SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
AMENDMENT NO. 3
Registration Statement
Under
The Securities Act of 1933
DALRADA FINANCIAL CORPORATION
(FORMERLY IMAGING TECHNOLOGIES CORPORATION)
(Name of small business issuer in its charter)
DELAWARE 33-0021693
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7363
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(Primary Standard Industrial
Classification Code Number)
9449 Balboa Avenue, Suite 211, San Diego, California 92123
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(Address of principal executive offices) (Zip code)
Registrant's Address and Telephone number, including area code:
Brian Bonar
Chief Executive Officer
9449 Balboa Avenue, Suite 211
San Diego, CA 92123
(858) 451-6120
(Name, address and telephone number of Agent for Service)
Copies of communications to:
Owen Naccarato, Esq.
Naccarato & Associates
18301 Von Karman, Suite 430
Irvine, California 92612
(949) 851-9261
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of each class of Amount to be Proposed Proposed Exercise Proceeds to Amount of
securities to be registered (1) maximum maximum price per DRDF registration
registered offering aggregate share (2) fee
price per offering
share (2) price
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Common Shares, par value 228,571,429 (3) $0.007 $1,600,000 $202.72
$.005 underlying secured
convertible debenture
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Shares underlying warrant 16,000,000 $0.011 $176,000 $ 22.30
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Total Registration Fee 244,571,429 $225.02 (*)
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* Previously paid
1) Includes shares of our common stock, par value $0.005 per share, which
may be offered pursuant to this registration statement, which shares
are issuable upon conversion of a convertible debentures and the
exercise of warrants held by the selling stockholders. In addition to
the shares set forth in the table, the amount to be registered includes
an indeterminate number of shares issuable upon conversion of the
debentures and the exercise of the warrants as such number may be
adjusted as a result of stock splits, stock dividends and similar
transactions in accordance with Rule 416. The number of shares of
common stock registered hereunder represents a good faith estimate by
us of the number of shares of common stock issuable upon conversion of
the debentures and upon exercise of the warrants. For purposes of
estimating the number of shares of common stock to be included in this
registration statement, we calculated a good faith estimate of the
number of shares of our common stock that we believe will be issuable
upon conversion of the debentures to account for market fluctuations
and the number of shares of common stock that we believe will be
issuable upon exercise of the warrants to account for antidilution and
price protection adjustments. Should the conversion ratio of the
secured convertible debentures result in our having insufficient
shares, we will not rely upon Rule 416, but will file a new
registration statement to cover the resale of such additional shares
should that become necessary. In addition, should a decrease in the
exercise price as a result of an issuance or sale of shares below the
then current market price, result in our having insufficient shares, we
will not rely upon Rule 416, but will file a new registration statement
to cover the resale of such additional shares should that become
necessary.
(2) Estimated solely for the purpose of determining the registration fee.
(3) Includes a good faith estimate of the shares underlying the $800,000 in
convertible notes accounting for market fluctuations.
(4) Common stock issuable upon the conversion of warrants issued in
connection with the convertible note.
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The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effectiveness date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said section 8(a), may determine.
2
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED September 27, 2005
Dalrada Financial Corporation
244,571,429 Shares of Common Stock
This prospectus relates to the resale by the selling stockholders of up to
244,571,429 shares of Dalrada Financial Corporation's ("DRDF")(Formerly Imaging
Technologies Corporation) common stock, including up to 228,571,429 shares of
common stock underlying convertible notes in a principal amount of $800,000 and
up to 16,000,000 shares of common stock issuable upon the exercise of common
stock purchase warrants at $.0187 a share. The convertible notes are basically
convertible into common stock at the lower of $0.02 or 70% of the average of the
three lowest closing bid prices of the common stock on the principal market for
the sixty trading days before but not including the conversion date. The selling
stockholders may sell common stock from time to time in the principal market on
which the stock is traded at the prevailing market price or in negotiated
transactions. These selling stockholders may be deemed underwriters of the
shares of common stock which they are offering within the meaning of Section
2(a)(11) of the Securities Act. We will pay the expenses of registering these
shares.
Our Common Stock is registered under Section 12(g) of the Securities Exchange
Act of 1934 and is quoted on the OTC Bulletin Board under the symbol "DRDF.ob".
On September 23, 2005, the closing bid price of our Common Stock on the OTC
Bulletin Board was $.003.
INVESTING IN THESE SECURITIES INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is September 27, 2005
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
3
TABLE OF CONTENTS
Section Title Page
No.
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Summary of Information in the Prospectus 5
Risk Factors 7
Dividend Policy 12
Use of Proceeds 13
Market for Common Equity and Related Stockholder Matters 14
Management's Discussion and Analysis or Plan of Operations 16
Our Business 26
Management 30
Executive Compensation 32
Security Ownership of Certain Beneficial Owners and Management 34
Certain Relationships and Related Transactions 35
Description of Securities 36
Selling Stockholders 37
Plan of Distribution 39
Legal Proceedings 40
Experts 42
Legal Matters 42
Other Available Information 42
Financial Statements F-1
Indemnification 45
4
PROSPECTUS SUMMARY
This summary contains all material terms of the offering. To understand this
offering fully, you should read the entire document carefully. Please pay
particular attention to the section entitled "RISK FACTORS" and the section
entitled "Financial Statements". Unless otherwise indicated, this Prospectus
assumes that any of DRDF's outstanding options or warrants have not been
exercised into shares of DRDF's Common Stock.
DALRADA FINANCIAL CORPORATION
Dalrada Financial Corporation (OTCBB symbol: DRDF) ("DRDF" or the
"Company")(formerly Imaging Technologies Corporation) was incorporated in March
1982 under the laws of the State of California, and reincorporated in May 1983
under the laws of the State of Delaware. The Company's principal executive
offices are located at 17075 via Del Campo, San Diego, CA 92127. The Company's
main phone number is (858) 451-6120.
We provide a variety of financial services to small and medium-size
businesses. These services allow our customers to outsource many human resources
tasks, including payroll processing, workers' compensation insurance, health
insurance, employee benefits, 401k investment services, personal financial
management, and income tax consultation. In November 2001, we began to provide
these financial services that relieve existing and potential customers of the
burdens associated with personnel management and control. To this end, the
Company, through strategic acquisitions, became a professional employer
organization ("PEO").
DRDF provides financial services principally through its wholly-owned
SourceOne Group, Inc. ("SOG") subsidiary, which includes several operating
units, including ProSportsHR(TM), MedicalHR(TM), and, CallCenterHR(TM)
(established subsequent to June 30, 2003). These units provide a broad range of
financial services, including: benefits and payroll administration, health and
workers' compensation insurance programs, personnel records management, employer
liability management, and (in the case of MedicalHR and CallCenterHR), temporary
staffing services, to small and medium-sized businesses.
In January 2003, we completed the acquisition of a controlling interest
approximating 88% of the shares of Greenland Corporation. Greenland shares are
traded on the NASD Electronic Bulletin Board under the symbol GRLC. Greenland is
a financial services company, whose wholly-owned ExpertHR(TM) subsidiary
provides the same services as SOG. Greenland's wholly-owned Check Central, Inc.
subsidiary is an information technology company that has developed the Check
Central Solutions' transaction processing system software and related
MAXcash(TM) Automated Banking Machine(TM) (ABM(TM) kiosk designed to provide
self-service check cashing and ATM-banking functionality). At present, there is
no activity in this subsidiary; and management is evaluating its future.
Subsequently, in March 2004, we entered into an agreement with Greenland to
return most of our shares in Greenland in return for Greenland's forgiveness of
certain DRDF indebtedness and business opportunities. Also see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION -
ACQUISITIONS, DISPOSITIONS AND SALE OF BUSINESS UNITS."
In January 2003, we completed the acquisition of a controlling interest
(approximately 85%) in the shares of Quik Pix, Inc. ("QPI"). QPI shares are
traded on the National Quotation Bureau Pink Sheets(R) under the symbol QPIX.
QPI is a visual marketing support firm located in Buena Park, California. QPI's
major source of revenues is in developing and mounting photographic and digital
images for use in display advertising for tradeshows and customer building
interiors. QPI also has a proprietary product PhotoMotion(TM), which is a
patented, color medium of multi-image transparencies. The process uses existing
originals to create the illusion of movement, and allows for three to five
distinct images to be displayed with an existing lightbox.
In prior years, we were principally involved in the development and
distribution of imaging products. Our core technologies are related to the
design and development of software products that improve the accuracy of color
reproduction. Our ColorBlind(R) software provides color management to improve
the accuracy of color reproduction - especially as it relates to matching color
between different devices in a network, such as monitors and printers. These
products are now supported and distributed by QPI. Additionally, we market our
ColorBlind software products on the Internet through our color.com website.
5
THE OFFERING
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Securities Offered by Selling Shareholders Up to 244,571,429 including i) up to 228,571,429 shares of
common stock underlying convertible debentures (and 100%
reserve) in the aggregate amount of $800,000, and ii) up to
16,000,000 shares of common stock issuable upon the exercise
of purchase warrants at an exercise price per share of 110% of
the Closing trade price as reported by Bloomberg L.P. for the
OTC Bulletin Board for the trading day preceding but not
including the closing date.
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Common Stock Outstanding after the offering... Up to 991,675,358 Shares
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Offering Price The selling shareholders can sell the shares at any price.
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Use of Proceeds This prospectus relates to shares of DRDF's common stock that
may be offered and sold from time to time by the selling
stockholders. We will not receive any proceeds from the sale
of shares by the selling shareholders. However, we will
receive proceeds upon the exercise of any warrants that may be
exercised by the selling shareholders. These funds will be
used for ongoing operations.
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Market for our Common Stock Our Common Stock is quoted on the Over-the Counter Bulletin
Board, also called OTCBB, under the trading symbol "DRDF". The
market for our Common Stock is highly volatile. We can provide
no assurance that there will be a market in the future for our
Common Stock.
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The above information regarding common stock to be outstanding after the
offering is based on 747,103,929 shares of common stock outstanding as of August
31, 2005 and assumes the subsequent conversion of the $800,000 issued
convertible debenture and the exercise of warrants.
On December 17, 2003, DRDF entered into a Subscription Agreement for $800,000,
whereby we issued convertible debentures bearing 8% annual interest rate, to the
following: 1) $225,000 to Alpha Capital Aktiengesellschaft, 2) $200,000 to Gamma
Opportunity Capital Partners, LP, 3) $200,000 to the Longview Fund, L.P. and 4)
$150,000 to Stonestreet Limited Partnership. The convertible debentures can be
converted into shares of common stock with the conversion price per share being
the lower of (i) $.02 or (ii) seventy percent (70%) of the average of the three
lowest closing bid prices for the sixty (60) trading days prior to but not
including the conversion date for the common stock.
The holders of the 8% convertible debentures may not convert its securities into
shares of DRDF's common stock if after the conversion such holder would
beneficially own over 9.9% of the outstanding shares of DRDF's common stock. The
holder may waive this percent ownership restriction upon not less than 61 days
notice to DRDF. Since the number of shares of DRDF's common stock issuable upon
conversion of the debentures will change based upon fluctuations of the market
price of DRDF's common stock prior to a conversion, the actual number of shares
of DRDF's common stock that will be issued under the debentures owned by the
holders is based on a reasonable good faith estimate of the maximum amount
needed.
DRDF issued in conjunction with these convertible debentures warrants to
purchase 16,000,000 shares of common with at an exercise price of $.0187 per
share.
See the "Selling Stockholders" and "Risk Factors" sections for a complete
description of the secured convertible notes.
6
RISK FACTORS
AN INVESTMENT IN SHARES OF DRDF'S COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION, WHICH SUMMARIZES ALL
MATERIAL RISKS, TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, BEFORE YOU DECIDE TO BUY DRDF'S COMMON STOCK. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCUR, DRDF'S BUSINESS WOULD LIKELY SUFFER. IN THESE
CIRCUMSTANCES, THE MARKET PRICE OF DRDF'S COMMON STOCK COULD DECLINE, AND YOU
MAY LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR BUSINESS:
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IF WE ARE UNABLE TO SECURE FUTURE CAPITAL, WE WILL BE UNABLE TO CONTINUE OUR
OPERATIONS.
Our business has not been profitable in the past and it may not be profitable in
the future. We may incur losses on a quarterly or annual basis for a number of
reasons, some within and others outside our control. See "Potential Fluctuation
in Our Quarterly Performance." The growth of our business will require the
commitment of substantial capital resources. If funds are not available from
operations, we will need additional funds. We may seek such additional funding
through public and private financing, including debt or equity financing.
Adequate funds for these purposes, whether through financial markets or from
other sources, may not be available when we need them. Even if funds are
available, the terms under which the funds are available to us may not be
acceptable to us. Insufficient funds may require us to delay, reduce or
eliminate some or all of our planned activities.
To successfully execute our current strategy, we will need to improve our
working capital position. The report of our independent auditors accompanying
the Company's June 30, 2003 financial statements includes an explanatory
paragraph indicating there is a substantial doubt about the Company's ability to
continue as a going concern, due primarily to the decreases in our working
capital and net worth. The Company plans to overcome the circumstances that
impact our ability to remain a going concern through a combination of increased
revenues and decreased costs, with interim cash flow deficiencies being
addressed through additional equity financing.
IF OUR QUARTERLY PERFORMANCE CONTINUES TO FLUCTUATE, IT MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS.
Our quarterly operating results can fluctuate significantly depending on a
number of factors, any one of which could have a negative impact on our results
of operations. We may experience significant quarterly fluctuations in revenues
and operating expenses as we introduce new products and services. Accordingly,
any inaccuracy in our forecasts could adversely affect our financial condition
and results of operations. Demand for our products and services could be
adversely affected by a slowdown in the overall demand for imaging products
and/or financial and PEO services. Our failure to complete shipments during a
quarter could have a material adverse effect on our results of operations for
that quarter. Quarterly results are not necessarily indicative of future
performance for any particular period.
SINCE MANY OF OUR COMPETITORS HAVE GREATER FINANCIAL AND MARKETING RESOURCES
THAN WE DO, WE MAY EXPERIENCE A REDUCTION IN MARKET SHARE AND REVENUES.
The markets for our products and services are highly competitive and rapidly
changing. Some of our current and prospective competitors have significantly
greater financial, technical, and marketing resources than we do. Our ability to
compete in our markets depends on a number of factors, some within and others
outside our control. These factors include: the frequency and success of product
and services introductions by us and by our competitors, the selling prices of
our products and services and of our competitors' products and services, the
performance of our products and of our competitors' products, product
distribution by us and by our competitors, our marketing ability and the
marketing ability of our competitors, and the quality of customer support
offered by us and by our competitors.
The PEO industry is highly fragmented. While many of our competitors have
limited operations, there are several PEO companies equal or substantially
greater in size than ours. We also encounter competition from "fee-for-service"
companies such as payroll processing firms, insurance companies, and human
resources consultants. The large PEO companies have substantially more resources
than us and provide a broader range of resources than we do.
IF WE ACQUIRE COMPLEMENTARY BUSINESSES, WE MAY NOT BE ABLE TO EFFECTIVELY
INTEGRATE THEM INTO OUR CURRENT OPERATIONS, WHICH WOULD ADVERSELY AFFECT OUR
OVERALL FINANCIAL PERFORMANCE.
7
In order to grow our business, we may acquire businesses that we believe are
complementary. To successfully implement this strategy, we must identify
suitable acquisition candidates, acquire these candidates on acceptable terms,
integrate their operations and technology successfully with ours, retain
existing customers and maintain the goodwill of the acquired business. We may
fail in our efforts to implement one or more of these tasks. Moreover, in
pursuing acquisition opportunities, we may compete for acquisition targets with
other companies with similar growth strategies. Some of these competitors may be
larger and have greater financial and other resources than we do. Competition
for these acquisition targets likely could also result in increased prices of
acquisition targets and a diminished pool of companies available for
acquisition. Our overall financial performance will be materially and adversely
affected if we are unable to manage internal or acquisition-based growth
effectively. Acquisitions involve a number of risks, including: integrating
acquired products and technologies in a timely manner, integrating businesses
and employees with our business, managing geographically-dispersed operations,
reductions in our reported operating results from acquisition-related charges
and amortization of goodwill, potential increases in stock compensation expense
and increased compensation expense resulting from newly-hired employees, the
diversion of management attention, the assumption of unknown liabilities,
potential disputes with the sellers of one or more acquired entities, our
inability to maintain customers or goodwill of an acquired business, the need to
divest unwanted assets or products, and the possible failure to retain key
acquired personnel.
Client satisfaction or performance problems with an acquired business could also
have a material adverse effect on our reputation, and any acquired business
could significantly under perform relative to our expectations. We cannot be
certain that we will be able to integrate acquired businesses, products or
technologies successfully or in a timely manner in accordance with our strategic
objectives, which could have a material adverse effect on our overall financial
performance.
In addition, if we issue equity securities as consideration for any future
acquisitions, existing stockholders will experience ownership dilution and these
equity securities may have rights, preferences or privileges superior to those
of our common stock.
IF WE ARE UNABLE TO DEVELOP AND/OR ACQUIRE NEW PRODUCTS IN A TIMELY MANNER, WE
MAY EXPERIENCE A SIGNIFICANT DECLINE IN SALES AND REVENUES, WHICH MAY HURT OUR
ABILITY TO CONTINUE OPERATIONS.
The markets for our products are characterized by rapidly evolving technology,
frequent new product introductions and significant price competition.
Consequently, short product life cycles and reductions in product selling prices
due to competitive pressures over the life of a product are common. Our future
success will depend on our ability to continue to develop new versions of our
ColorBlind software, and to acquire competitive products from other
manufacturers. We monitor new technology developments and coordinate with
suppliers, distributors and dealers to enhance our products and to lower costs.
If we are unable to develop and acquire new, competitive products in a timely
manner, our financial condition and results of operations will be adversely
affected.
IF WE ARE FOUND TO BE INFRINGING ON A COMPETITOR'S INTELLECTUAL PROPERTY RIGHTS
OR IF WE ARE REQUIRED TO DEFEND AGAINST A CLAIM OF INFRINGEMENT, WE MAY BE
REQUIRED TO REDESIGN OUR PRODUCTS OR DEFEND A LEGAL ACTION AT SUBSTANTIAL COSTS
TO US.
We currently hold only one patent through our QPI subsidiary for its Photomotion
product. Our software products are copyrighted. However, copyright protection
does not prevent other companies from emulating the features and benefits
provided by our software. We protect our software source code as trade secrets
and make our proprietary source code available to OEM customers only under
limited circumstances and specific security and confidentiality constraints.
IF OUR DISTRIBUTORS REDUCE OR DISCONTINUE SALES OF OUR PRODUCTS, OUR BUSINESS
MAY BE MATERIALLY AND ADVERSELY AFFECTED.
Our products are marketed and sold through a distribution channel of value added
resellers, manufacturers' representatives, retail vendors, and systems
integrators. We have a small network of dealers and distributors in the United
States and internationally. We support our worldwide distribution network and
end-user customers through operations headquartered in San Diego.
Portions of our sales are made through distributors, who may carry competing
product lines. These distributors could reduce or discontinue sales of our
products, which could adversely affect us. These independent distributors may
not devote the resources necessary to provide effective sales and marketing
support of our products. In addition, we are dependent upon the continued
viability and financial stability of these distributors, many of which are small
8
organizations with limited capital. These distributors, in turn, are
substantially dependent on general economic conditions and other unique factors
affecting our markets.
INCREASES IN HEALTH INSURANCE PREMIUMS, UNEMPLOYMENT TAXES, AND WORKERS'
COMPENSATION RATES WILL HAVE A SIGNIFICANT EFFECT ON OUR FUTURE FINANCIAL
PERFORMANCE.
Health insurance premiums, state unemployment taxes, and workers' compensation
rates are, in part, determined by our PEO companies' claims experience, and
comprise a significant portion of our direct costs. We employ risk management
procedures in an attempt to control claims incidence and structure our benefits
contracts to provide as much cost stability as possible. However, should we
experience a large increase in claims activity, the unemployment taxes, health
insurance premiums, or workers' compensation insurance rates we pay could
increase. Our ability to incorporate such increases into service fees to clients
is generally constrained by contractual agreements with our clients.
