<PAGE>
U.S. SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________to ________________
Commission file number:
CETEK TECHNOLOGIES, INC.
(Exact name of small business issuer in its charter)
Delaware 84-0925366
-------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
19 Commerce Street
Poughkeepsie, New York 12603
(Address of principal executive offices) (ZipCode)
Issuer's telephone number (914) 452-3510
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes__X__ No._____
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for the year ended December 31, 1999 were $354,030.
The aggregate market value of the common stock held by non-affiliates of
the issuer is $7,484,640
The number of shares outstanding of the issuer's common stock is
54,760,097 as of March 31, 2000
DOCUMENTS INCORPORATED BY REFERENCE
None.
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ITEM 1. Description of Business
Introduction General
Introduction
Cetek Technologies, Inc. (the "Company"), through its wholly owned subsidiary
Cetek Corporation (the "Subsidiary"), is engaged in the manufacturing and
development of materials such as ceramics. The Company has derived substantially
all its revenues from the fulfillment of orders for its contract manufacturing
operations. Nevertheless, its main focus since 1993 has been directed towards
the research and development of an improved manufacturing process for advanced
ceramics. Advanced ceramics are ceramics that require special engineering and
are used in electronics and other specialized applications. In 1999 the Company
did not derive any revenues from the sale of products utilizing its process.
The Subsidiary has been in continuous operation since November, 1987. In 1994
the Subsidiary was acquired by Darcy Corporation. 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).
The Company's executive offices and manufacturing facility are located at 19
Commerce Street, Poughkeepsie, New York 12603, telephone (914) 452-3510, fax
number (914) 454-3524. As used herein, unless otherwise indicated by the context
the term "Company" refers to the Company and its Subsidiary.
Contract Manufacturing
The Company has operated a contract manufacturing operation since 1988, handling
general precision machining, sheet metal fabrication and welding, electronic
manufacturing and testing, and general design of metal components and systems.
The Company as a contract manufacturer completes orders for original equipment
manufacturers and others. 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 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.
The equipment and personnel of the Company's fabricating facilities are also
utilized in the Company's proposed ceramic business. There are 14 employees
engaged in this business.
In connection with its contract manufacturing, since 1997 the Company has
maintained business relations with Pitney Bowes and Circon ACMI both of which
are unaffiliated with the Company. The Company's relationships with these
clients have accounted for approximately 80% of the Company's sales in 1998 and
1999. Pitney Bowes accounted for 61.3% and 55.7% of the Company's revenues in
1999 and 1998 respectively. Circon ACMI accounted for 22.6% and 31.6% of the
Company's revenues in 1998 and 1999 respectively.
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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 (or the base upon which
circuits and other components are affixed for electronic products.) The
substrates are used 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. Structural ceramics, for example, have been used in car engines and
military aircraft and helicopters as form of bullet-proof window protection.
Advanced ceramics are expected to continue their growth. 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
The Company has been engaged in developing a process (the "Cetek Process") to
produce ceramic products at lower production costs with possible enhanced
qualities. Most ceramic products are produced by mixing various raw materials
(alumina, silica and dozens of other compounds) and then sintered or heated in a
high temperature furnace until the mixture becomes hard. Varying mixing
procedures may also be used as well as different sintering methods varying
temperature, heating duration and other factors. Thus, there are wide array of
variables in manufacturing specific ceramic products. The final ceramic products
have different properties of hardness, thickness, heat resistance, durability,
electric resistance and other properties depending on the various elements of
process used.
Generally, the surface of the final ceramic product is not smooth. This requires
machining, grinding and polishing to smooth the ceramic surface. These machining
steps add cost to the final product. Machining also lessens the ability to affix
electronic circuitry to a substrate. In addition, machining may lead to breakage
of the product and in some instances cause microfissures which reduces the
quality of the product.
Over the last several years the Company has been engaged in the development of
the Cetek Process. The process involves proprietary formulations, mixing and
sintering procedures and results in a ceramic product which is smooth and
requires little or no machining thereby reducing or eliminating machining costs.
Products manufactured with the Cetek Process have enhanced qualities because of
the absence of microfissures caused by the machining process. The Company has
utilized the Cetek Process to produce mulite, cordierite and perovsite and other
commonly used ceramic materials.
In the first quarter of 2000 and in 1998 and 1999 the Company produced various
samples utilizing the Cetek Process and have had the resulting products tested
internally and by third parties including an independent laboratory of a
university at which a director was employed. While the Company has not received
orders it has engaged in marketing activity. It has had discussions with several
potential customers and supplied products for internal testing by these
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potential customers. It is also working with a customer to develop
specifications for and testing a product which the customer may utilize. The
customer has agreed to reimburse a portion of the expense involved in developing
this product.
During the development period prior to 2000 the Company has derived no revenues
from its ceramic operations. However, in 1997 it performed an agreement by New
York State Energy Research and Development Authority relating to development of
certain sintering procedures used in the development of the Cetek Process. The
Company has entered into an additional grant to further develop the process.
