-----------
Comprehensive income (loss) - - - - - $ (285,653) -
----------- ----------- ----------- ----------- ----------- =========== -----------
Balance, June 30, 1999 38,049,122 $38,050 $1,503,871 $ (5,477) $(1,379,343) $ 157,101
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six
Months Ended
Year Ended December 31, June 30,
-------------------------------------- ------------------------
1998 1997 1996 1999 1998
-------- -------- --------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net (loss) $ (250,867) $(346,043) $ (249,301) $(280,176) $(139,595)
Adjustments to reconcile net
(loss) to net cash provided
by operating activities:
Depreciation 92,178 98,958 51,513 45,438 46,089
Loss on sale of fixed
assets - 24,200 - - -
Non cash - rent expense 50,000 50,000 50,000 25,000 25,000
Non cash compensation - 5,800 - 116,000 -
Conversion of debt for stock 3,183 - - - -
Issuance of stock for services 3,970 - - - -
Changes in operating assets
and liabilities net of
effects from purchase of
C. W. Inc. 617 209,046 (5,213) (559,681) (6,279)
---------- ---------- ---------- ---------- ----------
Net Cash Provided by
(Used in)Operating
Activities (100,919) 41,961 (153,001) (653,419) (74,785)
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of equipment - (300,000) (78,217) (120,732) -
Proceeds from sale of fixed
assets - 250,000 - - -
---------- ---------- ---------- ---------- ----------
Net Cash (Used in)
by Investment
Activities - (50,000) (78,217) (120,732) -
---------- ---------- ---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
-7-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Six
Months Ended
Year Ended December 31, June 30,
-------------------------------------- ------------------------
1998 1997 1996 1999 1998
-------- -------- --------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing acti-
vities:
Proceeds from sale of stock 107,321 - - 451,757 49,500
Proceeds from sale of
convertible debentures 16,000 120,000 600,000 -
Repayment of borrowings (32,035) (39,583) (53,042) (28,828) (14,743)
Proceeds from officer loan 38,292 27,500 167,000 - 38,292
---------- ---------- ---------- ---------- ----------
Net Cash Provided by
Financing Activities 113,578 3,917 233,958 1,022,929 73,049
---------- ---------- ---------- ---------- ----------
Net Increase (Decrease) in Cash 12,659 (4,122) 2,740 248,778 (1,736)
Cash - beginning of year 4,691 8,813 6,073 17,350 4,691
---------- ---------- ---------- ---------- ----------
Cash - end of year $ 17,350 $ 4,691 $ 8,813 $ 266,128 $ 2,955
=========== ========== ========== ========== ==========
Changes in operating assets and
liabilities net of effects from
purchase of C. W., Inc. consist of:
(Increase) in marketable
securities $ - $ - $ - $(507,007) $ -
(Increase) decrease in accounts
receivable 4,830 (16,046) 139,775 31,012 4,459
Decrease (increase) in inventory (44,045) 2,213 (11,204) (20,616) (3,929)
Decrease (increase) in prepaid
expenses 3,696 33 (3,729) (44,564) -
Decrease (increase) in other assets 2,555 102,554 (96,800) 1,277 1,278
Increase (decrease) in
accounts payable (51,720) 59,835 12,450 22,993 6,579
Increase (decrease) in accrued
expenses 85,301 62,293 (47,541) (42,776) (14,666)
(Decrease) increase in due to
affiliated company - (1,836) 1,836 - -
---------- ---------- ---------- ---------- ----------
$ (617) $ 209,046 $ (5,213) $ (559,681) $ (6,279)
=========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
-8-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
For the Six
Months Ended
Year Ended December 31, June 30,
----------------------------------------------- ---------------------
1998 1997 1996 1999 1998
---------- --------- --------- --------- --------
(Unaudited)
Supplementary Information:
Cash paid during the year for:
<S> <C> <C> <C> <C> <C>
Interest $ 16,078 $ 27,128 $ 14,921 $ 8,343 $ 7,400
Taxes $ 0 $ 675 $ 753 $ 1,537 $ -
========= ========= ========= ========= ========
Non-Cash Financing Activities:
Conversion of
debt to common stock $ 20,000 $ - $ - $ 273,000 $ 20,000
========= ========= ========= ========= ========
Fair value of rent
contributed by officer $ 50,000 $ 50,000 $ 50,000 $ 25,000 $ 25,000
========= ========= ========= ========= ========
Issuance of warrants $ - $ 5,800 $ - $ - $ -
========= ========= ========= ========= ========
Capitalized lease obligations $ - $ - $ 148,732 $ 50,000 $ -
========= ========= ========= ========= ========
Issuance of stock for services $ 3,970 $ - $ - $ - $ 740
========= ========= ========= ========= ========
Conversion of accrued interest
to common stock $ 3,183 $ - $ - $ - $ 3,183
========= ========= ========= ========= ========
Unrealized loss on marketable
securities $ - $ - $ - $ 5,477 $ -
========= ========= ========= ========= ========
</TABLE>
See notes to consolidated financial statements.