Consequently, we could experience a delay before such increases could be
reflected in the service fees we charge. As a result, such increases could have
a material adverse effect on our financial condition or results of operations.
WE CARRY SUBSTANTIAL LIABILITY FOR WORKSITE EMPLOYEE PAYROLL AND BENEFITS COSTS.
Under our client service agreements, we become a co-employer of worksite
employees and we assume the obligations to pay the salaries, wages, and related
benefits costs and payroll taxes of such worksite employees. We assume such
obligations as a principal, not merely as an agent of the client company. Our
obligations include responsibility for (a) payment of the salaries and wages for
work performed by worksite employees, regardless of whether the client company
makes timely payment to us of the associated service fee; and (2) providing
benefits to worksite employees even if the costs incurred by us to provide such
benefits exceed the fees paid by the client company. If a client company does
not pay us, or if the costs of benefits provided to worksite employees exceed
the fees paid by a client company, our ultimate liability for worksite employee
payroll and benefits costs could have a material adverse effect on the our
financial condition or results of operations.
AS A MAJOR EMPLOYER, OUR OPERATIONS ARE AFFECTED BY NUMEROUS FEDERAL, STATE, AND
LOCAL LAWS RELATED TO LABOR, TAX, AND EMPLOYMENT MATTERS.
By entering into a co-employer relationship with employees assigned to work at
client company locations, we assume certain obligations and responsibilities or
an employer under these laws. However, many of these laws (such as the Employee
Retirement Income Security Act ("ERISA") and federal and state employment tax
laws) do not specifically address the obligations and responsibilities of
non-traditional employers such as PEOs; and the definition of "employer" under
these laws is not uniform. Additionally, some of the states in which we operate
have not addressed the PEO relationship for purposes of compliance with
applicable state laws governing the employer/employee relationship. If these
other federal or state laws are ultimately applied to our PEO relationship with
our worksite employees in a manner adverse to us, such an application could have
a material adverse effect on our financial condition or results of operations.
While many states do not explicitly regulate PEOs, over 20 states have passed
laws that have licensing or registration requirements for PEOs, and several
other states are considering such regulation. Such laws vary from state to
state, but generally provide for monitoring the fiscal responsibility of PEOs
and, in some cases, codify and clarify the co-employment relationship for
unemployment, workers' compensation, and other purposes under state law. There
can be no assurance that we will be able to satisfy licensing requirements of
other applicable relations for all states. Additionally, there can be no
assurance that we will be able to renew our licenses in all states.
THE MAINTENANCE OF HEALTH AND WORKERS' COMPENSATION INSURANCE PLANS THAT COVER
WORKSITE EMPLOYEES IS A SIGNIFICANT PART OF OUR BUSINESS.
The current health and workers' compensation contracts are provided by vendors
with whom we have an established relationship, and on terms that we believe to
be favorable. While we believe that replacement contracts could be secured on
competitive terms without causing significant disruption to our business, there
can be no assurance in this regard.
OUR STANDARD AGREEMENTS WITH PEO CLIENTS ARE SUBJECT TO CANCELLATION ON 60-DAYS
WRITTEN NOTICE BY EITHER THE COMPANY OR THE CLIENT.
Accordingly, the short-term nature of our client service agreements make us
vulnerable to potential cancellations by existing clients, which could
materially and adversely affect our financial condition and results of
9
operations. Additionally, our results of operations are dependent, in part, upon
our ability to retain or replace client companies upon the termination or
cancellation of our agreements.
A NUMBER OF PEO INDUSTRY LEGAL ISSUES REMAIN UNRESOLVED WITH RESPECT TO THE
CO-EMPLOYMENT AGREEMENT BETWEEN A PEO AND ITS WORKSITE EMPLOYEES, INCLUDING
QUESTIONS CONCERNING THE ULTIMATE LIABILITY FOR VIOLATIONS OF EMPLOYMENT AND
DISCRIMINATION LAWS.
Our client service agreement establishes a contractual division of
responsibilities between our clients and us for various personnel management
matters, including compliance with and liability under various government
regulations. However, because we act as a co-employer, we may be subject to
liability for violations of these or other laws despite these contractual
provisions, even if we do not participate in such violations. Although our
agreement provides that the client is to indemnify us for any liability
attributable to the conduct of the client, we may not be able to collect on such
a contractual indemnification claim, and thus may be responsible for satisfying
such liabilities. Additionally, worksite employees may be deemed to be our
agents, subjecting us to liability for the actions of such worksite employees.
IF THE SUPERIOR SECURITY INTEREST HELD BY IMPERIAL BANK IS REMOVED AND IF ALL OF
THE LAWSUITS CURRENTLY FILED WERE DECIDED AGAINST US AND/OR ALL THE JUDGMENTS
CURRENTLY OBTAINED AGAINST US WERE TO BE IMMEDIATELY COLLECTED, WE WOULD HAVE TO
CEASE OUR OPERATIONS.
Throughout fiscal 2001, 2002 and 2003, and through the date of this filing,
approximately fifty trade creditors have made claims and/or filed actions
alleging the failure of us to pay our obligations to them in a total amount
exceeding $3 million. These actions are in various stages of litigation, with
many resulting in judgments being entered against us. Several of those who have
obtained judgments have filed judgment liens on our assets. These claims range
in value from less than one thousand dollars to just over one million dollars,
with the great majority being less than twenty thousand dollars. Should we be
required to pay the full amount demanded in each of these claims and lawsuits,
we may have to cease our operations. However, to date, the superior security
interest held by Imperial Bank has prevented nearly all of these trade creditors
from collecting on their judgments.
IF OUR OPERATIONS CONTINUE TO RESULT IN A NET LOSS, NEGATIVE WORKING CAPITAL AND
A DECLINE IN NET WORTH, AND WE ARE UNABLE TO OBTAIN NEEDED FUNDING, WE MAY BE
FORCED TO DISCONTINUE OPERATIONS.
For several recent periods, up through the present, we had a net loss and
negative working capital, which raises substantial doubt about our ability to
continue as a going concern. Our losses have resulted primarily from an
inability to achieve revenue targets due to insufficient working capital. Our
ability to continue operations will depend on positive cash flow, if any, from
future operations and on our ability to raise additional funds through equity or
debt financing. Although we have reduced our work force, suspended some of our
operations, and entered into new market segments (financial services), if we are
unable to achieve the necessary revenues or raise or obtain needed funding, we
may be forced to discontinue operations.
IF AN OPERATIONAL RECEIVER IS REINSTATED TO CONTROL OUR OPERATIONS, WE MAY NOT
BE ABLE TO CARRY OUT OUR BUSINESS PLAN.
On August 20, 1999, at the request of Imperial Bank, our primary lender, the
Superior Court, San Diego appointed an operational receiver to us. On August 23,
1999, the operational receiver took control of our day-to-day operations. On
June 21, 2000, the Superior Court, San Diego issued an order dismissing the
operational receiver as a part of a settlement of litigation with Imperial Bank
pursuant to the Settlement Agreement effective as of June 20, 2000. The
Settlement Agreement requires that we make monthly payments of $150,000 to
Imperial Bank until the indebtedness is paid in full. This agreement does not
require us to pay any interest unless we default on the settlement agreement and
fail to cure the default. Regardless, we have continued to accrue interest on
this debt until it has been paid and there is no possibility that such interest
will become due and payable. However, in the future, without additional funding
sufficient to satisfy Imperial Bank and our other creditors, as well as
providing for our working capital, there can be no assurances that an
operational receiver may not be reinstated. If an operational receiver is
reinstated, we will not be able to expand our products nor will we have complete
control over sales policies or the allocation of funds.
The penalty for noncompliance of the Settlement Agreement is a stipulated
judgment that allows Imperial Bank to immediately reinstate the operational
receiver and begin liquidation proceedings against us. Our current arrangement
with CoAmerica Bank (formerly Imperial Bank) reduces are monthly payments of
$50,000. The remaining balance due as of June 30, 2004, is $3.1 million.
10
WE HAVE NOT REMAINED CURRENT IN OUR PAYMENT OF FEDERAL AND STATE INCOME AND
OTHER PAYROLL-RELATED TAXES WITHHELD IN OUR PEO BUSINESS.
We have not been able to remain current in our payments of federal and state tax
obligations related to our PEO operations. We are currently working with the
Internal Revenue Service and state agencies to resolve these issues and
establish repayment plans. If we are not able to establish repayment plans that
allow us to continue our operations, we may be forced to cease doing business in
the financial services marketplace. The amount due as of June 30, 2004 is
approximately $5.3 million.
RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENT:
----------------------------------------------------
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR CONVERTIBLE NOTES
COULD REQUIRE US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH WILL
CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
There are a large number of shares underlying the convertible note and warrants
in this offering that may be available for future sale and the sale of these
shares may depress the market price of DRDF's common stock and may cause
substantial dilution to DRDF's existing stockholders.
The number of shares of common stock issuable upon conversion of the convertible
note in this offering may increase if the market price of DRDF's stock declines.
All of the shares, including all of the shares issuable upon conversion of the
notes and debentures and upon exercise of DRDF's warrants, may be sold without
restriction. The sale of these shares may adversely affect the market price of
DRDF's common stock. The issuance of shares upon conversion of the convertible
notes and debentures and exercise of outstanding warrants will also cause
immediate and substantial dilution to DRDF's existing stockholders and may make
it difficult to obtain additional capital.
In addition, our obligation to issue shares upon conversion of our convertible
notes is essentially limitless. The following gives examples of the number of
shares that would be issued if the $800,000 of convertible notes in this
offering were converted at one time at prices representing 25%, 50%, and 75%
below the current market price (assuming a market price of $0.003). As of August
31, 2005, we had 747,103,929 shares of common stock outstanding.
Price With Number % of
% Below Per Discount of Shares Outstanding
Market Share at 30% Issuable Stock
--------- ---------- ---------- --------------- -----------
25% $0.00225 $0.00158 506,329,114 68%
50% $0.0015 $0.00105 761,904,762 102%
75% $0.00075 $0.00053 1,509,433,962 202%
SEE THE "SECURITY OWNERSHIP TABLE", DESCRIPTION OF SECURITIES AND THE
"SELLING SECURITY HOLDER TABLE" BEGINNING ON PAGE 31, 34 AND PAGE 35,
RESPECTIVELY, OF THIS PROSPECTUS.
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR CONVERTIBLE NOTES AND WARRANTS
THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS
THE MARKET PRICE OF OUR COMMON STOCK
As of August 31, 2005, we had 747,103,929 shares of common stock issued and
outstanding and convertible notes outstanding that may be converted into an
estimated 380,952,381 shares of common stock at the current market prices of
$.003, and outstanding warrants to purchase 16,000,000 shares of common stock.
In addition, the number of shares of common stock issuable upon conversion of
the outstanding convertible notes may increase if the market price of our stock
declines. All of the shares, including all of the shares issuable upon
conversion of the notes and upon exercise of our warrants, may be sold without
restriction. The sale of these shares may adversely affect the market price of
our common stock. As the market price declines, then the callable secured
convertible notes will be convertible into an increasing number of shares of
common stock resulting in dilution to our shareholders.
FUNDING BY ISSUING DEBT THAT CONVERTS AT EITHER A FIXED LOW PRICE OR AT A
DISCOUNT MAY HAVE THE EFFECT OF SETTING A CEILING ON YOUR STOCK AS THE INVESTORS
CONVERT AND SELL IN LARGE AMOUNTS.
11
Investors usually convert and sell at times when there is enough trading volume
to absorb blocks of stock without driving the price of the stock down. This
method of converting and selling into the market sometimes has the effect of
preventing the price of the stock to rise, resulting in a temporary ceiling in
the stock price. This ceiling has the possibility of remaining in place until
the convertible note holders have fully converted out of their convertible
notes.
RISKS RELATING TO OUR STOCK:
----------------------------
DRDF'S COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN DRDF'S SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN
DRDF'S STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN DRDF'S
STOCK.
DRDF's shares of Common Stock are "penny stocks" as defined in the Exchange Act,
which are quoted in the over-the-counter market on the OTC Bulletin Board. As a
result, an investor may find it more difficult to dispose of or obtain accurate
quotations as to the price of the shares of the Common Stock being registered
hereby. In addition, the "penny stock" rules adopted by the Commission under the
Exchange Act subject the sale of the shares of the Common Stock to certain
regulations which impose sales practice requirements on broker-dealers. For
example, broker-dealers selling such securities must, prior to effecting the
transaction, provide their customers with a document that discloses the risks of
investing in such securities. Included in this document are the following:
o The bid and offer price quotes for the penny stock, and the
number of shares to which the quoted prices apply.
o The brokerage firm's compensation for the trade.
o The compensation received by the brokerages firm's salesperson
for the trade.
In addition, the brokerage firm must send the investor:
o Monthly account statement that gives an estimate of the value
of each penny stock in your account.
o A written statement of your financial situation and investment
goals.
Legal remedies, which may be available to you, are as follows:
o If penny stocks are sold to you in violation of your rights
listed above, or other federal or state securities laws, you
may be able to cancel your purchase and get your money back.
o If the stocks are sold in a fraudulent manner, you may be able
to sue the persons and firms that caused the fraud for
damages.
o If you have signed an arbitration agreement, however, you may
have to pursue your claim through arbitration.
If the person purchasing the securities is someone other than an accredited
investor or an established customer of the broker-dealer, the broker-dealer must
also approve the potential customer's account by obtaining information
concerning the customer's financial situation, investment experience and
investment objectives. The broker-dealer must also make a determination whether
the transaction is suitable for the customer and whether the customer has
sufficient knowledge and experience in financial matters to be reasonably
expected to be capable of evaluating the risk of transactions in such
securities. Accordingly, the Commission's rules may limit the number of
potential purchasers of the shares of the Common Stock.
RESALE RESTRICTIONS ON TRANSFERRING "PENNY STOCKS" ARE SOMETIMES IMPOSED BY SOME
STATES, WHICH MAY MAKE TRANSACTIONS IN OUR STOCK CUMBERSOME AND MAY REDUCE THE
VALUE OF AN INVESTMENT IN OUR STOCK.
Various state securities laws impose restrictions on transferring "penny stocks"
and as a result, investors in the Common Stock may have their ability to sell
their shares of the Common Stock impaired. For example, the Utah Securities
Commission prohibits brokers from soliciting buyers for "penny stocks", which
makes selling them more difficult.
DRDF'S ABSENCE OF DIVIDENDS OR THE ABILITY TO PAY THEM PLACES A LIMITATION ON
ANY INVESTORS RETURN.
DRDF anticipates that for the foreseeable future, earnings will be retained for
the development of its business. Accordingly, DRDF does not anticipate paying
dividends on the common stock in the foreseeable future. The payment of future
dividends will be at the sole discretion of DRDF's Board of Directors and will
depend on DRDF's general business condition.
12
INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
--------------------------------------------
This Prospectus contains certain forward-looking statements, which involve
substantial risks and uncertainties. These forward-looking statements can
generally be identified because the context of the statement includes words such
as "may," "will," "except," "anticipate," "intend," "estimate," "continue,"
"believe," or other similar words. Similarly, this prospectus also contains
forward-looking statements about our future. Forward-looking statements include
statements about our:
Plans, Objectives, Goals, Strategies, Expectations for the future, Future
performance and events, Underlying assumptions for all of the above and other
statements, which are not statements of historical facts.
These forward-looking statements involve risks and uncertainties discussed in
the risk factor section (see page 7), which could cause our actual results to
materially differ from our forward-looking statements. We make these
forward-looking statements based on our analysis of internal and external
historical trends, but there can be no assurance that we will achieve the
results set forth in these forward-looking statements. Our forward-looking
statements are expressed in good faith and we believe that there is a reasonable
basis for us to make them.
We have no obligation to update or revise these forward-looking statements to
reflect future events.
USE OF PROCEEDS
---------------
DRDF will not receive any of the proceeds from the sale of the shares of common
stock offered by the selling shareholders under this prospectus. There are
warrants being issued with the current funding. If the warrants were exercised,
the maximum DRDF would receive are proceeds of approximately $240,000.
If the resale of the warrant shares fails to be registered pursuant to an
effective registration statement under the Securities Act, this warrant may
affect a cashless exercise, including a calculation of the number of shares of
Common Stock to be issued upon such exercise. In the event of a Cashless
Exercise, in lieu of paying the Exercise Price in cash, the holder shall
surrender this Warrant for that number of shares of Common Stock determined by
multiplying the number of Warrant Shares to which it would otherwise be entitled
by a fraction, the numerator of which shall be the difference between the then
current market price per share of the common stock and the exercise price, and
the denominator of which shall be the then current market price per share of
common stock. For example, if the holder is exercising 100,000 warrants with a
per warrant exercise price of $0.75 per share through a cashless exercise when
the Common Stock's current Market Price per share is $2.00 per share, the holder
will receive 62,500 shares of Common Stock.
The proceeds, if any, that DRDF receives from the exercise of warrants will be
used for working capital in support of the growing business.
The foregoing represents DRDF's current best estimate of our use of the proceeds
derived from the exercise of the warrants to purchase the shares of Common Stock
offered in this prospectus, if any, based upon our present plans, the state of
our business operations and current conditions in the industry in which we
operate. DRDF reserves the right to change the use of the proceeds if
unanticipated developments in our business, business opportunities, or changes
in economic, regulatory or competitive conditions, make shifts in the
allocations of proceeds necessary or desirable.
13
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Over-the Counter Bulletin Board, also
called the OTCBB, under the trading symbol "DRDF". The following table set forth
the quarterly high and low bid prices per share for our common stock. The bid
prices reflect inter-dealer prices, without retail markup, markdown, or
commission and may not represent actual transactions.
High Low
---- ---
Year ended June 30, 2002
First quarter $ 0.07 $ 0.03
Second quarter 0.02 0.05
Third quarter 0.05 0.01
Fourth quarter 0.04 0.01
Year ended June 30, 2003
First quarter $ 0.05 $ 0.01
Second quarter 0.04 0.01
Third quarter 0.02 0.01
Fourth quarter 0.02 0.01
Year ended June 30, 2004
First quarter $ 0.04 $ 0.01
Second quarter 0.04 0.02
Third quarter 0.02 0.01
Fourth Quarter 0.01 0.01
Year Ended June 30, 2005
First quarter $ 0.01 $ 0.01
Second quarter 0.00 0.00
Third quarter 0.00 0.00
Fourth quarter 0.00 0.00
As of August 31, 2005, there were approximately 498 registered
shareholders of DRDF's Common Stock and 747,103,929 shares issued and
outstanding.
DIVIDENDS
We have never declared nor paid any cash dividends on our common stock.
We currently intend to retain earnings, if any, after any payment of dividends
on our 5% Convertible Preferred Stock, for use in our business and therefore, do
not anticipate paying any cash dividends on our common stock.
Holders of the 5% Convertible Preferred Stock are entitled to receive,
when and as declared by the Board of Directors, but only out of amounts legally
available for the payment thereof, cumulative cash dividends at the annual rate
of $50.00 per share, payable semi-annually, commencing on October 15, 1986. DRDF
has never declared nor paid any cash dividends on the 5% Convertible Preferred
Stock. Dividends in arrears at June 30, 2004 were $421 thousand.
We do not anticipate paying dividends on the 5% Convertible Preferred
Stock in the near future. However, the 5% Convertible Preferred Stock is
convertible, at any time, into shares of DRDF common stock, at a price of $17.50
per common share. This conversion price is subject to certain anti-dilution
adjustments, in the event of certain future stock splits or dividends, mergers,
consolidations or other similar events. In addition, we shall reserve, and keep
reserved, out of our authorized but un-issued shares of common stock, sufficient
shares to effect the conversion of all shares of the 5% convertible preferred
stock.
On August 9, 2002, pursuant to shareholder authorization, we
implemented a 1-for-20 reverse split of our common stock. All share and per
share data in this Form 10-K have been retroactively restated to reflect Year
ended June 30, this Nine Months ended March 31, reverse stock split.