Under the grant the state contributes funds to demonstrate the effectiveness of
the sintering process (which is utilized in the Cetek Process) by building,
operating and documenting the performance of the process. The Company is
obligated to expend funds for this purpose. The State is to receive a royalty on
future sales.
Nature of Company's Products and Services to be Offered
The Company does not anticipate maintaining an inventory or manufacturing
products for sale of off-the-shelf products. Rather, it anticipates its sales
will be made to fulfill orders for ceramic products in accordance with the
specifications of a customer. The Company anticipates products made with the
Cetek Process will be utilized for substrates for electronic components and for
structural materials.
Substrates are made in a variety of sizes and are used as base for electronic
circuitry. Each electronic product may require a different substrate. Generally,
after a ceramic manufacturer produces the substrates for an electronic customer
specifications, either a subcontractor or the customer attaches or sets plugs or
pins where the wiring and components are to be attached to the substrate for a
completed product. The Company intends to acquire the equipment necessary for
insertion of the plugs at a future stage of its development. Whether simply as a
supplier of ceramic material or full service contractor the Company intends to
market its services to manufacturers of various electronic components.
The Company will also actively market its special ceramic material to be used
for flat display panels. This is the use of an extremely thin (less than an
inch) display for electronic products (i.e., screens for laptops.) The ceramic
is used for (back panel of the display). With the increased interest in the
development of flat panel displays, the industry has attracted federal
investment. The Company also believes that the ceramic material back panel used
for flat panel displays will further be applied for use on aircraft panels,
operating room electronics and other medical applications.
Proposed Marketing and Sales
At the present time the Company is seeking to pursue its ceramic business in the
small to medium sized quantity order market for electronic ceramic products and
flat panel display product.
The marketing and sales effort will be carried by the President and independent
non-exclusive sales representative. The Company intends to enter into agreements
with several 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 quality products at competitive prices due to its
manufacturing process as well as in its ability to offer a complete
manufacturing and service facility in one location.
Employees
As of March 15, 2000 the Company employed 21 full-time employees, none of whom
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
If the Company obtains sufficient funds and is able to commence production of
ceramic material in commercial quantities, the Company will compete with other
manufacturers of ceramic products. Many of these firms have greater financial,
managerial and technical resources than the Company. The Company will be in
direct competition with large companies such as Kyocera (Japan), Coors (US) and
Phillips (the Netherlands), as well as a large number of smaller companies. The
Company's ability to be competitive in the future will depend on its ability to
demonstrate the cost and structural advantage of products made with the Cetek
Process. There can be no assurance that the Company will be able to enter into
such agreements and be competitive. The Company is an insignificant factor in
the contract manufacturing industry.
Research and Development
The Company has expended $41,747 in first quarter of 2000, $351,058 in 1999 and
$19,171 in 1998 for research and development. The research expenses included the
expenses of employees, various consultants, and the costs of supplies and
independent testing.
The Company has had its products tested by a number of independent laboratories.
sThe primary purpose of these tests is to enable the Company to gauge the
effectiveness of the Company's Cetek Process. The results of these tests are
made available to potential customers which generally also conduct their own
tests. Until his retirement in 1997 from Alfred University, one of the Company's
director's was a professor at this university, which provided testing. The
Company does not believe this relationship affected the validity of the tests in
any manner.
ITEM 2. 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,
who is the principal stockholder and chief executive officer of the Company, has
agreed to waive all payments for the rent while the Company is in default to a
lender.
ITEM 3. Legal Proceedings
Management of the Company is not aware of any legal proceedings, threatened or
pending legal proceedings, to which the Company is a party or to which the
property of the Company is subject
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as a defendant.
ITEM 4. Submission of Matters to a vote of Securities Holders.
None.
PART II
ITEM 5. Market For Common Equity and Other Related Stockholder Matters
Until October 1999 our common stock was quoted on the OTC Bulletin Board;
thereafter quotations are published in the "pink sheets" maintained by National
Quotation Bureau. Set forth below are the high and low closing bid quotations
for our common stock for quotes for the stock have appeared in the pink sheets
published by the National Quotation Bureau. The quotations reflect interdealer
prices without retail mark-up, mark-down or commissions, and may not reflect
actual transactions.
Period Ending High Asked Low Bid
------------- ---------- -------
December 31, 1999 - -
September 30, 1999 - -
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, 2000, there were approximately 125 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.
We have not paid any dividend and have no surplus to legally pay any dividend.
We plan to retain most future earnings for use in our business. Payment of
dividends is within the
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discretion of our board of directors and cash dividends will depend, among other
factors, upon our earnings, financial condition and capital requirements.
Recent Securities Transactions
The following sets forth information relating to all unregistered securities of
the Company sold by it in the last 3 years.
