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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT 3
TO
FORM 10-SB/A
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 84-0925366
--------- -----------
(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"), 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.
<PAGE>
The Company's relationships with these clients have accounted for approximately
80% of the Company's sales in 1998 and the first nine months of 1999. Pitney
Bowes accounted for 61.3% and 55.7% of the Company's revenues in 1999 and the
first nine months of 1998 respectively. Circon ACMI accounted for 22.6% and
31.6% of the Company's revenues in 1998 and the first nine months of 1999
respectively.
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
<PAGE>
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
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 November, 1999 the Company had 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 according to an electronic
customer's 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 laptop.) The ceramic is
used for (back panel of the display). With the increased interest in the
development of flat panel display, the industry has attracted federal
<PAGE>
investment. The Company also believes that the ceramic material back panel 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 products.
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.
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 its ability to offer a complete manufacturing
and service facility in one location.
Employees
As of November 1, 2000 the Company employees 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 of 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, $37,698 in the first
nine months of 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.
The 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
<PAGE>
of the Company's director's was a professor at this university, which provided
testing. The Company does not believe this relationship effected the validity of
the tests in any manner.
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.
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 remainder of 1999 and 2000 will be to explore the marketability of
product manufactured through the Cetek Process. The Company has held discussions
with several potential customers and supplied these potential customers with
samples. If it obtains 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
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
<PAGE>
$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.
- Year Ended 1999 Compared to Year Ended 1998
The Company had slightly more revenues in first quarter 2000 then in first
quarter 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. The Company
incurred a net loss of approximately $842,000 1999 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 ($86,627) as of June
30, 2000 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 has been treated as a capital
contribution.
The Company was only 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 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
$6,000,000 in the first nine months of 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.
<PAGE>
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,
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 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of October 31, 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.
<TABLE>
<CAPTION>
Beneficial
Shares of Percentage
Common Stock Ownership
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<S> <C> <C>
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 a group 10,472,000 (1) 18.95%
(a total of 6 persons)
</TABLE>
(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
<PAGE>
none of the shares owned by the Trust are included in the number of
shares owned by any of these beneficiaries.
ITEM 5. Directors, Executive Officers, Promoters and Control Persons
The directors and executive officers of the Company are as
follows;
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
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
</TABLE>
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 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
<PAGE>
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.
ITEM 6. 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 its
directors.
ITEM 7. 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 8. Description of Securities
General
The Company's authorized capital stock consists of 150,000,000 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
<PAGE>
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
non-assessable.
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.
<PAGE>
PART II
ITEM 1. 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
August 15, 1999
* 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.
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.
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.
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 March 17,
<PAGE>
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 price. The
notes were issued pursuant to 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.
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.
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.
<PAGE>
PART F/S
See Index to Financial Statements and Financial Statements attached hereto.
<PAGE>
Exhibits
--------
Exhibit No. Description
----------- -----------
3.1 CERTIFICATE OF INCORPORATION
<PAGE>
CETEK TECHNOLOGIES, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 1998 AND 1997
<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, 1998
and 1997 and June 30, 1999 (Unaudited) F-3
Consolidated Statements of Operations, Years
Ended December 31, 1998, 1997 and 1996 and
Six Months Ended June 30, 1999 and 1998 (Unaudited) F-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) F-5 - F-6
Consolidated Statements of Cash Flows, Years
Ended December 31, 1998, 1997 and 1996 and
Six Months Ended June 30, 1999 and 1998 (Unaudited) F-7 - F-9
Notes to Consolidated Financial Statements F-10 - F-19
<PAGE>
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
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, 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.
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
April 28, 1999 except for Note 1,
which is as of August 26, 1999
F-2
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
December 31, 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.