-9-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cetek Technologies, Inc. and its subsidiary (the "Company") are engaged in
developing, marketing and manufacturing ceramic material and components used in
electronics, medical and consumer products. In addition, they are in the
business of general precision machining, sheet metal fabrication and welding,
electronic manufacturing and testing as well as general design of components and
systems.
Nature of Business and Liquidity
The Company's financial statements for the year ended December 31, 1998
have been prepared on a going concern basis which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course
of business.
As described in notes 6 and 12, the Company was in default at December 31,
1998 and 1997 on its loan agreements and its capitalized lease obligations.
Additionally, the Company has incurred net losses of $251,000, $346,000, and
$249,000 for the years ended December 31, 1998, 1997 and 1996, respectively. As
of December 31, 1998, the Company has a stockholders' deficiency of $500,000 and
a working capital deficiency of $545,000. Management recognizes that the
Company's continued existence is dependent upon its ability to obtain needed
working capital through additional equity and/or debt financing and increase its
sales sufficiently to cover its costs and expenses. In an effort to increase its
sales and profitability, management has acquired a manufacturing company (see
Note 11) and is aggressively seeking new business. Management's plans include
possible strategic alliances and mergers or acquisitions with other companies
that may be compatible with the Company.
Additionally, management's plans include obtaining private financing.
During the six months ended June 30, 1999, the Company completed a private
placement of its securities, in which the Company raised $997,000. See Note 13
of Notes to Consolidated Financial Statements. There can be no assurance, even
though the Company successfully raised these additional funds or if it enters
into any business alliances, that the Company will achieve profitability or
positive cash flow.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany transactions and
balances have been eliminated.
-10-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
Exposure to losses on receivables is principally dependant on each customer's
financial condition. The Company controls its exposure to credit risk through
credit approvals, credit limits and monitoring procedures.
Inventories
Inventories, consisting of raw materials and finished goods, are stated at
the lower of cost (first-in, first-out) or market.
Depreciation and Amortization
Property and equipment are stated at historical cost less accumulated
depreciation. Depreciation and amortization are calculated using the
straight-line method over their estimated useful lives.
Stock Based Compensation
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The
standard encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options and other equity instruments to
employees based on fair value accounting rules. The Company has adopted the
disclosure-only provisions of SFAS 123
Evaluation of Long-Lived Assets
Long-lived assets are assessed for recoverability on an ongoing basis. In
evaluating the fair value and future benefits of long-lived assets, their
carrying value would be reduced by the excess, if any, of the long-lived asset
over management's estimate of the anticipated undiscounted future net cash flows
of the related long-lived asset. As of December 31, 1998, management concluded
that no valuation allowance was required.
-11-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Earnings Per Common Share
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share,"
which requires companies to present basic earnings per share (EPS) and diluted
earnings per share, instead of the primary and fully diluted EPS that was
required. The new standard requires additional informational disclosures, and
also makes certain modifications to the currently applicable EPS calculations
defined in Accounting Principles Board No. 15.
Basic loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding during the year. Common
stock equivalents outstanding at June 30, 1999 and 1998 and at December 31, 1998
and 1997, relate to 100,000 and 120,000 warrants to purchase common stock
respectively. For the periods ending June 30, 1999 and 1998 and during the two
years ending December 31, 1998, common stock equivalents were not used in the
computation of diluted loss per common share as their effect would be
antidilutive.
In June 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 13 ("SFAS 133") "Accounting for Derivative
Instruments and Hedging Activities". The Company is required to adopt the
provisions of this Statement in the 2000 year-end financial statements. This
Statement requires that all derivatives be recorded in the balance sheet as
either an asset or liability measured at fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The Company is in the process
of evaluating this Statement and has no yet determined the future impact on the
Company's consolidated financial statements.