In March, 1999, the Company completed a private placement of its securities by
issuing 2% Series A Senior Subordinated Convertible Debentures. The Company
received gross proceeds of $600,000 from the sale of these debentures. The
debentures and interest were due March17, 2001, with interest accruing at 2% per
annum. The Company, at its 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, to convert all or any amount of the
debentures into shares of the Company's Common Stock at a conversion price equal
to 75% of market. The notes were issued pursuant to the provision of Rule 504 of
Regulation D. The holders of the debentures converted the entire amount of
debentures into 678,745 shares of common stock. The issuance of these shares was
exempt from the registration provisions of the Securities Act of 1933 pursuant
to Section 3(a)(9) thereof.
ITEM 6. 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.
This report contains certain forward-looking statements under the Private
Securities Litigation Reform Act of 1995 with respect to the business of the
Company. These forward-looking statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from these
forward-looking statements. These risk include:
- the failure to obtain orders for products made with the Cetek
Process;
- the failure to receive sufficient capital to commence ceramic
business and for operations;
- the inability to manufacture products utilizing the Cetek Process in
commercial quarters;
- products utilizing the Cetek Process in commercial quarters;
- the loss of contact manufacturing customers;
- change in technology.
Plan of Operation
The Company has incurred losses since inception. The Company has completed the
development of its Cetek Process for commercial purposes. During 2000, the
Company will seek to change the emphasis of its business operations from
contract manufacturing work to its ceramic operations. The Company is satisfied
that it is ready to market products utilizing the Cetek Process. Its main focus
during the year 2000 will be to explore the marketability of products
manufactured through the Cetek Process. The Company has held discussions with
several potential customers and supplied these potential customers with samples.
If it obtains
<PAGE>
sufficient customer interest it will seek financing of its ceramic operation
necessary to purchase any needed equipment and for operating expenses. The
Company will also hire additional employees for production and marketing of its
product. The Company also intends to pursue contract manufacturing operation but
will allocate more of its resources to its ceramic operations if the ceramic
operations increase.
Statement of Operations
First Quarter 2000 Compared to First Quarter 1999
The Company had slightly more revenues from operation in first quarter 2000 than
in the first quarter 1999 ($71,279 compared to $66,263). The net loss of the
Company for the first quarter of 2000 was $191,635 a decline of $60,170 from the
loss of $251,805 in the first quarter of 1999. The reduction resulted primarily
because we incurred interest expense, including non cash expenses of $135,842 in
the first quarter of 1999 due to our financing compared to interest expense of
$38,433 in the first quarter of 2000. During the first quarter 2000 we
nevertheless incurred increased research and general and administrative expenses
respectively of approximately $40,225 and $3,112.
- Year Ended 1999 Compared to Year Ended 1998
The Company had slightly more revenues in first quarter 2000 than in the first
quarter of 1999 ($71,274 in 2000 and $66,263 in 1999). The Company's net loss
declined from $251,805 in the first quarter 1999 to $191,635, however, incurred
a net loss of approximately $842,000 compared to 301,000 in 1998. This loss
resulted primarily from increased cost and expenses which increased from
approximately $674,750 in 1998 to approximately $1,196,000 in 1999. The increase
in expenses was in significant part attributable to an increase in research
expenses from $19,171 in 1998 to 351,085 in 1999 for the development of the
Cetek Process. In addition, interest expenses rose from $72,047 in 1998 to
$285,400 in 1999, due to a non-cash charge of $186,000 to reflect the conversion
of debentures below market value.
Liquidity
The Company had a working capital deficit of approximately $173,000 as of
December 31, 1999 compared to a working capital deficit of approximately
($450,000) as of December 31, 1998. The reduction of deficit is primarily
attributable to the sale of the Company's securities in 1999.
The Company however does not have sufficient working capital to sustain its
current levels of operations. During 1999 the Company has been unable to pay its
indebtedness on a timely basis. It has defaulted on several obligations
including a loan from Dutchess County Economic Development Corp. and amounts due
on equipment leases. In addition it has been unable to make rent payments for
its facility or to pay its chief executive officer salary. These payments
aggregating $100,000 have been waived and have been treated as a capital
contribution.
The Company was able to continue operations by financing activity pursuant to
which it received $1,000,000. In March 1999, the Company completed a private
placement of its securities by
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issuing 2% Series A Senior Subordinated Convertible Debentures. Through such
placement, the Company obtained gross proceeds of $600,000. It also obtained
additional funds of approximately $1,000,000 in 1999 from the sale of equity.
Unless the Company obtains additional funds from financing or other sources it
may not be able to survive and will not be able to promote the Cetek Process.
The Company's present liquidity problem stems from the funding requirements
necessary to develop the Cetek Process. The Company utilized the funds to
produce samples of its product which it either had tested by independent
laboratories or provided to potential customers. It also acquired and converted
equipment for the Cetek Process. The Company has estimated it needs additional
funds to commence commercial operations in order, among other things, to
purchase additional equipment estimated to cost approximately $450,000.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to pages F-1 through F-19 comprising a portion of this annual
report on Form 10-KSB.