F-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 216,693 429,311 291,083 183,588 175,420
Selling, general and
administrative 166,693 169,238 213,357 228,175 108,261
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 --
------------ ------------ ------------ ------------ ------------
674,751 713,154 561,010 469,116 327,167
------------ ------------ ------------ ------------ ------------
Net (loss) $ (300,867) $ (346,043) $ (249,301) $ (305,176) $ (164,595)
============ ============ ============ ============ ============
(Loss) per common share -
basic $ (.02) $ (.02) $ (.02) $ (.01) $ (.01)
============ ============ ============ ============ ============
(Loss) per common share -
diluted $ (.02) $ (.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.
F-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)
Foregiveness 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 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)
(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 officer salaries 25,000 25,000
Forgiveness of rent
obligation -- -- 25,000 -- -- 25,000
Sale of common stock
(at $.0544per share) 8,297,818 8,298 443,459 -- -- 451.731
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) -- -- -- -- (305,176) (305,176) (305,176)
--------
Comprehensive income (loss) -- -- -- -- -- $(310,653) --
---------- ------- ---------- ------- ----------- ======== ---------
Balance, June 30, 1999 38,049,122 $38,050 $1,578,871 $(5,477) $(1,454,343) $ 157,101
========== ======= ========== ======= =========== =========
</TABLE>
See notes to consolidated financial statements.
F-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) $(300,867) $(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 50,000 5,800 -- -- 65,000
Non cash interest expense 116,000
Conversion of debt for stock 3,183 -- -- 116,000 --
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 acti-
vities:
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.
F-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 conver-
tible 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)
(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.
F-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)
<S> <C> <C> <C> <C> <C>
Supplementary Information:
Cash paid during the year for:
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.
F-9
<PAGE>
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE SIX MONTHS ENDED June 30, 1999 AND 1998
(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 of 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 June 30,
1999, December 31, 1998 and 1997 on its loan agreements and its capitalized
lease obligations. Additionally, the Company has incurred net losses of
$280,000, $251,000, $346,000, and $249,000 for the six months ended June 30,
1999 and 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 $1,052,000. 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.
F-10
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE SIX MONTHS ENDED June 30, 1999 AND 1998
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Revenue Recognition
Revenue from sales is recognized upon shipment to customers. Provisions for
discounts and allowances to customers are provided for in the same.
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.
The Company places its temporary cash investments with qualified financial
institutions.
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.
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.
F-11
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE SIX MONTHS ENDED June 30, 1999 AND 1998
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Income Taxes
Deferred income 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 or the realization of this deferred tax asset is not more than likely.
Allowance for Doubtful Accounts
The Company records bad debt expense on a specific customer basis. As of
December 31, 1998 and 1997 no allowance for doubtful accounts was deemed
necessary.
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.
Loss Per Common Share
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 were 100,000 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.
Fair Value of Financial Instruments
For financial instruments including accounts receivable, accounts payable
and accrued expenses and debt it was assumed that the carrying amount
approximated their carrying values because of the short term nature of these
instruments. The fair value of marketable securities are based on quoted market
prices. It is not practical to estimate the fair value of the non-publicly
traded long term debt.
F-12
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE SIX MONTHS ENDED June 30, 1999 AND 1998
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
New Financial Accounting Pronouncements
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.
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.
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 in cash. The assets purchased
consisted primarily of machinery and equipment and customer lists. 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.
3. MARKETABLE SECURITIES
<TABLE>
<CAPTION>
Gross Gross
Estimated Unrealized Unrealized
Cost Fair Value Gains Losses
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
June 30, 1999:
Mutual funds $507,007 $501,530 $ - $ 5,477
======== ======== ====== ========
4. INVENTORIES
December 31, June 30,
------------------------- ------------
1998 1997 1999
---------- ---------- ------------
Raw materials $ 4,760 $ 5,241 $ 8,760
Finished goods 48,276 3,750 64,892
---------- ---------- ----------
$ 53,076 $ 8,991 $ 73,652
========== ========== ==========
</TABLE>
F-13
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE SIX MONTHS ENDED June 30, 1999 AND 1998
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
4. INVENTORIES (CONTINUED)
<TABLE>
<CAPTION>
5. PROPERTY AND EQUIPMENT
December 31, June 30,
------------------------- ------------
1998 1997 1999
---------- ---------- ------------
<S> <C> <C> <C>
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>
6. 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.