Fair Value of Financial Instruments
For financial instruments including cash, accounts receivable, accounts
payable and accrued expenses it was assumed that the carrying amount
approximated fair value because of the short maturities of these instruments.
Unaudited Interim Financial Statements
The financial statements as of June 30, 1999 and for the six months ended
June 30, 1999 and 1998 include, in the opinion of management, all adjustments
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for those
periods. The results for the interim period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the entire year.
-12-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Reclassification
Certain reclassifications have been made to prior year balances in order to
conform with the current year's presentation.
2. ACQUISITION
During January, 1997, the Company acquired all of the assets of C. W. Inc.,
a company that manufactures ceramic material and components used in electronics,
medical and consumer products, free and clear of any liens or liabilities, for
$300,000. The assets purchased consisted primarily of machinery and equipment
and customer lists. Subsequent to the acquisition, the Company sold a majority
of the machinery and equipment for $250,000. Of the remaining equipment, $25,000
was capitalized and approximately $25,000 was written off as unusable. The
Company has recorded the acquisition as a purchase. The results of the
operations from the date of acquisition to December 31, 1998 were not material.
<TABLE>
<CAPTION>
3. INVENTORIES
December 31, June 30,
----------------------- --------
1998 1997 1999
--------- -------- -------
<S> <C> <C> <C>
Raw materials $ 4,760 $ 5,241 $ 8,760
Finished goods 48,276 3,750 64,892
--------- -------- -------
$ 53,076 $ 8,991 $ 73,652
========= ======== =======
4. PROPERTY AND EQUIPMENT
December 31, June 30,
----------------------- --------
1998 1997 1999
--------- -------- -------
Machinery and equipment $ 564,737 $ 564,737 $720,717
Leasehold improvements 32,190 32,190 46,941
--------- -------- -------
596,927 596,927 767,658
Less accumulated depreci-
ation and amortization 326,577 234,399 372,015
--------- -------- -------
$ 270,350 $ 362,528 $395,643
========== ======== =======
</TABLE>
5. INCOME TAXES
At June 30, 1999, the Company has a net operating loss ("NOL") carryforward
of approximately $1,097,000 for financial reporting and tax purposes expiring in
the years 2009 through 2012. The Company has not reflected any benefit of such
net operating loss carryforward in the accompanying financial statements in
accordance with Financial Accounting Standards Board Statement No. 109 as the
realization of this deferred tax asset is not more than likely.
-13-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
6. DEBT
Short-Term Debt
December 31, June 30,
----------------------------- --------
1998 1997 1999
--------- -------- --------
<S> <C> <C> <C>
Subordinated convertible
debentures to various
individuals, interest at
11% per year, due on
demand (1)(2) $ 108,000 $136,000 $ 98,000
Subordinated convertible
debentures to various
individuals, interest at
2% per year, due on
March 17, 2001 - - 250,000
--------- -------- --------
$ 108,000 $136,000 $348,000
========= ======== ========
Long-Term Debt
Long-term debt consists of the following:
December 31, June 30,
----------------------------- --------
1998 1997 1999
--------- -------- --------
Note payable to U.S.
Small Business Administration,
interest at 11.75%, principal
and interest, in the amount of
$3,788 payable monthly,
through May, 2002 (3) $ 129,968 $ 154,002 $111,796
Note payable to Dutchess County
Economic Development Corp.,
interest at 3.875%, principal
and interest, in the amount of
$681 payable monthly
through November, 2001 (3) 33,103 33,103 33,103
--------- -------- --------
163,071 187,105 144,899
Less amount due in one year 67,823 187,105 77,671
--------- -------- --------
Long-term debt $ 95,248 $ - $ 67,228
========= ======== ========
</TABLE>
-14-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
6. DEBT (Continued)
(1) During November 1996, the Company entered into a private placement of
securities, in which the Company raised $120,000 through the sale of Units. Each
"Unit" consisted of one $20,000 convertible promissory note bearing interest at
11% per annum and a redeemable common stock warrant exercisable to purchase up
to 20,000 shares of the Company's common stock at $1.50 per share expiring in
five (5) years from the date of issuance and expiring through December, 2001.