<PAGE>
ITEM 8. 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.
<PAGE>
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons
The directors and executive officers of the Company are as follows;
Name Age Position
Fayiz Hilal 59 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 directors 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 Tratron, Inc., which he established in 1976 specializing in custom
engineering and technical design services. In addition, Mr. Hilal held technical
and managerial positions with Honeywell, Inc., Chemical Rubber and I.B.M.
Corporation.
JOHN HILAL. Mr. Hilal has been employed by the Company since 1994 and has served
as Vice President of Manufacturing and Director of the Company since 1996. Mr.
Hilal received his undergraduate degree in Business and Marketing from the
University of Notre Dame in 1994. Mr. John Hilal is the son of Fayiz Hilal.
DR. GORDON LOVE. Dr. Love has been Vice President of Strategic Planning,
Technical Director and a Director of the Company since 1993. From 1987 to 1992,
he served as Technical Director of the ceramic division of ALCOA. From 1978 to
1987, 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
<PAGE>
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. For more than the last five years she has been 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. For the last five years 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.
Compliance with Section 16(a) of the Exchange Act
Forms 3, 4 and 5 have not yet been filed by any officer, director or beneficial
owner of more than 10 percent of our common stock. The Company had no securities
registered under the Exchange Act prior to last fiscal year and therefore no
such reporting person was required to file reports under Section 16(a) of the
Exchange Act in prior years. All reports for officers and directors will be
filed by August 21, 2000. The Company will encourage beneficial owners of more
than 10% of the Company's common stock to file their reports by the same date.
ITEM 10. Executive Compensation
Mr. Fayiz Hilal, Chief Executive Officer of the Company, has not received any
compensation during the last three fiscal years. During 1998 through 1999 he
accrued $100,000 of salary all of which he has waived. There are no employment
agreements with any officer. The Company does not pay any compensation to
director.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of May 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
Common Stock Ownership
Percentage
<PAGE>
Fayiz K. Hilal (1) 5,162,000 9.34%
Christopher G. Hilal (3) 5,200,000 (1) 9.41%
Dr. Gordon Love 30,000 (2) 0.05%
Dr. Richard Spriggs 30,000 (2) 0.05%
Thomas Aposporos 30,000 (2) 0.05%
Dr. Ellen Tormey 20,000 (2) 0.04%
Hilal Family Trust 4,000,000 7.24%
John P. Hilal (3) 1,200,000 2.17%
David M. Hilal (3) 1,200,000 2.17%
Bridget M. Hilal (3) 1,200,000 2.17%
All officers and directors as 10,472,000 (1) 18.95%
a group (a total of 6 persons)
(1) Includes the 4,000,000 shares of the Company's common stock owned by the
Hilal Family Trust of which Christopher G. Hilal is Trustee and has sole
voting power over these shares.
(2) Represents significantly less than 1% of the issued and outstanding shares
of the Company's common stock.
(3) John Hilal, Christopher Hilal, Bridget Hilal and David Hilal are all
children of Fayiz Hilal none of whom are dependent children. Each of these
children are beneficiaries of the Hilal Family Trust. Except in the case
of Christopher Hilal who is sole Trustee none of the shares owned by the
Trust are included in the number of shares owned by any of these
beneficiaries.
ITEM 12. Certain Relationships and Transactions
During the years ended December 31, 1999 and 1998 Mr. Fayiz Hilal, the Company's
president and principal shareholder advanced the Company approximately $5,000
and $38,302 respectively. Interest in the amount of $15,334 and $12,643 accrued
respectively in each such year. The amount owing to Mr. Hilal is represented by
a note in the amount of $237,801 which includes advances and accrued interest.
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 and
Dutchess County Economic Development Corp. have been paid in full, in accordance
with the terms of the loans.
ITEM 13.
(a) Exhibits
3.01 Certificate of Incorporation of the Company
<PAGE>
CETEK TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report F-1 - F-2
Financial Statements:
Consolidated Balance Sheets, December 31, 1999
and 1998 F-3
Consolidated Statements of Operations, Years
Ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders'
(Deficiency), Years Ended December 31, 1999,
1998 and 1997 F-5 - F-6
Consolidated Statements of Cash Flows, Years
Ended December 31, 1999, 1998 and 1997 F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Cetek Technologies, Inc.
Poughkeepsie, New York
We have audited the accompanying consolidated balance sheets of Cetek
Technologies, Inc. and its subsidiary (the "Company"), as of December 31, 1999
and 1998, and the related consolidated statements of operations, stockholders'
(deficiency), and cash flows for each of the three years in the period ended
December 31, 1999. 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
standards. 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
its subsidiary at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
F-1
<PAGE>
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
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
WIENER, GOODMAN & COMPANY P.C.