14
TRANSFER AGENT AND REGISTRAR
DRDF's transfer agent is Atlas Stock Transfer, 5899 South State Street,
Salt Lake City, Utah 54107, with phone number of (801) 266-7151
SUMMARY FINANCIAL INFORMATION
The summary historical financial data should be read in conjunction with the
financial statements (and notes thereto) of our Company and the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
Year ended June 30, Nine Months ended March 31,
2004 2003 2005 2004
----------- ----------- ----------- -----------
(Audited)* (Unaudited)
Gross Profit $ 3,224 $ 1,665 $ 2,005 $ 1,389
Total Operating Costs 4,196 5,623 2,870 4,006
----------- ----------- ----------- -----------
Loss from Operations (972) (3,958) (865) (2,617)
Provision for Income Taxes -- --
Other income (expenses), net 1,053 (2,918) 192 (543)
Discontinued Operations 2,997
Net income( Loss) $ 81 $ (6,876) $ (673) $ (163)
=========== =========== =========== ===========
Weighted average Common
Shares outstanding 331,004 97,153 635,914 292,602
=========== =========== =========== ===========
Net income (loss) per share $ 0.00 $ (0.07) $ (0.00) $ (0.00)
=========== =========== =========== ===========
Total Assets $ 2,852 $ 7,595 $ 3,810 $ 2,013
Total Liabilities $ 23,777 $ 31,575 $ 25,015 $ 24,037
Shareholders' equity $ (20,925) $ (23,980) $ (21,205) $ (22,524)
* AMOUNT IN THOUSANDS
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company
Annual Report on Form 10-KSB for the year ended June 30, 2004. The statements
contained in this Report on Form 10-QSB that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, including statements regarding our expectations, hopes, intentions
or strategies regarding the future. Forward-looking statements include
statements regarding: future product or product development; future research and
development spending and our product development strategies, and are generally
identifiable by the use of the words "may", "should", "expect", "anticipate",
"estimates", "believe", "intend", or "project" or the negative thereof or other
variations thereon or comparable terminology. Forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause our
actual results, performance or achievements (or industry results, performance or
achievements) expressed or implied by these forward-looking statements to be
materially different from those predicted. The factors that could affect our
actual results include, but are not limited to, the following: general economic
and business conditions, both nationally and in the regions in which we operate;
competition; changes in business strategy or development plans; our inability to
retain key employees; our inability to obtain sufficient financing to continue
to expand operations; and changes in demand for products by our customers.
GENERAL OVERVIEW
We provide a variety of financial, staffing, and human resources services to
small and medium-size businesses. These services allow our customers to
outsource many human resources tasks, including payroll processing, workers'
compensation insurance, health insurance, employee benefits, and investment
services. These financial services relieve existing and potential customers of
the burdens associated with personnel management and control.
DRDF provides services through its wholly-owned SourceOne Group, Inc. ("SOG"),
and Master Staffing subsidiaries; and through The Solvis Group, Inc., ("Solvis")
a 79%-owned subsidiary that includes several operating units, including
CallCenterHR(TM), Heritage Staffing, Worldwide of California, and M&M Nursing.
These companies and business units provide a broad range of financial services,
including: benefits and payroll administration, health and workers' compensation
insurance programs, personnel records management, employer liability management,
and temporary staffing services, to small and medium-sized businesses.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discuss our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, we evaluate our estimates and
judgments, including those related to allowance for doubtful accounts, value of
intangible assets and valuation of non-cash compensation. We base our estimates
and judgments on historical experiences and on various other factors that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The most significant
accounting estimates inherent in the preparation of our consolidated financial
statements include estimates as to the appropriate carrying value of certain
assets and liabilities which are not readily apparent from other sources,
primarily allowance for doubtful accounts, estimated fair value of equity
instruments used for compensation, estimated tax liabilities fro PEO operations
and estimated liabilities associated with Worker's Compensation liabilities.
These accounting policies are described at relevant sections in this discussion
and analysis and in the notes to the consolidated financial statements included
in our Annual Report on Form l0-KSB for the fiscal year ended June 30, 2004.
REVENUE RECOGNITION
PEO SERVICE FEES AND WORKSITE EMPLOYEE PAYROLL COSTS
----------------------------------------------------
We recognize any revenues associated with our PEO business pursuant to EITF
99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent." Our
revenues are reported net of worksite employee payroll cost (net method).
Pursuant to discussions with the Securities and Exchange Commission staff, we
16
changed our presentation of revenues from the gross method to an approach that
presents our revenues net of worksite employee payroll costs (net method)
primarily because we are not generally responsible for the output and quality of
work performed by the worksite employees.
In determining the pricing of the markup component of the gross billings, we
take into consideration our estimates of the costs directly associated with our
worksite employees, including payroll taxes, benefits and workers' compensation
costs, plus an acceptable gross profit margin. As a result, our operating
results are significantly impacted by our ability to accurately estimate,
control and manage our direct costs relative to the revenues derived from the
markup component of our gross billings.
Consistent with our revenue recognition policy, our direct costs do not include
the payroll cost of our worksite employees. Our direct costs associated with our
revenue generating activities are comprised of all other costs related to our
worksite employees, such as the employer portion of payroll-related taxes,
employee benefit plan premiums and workers' compensation insurance premiums.
SALES OF PRODUCTS
-----------------
Revenue is recognized when earned. Our revenue recognition policies are in
compliance with all applicable accounting regulations, including American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With
Respect to Certain Transactions. Revenue from products licensed to original
equipment manufacturers is recorded when OEMs ship licensed products while
revenue from certain license programs is recorded when the software has been
delivered and the customer is invoiced. Revenue from packaged product sales to
and through distributors and resellers is recorded when related products are
shipped. Maintenance and subscription revenue is recognized ratably over the
contract period. When the revenue recognition criteria required for distributor
and reseller arrangements are not met, revenue is recognized as payments are
received. Provisions are recorded for returns and bad debts. Our software
arrangements do not contain multiple elements, and we do not offer post contract
support.
TEMPORARY STAFFING
------------------
We record gross revenue for temporary staffing. We have concluded that gross
reporting is appropriate because we (i) have the risk of identifying and hiring
qualified employees, (ii) have the discretion to select the employees and
establish their price and duties and (iii) bear the risk for services that are
not fully paid for by customers. Temporary staffing revenues are recognized when
the services are rendered by our temporary employees. Temporary employees placed
by us are our legal employees while they are working on assignments. We pay all
related costs of employment, including workers' compensation insurance, state
and federal unemployment taxes, social security and certain fringe benefits. We
assume the risk of acceptability of our employees to our customers.
PLAN OF OPERATION
-----------------
Our short-term objectives include reducing debt and achieving positive cash flow
from operations. The infusion of new capital is expected to enable us to
renegotiate certain indebtedness, which can then be paid. We have been
increasing our internal organization to accommodate the recent growth of our
business, which has been characterized by an increased number of client
companies we serve and, by extension, an increase in the services we provide to
those employees. We believe we can fund these objectives out of anticipated
positive cash flow.
Our long-term objectives include (1) further reduction of debt with new capital;
and (2) expanding our sales, marketing and operational efforts in order to
achieve economies of scale that will reduce our dependence on growing our
internal organization and provide greater operational profitability to our
business.
RESULTS OF OPERATIONS
ANALYSIS IN THOUSANDS ($000)
----------------------------
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
-------------------------------------------------------------------------------
17
REVENUES
Total revenues were $5,449 and $3,488 for the three months ended March 31, 2005
and 2004, respectively; an increase of $1,961 (56%). The increase was due
primarily to the addition of temporary staffing services, which contributed
$4,095 of revenues for the three months ended March 31, 2005 compared to $2,892
for the three months ended March 31, 2004 and an increase in PEO service revenue
which was $1,208 for the three months ended March 31, 2005 compared to $475 for
the same period in 2004.
PEO SERVICES
PEO revenues were $1,208 and $475 for the three months ended March 31, 2005 and
2004, respectively; an increase of $733 (154%) due primarily to the increase in
our PEO customer base.
TEMPORARY STAFFING
In September 2003, we entered into an agreement to purchase a temporary staffing
business through the organization of CallCenterHR and MedicalHR and the
acquisition of Jackson Staffing. In June 2004, we entered into an agreement to
purchase certain assets of M&M Nursing, a temporary staffing agency for nurses.
Temporary Staffing revenues were $4,095 and $2,892 for the three months ended
March 31, 2005 and 2004, respectively; an increase of $1,203 (42%). The
significant increase is due to the acquisition of Jackson Staffing and M&M
Nursing.
PRODUCTS
Sales of products were generated principally from our QPI subsidiary. Products
revenues were $137 and $91 for the three months ended March 31, 2005 and 2004,
respectively; an increase of $46 (51%). The increase is principally due to
additional sales of photographic and digital images though our QPI subsidiary.
SOFTWARE
Software revenues were $9 and $30 for the three months ended March 31, 2005 and
2004, respectively; a decrease of $21 (70%). Revenues from licenses and
royalties for the periods were insignificant.
Royalties and licensing fees vary from quarter to quarter and are dependent on
the sales of products sold by OEM customers using our technologies. These
revenues continue to decline as we have elected to transfer our ColorBlind
software to QPI, which has accelerated product development and begun to
implement a more aggressive product sales program.
COST OF PRODUCTS SOLD
Cost of PEO services for the three months ended March 31, 2005 and 2004 $1,088
(90% of PEO revenues) and $384 (81% of PEO revenues), respectively. The decrease
in gross profit is due primarily to us incurring additional employee benefit
related costs.
Costs of temporary staffing for the three months ended March 31, 2005 and 2004
was $3,591 (88% of temporary staffing revenue) and $2,663 (92% of temporary
staffing revenue), respectively.
Cost of products sold for the three months ended March 31, 2005 and 2004 were
$23 (17% of product sales) and $28 (31% of product sales), respectively.
Cost of software, licenses and royalties for the three months ended March
31,2005 and 2004 were $1 (11% of software, license and royalties revenue) and $0
(0% of software, license and royalties revenue), respectively.
OPERATING EXPENSES
Operating expenses have consisted primarily of salaries and commissions of sales
and marketing personnel, salaries and related costs for general corporate
functions, including finance, accounting, facilities and legal, advertising,
rent, depreciation and amortization, and other marketing related expenses, and
fees for professional services.
Operating expenses for the three months ended March 31, 2005 and 2004 were $904
and $(71), respectively; an increase of $975. As disclosed in "Significant
Accounting Policies and Estimates", we rely on estimates for such liabilities
related to, among other areas, worker's compensation and accrued payroll taxes.
18
During the three month period ended March 31, 2004, we changed our estimate of
workers' compensation and accrued payroll taxes, which resulted in a negative
cost of PEO operations. The cumulative changes in estimates for these accounts
aggregated approximately $1.2 million in the quarterly period ended March 31,
2004.
OTHER INCOME AND EXPENSE
Interest expense and financing costs for the three months ended March 31, 2005
and 2004 was $394 and $434 respectively; a decrease of $40 (9%). The decrease is
principally due to the write off of the unamortized debt discounts associated
with the conversion of debentures into common stock for the three months ended
March 31, 2004 (there were no conversion during the three months ended March
31,2005) offset by an increase due to the amount of debt outstanding.
GAIN ON EXTINGUISHMENT OF DEBT
Gain on the extinguishment of debt was $165 and $228 for the three months ended
March 31, 2005 and 2004, respectively. The amounts related to accounts payable,
which had become stale and uncollectible under the Statute of Limitations in the
State of California and upon obtaining a legal opinion with respect to the State
of California Statute of Limitations.
GAIN FROM RECONCILIATION OF PAYROLL TAX LIABILITES TO TAXING AUTHORITIES
During the three months ended March 31, 2005, we recorded as other income an
adjustment of accrued PEO payroll taxes payable of $454 resulting from
reconciliations of certain liabilities with the Internal Revenue Service and
certain State taxing authorities of amounts due for delinquent payment of
payroll tax liabilities. We continually updates our estimate of the amount due
related to delinquent payroll taxes and penalties as we receive correspondence
or settlement agreements with the Internal Revenue Service and State taxing
authorities.
NINE MONTHS ENDED MARCH 31, 2005 COMPARED TO NINE MONTHS ENDED MARCH 31, 2004
-----------------------------------------------------------------------------
REVENUES
Total revenues were $14,323 and $9,485 for the nine months ended March 31, 2005
and 2004, respectively; an increase of $4,838 (51%). The principal reason for
the increase is due to a full nine months of revenue from our temporary staffing
division for the nine months ended March 31, 2005 as compared to only seven
months for the same period in 2004.
PEO SERVICES
PEO revenues were $2,058 and $2,545 for the nine months ended March 31, 2005 and
2004, respectively; a decrease of $487 (19%) due primarily to the decrease in
our PEO customer base in the first half of fiscal 2005 offset by an increase in
the third fiscal quarter.
TEMPORARY STAFFING
In September 2003, we entered into an agreement to purchase a temporary staffing
business through the organization of CallCenterHR and MedicalHR and the
acquisition of Jackson Staffing. In June 2004, we entered into an agreement to
purchase certain assets of M&M Nursing, a temporary staffing agency for nurses.
Temporary Staffing revenues were $11,749 and $6,328 for the nine months ended
March 31, 2005 and 2004, respectively; an increase of $5,421 (86%). The
significant increase is due to the acquisition of Jackson Staffing and M&M
Nursing.
PRODUCTS
Sales of products were generated principally from our QPI subsidiary. Products
revenues were $468 and $546 for the nine months ended March 31, 2005 and 2004,
respectively; a decrease of $78 (14%).
SOFTWARE
Software revenues were $48 and $66 for the nine months ended March 31, 2005 and
2004, respectively; a decrease of $18 (27%). Revenues from licenses and
royalties for the periods were insignificant.
19
Royalties and licensing fees vary from quarter to quarter and are dependent on
the sales of products sold by OEM customers using our technologies. These
revenues continue to decline as we have elected to transfer our ColorBlind
software to QPI, which has accelerated product development and begun to
implement a more aggressive product sales program.
COST OF PRODUCTS SOLD
Cost of PEO services for the nine months ended March 31, 2005 and 2004 $1,716
(83% of PEO revenues) and $2,280 (90% of PEO revenues), respectively. The
increase in gross profit is due primarily to us being able to provide more
profitable services to our PEO customers, offset by higher employee benefit
costs in the quarter ended March 31, 2005.
Costs of temporary staffing for the nine months ended March 31, 2005 and 2004
was $10,539 (90% of temporary staffing revenue) and $5,657 (89% of temporary
staffing revenue), respectively. The significant increase is due to the increase
in temporary staffing revenue.
Cost of products sold for the nine months ended March 31, 2005 and 2004 were $59
(13% of product sales) and $156 (29% of product sales), respectively.
Cost of software, licenses and royalties for the nine months ended March 31,
2005 and 2004 were $4 (8% of software, license and royalties revenue) and $3
(5%of software, license and royalties revenue), respectively.
OPERATING EXPENSES
Operating expenses for the nine months ended March 31, 2005 and 2004 were $2,870
and $4,006, respectively; a decrease of $1,136 (28%). The decrease is due to a
reduction of payroll and related benefits due to a significant reduction in our
personnel. Also, as disclosed in "Significant Accounting Policies and
Estimates", we rely on estimates for such liabilities related to, among other
areas, worker's compensation and accrued payroll taxes. During the nine months
ended March 31, 2005, we changed our estimate of workers' compensation claims
aggregating approximately $700 and $1,200 for the nine months ended March 31,
2005 and 2004, respectively.
OTHER INCOME AND EXPENSE
Interest expense and financing costs for the nine months ended March 31, 2005
and 2004 was $1,208 and $1,363 respectively; a decrease of $155 (11%). The
decrease is principally due to the write off of the unamortized debt discounts
associated with the conversion of debentures into common stock for the nine
months ended March 31, 2004 (there were fewer conversions during the nine months
ended March 31, 2005) offset by an increase due to the amount of debt
outstanding.
GAIN ON EXTINGUISHMENT OF DEBT
Gain on the extinguishment of debt was $425 and $853 for the nine months ended
March 31, 2005 and 2004,, respectively. The amounts related to accounts payable,
which had become stale and uncollectible under the Statute of Limitations in the
State of California and upon obtaining a legal opinion with respect to the State
of California Statute of Limitations.
GAIN FROM RECONCILIATION OF PAYROLL TAX LIABILITES TO TAXING AUTHORITIES
During the nine months ended March 31, 2005, we recorded as other income an
adjustment of accrued PEO payroll taxes payable of $990 resulting from
reconciliations of certain liabilities with the Internal Revenue Service and
certain State taxing authorities of amounts due for delinquent payment of
payroll tax liabilities. We continually updates our estimate of the amount due
related to delinquent payroll taxes and penalties as we receive correspondence
or settlement agreements with the Internal Revenue Service and State taxing
authorities.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations primarily through cash generated
from operations, debt financing, and the sale of equity securities.
Additionally, in order to facilitate our growth and future liquidity, we have
made some strategic acquisitions.
20
As a result of some of our financing activities, there has been a significant
increase in the number of issued and outstanding shares. During the nine months
ended March 31, 2005 and the year ended June 30, 2004, we issued an additional
130,037,455 and 371,126,679 shares, respectively. These shares of common stock
were issued primarily for corporate expenses in lieu of cash, for acquisition of
businesses, for the conversion of convertible debentures and other debt, and for
the exercise of warrants.
As of March 31, 2005, we had negative working capital of $22,113, a decrease in
working capital of $245 since June 30, 2004.
Net cash used in operating activities was $186 for the nine months ended March
31, 2005 as compared to net cash used in activities of $1,560 for the prior-year
period; a decrease of $1,374.
Cash provided by financing activities was $400 for the nine months ended March
31, 2005, a decrease of $294 from the prior-year period.
We have no material commitments for capital expenditures. Our 5% convertible
preferred stock (which ranks prior to our common stock), carries cumulative
dividends, when and as declared, at an annual rate of $50 per share. The
aggregate amount of such dividends in arrears at March 31, 2005, was
approximately $498.
Our capital requirements depend on numerous factors, including market acceptance
of our products and services, the resources we devote to marketing and selling
our products and services, and other factors. The report of our independent
auditors accompanying our June 30, 2004 financial statements includes an
explanatory paragraph indicating there is a substantial doubt about our ability
to continue as a going concern, due primarily to the decreases in our working
capital and net worth.
CONTINGENT LIABILITY
--------------------
The Company accrues and discloses contingent liabilities in its consolidated
financial statements in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 5, Accounting for Contingencies. SFAS No. 5 requires
accrual of contingent liabilities that are considered probable to occur and that
can be reasonably estimated. For contingent liabilities that are considered
reasonably possible to occur, financial statement disclosure is required,
including the range of possible loss if it can be reasonably determined. The
Company has disclosed in its audited financial statements several issues that it
believes are reasonably possible to occur, although it cannot determine the
range of possible loss in all cases. As these issues develop, the Company will
continue to evaluate the probability of future loss and the potential range of
such losses. If such evaluation were to determine that a loss was probable and
the loss could be reasonably estimated, the Company would be required to accrue
its estimated loss, which would reduce net income in the period that such
determination was made.
Off-Balance Sheet Arrangements
------------------------------
There are no off balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors, except
for the following.. As of September 8, 2004, Warning Management Services, Inc.
("Warning") purchased all of the issued and outstanding shares of Employment
Systems, Inc. ("ESI") for $1,500. The purchase was $750 cash paid at the closing
and a $750 note payable. In connection with this transaction, the Company agreed
to be a guarantor of the $750 note payable. Our CEO, Brian Bonar, is also the
CEO of Warning. As inducement to enter into this guarantee, we were given a
non-cancelable 2-year payroll processing contract with ESI. Currently the $750
note payable is in dispute. Warning is claiming that certain representations
made by ESI were not correct and is proposing that the purchase price be
reduced, thus reducing the $750 note payable to $258. Management has evaluated
this contingent liability and has determined that no loss is anticipated as a
result of this guarantee.
We have no material commitments for capital expenditures. Our 5% convertible
preferred stock (which ranks prior to our common stock), carries cumulative
dividends, when and as declared, at an annual rate of $50 per share. The
aggregate amount of such dividends in arrears at December 31, 2004, was
approximately $473.