The notes are convertible at the option of the holder into shares of the
Company's common stock at a conversion price of $1 per share, and are
convertible any time or by Automatic Conversion (based on the average of the
last bid price of the Company's common stock as listed on NASDAQ or national
securities exchanges, for a period of thirty (30) consecutive trading days if
the price has equaled or exceeded $3.00 per common share). Due to the inability
of the Company to sell the minimum number of units required under the private
placement of securities, the notes are due on demand.
During 1998, one of the debt holders converted his note to 20,000 shares of the
Company's Common Stock. In addition, $3,184 of accrued interest on the debt was
converted into 3,183 of the Company's Common Stock. For the period ending June
30, 1999 and the year ending December 31, 1998 Company repaid $10,000 and $8,000
to various noteholders, respectively.
(2) During June 1997, the Company entered into a private placement of
securities, in which the Company raised $16,000 through the sale of units. Each
"Unit" consisted of one $8,000 convertible promissory note bearing interest at
11% per annum. Each note is convertible under the same terms as (1) above.
(3) On June 30, 1999, the Company was in default under the terms of its Bank
loan agreement with the Dutchess County Economics Development Corp.
Consequently, the remaining principal balance of $33,103 is due on demand and is
presented as a current liability in the accompanying balance sheet.
The notes are secured by substantially all the assets of the Company and
officer life insurance policies in the amount of $235,000. Additionally, the
building owned by Fayiz Hilal ("Hilal"), the Company's President, Chief
Executive Officer and major shareholder, has been pledged as collateral. No rent
payments may be paid to him while the loan is in default. (See Note 12).
7. NOTE PAYABLE TO OFFICER/STOCKHOLDER
December 31, June 30,
-------------------- --------
1998 1997 1999
-------------------- --------
Note payable to officer/
stockholder, interest pay-
able at 6.5 % interest $232,792 $194,500 $232,792
======== ======== ========
-15-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
8. RELATED PARTY TRANSACTIONS
(a) During the years ended December 31, 1998, 1997,and 1996, Hilal advanced
the Company $38,292, $27,500, and $167,000, and interest was accrued in the
amount of $7,565 and $5,500 for the period ending June 30, 1999 and 1998 and
$12,643, $11,375, and $2,606, respectively. The note payable to officer at
December 31, 1998 was $232,792.
(b) The Company leases its facilities from Hilal. Hilal has forgiven all
rent payments until the obligations to U.S. Small Business Administration and
Dutchess County Economic Development Corp. have been paid in full, in accordance
with the terms of the loans. The forgiveness of the rent obligation of $25,000
for the period ending June 30, 1999 and 1998 and $50,000 for the years ended
December 31, 1996, 1997 and 1998, has been credited to additional paid-in
capital.
(c) The Company had transactions with an affiliated entity of Hilal for the
year ended December 31, 1996. The Company sold to the affiliated entity, as part
of a sub-contracting agreement, finished goods in the amount $26,224 and paid
sales commissions of $1,836 for the year ended December 31, 1996.
9. MAJOR CUSTOMERS
The Company had sales in excess of ten (10%) percent with two (2) customers
for the periods ending June 30, 1999 and 1998 and for the years ended December
31, 1998 and 1997. The amounts and percentage were approximately $97,000 (52.7%)
and $85,000 (46.2%) and $104,000 (56.5%), $45,000 (26.5%) for the periods ending
June 30, 1999 and 1998 and $215,000 (55.7%) and $122,000 (31.6%) in 1998 and
$157,000 (42.8%) and $72,000 (29.6%) in 1997.
The loss of these customers could have a materially adverse effect on the
Company.
10. PRIOR PERIOD ADJUSTMENT
The accompanying financial statements for the year ended December 31, 1996
have been restated to correct an error related to the exclusion from the
statement of operations of rent expense which was forgiven by Hilal, the owner
of the property which the Company occupies. The effect of the restatement was to
increase the net loss for 1996 by $50,000 and $.00 and per share.
-16-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
11. WARRANTS
The Company issued warrants in connection with a private placement debt
offering. The Company has adopted the disclosure-only provision of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation." Interest expense has been charged for the warrants issued to
non-employees based on the fair value at the grant date consistent with the
provisions of SFAS No. 123. Therefore, the net loss, basic loss per share, and
diluted loss per share for years ended 1998 and 1997 are the same for both
reported and proforma amounts.