Certified Public Accountant
Eatontown, NJ
Date: March 21, 2000
F-2
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
-----------------------
1999 1998
---------- ----------
Current Assets:
Cash $377,673 $ 17,350
Accounts receivable 30,693 54,298
Inventory 32,296 53,036
Prepaid expenses 18,236 -
---------- -------
Total Current Assets 458,898 124,684
Property and equipment - net 474,200 270,350
Other assets 4,575 7,130
---------- -------
TOTAL ASSETS $ 937,673 $402,164
========== =======
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY)
Current Liabilities:
Short-term debt $ 138,000 $ 108,000
Current portion of long-term debt 69,284 67,823
Current maturities of capitalized
lease obligations 145,804 137,123
Accounts payable 46,975 48,164
Accrued expenses 222,696 213,017
---------- -------
Total Current Liabilities 622,759 574,127
Long term capital lease obligation 36,680
Long term debt 59,066 95,248
Note payable to officer 237,801 232,792
---------- --------
Total Liabilities 956,306 902,167
---------- --------
Stockholders' (Deficiency):
Preferred stock, par value $.001 per
share - authorized 1,000,000 shares;
none issued - -
Common stock, par value $.001 per
share - authorized 50,000,000 shares;
outstanding 46,977,516 and 22,562,279
shares 46,978 22,563
Paid-in-capital 1,937,515 626,601
(Deficit) (2,003,126) (1,149,167)
---------- -----------
Total Stockholders'(Deficiency) (18,633) (500,003)
---------- ----------
TOTAL LIABILITIES AND STOCK-
HOLDERS'(DEFICIENCY) $ 937,673 $ 402,164
========== ==========
See notes to consolidated financial statements.
F-3
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ----------
Sales-net $ 354,030 $ 373,884 $ 367,111
---------- ---------- ----------
Cost and Expenses:
Cost of sales 344,225 366,840 429,311
Selling, general and
administrative 206,679 216,693 169,238
Research and development 351,058 19,171 15,037
Interest expense 297,442 72,047 75,368
Loss on sale of assets - - 24,200
Dividend income 18,065 - -
Loss on sale of marketable
securities 26,650 - -
---------- ---------- ----------
1,207,989 674,751 713,154
---------- ---------- ----------
Net (loss) $ (853,959) $ (300,867) $ (346,043)
========== ========== ==========
(Loss) per common share -
basic and diluted $ (.02) $ (.02) $ (.02)
========== ========== ==========
Weighted average number of
common shares outstanding -
basic and diluted 36,444,154 17,636,422 15,321,898
========== ========== ==========
See notes to consolidated financial statements.
F-4
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock
Shares Par Paid-In
Outstanding Value Capital (Deficit) Total
----------- ------ ------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance, January
1, 1997 as restated 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 officer
salary - - 50,000 - 50,000
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 common stock
for services, valued
at $.001 per share 3,970,000 3,970 - - 3,970
Net (loss) - - - (300,867) (300,867)
---------- ------ ------- ---------- --------
Balance, December
31, 1998 22,562,279 22,563 626,601 (1,149,167) (500,003)
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock
Shares Par Paid-In
Outstanding Value Capital (Deficit) Total
----------- ------ ------- --------- --------
<S> <C> <C> <C> <C> <C>
Forgiveness of officer
salary - - 50,000 - 50,000
Forgiveness of rent
obligation - - 50,000 - 50,000
Sale of common stock
(at $.0544 per share) 8,297,818 8,298 443,459 - 451,757
Conversion of debenture
(at $.0113-$.0562 per
share) 16,117,419 16,117 541,883 - 558,000
Conversion of debentures
to common stock at below
fair market value - - 202,100 - 202,100
Issuance of warrants
in connection with
loan financing - - 23,472 - 23,472
Net (loss) - - - (853,959) (853,959)
---------- ------- --------- ---------- ---------
Balance, December
31, 1999 46,977,516 $ 46,978 $1,937,515 $(2,003,126) $ (18,633)
========== ======= ========= ========== =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
Cash flows from operating
activities:
Net (loss) $(853,959) $(300,867) $ (346,043)
Adjustments to reconcile net
(loss) to net cash provided
by operating activities:
Depreciation 101,731 92,178 98,958
Loss on sale of fixed
assets - - 24,200
Non-cash rent expense 50,000 50,000 50,000
Non-cash compensation 50,000 50,000
Non-cash interest expense 225,572 3,183 5,800
Issuance of stock for services - 3,970 -
Loss on sale of marketable
securities 26,650 - -
Changes in operating assets
and liabilities 37,154 617 209,046
--------- --------- ---------
Net Cash Provided by
(Used in)Operating
Activities (362,852) (100,919) 41,961
--------- --------- ---------
Cash flows from investing acti-
vities:
Purchases of equipment (255,581) - (300,000)
Proceeds from sale of fixed
assets - - 250,000
Purchase of marketable
securities - - -
--------- --------- ---------
Net Cash (Used in) Pro-
vided by Investment
Activities (255,581) - (50,000)
--------- --------- ---------
Cash flows from financing acti-
vities:
Proceeds from sale of common
stock 451,757 107,321 -
Proceeds from sale of conver-
tible debentures 600,000 - 16,000
Repayment of borrowings (51,360) (32,035) (39,583)
Proceeds from officer loan 5,009 38,292 27,500
Proceeds from sale of
marketable securities 537,251 - -
Purchase of marketable
securities (563,901) - -
--------- --------- ---------
Net Cash Provided by
Financing Activities 978,756 113,578 3,917
--------- --------- ---------
(Continued)
See notes to consolidated financial statements.