Our capital requirements depend on numerous factors, including market acceptance
of our products and services, the resources we devote to marketing and selling
our products and services, and other factors. The report of our independent
auditors accompanying our June 30, 2004 financial statements includes an
21
explanatory paragraph indicating there is a substantial doubt about our ability
to continue as a going concern, due primarily to the decreases in our working
capital and net worth.
The important matters on which DRDF focuses in evaluating its financial
condition and operating performance are as follows: 1) since we are a cash
driven business, the speed in which cash is collected from our clients is
crucial, and 2) since our margins are thin, the volume of our business is
important, therefore acquiring new businesses and/or clients is very important.
The fixed and ongoing expenses of DRDF are as follows:
------------------------------------------------------
Current Liabilities:
--------------------
a) Borrowings under bank notes payable: This represents a bank note that is past
due. We do not have the funds to currently satisfy this note. Dalrada intends to
seek in the future, additional long term financing with the goal to negotiate
and settle a substantial portion of the liabilities.
b) Lines of credit: The lines of credit are secured by the accounts receivable
and will be paid as the receivables are collected.
c) Notes payable current portion: This consists of $1.5 million due to the
Dalrada's former chairman. We do not have the funds to currently satisfy this
note. The remaining balance consists of $275K due a third party and $842K
consists of various term loans obtained from banks by our various operating
subsidiaries. It is the intention of management to pay approximately half of
these down over time and to negotiate some sort of settlement on the remaining
half.
d) Convertible debt: These will be converted into equity.
e) Accounts payable: Half of these are over four years old and will most likely
be written off in the future and the remaining will be paid and/or a negotiated
settlement will be reached.
f) Obligations under capital lease: This is a company car and will be paid
according to the terms.
g) PEO payroll taxes and other payroll deductions: Dalrada is liable for this
amount and is currently negotiating payment schedules with the Internal Revenue
Service and various state taxing authorities.
Estimated future cash requirements ($000)
-----------------------------------------
DRDF's estimate of net cash requirements for operating costs for the next twelve
months subsequent to March 31, 2005, is approximately $3,282 a month for a
twelve total of $ 39,390. The Estimate of cash inflow from operations for that
same time period is estimated to be approximately $ 40,552. The excess cash will
be used for the paydown of certain current liabilities as addressed above.
DRDF received funding from a private placement on December 17, 2003, issuing
$800 of convertible notes resulting in net proceeds to the Company of
approximately $681. The terms of the notes provide that the convertible
debentures can be converted into shares of common stock with the conversion
price per share being the lower of (i) $.02 or (ii) seventy percent (70%) of the
average of the three lowest closing bid prices for the sixty (60) trading days
prior to but not including the conversion date for the common stock
DRDF'S future capital requirements will depend on numerous factors, including:
1) keeping existing and adding on new clients, 2) cash collection from clients
and 3) the successful negotiation and paydown of our current liabilities.
However, we will most likely need an additional capital contribution in the
future therefore may need to seek one or more substantial new investors. We
anticipate a need to raise up to $3 million in the next few years for the
purpose of retiring outstanding debt. These new investors could cause
substantial dilution to existing stockholders.
22
YEAR ENDED JUNE 30, 2004 COMPARED TO YEAR ENDED JUNE 30, 2003
-------------------------------------------------------------
Revenues
Total revenues were $13,526 and $3,790 for the years ended June 30, 2004 and
2003, respectively; an increase of $9,736 (257%). The increase was due primarily
to the addition of temporary staffing services, which contributed $10,119 of
revenues for the year ended June 30, 2004.
PEO Services
PEO revenues were $2,607 and $2,499 for the years ended June 30, 2004 and 2003,
respectively; an increase of $108 (4%) due primarily to the small increase in
our PEO customer base.
Temporary Staffing
In September 2003, we entered into an agreement to purchase a temporary staffing
business through the organization of CallCenterHR and MedicalHR and the
acquisition of Jackson Staffing. There were no revenues from temporary staffing
in the 2003 fiscal year and $10,119 for the year ended June 30, 2004.
Imaging Products
Sales of imaging products were generated principally from our QPI subsidiary.
Imaging Products revenues were $764 and $924 for the years ended June 30, 2004
and 2003, respectively; a decrease of $160 (17%) due primarily to the decrease
in product sales as a result of the suspension of sales and marketing activities
associated with the resale of office products in order to concentrate on color
management products and services, including ColorBlind software and PhotoMotion
Images.
Software
Software revenues were $36 and $367 for the years ended June 30, 2004 and 2003,
respectively; a decrease of $331 (90%). The reduction in software revenues was
due to a delay in completing certain versions of our software which can be used
with multiple computer operating systems. Revenues from licenses and royalties
for the periods were insignificant.
Royalties and licensing fees vary from quarter to quarter and are dependent on
the sales of products sold by OEM customers using our technologies. These
revenues continue to decline as we have elected to transfer our ColorBlind
software to QPI, which has accelerated product development and begun to
implement a more aggressive product sales program.
COST OF PRODUCTS SOLD
Cost of PEO services for the years ended June 30, 2004 and 2003 $894 (34% of PEO
revenues) and $1,639 (66% of PEO revenues), respectively. The increase in gross
profit is due primarily to us being able to provide more profitable services to
our PEO customers.
Costs of temporary staffing for the years ended June 30, 2004 was $9,209 (91% of
temporary staffing revenue). There was no such cost of revenues in the
prior-year period.
Cost of products sold for the year ended June 30, 2004 and 2003 were $196 (26%
of product sales) and $396 (43% of product sales), respectively. Product sales
continue to decline as we concentrate on other products and services. The
increase in margins is due primarily to changes in product mix and our
competitive position with customers.
Cost of software, licenses and royalties for the years ended June 30, 2004 and
2003 were $3 and $90, respectively The decrease is due primarily to decreased
business activity while awaiting the completion of new releases of ColorBlind
software. This represented 8% of revenue in 2004 and 25% of revenue in 2003.
23
OPERATING EXPENSES
Operating expenses have consisted primarily of salaries and commissions of sales
and marketing personnel, salaries and related costs for general corporate
functions, including finance, accounting, facilities and legal, advertising,
rent, depreciation and amortization, and other marketing related expenses, and
fees for professional services.
Operating expenses for the years ended June 30, 2004 and 2003 were $4,196 and
$5,623, respectively; a decrease of $1,427 (25%). The significant decrease is
due to a reduction of payroll and related benefits of $1,491 due to a
significant reduction in our personnel. Also, as disclosed in "Significant
Accounting Policies and Estimates", we rely on estimates for such liabilities
related to, among other areas, worker's compensation and accrued payroll taxes.
During the year ended June 30, 2004, we changed our estimate of workers'
compensation and accrued payroll taxes aggregating approximately $2,500, which
resulted in a negative general and administrative expenses. These reduction in
operating expenses were offset by an increase in consulting expenses of $843 due
to us using outside consultants since we have reduce the number of full-time
personnel.
OTHER INCOME AND EXPENSE
Other income and expense, net for the years ended June 30, 2004 and 2003 was
$1,923 and $1,028 respectively; an increase in other expenses of $895 (87%) The
increase is principally due to a decrease in other income resulting from the
gain on the settlement of debt. For the years ended June 30, 2004 and 2003, the
gain on the settlement of debt was $1,145 and $2,343, respectively; a decrease
of $1,198 (51%) These gains are principally due to the write off of old, stale
accounts payable that our attorneys have advised us that we have been released
from these obligations. Pursuant to an opinion provided by counsel, we elected
to record these gains pursuant to the Statute of Limitations in the State of
California. Interest expense for the years ended June 30, 2004 and 2003 was
$1,930 and $1,493 respectively; an increase of $437 (29%). The increase is
principally due to the write off of the unamortized debt discounts associated
with the conversion of debentures into common stock. Penalties and interest for
the years ended June 30, 2004 and 2003 was $795 and $2,023 respectively; a
decrease of $1,228 (61%). The decrease is due to the pay down of the outstanding
payroll liabilities
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations primarily through cash generated
from operations, debt financing, and the sale of equity securities.
Additionally, in order to facilitate our growth and future liquidity, we have
made some strategic acquisitions.
As a result of some of our financing activities, there has been a significant
increase in the number of issued and outstanding shares. During the year ended
June 30, 2004, we issued an additional 371,126,679 shares. These shares of
common stock were issued primarily for corporate expenses in lieu of cash, for
acquisition of businesses, for the conversion of convertible debentures and
other debt, and for the exercise of warrants.
As of June 30, 2004, we had negative working capital of $21,936, an increase in
working capital of $6,510 since June 30, 2003. This increase was due primarily
to our disposition of Greenland Corporation, gains on the disposition of debt,
the conversion of debt to equity and a change in estimates as previously
discussed.
Net cash used in operating activities was $489 for the year ended June 30, 2004
as compared to net cash provided by operating activities of $1,112 for the
prior-year period; a decrease of $1,601. The decrease was due primarily to a
decrease in current liabilities.
Cash provided by investing activities was $11 for the year ended June 30, 2004,
an increase of $56 from the previous year.
We have no material commitments for capital expenditures. Our 5% convertible
preferred stock (which ranks prior to our common stock), carries cumulative
dividends, when and as declared, at an annual rate of $50 dollars per share. The
aggregate amount of such dividends in arrears at June 30, 2004, was
approximately $420.
Our capital requirements depend on numerous factors, including market acceptance
of our products and services, the resources we devote to marketing and selling
our products and services, and other factors. The report of our independent
auditors accompanying our June 30, 2004 financial statements includes an
explanatory paragraph indicating there is a substantial doubt about our ability
to continue as a going concern, due primarily to the decreases in our working
capital and net worth.
24
OPERATING AND CAPITAL LEASES
----------------------------
DRDF owns no real property. Dalrada leases the facility at 9449 Balboa Avenue,
Suite 211, San Diego, California, 92123. This is a four year lease entered into
on August 26, 2002 by the Christianson Group. The facility is approximately
2,848 square feet and will serve as our new corporate headquarters. Payments
under the lease are currently $5.4 thousand per month and increase to $5.8
thousand in 2005 and $6 thousand in 2006.
Dalrada's, Employers Administration Group, Inc. subsidiary, leases the facility
at 180 F. Main Street, Tustin California. This is a three year lease entered
into on July 15, 2003 by the Christianson Group. The facility is approximately
1,700 square feet. Payments under the lease are currently $2.3 thousand per
month.
Dalrada's, Quick Pix, Inc subsidiary leases the facility at 7050 Village Drive,
Suite E and F, Buena Park, California. This is three lease entered on July 1,
2001. The facility is approximately 8,602 square feet. Payments under the lease
are currently $5.8 thousand per month.
The Company leases other facilities and equipment under operating and capital
short-term leases.
Future minimum lease payments under non-cancelable capital and
operating leases with initial or remaining terms of one year or more are as
follows:
------------------------------------------- ----------------- ------------------
(In thousands) Capital Leases Operating Leases
------------------------------------------- ----------------- ------------------
Year ending June 30,
------------------------------------------- ----------------- ------------------
------------------------------------------- ----------------- ------------------
2005 21 123
------------------------------------------- ----------------- ------------------
2006 15 116
------------------------------------------- ----------------- ------------------
2007 11 46
------------------------------------------- ----------------- ------------------
2008 11 -
------------------------------------------- ----------------- ------------------
2009 30 -
------------------------------------------- ----------------- ------------------
Net minimum lease payments $ 88 $ 104
------------------------------------------- ----------------- ------------------
Less: Amounts representing interest (15)
------------------------------------------- ----------------- ------------------
Present value of net minimum lease payments 73
------------------------------------------- ----------------- ------------------
Less: current portion (10)
------------------------------------------- ----------------- ------------------
Long-term portion $ 63
------------------------------------------- ----------------- ------------------
ANNUAL MEETING OF STOCKHOLDERS HELD ON MAY 14, 2004
Notice was given and the 2004 Annual Meeting of Stockholders of DALRADA
FINANCIAL CORPORATION, formerly Imaging Technologies Corporation, was be held at
9449 Balboa Avenue, Suite 211, San Diego, California 92123, at 10 a.m., local
time, to where upon the following proposals were approved by a majority of the
shareholders:
1. The election of five persons named in the accompanying Proxy Statement to
serve as directors on the Company's board of directors (the "Board") and until
their successors are duly elected and qualified;
2. To approve an amendment to the Company's certificate of incorporation (the
"Certificate of Incorporation") to increase the number of the Common Stock,
authorized to be issued from 500,000,000 shares to 1,000,000,000 shares;
3. To ratify the appointment of Pohl, McNabola, Berg and Company, LLP, as the
Company's independent auditors for the fiscal year ending June 30, 2004; and
4. To consider and transact such other business as may properly come before the
Meeting or any adjournment(s) thereof.
25
OUR BUSINESS
Dalrada Financial Corporation (OTCBB symbol: DRDF) ("DRDF" or the "Company") was
incorporated in March 1982 under the laws of the State of California, and
reincorporated in May 1983 under the laws of the State of Delaware. The
Company's principal executive offices are located at 9949 Balboa Avenue, Suite
210, San Diego, CA 92123. The Company's main phone number is (858) 451-6120.
We provide a variety of financial, staffing, and human resources
services to small and medium-size businesses. These services allow our customers
to outsource many human resources tasks, including payroll processing, workers'
compensation insurance, health insurance, employee benefits, and investment
services. These financial services relieve existing and potential customers of
the burdens associated with personnel management and control.
DRDF provides services through its wholly-owned SourceOne Group, Inc.
("SOG"), and Master Staffing subsidiaries; and through The Solvis Group, Inc.,
("Solvis") a 79%-owned subsidiary that includes several operating units,
including CallCenterHR(TM), Heritage Staffing, Worldwide of California, and M&M
Nursing. These companies and business units provide a broad range of financial
services, including: benefits and payroll administration, health and workers'
compensation insurance programs, personnel records management, employer
liability management, and temporary staffing services, to small and medium-sized
businesses.
In January 2003, we completed the acquisition of a controlling interest
approximating 88% of the shares of Greenland Corporation, whose shares are
traded on the NASD Electronic Bulletin Board under the symbol GRLC.
Subsequently, in March 2004, due to disagreements with Greenland's management,
we entered into an agreement with Greenland to return most of our shares in
Greenland in return for Greenland's forgiveness of certain DRDF indebtedness and
business opportunities. Greenland is not longer affiliated with Dalrada.
In January 2003, we completed the acquisition of a controlling in the
shares of Quik Pix, Inc. ("QPI"), located in Anaheim, California. QPI shares are
traded on the National Quotation Bureau Pink Sheets(R) under the symbol QPIX. At
the time of acquisition, QPI's principal business was providing products and
services associated with visual marketing support. At that time, QPI's major
source of revenues is in developing and mounting photographic and digital images
for use in display advertising for tradeshows and customer building interiors.
QPI also has a proprietary product PhotoMotion(TM), which is a patented color
medium of multi-image transparencies. The process uses existing originals to
create the illusion of movement, and allows for three to five distinct images to
be displayed with an existing lightbox.
In July 2005, QPI acquired Solvis from DRDF and changed its name to The
Solvis Group and its trading symbol to SLVG. Solvis principally serves as a
staffing company and provides extensive human resources services. At this time,
DRDF owns 79% of Solvis. Also in July 2005, Solvis organized a wholly-owned
subsidiary, Imaging Tech, Inc., in order to separately pursue its remaining
imaging business.
On December 1, 2004, DRDF completed its acquisition of 70% of Info
Services, Inc. ("Info"), but has subsequently reversed the transaction. (Also
see, "Legal Matters".).
Market Overview - Financial and Human Resources Services
Our entry into the financial services and human resources business, in
November 2001, was through the acquisition of professional employer
organizations ("PEO"). We are expanding the services we provide beyond PEO
services, including staffing. Our services cover a broad range of services
including payroll management, workers' compensation insurance, and safety
programs. Expanded products and services are made available to employers and
employees, such as payroll debit cards, group health insurance, 401(k) and
125-Flex plans, supplemental insurance, payroll advances, and other value-added
benefits.
The burdens placed on small and medium-sized employers by the complex
legal and regulatory issues related to human resources management caused our
industry segment to grow beginning in the 1980's. While various service
providers have been available to assist these businesses with specific tasks,
companies like ours emerged as providers of a more comprehensive range of
services relating to the employer/employee relationship. Integral to our client
relationships, we assume broad aspects of the employer/employee relationship.
26
Because we provide employee-related services to a large number of employees, we
provide economies of scale that provide our clients employment-related functions
more efficiently, provide a greater variety of employee benefits, and devote
more attention to human resources management.
We believe that the demand for our services is driven by (1) the trend
by small and medium-sized businesses toward outsourcing management tasks outside
of core competencies; (2) the difficulty of providing competitive health care
and related benefits to attract and retain employees; (3) the increasing costs
of health and workers' compensation insurance coverage and workplace safety
programs; and (4) complex regulation of labor and employment issues and the
related costs of compliance.
Market Overview - Imaging Products
We continue to operate a business unit (Imaging Tech, Inc., a
wholly-owned subsidiary of The Solvis Group) to market our proprietary imaging
products and to provide photographic services to selected clientele.
ColorBlind software is a suite of software applications, which allow
users to build color profiles of images in order to insure accurate output on
digital devices such as printers, plotters, scanners, monitors, and cameras.
Color integrity is an important underlying requirement in the imaging
process. The widespread use of color applications at the desktop, demand for
higher quality color reproduction, expanded use of the Internet for document
dissemination and e-commerce, growth of office networks, and the increased
acceptance and use of digital photography are some of the factors that influence
our markets.
Photomotion is a patented process for adding multiple images to backlit
static displays that appear to change as the viewer passes by the image. The
Photomotion process uses existing original art to create an illusion of
movement; and allows for separate and distinct image displays. It allows for
three to five distinct images to be displayed within an existing light box.
Images appear to change or "morph" as the viewer passes the display.
We offer a spectrum of services allowing a client to produce color
visuals (digital and photographic) according to parameters as specified by a
client. We also offer a full range of color laboratory reproduction services.
The market for Photomotion and color reproduction services is large.
The products are especially useful in point-of-purchase displays, indoor display
advertising, and trade show exhibits and displays. To date, marketing has been
limited to targeted customers such as beverage companies, casinos, sports
arenas, and other specialty clients.
Business Strategy
-----------------
Financial and Human Resources Services
Our business provides a broad range of services associated with human
resources management. These include benefits and payroll administration, health
and workers' compensation insurance programs, other benefits programs, personnel
records management, employer liability management, employee recruiting and
selection, performance management, and training and development services.
Administrative Functions. We perform a wide variety of processing and
record keeping tasks, mostly related to payroll administration and government
compliance. Specific examples include payroll processing, payroll tax deposits,
quarterly payroll tax reporting, employee file maintenance, unemployment claims
processing, workers' compensation claims management and reporting, safety
programs, and other benefits administration..
Workers' Compensation. We provide workers' compensation insurance and
coordinate rates, compliance, claims, safety programs, and medical review. We
provide coverage through an A-rated national carrier and take responsibility for
payment of premiums and the deposit of adequate reserves against claims.
Benefit Plans Administration. We sponsor benefit plans including
individual and group health coverage, 401(k) and 125-Flex plans, and others. We
are responsible for the costs and premiums associated with these plans, act as
plan sponsor and administrator of the plans, negotiate the terms and costs of
the plans, maintain the plans in accordance with applicable federal and state
regulations, and serve as liaison for the delivery of such benefits to worksite
employees.
Personnel Management. We provide a variety of personnel management
services, which provide our client companies access to resources normally found
in the human resources departments of larger companies. Our client companies
will have access to a personnel guide, which will set forth a systematic
approach to administering personnel policies and practices and can be customized
to fit a client company's particular work culture/environment.
27
Employer Liability Management. We assume many employment-related
responsibilities associated with administrative functions and benefit plans
administration. Upon request, we can also provide our clients guidance on
avoiding liability for discrimination, sexual harassment, and civil rights
violations. We employ counsel specializing in employment law.