The fair value of each warrant granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for warrants in 1996: dividend yield of -0-%, expected
volatility of -0-%, risk free interest rate of 4.0% and expected life of five
(5) years.
Information regarding the Company's Warrants for 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ------ ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Warrrants outstanding
beginning of year 120,000 $ 1.50 120,000 $ 1.50 - $ -
Warrants exercised (20,000) 1.50 - - - -
Warrants granted - - 120,000 $ 1.50
------- ------ ------- ------ ------- -------
Warrants outstanding
end of year 100,000 $ 1.50 120,000 $ 1.50 120,000 $ 1.50
======= ====== ======= ====== ======= =======
Warrants price range
at end of year $ 1.50 $ 1.50 $ 1.50
Warrant price range
for exercised shares $ 1.50 $ - $ -
Weighted-average fair
value of warrants
granted during the year $ - $ - $ .24
</TABLE>
The following table summarizes information about fixed-price stock warrants
outstanding at December 31, 1998:
Weighted- Number
Number Out- Average Weighted- Exercisable Weighted
Range of standing at Remaining Average at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 1998 Life Price 1998 Price
- -------- ------------ ----------- -------- ------------ -------
$ 1.50 100,000 2 yrs. 11 mos. $ 1.50 100,000 $ 1.50
======= =======
-17-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
12. COMMITMENTS AND CONTINGENCIES
Leases
(a) The Company leases its facilities under an operating lease with Hilal on a
month-to-month basis. Hilal has waived rent payments until the obligations to
the U.S. Small Business Administration and Dutchess County Economic Development
Corp. have been paid and retired in accordance with the terms of the loans. (See
Note 5 of Notes to Consoli-dated Financial Statements). Under the terms of the
lease, the Company is responsible for real estate taxes and other executor
charges. The rent and executory charges for the period ending June 30, 1999 and
the years ended December 31, 1998, 1997 and 1996 were $33,637, $55,706, $85,040,
and $79,227, respectively.
(b) The Company leases equipment under capital leases. The equipment in the
amount of $232,332 and $148,732 is included in property and equipment as
follows:
December 31, June 30,
------------------------- ---------
1998 1997 1999
------ ------ ---------
Equipment $ 148,732 $ 148,732 $ 237,732
Less accumulated
depreciation 42,494 21,247 65,224
--------- --------- ---------
$ 106,238 $ 127,485 $ 172,508
========= ========= =========
At June 30, 1999, the Company was in default on the leases due to Colonial
Pacific due to non-payment of monthly principal and interest lease agreements.
Consequently, the remaining principle balance of $137,123 is due on demand and
is presented as a current liability in the balance sheet.
Following is a schedule of future minimum lease payment for capital leases as of
December 31, 1998:
1999 $138,910
2000 12,572
2001 12,572
2002 12,572
2003 12,572
2004 6,330
Thereafter -
195,528
--------
Less interest 9,062
--------
Present value of net
minimum obligations 186,466
Less current portion 141,168
--------
Long-term obligation $ 45,298
=======
-18-
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
12. COMMITMENTS AND CONTINGENCIES (Continued)
3) In the event of termination, death, sale or transfer of ownership of the
control of the Company, additional compensation shall be paid in an amount equal
to the sum of $350,000 less the total compensation paid above.
For the period ending June 30, 1999 and the years ending 1998 and 1997, no
amounts were earned under the terms of the agreement.
Commitment
In connection with the acquisition of the assets of C. W. Inc. in January,
1997, the Company entered into an employment agreement with a sales
representative for a term of ten (10) years. The sales representative will be
paid:
1) A fifteen (15%) percent commission on the gross sales (as defined) on the
first $800,000 and eight (8%) percent commission on the excess during the first
three (3) years.
2) For the remaining seven (7) years he will receive eight (8%) percent
commission on gross sales that he services and ten (10%) percent commission on
sales to new customers.