F-7
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
Year Ended December 31,
-------------------------------------
1999 1998 1997
--------- -------- --------
Net Increase (Decrease) in Cash 360,323 12,659 (4,122)
Cash - beginning of year 17,350 4,691 8,813
--------- -------- --------
Cash - end of year $ 377,673 $ 17,350 $ 4,691
========= ======== ========
Changes in operating assets and
liabilities consist of:
(Increase) decrease in accounts
receivable $ 23,605 $ 4,830 $(16,046)
Decrease (increase) in inventory 20,740 (44,045) 2,213
Decrease (increase) in prepaid
expenses (18,236) 3,696 33
Decrease in other assets 2,555 2,555 102,554
Increase (decrease) in
accounts payable (1,189) (51,720) 59,835
Increase in accrued expenses 9,679 85,301 62,293
(Decrease) in due to
affiliated company - - (1,836)
--------- -------- --------
$ 37,154 $ (617) $209,046
========= ======== ========
Supplementary Information:
Cash paid during the year for:
Interest $ 13,933 $ 16,078 $ 27,128
========= ======== ========
Taxes $ 1,537 $ - $ 675
========= ======== ========
Non-Cash Financing Activities:
Conversion of
debt to common stock $ 558,000 $ 20,000 $ -
========= ======== =======
Fair value of rent
contributed by officer $ 50,000 $ 50,000 $ 50,000
========= ======== =======
Issuance of warrants $ - $ - $ 5,800
========= ======== =======
Capitalized lease obligations $ 50,000 $ - $ -
========= ======== =======
Issuance of stock for services $ - $ 3,970 $ -
========= ======== =======
Conversion of accrued interest
to common stock $ - $ 3,183 $ -
========= ======== =======
Forgiveness of officers
salary $ 50,000 $ 50,000 $ -
========= ======== =======
Conversion of debentures to
common stock $ 202,100 $ - $ -
========= ======== =======
Issue of warrants in
connection with loan financing $ 23,472 $ - $ -
========= ======== =======
See notes to consolidated financial statements.
F-8
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999
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 7 and 12, the Company was in default at December
31, 1999 and 1998 on its loan agreements and its capitalized lease obligations.
Additionally, the Company has incurred net losses of $854,000, $301,000, and
$346,000 for the years ended December 31, 1999, 1998 and 1997, respectively. As
of December 31, 1999, the Company has a stockholders' deficiency of $18,600 and
a working capital deficiency of $164,000. 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 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.
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.
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.
F-9
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Marketable Securities
The Company classifies its investment in equity securities net of
deferred income taxes as "available for sale", and accordingly, reflects
unrealized losses as a separate component of stockholders' equity (deficiency).
The fair value of marketable securities are estimated based on quoted
market prices. Realized gain or losses are based on the specific identification
method. The gross realized loss for the year ended December 31, 1999 was
approximately $26,000.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and 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.
The Company places its temporary cash investments with quality
financial institutions.
Inventories
Inventories, consisting of raw materials and finished goods, are stated
at the lower of cost (first-in, first-out) or market.
Revenue Recognition
Revenue from sales is recognized upon shipment to customers. Provision
for discounts and allowances to customers are provided for in the same period
the related sales are recorded.
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.
Income Taxes
Deferred taxes are provided to reflect the tax effect of temporary
differences between financial reporting and tax basis of assets and liabilities.
The principal item giving rise to deferred taxes is the net operating loss
carryforward. The Company has not reflected any benefit of such net operating
loss as the realization of this deferred tax asset is not more than likely.
F-10
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Allowance for Doubtful Accounts
The Company records bad debt expense on a specific customer basis. As
of December 31, 1999 and 1998 no allowance for doubtful accounts was deemed
necessary.
Stock Based Compensation
The Company has adopted the disclosure-only provisions of 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.
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, 1999, management concluded
that no impairment exists.
Loss Per Common Share
Basic earnings (loss) per common share is computed by dividing the net
loss by the weighted average number of common shares outstanding during the
year. Diluted earnings per common share is computed by dividing the net earnings
by the weighted average of common shares and potential common shares outstanding
during the year. Potential common shares outstanding at December 31, 1999, 1998
and 1997 related to 1,023,636, 108,000 and 120,000 warrants and convertible debt
to purchase common stock, respectively. During the three years ending December
31, 1999 potential common shares were not used in the computation of diluted
loss per share as their effect would be antidilutive.