Service Staffing and/or Services Agreement. All clients we serve sign a
service staffing agreement and/or services agreement ("Client Agreement")t,
which establishes our service fee. The client agreement is subject to periodic
adjustments to account for changes in the composition of the associated
workforce and statutory changes that affect our costs. Our client agreement
establishes the division of responsibilities between us and client management at
the employee worksite. We are responsible for personnel administration and are
liable for certain employment-related government regulation. In addition, we
assume liability for payment of salaries, wages (including payroll taxes), and
employee benefits of worksite employees. Client company management retains the
employees' services and remains liable for the purposes of certain government
regulations.
Our business represents a distribution channel for a wide variety of
employer and employee benefit programs such as 401(k) plans, 125-Flex plans,
legal services, tax consulting, payroll advances, and insurance programs. Our
intention is to expand our business through offering a variety of financial
services.
Our business is growing rapidly, but profit margins are small.
Consequently, profitability depends on (1) economies of scale leading to greater
operating efficiencies; and (2) value-added services such as training,
education, Internet support, and other services that may be used by employers
and employees.
The income model for the service segment of our business generally
revolves around fees charged per employee. While gross profit is low, gross
revenues are generally substantial. To this end, the Company intends to pursue
acquisitions of small firms and strategic alliances with similar companies as
ours.
We evaluate our business as one segment even though our staffing and
human resources services and products are offered under various brand names.
Imaging Products and Services
We continue to provide imaging products and services through the
Imaging Tech subsidiary of The Solvis Group subsidiary. This business segment
includes our proprietary ColorBlind color management software, our patented
Photomotion visual images, and photographic services.
Accurate color reproduction is one of the largest single challenges
facing the imaging industry. Customers demand systems that are easy to use,
predictable and consistent. A color management system is needed so users can
convert files for use with different devices. The varying characteristics of
each device are captured in a device profile. The International Color Consortium
("ICC") has established a standard for the format for these profiles.
ColorBlind(R) color management software is a pre-packaged suite of
applications, utilities, and tools that allow users to precisely create ICC
profiles for each device in the color workflow including scanners, monitors,
digital cameras, printers, and other specialized digital color input and output
devices. Once profiled, ColorBlind balances these profiles to produce accurate,
consistent, and reliable color rendering from input to output. ColorBlind
software is sold as a stand-alone application or licensed to OEM's for resale to
be bundled with peripheral devices.
We operate an internet site, color.com, as a resource center to provide
information on the highest quality correct color. This site allows consumers to
purchase our products, including ColorBlind software; and serves as an
information resource for color imaging, including white papers on color imaging
and management, links to color consultants and experts, and products.
Photomotion Images(TM) are based upon patented technology. The
resulting product is a unique color medium that uses existing original images to
create the illusion of movement or multiple static displays that allow three to
five distinct images to be displayed in an existing light box. The images appear
to change, or "morph," as a viewer passes the display. This ability to put
multiple images in a single space, without the need for mechanical devices,
allows for the creation of an active and entertaining display. The product is
currently marketed in the U.S., Europe, Asia and Latin America.
28
Visual marketing, including out-of-home media, is a large and growing,
multi-billion dollar worldwide industry. An industry survey suggests that the
field of visual marketing will increase at a rate of 50% annual for the next ten
years. Out-of-home media plays a critical role in the media plans of national
and international advertisers.
Competition
The financial and human resources services business is highly
competitive, with over 800 firms operating in the U.S. There are several firms
that operate on a nationwide basis with revenues and resources far greater than
ours. Some large PEO companies are owned by insurance carriers and some are
public companies whose shares trade on Nasdaq, including Administaff, Inc., Team
Staff, Inc., Barrett Business Services, and Staff Leasing, Inc. Also see "Risks
and Uncertainties."
The markets for our imaging products and services are also highly
competitive and rapidly changing. Our ability to compete in our markets depends
on a number of factors, including the success and timing of product and services
introductions by us and our competitors, selling prices, performance,
distribution, marketing ability, and customer support. A key element of our
strategy is to provide competitively-priced, quality products and services.
Operations
Our corporate headquarters facility in San Diego, California houses
most of our administrative operations. Human resource services operations are
conducted from the Company's headquarters offices and small branch offices in
Michigan and California.
Manufacturing, Production, and Sources of Supply
We manufacture our software products in-house and through selected
outside vendors. Also see "Risks and Uncertainties."
Research and Development
Some of our imaging products are characterized by rapidly evolving
technology, frequent new product introductions, and significant price
competition. Accordingly, we monitor new technology developments and coordinate
with suppliers, distributors and dealers to enhance existing products and to
lower costs. Advances in technology require ongoing investment. We have entered
into no formal projects in research and development for several years; however,
we do make modifications to existing products on an as-needed basis to maintain
their currency. Also see "Risks and Uncertainties."
Intellectual Property
Our software products are copyrighted. However, copyright protection
does not prevent other companies from emulating the features and benefits
provided by our software. We protect our software source code as trade secrets
and make our proprietary source code available to OEM customers only under
limited circumstances and specific security and confidentiality constraints.
Imaging Tech, Inc. (The Solvis Group) holds the patent for Photomotion Images.
Technology products exist in a rapidly changing business environment.
Consequently, we believe the effectiveness of patents, trade secrets, and
copyright protection is less important in influencing long term success than the
experience of our employees and our contractual relationships. Due to lack of
sales in the Photomotion Imaging area, Dalrada intends to fully write-off the
value of the related patent at fiscal June 2005 year end. The book value is
approximately $1.6 million.
We have obtained U.S. registration for several of our trade names or
trademarks, including ColorBlind, Photomotion Images, MedicalHR, CallCenterHR,
SourceOne Group, and The Benefits Bank. These trade names are used to
distinguish our products and services in the markets we serve.
If we fail to establish that we have not violated the asserted rights,
we could be prohibited from marketing the associated product and/or services,
and we could be liable for damages. We rely on a combination of trade secret,
copyright and trademark protection, and non-disclosure agreements to protect our
proprietary rights. Also see "Risks and Uncertainties."
29
Employees
Our Company (including subsidiaries, but not including employees pursuant to
staffing and/or co-employer client contracts) employed a total of 50 individuals
worldwide as of August 31, 2005. Of this number, 10 were involved in sales and
marketing, 8 in corporate administration and finance, 30 were in human
resources, payroll, and benefits administration, and 2 in engineering and
technical support. There is no union representation for any of our employees.
Government Regulation
While many states do not explicitly regulate companies like ours, over 20 states
have passed laws that have licensing or registration requirements for
professional employer organizations ("PEO"), which is a component of our
business. Such laws vary from state to state, but generally provide for
monitoring the fiscal responsibility of PEOs and, in some cases, codify and
clarify the co-employment relationship for unemployment, workers' compensation,
and other purposes under state law. We estimate that the annual costs of
compliance with these regulations is approximately $250,000.
MANAGEMENT AND MEMBERS OF THE BOARD OF DIRECTORS
EXECUTIVE OFFICERS AND MEMBERS OF THE BOARD OF DIRECTORS
The directors and executive officers of the Company, their ages and positions
with the Company as of June 30, 2005 are as follows:
Name Age Since Director Title
Brian Bonar 58 1995 Director and Chief Executive Officer
Richard H. Green 69 2000 Director
Robert A. Dietrich 60 2000 Director
Eric W. Gaer 57 2000 Director
Stephen J. Fryer 67 2000 Director
Randall Jones 51 2005 Chief Financial Officer
BRIAN BONAR has served as a director of the Company since August 1995
and became the Company's Chairman of the Board in December 1999. From August
1992 through April 1994, Mr. Bonar served as the Company's Director of
Technology Sales and from April 1994 through September 1994 as the Company's
Vice President, Sales and Marketing. In September 1994, Mr. Bonar became the
Company's Executive Vice President and, in July 1997, was appointed as the
Company's President and Chief Operating Officer. In April 1998 Mr. Bonar assumed
the post of CEO. From 1991 to 1992, Mr. Bonar was Vice President of Worldwide
Sales and Marketing for Bezier Systems, Inc., a San Jose, California-based
manufacturer and marketer of laser printers. From 1990 to 1991, he was Worldwide
Sales Manager for Adaptec, Inc., a San Jose-based laser printer controller
developer. From 1988 to 1990, Mr. Bonar was Vice President of Sales and
Marketing for Rastek Corporation, a laser printer controller developed located
in Huntsville, Alabama. From 1984 to 1988, Mr. Bonar was employed as Executive
Director of Engineering at QMS, Inc., an Alabama-based developer and
manufacturer of high-performance color and monochrome printing solutions. Prior
to these positions, Mr. Bonar was employed by IBM, U.K. Ltd. for approximately
17 years.
DR. RICHARD H. GREEN has served as a director since September 2000. He
is currently the President of International Power & Environmental Company
(IPEC), a consulting company located in San Diego, California. From 1993 through
1995, he served as Deputy Secretary of the State of California Environmental
Protection Agency (Cal/EPA). From 1988 through 1993 Dr. Green served as Manager
of Program Engineering and Review Office in the Office of Technology and
Applications at the Jet Propulsion Laboratory (JPL) in Pasadena, California,
where he had held various management positions since 1967. From 1965 through
1967, Dr. Green served as Senior Engineer for The Boeing Company, Space
Division. From 1983 through 1985, Dr. Green held the Corwin D. Denny Chair as
Professor of Energy and Director of the Energy Institute at the University of
LaVerne, and from 1961 through 1964 served as Assistant Professor of Civil
Engineering (Environmental Sciences) at Washington State University. Dr. Green
currently is a member of the Governing Board of Pasadena City College. Dr. Green
30
completed his bachelor's degree at Whitman College in 1958, his Master of
Science at Washington State University in 1961, and his Ph.D. at Washington
State University, under a United States Public Health Services Career
Development Award, in 1965.
ROBERT A. DIETRICH has served as a director of the Company since
January 2000. Mr. Dietrich is President and CEO of Cyberair Communications Inc.,
a privately-held telecommunications company with strategic interests in Internet
communications and "bandwidth" expansion technologies, as well as domestic and
international telephone services, in Irvine, California. Recently, Mr. Dietrich
was named President and CEO of Semper Resources Corporation, a public natural
resources holding company in Irvine, California. From 1996 to 2000, Mr. Dietrich
was Managing Director and CFO of Ventana International, Ltd., Irvine,
California, a venture capital and private investment-banking firm. From 1990 to
1994, Mr. Dietrich was Vice President and Chief Financial Officer of CEI, Inc.,
in Santa Ana, California, a commercial furnishings firm, prior to joining
Ventana. Mr. Dietrich is a graduate of the University of Notre Dame, with a
bachelor's degree in accounting, and the University of Detroit, with a master's
degree in finance. He served as a lieutenant in the U.S. Navy's Atlantic Command
Operations Control Center.
ERIC W. GAER has served as a director since March 2000. Since 1998, Mr.
Gaer has been the President and CEO of Arroyo Development Corporation, a
privately-held, San Diego-based management consulting company. From 1996 to
1998, he was Chairman, President and CEO of Greenland Corporation, a
publicly-held high technology company in San Diego, California. In 1995, he was
CEO of Ariel Systems, Inc., a privately-held engineering development company in
Vista, California. Over the past 25 years, Mr. Gaer has served in executive
management positions at a variety of high-technology companies, including ITEC,
Daybreak Technologies, Inc., Venture Software, Inc., and Merisel, Inc. In 1970,
he received a Bachelor of Arts degree in mass communications from California
State University, Northridge.
STEPHEN J. FRYER has served as a director of the Company since March
2000. He is currently Chairman of the Board and CEO of Pen Interconnect, Inc.
("Pen"), a high technology company in Irvine, California. He began his
employment service at Pen in 1997 as Senior Vice President of Sales and
Marketing. At Pen, he became a director in 1995 and was appointed President and
CEO in 1998. From 1989 to 1996, Mr. Fryer was a principal in Ventana
International, Ltd., a venture capital and private investment-banking firm in
Irvine, California. He has over 28 years experience in the computer industry in
the United States, Asia and Europe. Mr. Fryer graduated from the University of
California in 1960 with a bachelor's degree in mechanical engineering.
RANDALL JONES became the CFO for Dalrada in January of 2005. Mr Jones
is also the CFO for Kaire Holdings Incorporated and Warning Management Services,
Inc. Prior to that, Mr. Jones was CEO of South Coast Corporate Development since
1981. Mr. Jones has over twenty-five years experience as a financial executive.
He has consulted to companies in a variety of industries, from aerospace,
manufacturing, retail, employee staffing to banking. His area of specialty is
consulting to companies that either want to enter the public marketplace or are
already publicly held and need assistance in the reorganization of their
accounting operations and public reporting.
31
EXECUTIVE COMPENSATION
The following table sets forth certain summary information regarding
compensation paid for services rendered during the fiscal years ended June 30,
2004, 2003 and 2002, respectively, to Dalrada's Chief Executive Officer,
President and Chief Financial Officer during such period.
----------------------- --------------------------------------- --------------------------------------------------------------
Payouts Annual Compensation ($000) Long Term Compensation Awards
----------------------- --------------------------------------- --------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
----------------------- ------- ---------- -------- ----------- -------------- ------------------ ---------- -----------------
Name and Principal Year Salary Bonus Other Restricted Securities LTIP All Other
Position Annual Stock Underlying Payouts Compensation ($)
Compensa- Awards ($) Options/SAR ($) ($)
tion($) (#) (2)
----------------------- ------- ---------- -------- ----------- -------------- ------------------ ---------- -----------------
Brian Bonar, 2004 $157 $150 8,000,000
Chairman, Board of 2003 $275 $77 15,000,000
Directors, President 2002 $230 1,750,000
and C.E.O.
----------------------- ------- ---------- -------- ----------- -------------- ------------------ ---------- -----------------
James R. Downey, 2004 $100 $20
Jr., Chief Operating 2003 $79
Officer and Chief
Accounting Officer (1)
----------------------- ------- ---------- -------- ----------- -------------- ------------------ ---------- -----------------
(1) Mr. Downey joined the Company effective January 6, 2003 and resigned
effective January 31, 2004.
(2) Options granted
32
OPTIONS/SAR GRANTS IN THE LAST FISCAL YEAR
The following table provides information on Options granted in the 2004
Fiscal Year to the Named Officers.
Potential Realizable
Value at Assumed
Number of Percent of Annual Rates of
Securities Total Stock Price
Underlying Options/SARs Appreciation for
Options/SARs Granted to Exercise or Option Term (4)
Granted (#) Employees in Base Price Expiration -----------------------
Name Fiscal Year ($/share) Date 5% ($) 10% ($)
-------------------------------- -------------- ----------------- -------------- ------------ -----------------------
Brian Bonar 8,000,000 23.2% $0.015 12/1/05 6K 12K
James R. Downey, Jr. (1) 0
(1) Mr. Downey resigned effective January 30, 2004
Options/SAR Grants in the Last Fiscal Year
The following table provides information on option exercises in the
2004 Fiscal Year by the Named Officers and the value of such Named Officers'
unexercised options at June 30, 2004. Warrants to purchase Common Stock are
included as options. No stock appreciation rights were held by them at the end
of the 2004 Fiscal Year.
SHARES VALUE OF UNEXERCISED
ACQUIRED ON NUMBER OF SECURITIES IN-THE-MONEY OPTIONS/SAR
EXERCISE VALUE UNDERLYING UNEXERCISED AT FISCAL YEAR END ($)
NAME (#) REALIZED ($) OPTIONS AT FY-END (#) (2)
---------------------------------- ------------- ------------- --------------------------- ---------------------------
EXERCISABLE UN-EXERCISABLE EXERCISABLE UN-EXERCISABLE
----------- -------------- ----------- --------------
Brian Bonar 7,000,000 $0 8,000,000 --- $0 ---
James R. Downey, Jr. (1) -- -- 9,500,000 --- $0 ---
(1) Mr. Downey resigned effective January 30, 2004
COMPENSATION OF DIRECTORS
Each member of the Board of Directors of the Company receives a fee of
$500 from the Company for each meeting attended.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
None
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Gaer and
Green. Neither of these individuals was an officer or employee of the Company at
any time during the 2003 Fiscal Year. Mr. Gaer owns a company that receives
consulting fees from the Company.
AUDIT COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Audit Committee currently consists of Messrs. Green and Dietrich
(the audit committee expert). Neither of these individuals was an officer or
employee of the Company at any time during the 2004 Fiscal Year.
33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to DRDF with respect to
the beneficial ownership of DRDF's common stock as of August 31, 2005 by (i)
each person who is known by the Company to own beneficially more than 5% of the
Company's common stock, (ii) each of DRDF's directors and executive officers,
and (iii) all officers and directors of DRDF as a group. Except as otherwise
listed below, the address of each person is c/o Dalrada Financial Corporation.,
9449 Balboa Avenue, Suite 211, San Diego, CA 92123
------------------------------------------------- ------------------ -------------- -----------------
Name and Address Number of Percent of Percent of
Of Beneficial Owner Shares class prior class after
Owned (1) Beneficially Resale resale offering
owned prior offering (2) (3)
to resale
offering
------------------------------------------------- ------------------ -------------- -----------------
ALPHA Capital AG (4)
Pradafant 7 36,642,857 (13) .05% .04%
9490 Furstentums,
Vaduz, Liechtenstein
------------------------------------------------- ------------------ -------------- -----------------
------------------------------------------------- ------------------ -------------- -----------------
Gamma Opportunity Capital (5)
Partners, LP 36,642,857 (14) .05% .04%
British Colonial Centre of Commerce
One Bay Street, Suite 401
Nassau (NP), The Bahamas
------------------------------------------------- ------------------ -------------- -----------------
------------------------------------------------- ------------------ -------------- -----------------
LONGVIEW FUND, L.P. (6)
1325 Howard Avenue, #422 32,571,428 (15) .04% .03%
Burlingame, CA 94010 ---- ----
------------------------------------------------- ------------------ -------------- -----------------
------------------------------------------------- ------------------ -------------- -----------------
Stonestreet Limited Partnership (7)
C/o Canaccord Capital Corporation 24,428,571 (16) .03% .02%
320 Bay Street, Suite 1300 ---- ----
Toronto, Ontario M5H 4A6, Canada
------------------------------------------------- ------------------ -------------- -----------------
------------------------------------------------- ------------------ -------------- -----------------
Directors and Officers
----------------------
Brian Bonar (8) 19,007,500 .03% .02%
------------------------------------------------- ------------------ -------------- -----------------
Robert A. Dietrich (9) 11,384,500 .01% .01%
------------------------------------------------- ------------------ -------------- -----------------
Stephen J. Fryer (10) 7,453,250 .01% .01%
------------------------------------------------- ------------------ -------------- -----------------
Eric W. Gaer (11) 9,936,000 .02% .01%
------------------------------------------------- ------------------ -------------- -----------------
Richard Green (12) 9,969,500 .02% .01%
------------------------------------------------- ------------------ -------------- -----------------
All current directors and
Executive officers (group of 5) 58,003,750 .09% .06%
------------------------------------------------- ------------------ -------------- -----------------
------------------------------------------------- ------------------ -------------- -----------------
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of August 31, 2005 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Except as pursuant
to applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock
beneficially owned.
34
(2) Percentage based on 747,103,929 shares of common stock outstanding as of
August 31, 2005, plus shares underlying each shareholders convertible note.
(3) Percentage based on 991,675,358 shares of common stock outstanding after the
offering.
(4) Alpha Capital Aktiengesellschaft: In accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, Konard Ackerman may be deemed the control
person of the shares owned by such entity. ALPHA Capital AG is a private
investment fund that is owned by all its investors and managed by Mr. Ackerman.
Mr. Ackerman disclaims beneficial ownership of the shares of common stock being
registered hereto.
(5) Gamma Opportunity Capital Partners, LP: In accordance with Rule 13d-3 under
the Securities Exchange Act 1934, Gamma Capital Advisors, Ltd., an Anguilla,
British West Indies company, is the general partner to the stockholder Gamma
Opportunity Capital Partners, LP, a Cayman Islands registered limited
partnership, with the power to vote and dispose of the common shares being
registered on behalf of the stockholder. As such, Gamma Capital Advisors, Ltd.
may be deemed to be the beneficial owner of said shares. Christopher Rossman and
Jonathan P. Knight, PhD. are the Directors of Gamma Capital Advisors, Ltd., each
possessing the power to act on its behalf. Gamma Capital Advisors, Ltd.,
Christopher Rossman and Jonathan P. Knight, PhD. each disclaim beneficial
ownership of the shares of common stock being registered hereto.