13. SUBSEQUENT EVENT
In March 1999, the Company completed a private placement of its securities
by issuing 2% Series A Senior Subordinated Convertible Debentures. The Company
raised $600,000 from the sale of these debentures. The debentures and interest
are due March 17, 2001, with interest accruing at 2% per annum. The Company, at
their option, at maturity may pay any remaining principal plus all accrued
interest in cash or common stock of the Company. The holder of debentures are
entitled, at their option, at any time immediately following execution of the
agreement to convert all or any amount of the debenture into shares of Common
Stock, $.001 par value per share, of the Company. The conversion price for each
share of Common Stock will be equal to 75% of the closing bid price of Common
Stock as reported on the National Association of Securities Dealers Electronic
Bulletin Board for the day immediately preceding the date of receipt by the
Company of notice of conversion.
Debt discount in connection with the issuance of debt with stock purchase
warrants must be amortized over the life of the related obligation and interest
expense will be included in the accompanying statements of operations in 1999.
As of June 30, 1999 the holders of the debentures converted $350,000 of the
debentures into 7,189,025 shares of common stock.
-19-
<PAGE>
Exhibits
- --------
Exhibit No. Description
- ----------- -----------
3.1 CERTIFICATE OF INCORPORATION
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, hereunto duly authorized.
Date: September 1, 1999
CETEK TECHNOLOGIES, INC.
By: /s/ Fayiz K. Hilal
-------------------------
Fayiz K. Hilal, President
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 04/28/1994
944074351 - 2398362
CERTIFICATE OF INCORPORATION
OF
CETEK TECHNOLOGIES, INC.
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified and
referred to as the "General Corporation Law of the State of Delaware") hereby
certifies that:
FIRST: The name of this corporation (hereinafter called the "Corporation,")
is CETEK TECHNOLOGIES, INC.
SECOND: The address, including street, number, city and county of the
registered office of the Corporation in the State of Delaware is 9 East
Loockerman Street, City of Dover, County of Kent (zip code 19901) and the name
of the registered agent of the corporation in the State of Delaware at such
address is National Corporate Research, Ltd.
THIRD: The nature of the business and of the purposes to be conducted and
promoted by the Corporation are to conduct any lawful business, to promote any
lawful purpose, and to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
FOURTH: The total number of shares of all classes of stock that the
Corporation shall have authority to issue is 51,000,000 of which 1,000,000
shall be Preferred Stock, par value $.001 per share ("Preferred Stock"), and
50,000,000 shall be Common Stock, par value $.001 per share ("Common Stock"),
and the voting powers, designations, preferences and relative, participating,
optional or other special qualifications, limitations or restrictions thereof
are as follows:
1. Preferred Stock
a. The Preferred Stock may be issued from time to time in one or
more series, each of which shall be distinctively designated, shall rank equally
and shall be identical in all respects, except as otherwise provided in
subsection 1(b) of this Article FOURTH.
b. Authority is hereby vested in the Board of Directors to issue
from time to time the Preferred Stock of any series and to state in the
resolution or resolutions providing for
<PAGE>
the issue of shares of any series the voting powers, if any, designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions of such series to the full
extent now or hereafter permitted by the law of the State of Delaware in respect
of the matters set forth in the following clauses (i) to (viii) inclusive:
(1) the number of shares to constitute such series, and the
distinctive designations thereof;
(2) the voting powers, full or limited, if any, of such
series;
(3) the rate of dividends payable on shares of such series,
the conditions on which and the times when such dividends are payable, the
preferences to, or the relation to, the payment of the dividends payable on any
other class, classes or series of stock whether cumulative or non-cumulative
and, if cumulative, the date from which dividends on shares of such series shall
be cumulative;
(4) the redemption price or prices, if any, and the terms
and conditions on which shares of such series shall be redeemable;
(5) the requirement of any sinking fund or funds to be
applied to the purchase or redemption of shares of such series and, if so, the
amount of such fund or funds and the manner of application;
(6) the rights of shares of such series upon the
liquidation, dissolution or winding up of, or upon any distribution of the
assets of, the Corporation;
(7) the rights, if any, of the holders of shares of such
series to convert such shares into, or to exchange such shares for, shares of
any other class, classes or series of stock and the price or prices or the rates
of exchange and the adjustments at which such shares shall be convertible or
exchangeable, and any other terms and conditions of such conversion or exchange;
(8) any other preferences and relative, participating,
optional or other special rights of shares of such series, and qualifications,
limitations or restrictions including, without limitation, any restriction on an
increase in the number of shares of any series theretofore authorized and any
qualifications, limitations or restrictions of rights or powers to which shares
of any future series shall be subject.
c. The number of authorized shares of Preferred Stock may be
increased or decreased by the affirmative vote of the
2
<PAGE>
owners of a majority of the stock of the Corporation that is entitled to vote,
without a class vote of the Preferred Stock, or any series thereof, except as
otherwise provided in the resolution or resolutions fixing the voting rights of
any series of the Preferred Stock.