Fair Value of Financial Instruments
For financial instruments including cash, accounts receivable, prepaid
expenses short-term debt, current portion of long-term debt, current portion of
capitalized leases, accounts payable and accrued expenses it was assumed that
the carrying amount approximated fair value because of the short term nature of
these instruments. The estimated fair values of convertible debt subject to fair
value disclosure was determined by multiplying the number of common shares the
debt is convertible into by the quoted market price of the Company's common
stock at December 31, 1999 and 1998, respectively.
F-11
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, December 31,
1999 1998
----------- -----------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Convertible debt $138,000 $42,000 $108,000 $5,000
New Financial Accounting Standards
In June 1998, The Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"). This statement establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires the recognition of
all derivatives as either assets or liabilities in the statement of financial
position and measurement of those instruments as either assets or liabilities in
the statement of financial position and measurement of those instruments at fair
value. The accounting for changes in the fair value of a derivative is dependent
upon the intended use of the derivative. SFAS No. 133 will be effective in the
Company's first quarter in the year ending December 31, 2001 and retroactive
application is not permitted. Management does not believe that this Statement
will have a significant impact on the Company.
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 for $300,000 cash. 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, 1999 were not material.
3. INVENTORIES
December 31,
-----------------------
1999 1998
---------- ---------
Raw materials $ - $ 4,760
Finished goods 32,296 48,276
--------- ---------
$ 32,296 $ 53,076
========= =========
4. PROPERTY AND EQUIPMENT
December 31,
-----------------------
1999 1998
---------- ----------
Machinery and equipment $ 846,900 $ 564,737
Leasehold improvements 55,608 32,190
--------- --------
902,508 596,927
Less accumulated depreci-
ation and amortization 428,308 326,577
--------- --------
$ 474,200 $ 270,350
========= ========
F-12
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES
At December 31, 1999, the Company has a net operating loss ("NOL")
carryforward of approximately $1,991,000 for financial reporting and tax
purposes expiring in the years 2009 through 2013. 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.
The types of temporary differences between the tax basis of assets and
liabilities and their financial reporting amounts that give rise to the deferred
tax liability and deferred tax asset and their approximate tax effect are as
follows:
December 31,
------------
1999 1998
---- ----
Temporary Tax Temporary Tax
Difference Effect Difference Effect
---------- ------- ---------- --------
Net operating loss $(2,003,000) $(812,000) $(1,099,000) $(440,000)
Valuation allowance 2,003,000 812,000 1,099,000 440,000
---------- ------- ---------- --------
$ - $ - $ - $ -
========== ======= ========== ========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes. At December 31, 1999 and 1998 the Company recorded a full
valuation allowance for the deferred tax assets as the Company's ability to
realize these benefits is not "more likely than not". Accordingly, there is no
deferred tax asset included in the accompanying consolidated balance sheets at
December 31, 1999 and 1998, respectively.
6. DEBT
Short-Term Debt
December 31,
---------------------
1999 1998
-------- ---------
Subordinated convertible deben-
tures to various individuals,
interest at 11% per year, due
on demand (1)(2) $ 96,000 $108,000
Subordinated convertible deben-
tures to various individuals,
interest at 2% per year, due
on March 17, 2000 (4) 42,000 -
------- -------
$138,000 $108,000
======= =======
F-13
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT (Continued)
Long-Term Debt
Long-term debt consists of the following:
December 31,
-----------------------
1999 1998
---------- ----------
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) $ 95,251 $ 129,968
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
-------- --------
128,354 163,071
Less amount due in one year 69,288 67,823
-------- --------
Long-term debt $ 59,066 $ 95,248
======== ========
(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 years ending
December 31, 1999 and 1998 the Company repaid $10,000 and $8,000 to various
stockholders, respectively on the subordinated convertible debentures which are
in default.
(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. For
the years ending December 31, 1999 and 1998 the Company repaid $2,000 and $-0-,
respectively on the subordinated convertible debentures which are in default.
F-14
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT (Continued)
(3) On December 31, 1999, the Company was in default under the terms of its 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).
(4) 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, to convert all or any amount of the debentures into
shares of the Company's Common Stock. 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 are amortized over the life of the related obligation.
Interest expense for the year ended December 31, 1999 is $36,750.
As of December 31, 1999 the holders of the debentures converted
$558,000 of the debentures into 16,117,419 shares of common stock. The
conversion price for the debentures was 75% of closing bid price upon
conversion. The Company recorded $186,000 of additional interest expense for the
year ended December 31, 1999 to reflect the conversion of the debentures below
the fair market value of the Company's common stock at the date of conversion
and is included in the accompanying statement of operations.
In February 2000, the remaining convertible debentures in the amount of
$42,000 were converted into 523,636 shares of common stock. An additional 37,690
shares were issued in lieu of interest in February 2000. The Company recorded
additional interest expense for the year ended December 31, 1999 to reflect the
interest at below market rate, in the amount of approximately $16,000 and is
included in the accompanying statement of operations.