(6) Longview Fund, LP is a private investment fund that is in the business of
investing publicy-traded securities for their own accounts and is structured as
a limited liability company whose members are the investors in the fund. The
General Partner of the fund is Viking Asset Management, LLC, a California
limited liability company which manages the operations of the fund. Peter T.
Benz is the managing member of Viking Asset Management, LLC. As the control
person of the shares owned by Longview Fund, LP, Peter T. Benz may be viewed as
the beneficial owner of such shares pursuant to Rule 13d-3 under the Securities
Exchange Act of 1934.
(7) Stonestreet Limited Partnership: In accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, Mr. Michael Finkelstein may be deemed the
control person of the shares owned by such entity. Stonestreet Limited
Partnership is a private investment fund that is owned by all its investors and
managed by Ms. Libby Leonard.
(8) Includes 12,000,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after April 30,
2005.
(9) Includes 9,125,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after April 30,
2005.
(10) Includes 4,875,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after April 30,
2005.
(11) Includes 7,375,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after April 30,
2005.
(12) Includes 40,750,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after April 30,
2005.
(13) Concerning Alpha Capital Aktiengesellschaft: Assuming $225,000 of
Convertible Debentures converted at $0.007 plus 4,500,000 warrants.
(14) Concerning Gamma Opportunity Capital Partners, LP: Assuming $225,000 of
Convertible Debentures converted at $0.007 plus 4,500,000 warrants.
(15) Concerning Longview Fund, LP: Assuming $200,000 of Convertible Debentures
converted at $0.007 plus 4,000,000 warrants.
(16) Concerning Stonestreet Limited Partnership: Assuming $150,000 of
Convertible Debentures converted at $0.007 plus 3,000,000 warrants.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended June 30, 2004, the Company accrued consulting expenses of
$60,000 due Arroyo Development Corporation, owned by Mr. Eric Gaer, a member of
the Board of Directors. There was no officer or director indebtedness to the
Company.
35
DESCRIPTION OF SECURITIES
GENERAL
-------
Our authorized capital stock consists of 1,000,000,000 shares of Common Stock at
$.005 par value, of which 747,103,929 shares are issued and outstanding at
August 31, 2005.
The following is a description of the securities of DRDF taken from provisions
of our Company's Articles of Incorporation and By-laws, each as amended. The
following description is a summary of the material terms in our articles of
incorporation and bylaws, as currently in effect.
COMMON STOCK
------------
Holders of the common stock are entitled to one vote for each share held in the
election of directors and in all other matters to be voted on by shareholders.
Stockholders have cumulative voting rights in the election of directors. Holders
of common stock are entitled to receive dividends as may be declared from time
to time by our board of directors out of funds legally available. In the event
of liquidation, dissolution or winding up, holders of common stock are to share
in all assets remaining after the payment of liabilities.
The holders of common stock have no preemptive or conversions rights and are not
subject to further calls or assessments. There are no redemption or sinking fund
provisions applicable to the common stock. The rights of the holders of the
common stock are subject to any rights that may be fixed for holders of
preferred stock. All of the outstanding shares of common stock are fully paid
and non-assessable.
The holders of the outstanding shares of common stock are entitled to receive
dividends out of assets legally available at such times and in such amounts as
the Board of Directors may from time to time determine, subject to the rights of
the holders of our preferred stock. Upon our liquidation, dissolution, or
winding up, our assets, which are legally available for distribution to the
stockholders, will be distributed equally among the holders of the shares.
We have never paid any cash dividends on the common stock. Future cash
dividends, if any, will be at the discretion of our Board of Directors and will
depend upon, among other things, our future operations and earnings, capital
requirements and surplus, general financial condition, contractual restrictions,
and such other factors as the Board of Directors may deem relevant.
WARRANTS AND OPTIONS:
---------------------
On December 17, 2003, DRDF issued four Warrants to purchase an aggregate of
16,000,000 shares of common stock of DRDF with an exercise price per share of
110% of the Closing trade price as reported by Bloomberg L.P. for the OTC
Bulletin Board for the trading day preceding but not including the closing date
to the following: 1) Alpha Capital Aktiengesellschaft for 4,500,000 shares, 2)
Gamma Opportunity Capital Partners, LP for 4,500,000 shares, 3) Longview Fund,
L.P. for 4,000,000 shares and Stonestreet Limited Partnership for 3,000,000
shares. These warrants will expire in five years. The underlying shares of these
warrants are being registered in this registration statement.
PENNY STOCK DISCLOSURE REQUIREMENTS:
------------------------------------
See discussion in risk factor section, page 8, with the heading "Penny Stock
issues may be difficult for an investor to dispose of."
SELLING SHAREHOLDERS
--------------------
SHARES ELIGIBLE FOR FUTURE SALE
-------------------------------
As of August 31, 2005, DRDF has 747,103,929 shares of Common Stock outstanding.
Sales of a substantial number of shares of DRDFs Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock. DRDF is registering with this document 244,571,429 shares of
Common Stock for resale, all of which will be freely tradable without
restriction or further registration under the Securities Act. The Shares being
offered for resale by our Selling Stockholders are issuable in accordance with
ss. 4(2) and Rule 506 under the Securities Act of 1933, as amended (the
"Securities Act").
36
SELLING SHAREHOLDER TABLE
The table below sets forth information concerning the resale of shares of Common
Stock by the Selling Stockholder. We will not receive any proceeds from the
resale of the Common Stock by the Selling Stockholder nor will we receive
proceeds from the exercise of the warrants.
Assuming the Selling Stockholder sells all the shares registered below, the
Selling Stockholder will no longer continue to own any shares of our Common
Stock.
The following table also sets forth the name of the person who is offering
shares of common stock by this prospectus, the number of shares of common stock
beneficially owned by such person, the number of shares of common stock that may
be sold in this offering and the number of shares of common stock such person
will own after the offering, assuming he sells all of the shares offered.
Selling Stockholder Shares Beneficially Owned Prior Shares Offered Shares Beneficially Owned After Offering
------------------- to the Offering For Sale (6) If All Offered Shares Are Sold
------------------------------------ -------------- ----------------------------------------
Number of Shares Percentage(5) Number of Shares Percentage
---------------- ------------- ---------------- ----------
Alpha Capital
Aktiengesellschaft (1) 68,785,714 9.2% 68,785,714 0 0%
Gamma Opportunity
Capital Partners LP(2) 68,785,714 9.2% 68,785,714 0 0%
Longview Fund, LP(3) 61,142,857 8.2% 61,142,857 0 0%
Stonestreet Limited 45,867,143 6.1% 45,867,143 0 0%
Partnership (4)
* The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholder has sole or shared voting power or investment power and
also any shares, which the selling stockholder has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the debentures and exercise of the debenture warrants is subject
to adjustment depending on, among other factors, the future market price of the
common stock, and could be materially less or more than the number estimated in
the table.
The above investors do not hold any position or office, or has had any material
relationship with us or any of our affiliates within the past three years
The selling shareholders are not a broker-dealers or affiliates of a
broker-dealer.
(1) Alpha Capital Aktiengesellschaft: In accordance with Rule 13d-3 under
the Securities Exchange Act of 1934, Konard Ackerman may be deemed the
control person of the shares owned by such entity. ALPHA Capital AG is
a private investment fund that is owned by all its investors and
managed by Mr. Ackerman. Mr. Ackerman disclaims beneficial ownership of
the shares of common stock being registered hereto.
(2) Gamma Opportunity Capital Partners, LP: In accordance with Rule 13d-3
under the Securities Exchange Act of 1934, Gamma Capital Advisors,
Ltd., an Anguilla, British West Indies company, is the general partner
to the stockholder Gamma Opportunity Capital Partners, LP, a Cayman
Islands registered limited partnership, with the power to vote and
dispose of the common shares being registered on behalf of the
stockholder. As such, Gamma Capital Advisors, Ltd. may be deemed to be
the beneficial owner of said shares. Christopher Rossman and Jonathan
P. Knight, PhD. are the Directors of Gamma Capital Advisors, Ltd., each
possessing the power to act on its behalf. Gamma Capital Advisors,
Ltd., Christopher Rossman and Jonathan P. Knight, PhD. each disclaim
beneficial ownership of the shares of common stock being registered
hereto.
37
(3) Longview Fund, L.P. is a private investment fund that is in the
business of investing publicy-traded securities for their own accounts
and is structured as a limited liability company whose members are the
investors in the fund. The General Partner of the fund is Viking Asset
Management, LLC, a California limited liability company which manages
the operations of the fund. Peter T. Benz is the managing member of
Viking Asset Management, LLC. As the control person of the shares owned
by Longview Fund, LP, Peter T. Benz may be viewed as the beneficial
owner of such shares pursuant to Rule 13d-3 under the Securities
Exchange Act of 1934.
(4) Stonestreet Limited Partnership: In accordance with Rule 13d-3 under
the Securities Exchange Act of 1934, Mr. Michael Finkelstein may be
deemed the control person of the shares owned by such entity.
Stonestreet Limited Partnership is a private investment fund that is
owned by all its investors and managed by Ms. Libby Leonard.
(5) Percentages are based on 747,103,929 shares of our common stock
outstanding as of August 31, 2005.
(6) This column represents the total number of shares of common stock that
each selling security holder intends to sell based on the current
market price at the time the registration statement was first filed.
TERMS OF THE CONVERTIBLE NOTES
------------------------------
On December 17, 2003, DRDF entered into a Securities Purchase Agreement with
four accredited investors for the sale of (i) $800,000 in Convertible Debentures
and (ii) warrants to buy 16,000,000 shares of our common stock. This prospectus
relates to the resale of the common stock underlying these convertible notes and
warrants.
The convertible notes bear interest at 8% per annum, mature two years from the
date of issuance, and are convertible into our common stock at the investors
option, at the lower of (i) $.02 (maximum price") or (ii) seventy percent (70%)
of the average of the three lowest closing bid prices for the sixty (60) trading
days prior to but not including the conversion date for the common stock. The
full principal amount of the convertible notes is due upon default under the
terms of secured convertible notes. The warrants are exercisable until five
years from the date of issuance at a purchase price of $0.0187 per share. In
addition, the conversion price of the convertible notes and the exercise price
of the warrants will be adjusted in the event that we issue common stock at a
price below the fixed conversion price or below market price, with the exception
of any securities issued in connection with the Securities Purchase Agreement.
The conversion price of the convertible notes and the exercise price of the
warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater
or lesser number of shares, or take such other actions as would otherwise result
in dilution of the selling stockholder's position..
The warrants are exercisable until five years from the date of issuance at a
purchase price of $0.0187 per share. The selling stockholders will be entitled
to exercise the warrants on a cashless basis if the shares of common stock
underlying the warrants are not then registered pursuant to an effective
registration statement. In the event that the selling stockholder exercises the
warrants on a cashless basis, then we will not receive any proceeds. In
addition, the exercise price of the warrants will be adjusted in the event we
issue common stock at a price below market, with the exception of any securities
issued as of the date of this warrant or issued in connection with the callable
secured convertible notes issued pursuant to the Securities Purchase Agreement,
dated December 17, 2003.
The holders of the 8% convertible debentures may not convert its securities into
shares of DRDF's common stock if after the conversion such holder would
beneficially own over 9.9% of the outstanding shares of DRDF's common stock. The
holder may waive this percent ownership restriction upon not less than 61 days
notice to DRDF. Since the number of shares of DRDF's common stock issuable upon
conversion of the debentures will change based upon fluctuations of the market
price of DRDF's common stock prior to a conversion, the actual number of shares
of DRDF's common stock that will be issued under the debentures owned by the
holders is based on a reasonable good faith estimate of the maximum amount
needed.
If DRDF issues any shares of common stock for a price less than the purchase
price of the warrants, prior to the complete exercise of the above warrants, the
exercise price for future purchased will be reduced accordingly. The warrant
purchase price shall be reduced as follows: (i) the number of shares of our
common stock outstanding immediately prior to such issue shall be multiplied by
the purchase price in effect at the time of such issue and the product shall be
added to the aggregate consideration, if any, received by us upon such issue of
additional shares of common stock; and (ii) the sum so obtained shall be divided
by the number of shares of common stock outstanding immediately after such
issue. The resulting figure shall be the adjusted purchase price.
38
The conversion price of the convertible notes and the exercise price of the
warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater
or lesser number of shares, or take such other actions as would otherwise result
in dilution of the selling shareholder's position.
The selling stockholders have contractually agreed to restrict their ability to
convert or exercise their warrants and receive shares of our common stock such
that the number of shares of common stock held by them and their affiliates
after such conversion or exercise does not exceed 9.99% of the then issued and
outstanding shares of common stock. The Subscriber may void this conversion
limitation effective after (sixty-one) 61 days upon prior written notice to the
Company.
The notes were issued to the following: Alpha Capital Aktiengesellschaf, a
$225,000 secured convertible debenture, Gamma Opportunity Capital Partners, LP,
a $225,000 secured convertible debenture, Longview Fund, L.P., a $200,000
secured convertible debenture and Stonestreet Limited Partnership, a $150,000 in
secured convertible debenture. None of the investors are affiliated.
SAMPLE CONVERSION CALCULATION
-----------------------------
The following gives examples of the number of shares that would be issued if the
$800,000 of convertible notes in this offering were converted at one time at
prices representing 25%, 50%, and 75% below the current market price (assuming a
conversion price to the note holders of $0.003). As of August 31, 2005, we had
747,103,929 shares of common stock outstanding.
Price With Number % of
% Below Per Discount of Shares Outstanding
Market Share at 30% Issuable Stock
--------- ------------ ---------- ---------------- -----------
25% $0.00225 $0.00158 506,329,114 68%
50% $0.0015 $0.00105 761,904,762 102%
75% $0.00075 $0.00053 1,509,433,962 202%
PLAN OF DISTRIBUTION
Each selling stockholders will most likely sell their shares on the open market.
Our stock is quoted on the OTCBB under the symbol DRDF.
Therefore, the selling stockholders may, from time to time, sell any or all of
their shares of common stock on any stock exchange, market, or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. There is no assurance that the selling stockholders
will sell any or all of the common stock in this offering. The selling
stockholders may use any one or more of the following methods when selling
shares:
o Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers.
o Block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction.
o Purchases by a broker-dealer as principal and resale by the
broker-dealer for its own account.
o An exchange distribution following the rules of the applicable
exchange
o Privately negotiated transactions
o Short sales or sales of shares not previously owned by the
seller
39
o Broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share
o A combination of any such methods of sale any other lawful
method
The selling stockholders may also engage in
o Short selling against the box, which is making a short sale
when the seller already owns the shares.
o Other transactions in our securities or in derivatives of our
securities and the subsequent sale or delivery of shares by
the stockholder.
o Pledging shares to their brokers under the margin provisions
of customer agreements. If a selling stockholder defaults on a
margin loan, the broker may, from time to time, offer to sell
the pledged shares.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from selling stockholders in amounts to be negotiated. If any
broker-dealer acts as agent for the purchaser of shares, the broker-dealer may
receive commission from the purchaser in amounts to be negotiated. The selling
stockholders do not expect these commissions and discounts to exceed what is
customary in the types of transactions involved.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholders defaults on
a margin loan, the broker may, from time to time, offer and sell the pledged
shares. The selling stockholders and any other persons participating in the sale
or distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. In
addition, if such short sale is deemed to be a stabilizing activity, then the
selling stockholder will not be permitted to engage in a short sale of our
common stock. All of these limitations may affect the marketability of the
shares.
The selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be considered to be "underwriters" within the meaning of
the Securities Act for such sales. An underwriter is a person who has purchased
shares from an issuer with a view towards distributing the shares to the public.
In such event, any commissions received by such broker-dealers or agents and any
profit on the resale of the shares purchased by them may be considered to be
underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares in this offering. However, we will not pay any commissions or any other
fees in connection with the resale of the common stock in this offering. We have
agreed to indemnify the selling shareholders and their officers, directors,
employees and agents, and each person who controls any selling shareholder, in
certain circumstances against certain liabilities, including liabilities arising
under the Securities Act. Each selling shareholder has agreed to indemnify DRDF
and its directors and officers in certain circumstances against certain
liabilities, including liabilities arising under the Securities Act.
If the selling stockholder notifies us that they have a material arrangement
with a broker-dealer for the resale of the common stock, then we would be
required to amend the registration statement of which this prospectus is a part,
and file a prospectus supplement to describe the agreements between the selling
stockholder and the broker-dealer.
LEGAL PROCEEDINGS
In October 1999, the law firms of Weiss & Yourman and Stull, Stull & Brody made
a public announcement that they had filed a lawsuit against the Company and
certain current and past officers and/or directors, alleging violation of
federal securities laws and, in November 1999, the lawsuit, filed in the name of
Nahid Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on the Company. In January 2003, the Company entered into a
40
Stipulation of Settlement with the plaintiffs. It agreed to pay the plaintiffs
5,000,000 shares of common stock and $200 in cash. The Parties have accepted the
settlement. DRDF has issued the shares, and its insurance carrier has paid the
$200 cash payment. Pursuant to a hearing in May 2003 the Court provided approval
to the settlement, which has been satisfied.
On August 22, 2002, the Company was sued by its former landlord, Carmel Mountain
#8 Associates, L.P. or past due rent on its former facilities at 15175
Innovation Drive, San Diego, CA 92127. A judgment was entered against the
Company for $56 in February 2003. The debt is still outstanding.
DRDF was a party to a lawsuit filed by Symphony Partners, L.P. related to its
acquisition of SourceOne Group, LLC. As reported on Form 8-K, dated July 22,
2003, the plaintiffs sought payment of $702. In June 2003, the Company entered
into a settlement with the plaintiffs for a cash payment of $274, which has been
paid.
DRDF is one of dozens of companies sued by The Massachusetts Institute of
Technology, et al., related to a patent held by the plaintiffs that may be
related to part of the Company's ColorBlind software. Subsequent to the period
reported in this filing, in June 2003, the Company entered into a settlement
with the plaintiffs who have agreed to dismiss their claims against DRDF with
prejudice in exchange for a settlement fee payment of $10, which has been paid.
The Company and its SourceOne Group ("SOG") subsidiary have been sued by the
Arena Football 2 Operating Company, LLC ("Arena") in Wayne County Circuit Court,
Michigan. The claims made by Arena against the Company and SOG are that SOG
failed to perform under an agreement to procure and furnish workers'
compensation insurance and that Arena incurred alleged damages in an amount no
less than $709 as a result. Management has vigorously contested the claims made
by Arena. In addition, the Company has filed claims against Arena and Arena's
agent, Thilman and Filippini, based on, among other things, the representations
made to SOG that let it to enter into the agreement with Arena. The case remains
in the discovery phase.
The Company and SOG have been sued by Liberty Mutual Insurance Company
("Liberty") in the United States Distriict Court for the Northern District of
Illinois. The nature of the specific claims made by Liberty against the Company
and SOG are that the Company and SOG were and are obligated to make additional
premium payments to Liberty for workers' compensation insurance, which is
related to the Arena litigation described above. The initial claim by Liberty
was estimated by Liberty to be $829 and is now claimed to exceed $1,000.
Management has vigorously contested the claims made by Liberty. The case remains
in the discovery phase.
On February 10, 2005, Berryman & Henigar Enterprises ("Plaintiff"), filed a
complaint in the Superior Court of California, County of San Diego, Case No.
GIC842610, against Warning Model Management, Inc. for breach of a promissory
note issued pursuant to terms and conditions of a certain stock purchase and
sale agreement dated September 9, 2004. The Company and its subsidiary,
Employment Systems, Inc. ("ESI"), each allegedly guaranteed payments on the
underlying promissory note. Plaintiff seeks principal damages of $750,000.00 in
that regard. Warning Model Management, Inc. has taken the position that
Plaintiff failed to disclose certain material information in the underlying
transaction which thereby negates the promissory note. As such, the guarantees
allegedly provided by the Company and ESI could thereby be invalided. Discovery
has commenced but is not complete at this time. Trial has not been set.
Management has fully cooperated in our investigation of the facts and we intend
to defend against the claims asserted. This case is currently in arbitation.