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 appropriate tax effect are as
follows:
<TABLE>
<CAPTION>
December 31, June 30,
------------ --------
1998 1997 1999
---- ---- ----
Temporary Tax Temporary Tax Temporary Tax
Difference Effect Difference Effect Difference Effect
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Net operating
(loss) $(1,099,000) $(440,000) $(799,000) $(320,000) $(1,400,000) $(560,000)
Valuation
allowance 1,099,000 440,000 799,000 320,000 1,400,000 560,000
---------- ------- ---------- ------- ---------- ------
$ - $ - $ - $ - $ - $ -
========== ======= ========== ======= ========== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes. At June 30, 1999, December 31, 1998 and 1997 the Company recorded a
full valuation allowance for the deferred tax assets on the Company's ability to
realize these benefits is not "more likely then not". Accordingly, there is no
deferred tax asset included in the accompanying balance sheets at June 30, 1999,
December 31, 1998 and 1997, respectively.
F-14
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE SIX MONTHS ENDED June 30, 1999 AND 1998
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
7. DEBT
Short-Term Debt
<TABLE>
<CAPTION>
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
========== ========= ========
<CAPTION>
Long-Term Debt
Long-term debt consists of the following:
December 31, June 30,
------------------------- ------------
1998 1997 1999
----------- ---------- ------------
<S> <C> <C> <C>
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>
(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 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.
F-15
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE SIX MONTHS ENDED June 30, 1999 AND 1998
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
7. DEBT (CONTINUED)
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 the 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 13).
(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 at any time immediately following execution of the
agreement to convert all or any amount of the debenture into shares of Common
Stock, at $1.50 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. Interest
expense for the six months ended June 30, 1999 is $18,375.
As of June 30, 1999 the holders of the debentures converted $350,000 of the
debentures into 7,189,025 shares of common stock.
8. NOTE PAYABLE TO OFFICER/STOCKHOLDER
<TABLE>
<CAPTION>
December 31, June 30,
------------------------- ------------
1998 1997 1999
----------- ---------- ------------
<S> <C> <C> <C>
Note payable to officer/
stockholder, interest pay-
able at 6.5 % interest $232,792 $194,500 $232,792
</TABLE>
F-16
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE SIX MONTHS ENDED June 30, 1999 AND 1998
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
9. 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 $12,643, $11,375 and $2,606 respectively and $7,565 and $5,500 for
the period ending June 30, 1999 and 1998. The note payable to officer at June
30, 1999, December 31, 1998 and 1997 was $232,796, $237,792 and $194,500,
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 $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.
10. 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%) $104,000 (56.5%), $45,000 (26.5%) for the periods ending
June 30, 1999 and 1998 respectively and $215,000 (55.7%) and $122,000 (31.6%)
and $157,000 (42.8%) and $72,000 (29.6%) for the years ended December 31, 1998
and 1997 respectively.
The loss of these customers could have a materially adverse effect on the
Company.
11. 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.
12. 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.
F-17
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE SIX MONTHS ENDED June 30, 1999 AND 1998
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
12. 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 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> <C>
Warrants 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:
<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 1998 Life Price 1998 Price
-------- ------------ ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$ 1.50 100,000 2 yrs. 11 mos. $ 1.50 100,000 $ 1.50
</TABLE>
13. 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 Consolidated 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.
F-18
<PAGE>
CETEK TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
AND THE SIX MONTHS ENDED June 30, 1999 AND 1998
(INFORMATION FOR JUNE 30, 1999 AND 1998 IS UNAUDITED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 under the terms of
the 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
3) In the event of termination, death, sale or transfer of ownership of
the control of the Company, additional compensation shall be paid to Charles
Wright 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) 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 total compensation paid above.
During 1998 and 1997 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.
Date: September 25, 2000
CETEK TECHNOLOGIES, INC.
By: /s/ Fayiz Hilal
---------------------------
Fayiz Hilal, President
and Chief Executive Officer