F-15
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. NOTE PAYABLE TO OFFICER/STOCKHOLDER
December 31,
-------------------
1999 1998
--------------------
Note payable to officer/
stockholder, interest pay-
able at 6.5 % interest $237,801 $232,792
======= =======
8. RELATED PARTY TRANSACTIONS
(a) During the years ended December 31, 1999, 1998,and 1997, Hilal
advanced the Company $5,009, $38,292, and $27,500, and interest was accrued in
the amount of $15,334, $12,643, and $11,375, respectively. The note payable to
officer at December 31, 1999 and 1998 was $237,801 and $232,801, respectively.
(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 $50,000 for the years ended December 31, 1999, 1998 and 1997, has been
credited to additional paid-in capital.
(c) Hilal has forgiven his officers salary in the amount of $50,000 for
the years ended December 31, 1999 and 1998 and the Company has recorded the
forgiveness as a contribution to additional paid-in-capital.
9. MAJOR CUSTOMERS
The Company had sales in excess of ten (10%) percent with two (2)
customers in 1999 and 1998. The amounts and percentage were approximately
$217,000 (61.3%) and $80,000 (22.6%) in 1999 and $215,000 (55.7%) and $122,000
(31.6%) in 1998.
The loss of these customers could have a materially adverse effect on
the Company.
10. 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 1999 and 1998 are the same for both
reported and proforma amounts.
F-16
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. WARRANTS (Continued)
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 1999: dividend yield of -0- %,
expected volatility of 273.124%, risk free interest rate of 10.0% and expected
life of five (5) years..
Information regarding the Company's Warrants for 1999, 1998 and 1997 is
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Warrants outstanding
beginning of year 100,000 $ 1.50 120,000 $ 1.50 120,000 $ 1.50
Warrants granted 1,000,000 .08 - - - $ 1.50
Warrants exercised (500,000) .08 (20,000) 1.50 - -
--------- ----- -------- ----- ------- ------
Warrants outstanding
end of year 600,000 $ 1.50 100,000 $ 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 $ .08 $ 1.50 $ -
Weighted-average fair
value of warrants
granted during the year $ .08 $ - $ -
</TABLE>
The following table summarizes information about fixed-price stock
warrants outstanding at December 31, 1999:
<TABLE>
<CAPTION>
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 1999 Life Price 1999 Price
-------- ------------ ----------- -------- ------------ -------
<S> <C> <C> <C> <C> <C>
$ 1.50 100,000 1 yr. 11 mos. $ 1.50 100,000 $ 1.50
$ .08 500,000 4 yrs. 3 mos. $ .08 500,000 $ .08
------- -------
600,000 600,000
======= =======
</TABLE>
F-17
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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. The
Company has recorded the forgiveness of rent as a contribution to paid-in
capital. (See Note 5 of Notes to Consolidated Financial Statements). Under the
terms of the lease, the Company is responsible for real estate taxes and other
executory charges. The rent and executory charges for the years ended December
31, 1999, 1998 and 1997 were $67,541, $55,706, and $85,040, respectively.
(b) The Company leases equipment under capital leases. The cost of equipment in
the amount of $237,732 and accumulated depreciation of $106,238 is included in
property and equipment.
At December 31, 1999, the Company was in default with Colonial Pacific
Leasing 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. In addition, included
in accrued expense is $53,103 of interest expense for the year ended December
31, 1999.
Following is a schedule of future minimum lease payments for capital
leases as of December 31, 1999:
2000 $260,930
2001 12,572
2002 12,572
2003 12,572
2004 5,239
Thereafter -
-------
303,885
Less interest 121,401
-------
Present value of net
minimum obligations 182,484
Less current portion 145,804
-------
Long term obligation $ 36,680
=======
F-18
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES (Continued)
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) Commissions on gross sales over a period of ten (10) years as
defined in the agreement.
2) 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.
During 1999 and 1998, no amounts were earned under the terms of the
agreement.
F-19
<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.
August 21, 2000 CETEK TECHNOLOGIES, INC.
By: /s/ Fayiz Hilal
--------------------------------------
Fayiz Hilal, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date: August 21, 2000
By: /s/ Fayiz Hilal
--------------------------------------
Fayiz Hilal, President, Chief Executive
Officer and Director Chief Financial
Officer
Date: August 21, 2000
By: /s/ John Hilal
--------------------------------------
John Hilal, Vice Presidentof Operation
and Director
Date: August 21, 2000
By: /s/ Gordon Lane
--------------------------------------
Dr. Gordon Lane
Date: August 21, 2000
By: /s/ Richard Spriggs
--------------------------------------
Dr. Richard Spriggs
Date: August 21, 2000
By: /s/ Thomas C. Aposporas
--------------------------------------
Thomas C. Aposporas
Date: August 21, 2000
By: /s/ Ellen Tormey
--------------------------------------
Dr. Ellen Tormey