On March 17, 2005, Greenland Corporation ("Plaintiff"), filed an amended
complaint in the Superior Court of California, County of San Diego, Case No.
GIC842605, against the Company and multiple other individuals and entities
resulting from a transaction as evidenced by the "Agreement to Acquire Shares"
dated August 9, 2002, whereby the Company obtained a controlling equity interest
in Plaintiff. Plaintiff contends that the Company engaged in various forms of
wrongdoing including breach of fiduciary duty, conversion, conspiracy and aiding
and abetting. Discovery has commenced but is not complete at this time. Trial
has not been set. Management has fully cooperated in our investigation of the
facts and we intend to continue with vigorous defense against the claims
asserted.
On August 29, 2005, United Bank & Trust filed suit against the Company and other
parties. The allegations of the lawsuit are that the Company guaranteed certain
debt owed by InfoServices, Inc. and is liable in the amount of $678. The case is
in its early stages and discovery has not yet commenced. However, the Company
intends to vigorously defend itself against the claims asserted.
41
Throughout fiscal 2003 and 2004, and through the date of this filing, trade
creditors have made claims and/or filed actions alleging the failure of the
Company to pay its obligations to them in a total amount exceeding $3,000. These
actions are in various stages of litigation, with many resulting in judgments
being entered against the Company. Several of those who have obtained judgments
have filed judgment liens on the Company's assets. These claims range in value
from less than one thousand dollars to just over one million dollars, with the
great majority being less than twenty thousand dollars.
EXPERTS
The financial statements of DRDF at June 30, 2004 and 2003, appearing in this
Prospectus and Registration Statement have been audited by Pohl, McNabola, Berg
& Company, LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Legal matters concerning the issuance of shares of common stock offered in this
registration statement will be passed upon by Naccarato & Associates, Owen
Naccarato, Esq.
OTHER AVAILABLE INFORMATION
We are subject to the reporting requirements of the Securities and Exchange
Commission (the "Commission"). We file periodic reports, proxy statements and
other information with the Commission under the Securities Exchange Act of 1934.
We will provide without charge to each person who receives a copy of this
prospectus, upon written or oral request, a copy of any information that is
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless the exhibits are themselves
specifically incorporated by reference). Requests should be directed to: Brian
Bonar
We have filed a registration statement on Form SB-2 under the Securities Act of
1933 Act with the Commission in connection with the securities offered by this
Prospectus. This Prospectus does not contain all of the information that is the
registration statement, you may inspect without charge, and copy our filings, at
the public reference room maintained by the Commission at 450 Fifth Street, N.W.
Washington, D.C. 20549. Copies of this material may also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W. Washington,
D.C. 20549, at prescribe rates.
Information about the public reference room is available from the commission by
calling 1-800-SEC-0330.
The commission maintains a web site on the Internet that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the commission. The address of the site is www.sec.gov.
Visitors to the site may access such information by searching the EDGAR archives
on this web site.
We have not authorized anyone to provide you with any information that is
different.
The selling security holders are offering to sell, and seeking offers to buy,
shares of common stock only in jurisdictions where such offers and sales are
permitted.
The information contained in this Prospectus is accurate as of the date of this
prospectus. We will keep this prospectus up to date and accurate.
FINANCIAL STATEMENTS
OUR FINANCIAL STATEMENTS BEGIN ON PAGE F-1
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
1. On September 3, 2003, the Registrant appointed Pohl, McNabola, Berg &
Company, LLP ("PMBC") as Imaging Technologies Corporation's ("ITEC," the
"Registrant", or the "Company") independent auditors upon the recommendation of
its Audit Committee.
42
The Dalrada (formerly ITEC) Audit Committee interviewed a number of candidates,
including Stonefield Josephson, Inc., its prior independent auditors. The Audit
Committee determined that it was in the best interests of the Company to engage
a new independent auditor to perform services for ITEC and its subsidiaries, two
of whose shares are publicly traded.
Stonefield Josephson's audit report on the financial statements of the Company
as of June 30, 2002 expressed its uncertainty as to the Company's ability to
continue as a going concern. They cited recurring losses from operations, the
Company's working capital deficiency, and limited cash resources. These
circumstances were also present in the financial statements of the Company as of
March 31, 2003 and in financial statements for several consecutive reporting
periods. The Company expects that this condition will be reported in its audited
financial statements for the fiscal year ended June 30, 2003. PMBC has been
engaged to perform the audit for this fiscal year ended June 30, 2003.
The Registrant believes there were no disagreements with Stonefield Josephson
within the meaning of Instruction 4 to Item 304 of Regulation S-K on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure in connection with the audit of the Company's
financial statements for the period ended June 30, 2002, or for any subsequent
interim period, which disagreements, if not resolved to their satisfaction,
would have caused Stonefield Josephson to make reference to the subject matter
of the disagreements in connection with its report.
During the fiscal years ended June 30, 2000, 2001, 2002, and through the
present, there have been no reportable events (as defined in Item 304(a)(1)(v)
of Regulation S-K) of the type required to be disclosed by that section. The
Company has not consulted with any other independent auditors regarding either
(i) the application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Company's financial statements; or (ii) any matter that was either the
subject matter of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation
S-K and the related instructions) or a reportable event (as defined in Item
304(a)(1)(v) of Regulation S-K).
A letter of Stonefield Josephson addressed to the Securities and Exchange
Commission is included as Exhibit 16 to this Form 8-K. Such letter states that
such firm agrees with the statements made by the Company in this Item 4.
2. On August 23, 2002, the Registrant appointed Stonefield Josephson, Inc.
("SJI") as Imaging Technologies Corporation's ("ITEC," the "Registrant", or the
"Company") independent auditors because the Company and its prior auditors,
Merdinger, Fruchter, Rosen & Corso, PC ("MFRC").
The Registrant stated that the Company and MFRC "mutually agreed that it
was in the best interests of the Company to have auditors with offices closer to
the Company's corporate offices". However, MFRC disagrees.
MFRC was appointed as ITEC auditors on April 22, 2002, Boros & Farrington,
PC ("BF"). Since the appointment, MFRC has had staff changes, which the
Registrant believes would have adversely affected services provided to the
Registrant. MFRC disagrees with this assessment.
Other than those disagreements noted above, The Registrant believes
there were no othger disagreements with MFRC within the meaning of Instruction 4
to Item 304 of Regulation S-K on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure with
regard to its services to the Registrant, which disagreements, if not resolved
to their satisfaction, would have caused MFRC to make reference to the subject
matter of the disagreements.
On August 23, 2002, the Company engaged SJI as the Company's independent
auditors for the year ended June 30, 2002, replacing the firm of MFRC. The
change has been approved by the Company's audit committee.
43
3. On April 22, 2002, the Registrant appointed Merdinger, Fruchter, Rosen &
Corso, PC ("MFRC") as Imaging Technologies Corporation's ("ITEC," the
"Registrant", or the "Company") independent auditors because the Company and its
prior auditors, Boros & Farrington, PC ("BF") have mutually agreed that BF may
not be able to adequately serve the continuing auditing requirements of the
Company.
ITEC's acquisition of SourceOne Group, Inc., which is located in Virginia,
has created the need for auditing services on a larger scope than those provided
by BF.
BF's audit report on the financial statements of the Company as of June 30,
2001 expressed its uncertainty as to the Company's ability to continue as a
going concern. They cited recurring losses from operations, the Company's
working capital deficiency, and limited cash resources. These circumstances were
also present in the financial statements of the Company as of September 30, 2001
and December 31, 2000 and 2001; and will be reported in the Company's financial
statements as of March 31, 2002. The Registrant has not yet filed its Form 10-Q
for the period ended March 31, 2002.
The Registrant believes there were no disagreements with BF within the
meaning of Instruction 4 to Item 304 of Regulation S-K on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure in connection with the audit of the Company's financial
statements for the periods ended June 30, 1999, 2000, and 2001, or for any
subsequent interim period, which disagreements, if not resolved to their
satisfaction, would have caused BF to make reference to the subject matter of
the disagreements in connection with its report.
During the fiscal year ended June 30, 1999, 2000, 2001, and through the
present, there have been no reportable events (as defined in Item 304(a)(1)(v)
of Regulation S-K) of the type required to be disclosed by that section. The
Company has not consulted with any other independent auditors regarding either
(i) the application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Company's financial statements; or (ii) any matter that was either the
subject matter of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation
S-K and the related instructions) or a reportable event (as defined in Item
304(a)(1)(v) of Regulation S-K).
On April 22, 2002, the Company engaged MFRC as the Company's independent
auditors for the year ended June 30, 2002, replacing the firm of BF. The change
has been approved by the Company's audit committee.
A letter of BF addressed to the Securities and Exchange Commission is
included as Exhibit 16 to this Form 8-K. Such letter states that such firm
agrees with the statements made by the Company in this Item 4.
44
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
-------------------------------------------------
INDEMNIFICATION OF DIRECTORS AND OFFICER
Section 145 of the General Corporation Law of the State of Delaware provides, in
general, that a corporation incorporated under the laws of the State of
Delaware, such as the registrant, may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding (other than a derivative action by or in the right of
the corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe such person's conduct was
unlawful. In the case of a derivative action, a Delaware corporation may
indemnify any such person against expenses (including attorneys' fees) actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or any other court in which such
action was brought determines such person is fairly and reasonable entitled to
indemnity for such expenses.
Our certificate of incorporation provides that directors shall not be personally
liable for monetary damages to our company or our stockholders for breach of
fiduciary duty as a director, except for liability resulting from a breach of
the director's duty of loyalty to our company or our stockholders, intentional
misconduct or willful violation of law, actions or inactions not in good faith,
an unlawful stock purchase or payment of a dividend under Delaware law, or
transactions from which the director derives improper personal benefit. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission. Our certificate of incorporation also
authorizes us to indemnify our officers, directors and other agents to the
fullest extent permitted under Delaware law. Our bylaws provide that the
registrant shall indemnify our officers, directors and employees. The rights to
indemnity thereunder continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors, and administrators of the person. In addition, expenses incurred by a
director or officer in defending any action, suit or proceeding by reason of the
fact that he or she is or was a director or officer of our company shall be paid
by the registrant unless such officer, director or employee is adjudged liable
for negligence or misconduct in the performance of his or her duties.
This means that our certificate of incorporation provides that a director is not
personally liable for monetary damages to us or our stockholders for breach of
his or her fiduciary duties as a director. A director will be held liable for a
breach of his or her duty of loyalty to us or our stockholders, his or her
intentional misconduct or willful violation of law, actions or in actions not in
good faith, an unlawful stock purchase or payment of a dividend under Delaware
law, or transactions from which the director derives an improper personal
benefit. This limitation of liability does not affect the availability of
equitable remedies against the director including injunctive relief or
rescission. Our certificate of incorporation authorizes us to indemnify our
officers, directors and other agent to the fullest extent permitted under
Delaware law. We have entered into indemnification agreements with all of our
officers and directors. In some cases, the provisions of these indemnification
agreements may be broader than the specific indemnification provisions contained
in our certificate of incorporation or otherwise permitted under Delaware law.
Each indemnification agreement may require us to indemnify an officer or
director against liabilities that may arise by reason of his status or service
as an officer or director, or against liabilities arising from the director's
willful misconduct of a culpable nature.
Commission Policy
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling DRDF. DRDF has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is therefore unenforceable.
45
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Related to the securities being registered. The expenses shall be paid by the
Registrant.
SEC Registration Fee $243.26
Printing and Engraving Expenses $5,000.00
Legal Fees and Expenses $20,000.00
Accounting Fees and Expenses $15,000.00
Transfer Agent Fees $5,000.00
Blue Sky Fees $1,000.00
Miscellaneous $5,000.00
----------
Total $51,243.26
RECENT SALES OF UNREGISTERED SECURITIES
---------------------------------------
DRDF made the following sales of stock without registration using the exceptions
available under the Securities Act of 1933, as amended, including unregistered
sales made pursuant to Section 4(2) of the Securities Act of 1933, as follows:
Fiscal Year 2001
----------------
On March 6, 2001, 5,067,568 shares were issued to the Celeste Trust for the
conversion of a convertible debenture at $0.056 per share. These shares were
valued at $283,784. These shares were issued pursuant to the exempt provided by
Section 4(2) of the Securities Act of 1933, as amended. We made a determination
that the Celest Trust, was a sophisticated investor with enough knowledge and
experience in business to evaluate the risks and merits of the investment.
Fiscal Year 2002
----------------
On January 28, 2002, 166,667 shares were issued to Lucan Allen Cline at $0.46
per share in payment of consulting services valued at $76,667. These shares were
issued pursuant to the exempt provided by Section 4(2) of the Securities Act of
1933, as amended. We made a determination that Lucan Allen Cline, was a
sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
On April 3, 2002, 35,000,000 shares were issued to American Industries at $.033
per shares for a legal settlement valued at $1,155,000. These shares were issued
pursuant to the exempt provided by Section 4(2) of the Securities Act of 1933,
as amended. We made a determination that American Industires, was a
sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
Fiscal Year 2003
----------------
On July 8, 2002, 450,000 shares were issued to Technipower, Inc. at $0.16 per
share in settlement of debt valued at $72,000. These shares were issued pursuant
to the exempt provided by Section 4(2) of the Securities Act of 1933, as
amended. We made a determination that Technipower, Inc., was a sophisticated
investor with enough knowledge and experience in business to evaluate the risks
and merits of the investment.
On October 10, 2002, 250,000 shares were issued to Gary Fong at $0.013 per share
for payment of rent, valued at $3,250. These shares were issued pursuant to the
exempt provided by Section 4(2) of the Securities Act of 1933, as amended. We
made a determination that Gary Fong, was a sophisticated investor with enough
knowledge and experience in business to evaluate the risks and merits of the
investment.
On November 11, 2002, 1,000,000 shares were issued to Michael Belletini at
$0.013 per share for employee compensation valued at $13,000. These shares were
issued pursuant to the exempt provided by Section 4(2) of the Securities Act of
1933, as amended. We made a determination that Michael Belletini, was a
sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
On November 11, 2002, 1,000,000 shares were issued to David Stone at $0.013 per
share for employee compensation valued at $13,000. These shares were issued
pursuant to the exempt provided by Section 4(2) of the Securities Act of 1933,
as amended. We made a determination that David Stone, was a sophisticated
investor with enough knowledge and experience in business to evaluate the risks
and merits of the investment.
46
On November 11, 2002, 1,000,000 shares were issued to David Valade at $0.013 per
share for employee compensation valued at $13,000. These shares were issued
pursuant to the exempt provided by Section 4(2) of the Securities Act of 1933,
as amended. We made a determination that David Valade, was a sophisticated
investor with enough knowledge and experience in business to evaluate the risks
and merits of the investment.
On November 14, 2002, 500,000 shares were issued to Hiichiro Ogawa at $0.012 per
share for consulting services valued at $6,000. These shares were issued
pursuant to the exempt provided by Section 4(2) of the Securities Act of 1933,
as amended. We made a determination that Hiichiro Ogawa, was a sophisticated
investor with enough knowledge and experience in business to evaluate the risks
and merits of the investment.
On November 14, 2002, 437,500 shares were issued to Sayakp Torihara at $0.012
per share for consulting services valued at $6,000. These shares were issued
pursuant to the exempt provided by Section 4(2) of the Securities Act of 1933,
as amended. We made a determination that Sayakp Torihara, was a sophisticated
investor with enough knowledge and experience in business to evaluate the risks
and merits of the investment.
On November 18, 2002, 198,379 shares were issued to Balmore Funds at $0.008 per
share for conversion of a convertible debenture valued at $1,666. These shares
were issued pursuant to the exempt provided by Section 4(2) of the Securities
Act of 1933, as amended. We made a determination that Balmore S.A., was a
sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
On December 20, 2002, 45,000,000 shares were issued to Mr. Kim Guardtec, Inc.
for foreign services rendered valued at $490,000. These shares were issued
pursuant to the exempt provided by Section 4(2) of the Securities Act of 1933,
as amended. We made a determination that Mr. Kim, was a sophisticated investor
with enough knowledge and experience in business to evaluate the risks and
merits of the investment.
On January 9, 2003 3,125,000 shares were issued to Sid Berman at $0.013 for the
acquisition of QPI, valued at $40,625. These shares were issued pursuant to the
exempt provided by Section 4(2) of the Securities Act of 1933, as amended. We
made a determination that Sid Berman, was a sophisticated investor with enough
knowledge and experience in business to evaluate the risks and merits of the
investment.
On January 9, 2003 1,250,000 shares were issued to Lee Finger at $0.013 for the
acquisition of QPI, valued at $16,250. These shares were issued pursuant to the
exempt provided by Section 4(2) of the Securities Act of 1933, as amended. We
made a determination that Lee Finger, was a sophisticated investor with enough
knowledge and experience in business to evaluate the risks and merits of the
investment.
On January 9, 2003 1,250,000 shares were issued to Hal Kirsch at $0.013 for the
acquisition of QPI, valued at $16,250. These shares were issued pursuant to the
exempt provided by Section 4(2) of the Securities Act of 1933, as amended. We
made a determination that Hal Kirsch was a sophisticated investor with enough
knowledge and experience in business to evaluate the risks and merits of the
investment.
On January 9, 2003, 500,000 shares were issued to Edie Youngman at $0.013 for
the acquisition of QPI, valued at $6,500. These shares were issued pursuant to
the exempt provided by Section 4(2) of the Securities Act of 1933, as amended.
We made a determination that Mr. Youngman, was a sophisticated investor with
enough knowledge and experience in business to evaluate the risks and merits of
the investment.
On January 14, 2003, 5,000,000 shares were issued to Eun Hee Chung at $0.012 for
consulting services valued at $60,000. These shares were issued pursuant to the
exempt provided by Section 4(2) of the Securities Act of 1933, as amended. We
made a determination that Eun Hee Chung, was a sophisticated investor with
enough knowledge and experience in business to evaluate the risks and merits of
the investment.
On January 14, 2003, 5,000,000 shares were issued to W.Y. Kim at $0.012 for
$60,000 in cash. These shares were issued pursuant to the exempt provided by
Section 4(2) of the Securities Act of 1933, as amended. We made a determination
that W.Y. Kim was a sophisticated investor with enough knowledge and experience
in business to evaluate the risks and merits of the investment.
47
On March 3, 2003, 300,000 shares were issued to Steven Reid at $0.011 for
consulting services valued at $60,000. These shares were issued pursuant to the
exempt provided by Section 4(2) of the Securities Act of 1933, as amended. We
made a determination that Steven Reid, was a sophisticated investor with enough
knowledge and experience in business to evaluate the risks and merits of the
investment.
On April 21, 2003, 1,000,000 shares were issued to Lester Brann at $0.011 per
share for employee compensation valued at $11,000. These shares were issued
pursuant to the exempt provided by Section 4(2) of the Securities Act of 1933,
as amended. We made a determination that Lester Brann, was a sophisticated
investor with enough knowledge and experience in business to evaluate the risks
and merits of the investment.
Fiscal Year 2004
----------------
On July 18, 2003, 5,945,946 shares were issued to Bristol Investment Fund at
$0.019 per share for conversion of a convertible debenture valued at $112,378.
These shares were issued pursuant to the exempt provided by Section 4(2) of the
Securities Act of 1933, as amended. We made a determination that Bristol Capital
....., was a sophisticated investor with enough knowledge and experience in
business to evaluate the risks and merits of the investment.
On August 1, 2003, 5,000,000 shares were issued to MarketByte LLC at $0.025 for
consulting services valued at $125,000. These shares were issued pursuant to the
exempt provided by Section 4(2) of the Securities Act of 1933, as amended. We
made a determination that MarketByte, LLC., was a sophisticated investor with
enough knowledge and experience in business to evaluate the risks and merits of
the investment.
On October 2, 2003, 12,402,597 shares were issued to Bristol Investment Fund at
$0.025 per share for conversion of a convertible debenture valued at $312,545.
These shares were issued pursuant to the exempt provided by Section 4(2) of the
Securities Act of 1933, as amended. We made a determination that Bristol Capital
....., was a sophisticated investor with enough knowledge and experience in
business to evaluate the risks and merits of the investment.