FIFTH: The name and mailing address of the incorporator is as follows:
Karen S. Lieberstein
DORNBUSH MENSCH MANDELSTAM & SCHAEFFER
747 Third Avenue
New York, New York 10017
SIXTH: The corporation is to have perpetual existence.
SEVENTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution of or any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
EIGHTH: The original By-Laws of the Corporation shall be adopted by the
incorporator. Thereafter, the power to make, alter, or repeal the By-Laws, and
to adopt any new By-Law, shall be vested in the Board of Directors.
NINTH: The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, or by any successor thereto, indemnify any and all
persons whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters referred
3
<PAGE>
to in or covered by said Section. The Corporation shall advance expenses to the
fullest extent permitted by such Section. Such right to indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person. The indemnification and advancement of expenses provided for
herein shall not be deemed exclusive of any other rights of which those seeking
indemnification may be entitled under any By-Law, arrangement, vote of
stockholders or disinterested directors or otherwise. To the fullest extent that
the General Corporation Law of the State of Delaware, as it exists on the date
hereof or as it may hereafter be amended, permits the limitation or elimination
of the liability of directors, no director shall be personally liable to the
Corporation or its stockholders for any monetary damages for breach of fiduciary
duty as a director. Notwithstanding the foregoing, a director shall be liable to
the extent provided by applicable law (i) for any breach of such director's duty
of loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which such director derived an
improper personal benefit. Neither the amendment or repeal of this Article, nor
the adoption of any provision of this Certificate of Incorporation inconsistent
with this Article shall adversely affect any right or protection existing under
this Article at the time of such amendment or repeal.
TENTH: The personal liability of the directors of the Corporation is hereby
eliminated to the fullest extent permitted by paragraph (7) of subsection (b) of
Section 102 of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented.
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hands this 26th day of April, 1994.
/s/ Karen S. Lieberstein
--------------------------------------
Karen S. Lieberstein
Incorporator
Dornbush Mensch Mandelstam & Schaeffer
747 Third Avenue
New York, New York 10017
4
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 07/07/1994
944124470 - 2398362
CERTIFICATE OF MERGER
MERGING
DARCY CORPORATION
INTO
CETEK TECHNOLOGIES, INC.
CETEK Technologies, Inc., a corporation organized and existing under and by
the virtue of the General Corporation Law of the State of Delaware, does hereby
certify as follows:
FIRST: The names and states of incorporation of each of the constituent
corporations are as follows:
Darcy Corporation
a Colorado corporation
and
CETEK Technologies, Inc.
a Delaware corporation
SECOND: An Agreement and Plan of Merger dated as of June 23, 1994 has been
approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with the requirements of Section 252(c)
of the Delaware General Corporation Law.
THIRD: CETEK Technologies, Inc. shall be the surviving corporation and its
name shall be unchanged.
FOURTH: The Certificate of Incorporation of CETEK Technologies, Inc. shall
be the Certificate of Incorporation for the surviving corporation.
FIFTH: A copy of the executed Agreement and Plan of Merger in on file at
the principal place of business of CETEK Technologies, Inc., 19 Commerce Street,
Poughkeepsie, N.Y. 12603.
SIXTH: A copy of the Agreement and Plan of Merger will be furnished by
CETEK Technologies, Inc. on request and without cost to any stockholder of any
constituent corporation.
<PAGE>
SEVENTH: The authorized capital stock of Darcy Corporation is 50,000,000
shares of Common Stock, par value $.001.
IN WITNESS WHEREOF, CETEX Technologies, Inc. has caused this Certificate to
be signed by Fayiz K. Hilal, its President, and attested by Jeanette Zammetti,
its Secretary, on the 23rd day of June, 1994.
CETEK TECHNOLOGIES, INC.
By: /s/ Fayiz K. Hilal
-------------------------
Fayiz K. Hilal, President
ATTEST:
/s/ Jeanette Zammetti
---------------------------
Jeanette Zammetti, Secretary
- 2 -