On October 9, 2003, 175,000 shares were issued to Stull, Stull & Brody at $0.032
for legal services valued at $5,600. These shares were issued pursuant to the
exempt provided by Section 4(2) of the Securities Act of 1933, as amended. We
made a determination that Stull, Stull & Brody, was a sophisticated investor
with enough knowledge and experience in business to evaluate the risks and
merits of the investment.
On October 9, 2003, 1,075,000 shares were issued to Weiss & Youngman at $0.032
for legal services valued at $34,400. These shares were issued pursuant to the
exempt provided by Section 4(2) of the Securities Act of 1933, as amended. We
made a determination that Weiss & Youngman was a sophisticated investor with
enough knowledge and experience in business to evaluate the risks and merits of
the investment.
On October 2, 2003, 5,876,872 shares were issued to Bristol Investment Fund at
$0.021 per share for conversion of a convertible debenture valued at $123,414.
These shares were issued pursuant to the exempt provided by Section 4(2) of the
Securities Act of 1933, as amended. We made a determination that Bristol Capital
....., was a sophisticated investor with enough knowledge and experience in
business to evaluate the risks and merits of the investment.
On December 18, 2003, 2,454,146 shares were issued to Bristol Investment Fund at
$0.013 per share for conversion of a convertible debenture valued at $32,640.
These shares were issued pursuant to the exempt provided by Section 4(2) of the
Securities Act of 1933, as amended.
On January 4, 2004, 75,000 shares were issued to Gary Fong at $0.015 for rent
valued at $1,125. These shares were issued pursuant to the exempt provided by
Section 4(2) of the Securities Act of 1933, as amended. We made a determination
that Gary Fong was a sophisticated investor with enough knowledge and experience
in business to evaluate the risks and merits of the investment.
48
On January 7, 2004, 75,000 shares were issued to Gary Fong at $0.02 for services
valued at $1,500. These shares were issued pursuant to the exempt provided by
Section 4(2) of the Securities Act of 1933, as amended. We made a determination
that Gary Fong, was a sophisticated investor with enough knowledge and
experience in business to evaluate the risks and merits of the investment.
On January 7, 2004, 150,000 shares were issued to Karim Alami at $0.02 for
services valued at $3,000. These shares were issued pursuant to the exempt
provided by Section 4(2) of the Securities Act of 1933, as amended. We made a
determination that Karim Alami was a sophisticated investor with enough
knowledge and experience in business to evaluate the risks and merits of the
investment.
On January 15, 2004, 7,481,989 shares were issued to Amro at $0.0124 per share
for the conversion of convertible debentures and accrued interest of $92,777.
These shares were issued pursuant to the exempt provided by Section 4(2) of the
Securities Act of 1933, as amended. We made a determination that Amro, was a
sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
On February 2, 2004, 4,523,810 shares were issued to Bristol Capital at $0.0084
per share for the conversion of convertible debentures of $38,000. These shares
were issued pursuant to the exempt provided by Section 4(2) of the Securities
Act of 1933, as amended. We made a determination that Bristol Capital, was a
sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
On February 4, 2004, 12,000,000 shares were issued (Bonar 7,000,000, Dietrich
and Gaer both 2,500,000) pursuant to the exercise of stock options with an
exercise price of $0.006. These shares were issued pursuant to the exempt
provided by Section 4(2) of the Securities Act of 1933, as amended. We made a
determination that these individuals were sophisticated investors with enough
knowledge and experience in business to evaluate the risks and merits of the
investment.
On February 19, 2004, 7,500,000 shares were issued (Fryer 5,000,000 and Green
2,500,000) pursuant to the exercise of stock options with an exercise price of
$0.006. These shares were issued pursuant to the exempt provided by Section 4(2)
of the Securities Act of 1933, as amended.
On March 1, 2004, 12,852,603 shares were issued to Bristol Capital at $0.007 per
share for the conversion of convertible debentures of $89,968. These shares were
issued pursuant to the exempt provided by Section 4(2) of the Securities Act of
1933, as amended. We made a determination that Bristol Capital, was a
sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
On March 5, 2004, 10,000,000 shares were issued (Green and Fryer both 4,875,000
and Dietrich Green 250,000) pursuant to the exercise of stock options with an
exercise price of $0.006 per share. These shares were issued pursuant to the
exempt provided by Section 4(2) of the Securities Act of 1933, as amended.
On March 8, 2004, 2,747,287 shares were issued to Stonestreet at $0.0073 per
share for the conversion of convertible debentures of $20,000. These shares were
issued pursuant to the exempt provided by Section 4(2) of the Securities Act of
1933, as amended. We made a determination that Stonestreet Limited Partnership
was a sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
On March 15, 2004, 13,121,275 shares were issued to Bristol Capital at $0.0049
per share for the conversion of convertible debentures of $64,294. These shares
were issued pursuant to the exempt provided by Section 4(2) of the Securities
Act of 1933, as amended. We made a determination that Bristol Capital, was a
sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
On March 16, 2004, 6,911,011 shares were issued to Balmore S.A at $0.0088 per
share for the conversion of convertible debentures of $60,817. These shares were
issued pursuant to the exempt provided by Section 4(2) of the Securities Act of
1933, as amended. We made a determination that Balmore S.A., was a sophisticated
investor with enough knowledge and experience in business to evaluate the risks
and merits of the investment.
On May 25, 2004, 13,954,855 shares were issued to Stonestreet Limited
Partnership at $0.00475 per share for conversion of a convertible debenture
valued at $65,000 plus $1,285.56 in interest. These shares were issued pursuant
to the exempt provided by Section 4(2) of the Securities Act of 1933, as
amended. We made a determination that Stonestreet Limited Partnership was a
sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
49
On May 25, 2004, 36,771,937 shares were issued to Balmore S.A at $0.0046526 per
share for conversion of a convertible debenture valued at $140,000 and
$31,087.79 in interest. These shares were issued pursuant to the exempt provided
by Section 4(2) of the Securities Act of 1933, as amended. We made a
determination that Balmore S.A., was a sophisticated investor with enough
knowledge and experience in business to evaluate the risks and merits of the
investment.
On May 25, 2004, 27,500,000 shares were issued to Howard Schraub at $0.008 per
share for conversion of a convertible debenture valued at $220,000. These shares
were issued pursuant to the exempt provided by Section 4(2) of the Securities
Act of 1933, as amended. We made a determination that Bristol Investment Fund,
Ltd., was a sophisticated investor with enough knowledge and experience in
business to evaluate the risks and merits of the investment.
On May 25, 2004, 7,500,000 shares were issued to Blue Fin Corporation at $0.008
per share for conversion of a convertible debenture valued at $60,000. These
shares were issued pursuant to the exempt provided by Section 4(2) of the
Securities Act of 1933, as amended.
On September 22, 2004, Bristol Investment Fund, Ltd., was issued as a partial
conversion of $17,500 of principal and $3,728.22 of interest at $0.0021 per
share into 10,108,706 shares of Dalrada common stock. These shares were issued
pursuant to the exempt provided by Section 4(2) of the Securities Act of 1933,
as amended.
On October 22, 2004, Bristol Investment Fund, Ltd., was issued as a conversion
of $35,000 of principal and $7,640.55 of interest at $0.00147 per share into
28,427,032 shares of Dalrada common stock. These shares were issued pursuant to
the exempt provided by Section 4(2) of the Securities Act of 1933, as amended.
We made a determination that Bristol Investment Fund, Ltd., was a sophisticated
investor with enough knowledge and experience in business to evaluate the risks
and merits of the investment.
On December 3, 2004, Bristol Investment Fund, Ltd., was issued as a conversion
of $29,000 of principal and $6,635.84 of interest at $0.00154 per share into
23,757,224 shares of Dalrada common stock. These shares were issued pursuant to
the exempt provided by Section 4(2) of the Securities Act of 1933, as amended.
We made a determination that Bristol Investment Fund, Ltd., was a sophisticated
investor with enough knowledge and experience in business to evaluate the risks
and merits of the investment.
On December 9, 2004, 21,121,413 shares were issued to Stonestreet Limited
Partnership at $0.00157 per share for conversion of a convertible debenture
valued at $30,000 plus $1893.56 in interest. These shares were issued pursuant
to the exempt provided by Section 4(2) of the Securities Act of 1933, as
amended. We made a determination that Stonestreet Limited Partnership was a
sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
From October 1, 2004 through December 31, 2004 the following shares were issued
for services rendered:
Whiteford Brann, Michael Brann and Jason Brann were issued 375,000, 576,950 and
576,950 shares of Dalrada common stock respectively valued at $.00458 a shares
for they service they performed in relation to the acquisition of Jackson
Staffing. These shares were issued pursuant to the exempt provided by Section
4(2) of the Securities Act of 1933, as amended. We made a determination that
Whiteford Brann, Michael Brann and Jason Brann were sophisticated investors with
enough knowledge and experience in business to evaluate the risks and merits of
the investment.
Anne Woelk was issued 144,000 shares valued at $.00500 a share for
administrative services rendered. These shares were issued pursuant to the
exempt provided by Section 4(2) of the Securities Act of 1933, as amended. We
made a determination that Anne Woelk was a sophisticated investor with enough
knowledge and experience in business to evaluate the risks and merits of the
investment.
Dominick Zack was issued 4,000,000 shares valued at $.00500 a share for
accounting services rendered in relation to the Jackson Staffing subsidiary.
These shares were issued pursuant to the exempt provided by Section 4(2) of the
Securities Act of 1933, as amended. We made a determination that Dominick Zack
was a sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
Deborah McNeil was issued 1,000,000 shares valued at $.00500 a share for
accounting services rendered in relation to the Jackson Staffing subsidiary.
These shares were issued pursuant to the exempt provided by Section 4(2) of the
Securities Act of 1933, as amended. We made a determination that Deborah McNeil
was a sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
50
On April 1, 2005, 6,823,960 shares were issued to Longview Fund, LP for a
partial conversion of a convertible debenture valued at $8,645.90. These shares
were issued pursuant to the exempt provided by Section 4(2) of the Securities
Act of 1933, as amended. We made a determination that Longview Fund, LP was a
sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
On April 5, 2005, 8,298,277 shares were issued to Longview Fund, LP for a
partial conversion of a convertible debenture valued at $10,513.94. These shares
were issued pursuant to the exempt provided by Section 4(2) of the Securities
Act of 1933, as amended. We made a determination that Longview Fund, LP was a
sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
On April 8, 2005, 46,852,671 shares were issued to Balmore S.A. at $0.00181 per
share for conversion of a convertible debenture valued at $65,000 plus
$19,803.33 in interest. These shares were issued pursuant to the exempt provided
by Section 4(2) of the Securities Act of 1933, as amended. We made a
determination that Balmore S.A. was a sophisticated investor with enough
knowledge and experience in business to evaluate the risks and merits of the
investment.
On July 12, 2005, 17,659,540 shares were issued to Bristol Investment Fund, Ltd.
at $0.001267 per share for conversion of a convertible debenture valued at
$22,374.67. These shares were issued pursuant to the exempt provided by Section
4(2) of the Securities Act of 1933, as amended. We made a determination that
Bristol Investment Fund, Ltd was a sophisticated investor with enough knowledge
and experience in business to evaluate the risks and merits of the investment.
On July 12, 2005, 6,820,000 shares were issued to Longview Fund, LP for a
partial conversion of a convertible debenture valued at $27,280. These shares
were issued pursuant to the exempt provided by Section 4(2) of the Securities
Act of 1933, as amended. We made a determination that Longview Fund, LP was a
sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
51
EXHIBITS
--------
Exhibit
Number Description
------- -----------
3(c) Certificate of Amendment of Certificate of Incorporation of the Company, filed
May 23, 1997, as amended, and currently in effect (Incorporated by reference to
1997 Form 10-K) *
3(d) Certificate of Amendment of Certificate of Incorporation, filed January 12,
1999, as amended and currently in effect (Incorporated by reference to Form 10-Q
for the period ended December 31, 1998) *
3(e) Certificate Eliminating Reference to Certain Series of Shares of Stock from the
Certificate of Incorporation, filed January 12, 1999, as amended and currently
in effect (Incorporated by reference to Form 10-Q for the period ended December
31, 1998) *
3(f) By-Laws of the Company, as amended, and currently in effect (Incorporated by
reference to Exhibit 3(b) to 1987 Form 10-K) *
3(g) Certificate of Amendment of Certificate of Incorporation, filed May 12, 2000, as
amended and currently in effect (Incorporated by reference to Exhibit 3(g) to
2001 Form 10-K) *
4(a) Amended Certificate of Designation of Imaging Technologies Corporation with
respect to the 5% Convertible Preferred Stock (Incorporated by reference to
Exhibit 4(d) to 1987 Form 10-K) *
4(b) Amended Certificate of Designation of Imaging Technologies Corporation with
respect to the 5% Series B Convertible Preferred Stock (Incorporated by
reference to Exhibit 4(b) to 1988 Form 10-K) *
4(c) Certificate of Designations, Preferences and Rights of Series C Convertible
Preferred Stock of Imaging Technologies Corporation (Incorporated by reference
to Exhibit 4(c) to 1998 Form 10-K) *
4(d) Certificate of Designation, Powers, Preferences and Rights of the Series of
Preferred Stock to be Designated Series D Convertible Preferred Stock, filed
January 13, 1999 (Incorporated by reference to Form 10-Q for the period ended
December 31, 1998) *
4(e) Certificate of Designation, Powers, Preferences and Rights of the Series of
Preferred Stock to be Designated Series E Convertible Preferred Stock, filed
January 28, 1999 (Incorporated by reference to Form 10-Q for the period ended
December 31, 1998) *
5.1 Opinion re: Legality **
10(a) Private Equity Line of Credit Agreement by and among certain Investors and the
Company (Incorporated by reference to Form 8-K, filed July 26, 2000) *
10(b) Convertible Note Purchase Agreement dated December 12, 2000 between the Company
and Amro International, S.A., Balmore Funds, S.A., and Celeste Trust Reg.
(Incorporated by reference to Form 8-K, filed January 19, 2001. *
10(c) Convertible Note Purchase Agreement dated July 26, 2001 between the Company and
Balmore Funds, S.A. (Incorporated by reference to Form 8-K filed August 2, 2001. *
10(d) Share Purchase Agreement, dated December 1, 2000, between ITEC and
EduAdvantage.com, Inc. (Incorporated by reference to Form 10-Q for the period
ended September 30, 2000) *
52
10(e) Agreement to Acquire Shares, dated December 1, 2000, between ITEC and Quik Pix,
Inc. (Incorporated by reference to Form 10-Q for the period ended September 30,
2000) and subsequently cancelled. *
10(f) Agreement to Acquire Shares, dated December 17, 2000, between ITEC and Pen
Internconnect, Inc. (Incorporated by reference to Form 10-Q for the period ended
September 30, 2000) and subsequently cancelled. *
10(g) Share Purchase Agreement, dated December 1, 2000, between ITEC and
EduAdvantage.com, Inc. (Incorporated by reference to Form 10-Q for the period
ended September 30, 2000) *
10(h) Convertible Promissory Note dated September 21, 2001 between the Company and
Stonestreet Limited Partnership. (Incorporated by reference to Exhibit 10(u) of
2001 Form 10-K) *
10(i) Convertible Note Purchase Agreement dated September 21, 2001 between the Company
and Stonestreet Limited Partnership. (Incorporated by reference to Exhibit 10(v)
of 2001 Form 10-K) *
10(j) Registration Rights Agreement dated September 21, 2001 between the Company and
Stonestreet Limited Partnership. (Incorporated by reference to Exhibit 10(w) of
2001 Form 10-K) *
10(k) Form of Warrant to Purchase 11,278,195 Shares of Common Stock of ITEC, dated
September 21, 2001, between ITEC and Stonestreet Limited Partnership.
(Incorporated by reference to Exhibit 10(x) of 2001 Form 10-K) *
10(l) Asset Purchase Agreement, dated October 25, 2001, among the Company and Lisa
Lavin, Gary J. Lavin, and Roland A. Fernando. (Incorporated by reference to
Exhibit 10(a) to September 2001 Form 10-Q) *
10(m) Audited Financial Statements of SourceOne Group, LLC. (Incorporated by reference
to Form 8-K filed on January 25, 2002) *
10(n) Secured Convertible Debenture issued by the Company to Bristol Investment Fund,
Ltd., dated January 22, 2002. (Incorporated by reference to Exhibit 10(a) of
December 2001 Form 10-Q) *
10(o) Securities Purchase Agreement between the Company and Bristol Investment Fund,
Ltd., dated January 22, 2002. (Incorporated by reference to Exhibit 10(b) of
December 2001 Form 10-Q) *
10(p) Registration Rights Agreement between the Company and Bristol Investment Fund,
Ltd., dated January 22, 2002. (Incorporated by reference to Exhibit 10(c) of
December 2001 Form 10-Q) *
10(q) Transaction Fee Agreement between the Company and Alexander Dunham Securities,
Inc., dated January 22, 2002. (Incorporated by reference to Exhibit 10(d) of
December 2001 Form 10-Q) *
10(r) Stock Purchase Warrant issued to Alexander Dunham Securities, Inc., dated
January 22, 2002. (Incorporated by reference to Exhibit 10(e) of December 2001
Form 10-Q) *
10(s) Stock Purchase Warrant issued to Bristol Investment Fund, Ltd., dated January
22, 2002. (Incorporated by reference to Exhibit 10(f) of December 2001 Form
10-Q) *
10(t) Security Agreement between the Company and Bristol Investment Fund, Ltd., dated
January 22, 2002. (Incorporated by reference to Exhibit 10(g) of December 2001
Form 10-Q) *
10(u) Convertible Promissory Note between the Company and Stonestreet Limited
Partnership, dated November 7, 2001. (Incorporated by reference to Exhibit 10(h)
of December 2001 Form 10-Q) *
10(v) Convertible Note Purchase Agreement between the Company and Stonestreet
Partnership, dated November 7, 2001. (Incorporated by reference to Exhibit 10(i)
of December 2001 Form 10-Q) *
10(w) Registration Rights Agreement between the Company and Stonestreet Limited
Partnership, dated November 7, 2001. (Incorporated by reference to Exhibit 10(j)
of December 2001 Form 10-Q) *
53
10(x) Stock Purchase Warrant issued to Stonestreet Limited Partnership, dated November
7, 2001. (Incorporated by reference to Exhibit 10(k) of December 2001 Form 10-Q *
10(y) Acquisition Agreement between the Company and Dream Canvas, Inc., dated May 17,
2002; subject to completion of its terms. (Incorporated by reference to Exhibit
10(y) of Form 10-K filed November 18, 2002.) *
10(z) Closing Agreement between the Company and Quik Pix, Inc., dated July 23, 2002,
subject to completion of its terms. (Incorporated by reference to Exhibit 10(z)
of Form 10-K filed November 18, 2002.) *
10(aa) Agreement to Acquire Shares between the Company and Greenland Corporation, dated
August 5, 2002, subject to completion of its terms. (Incorporated by reference to
Exhibit 10(aa) to Form 10-K filed November 18, 2002.) *
10(ab) Acquisition Agreement, dated December 13, 2002, between the Company and Baseline
Worldwide, Limited. (Incorporated by reference to Exhibit 99.3 of Form 8-K filed
December 19, 2002.) *
10(ac) Secured Promissory Note in the amount of $2,250,000 issued by the Company to
Greenland Corporation, dated January 7, 2003. (Incorporated by reference to
Exhibit 99.1 of Form 8-K filed January 21, 2003.) *
10(ad) Security Agreement, dated January 7, 2003, between the Company and Greenland
Corporation. (Incorporated by reference to Exhibit 99.2 of Form 8-K filed
January 21, 2003.) *
10(ae) Agreement to Acquire Shares, dated August 9, 2002 between the Company and
Greenland Corporation. (Incorporated by reference to Exhibit 99.3 of Form 8-K
filed January 21, 2003.) *
10(af) Closing Agreement, dated January 7, 2003, between the Company and Greenland
Corporation. (Incorporated by reference to Exhibit 99.4 of Form 8-K filed
January 21, 2003.) *
10(ag) Share Acquisition Agreement, dated June 12, 2002, between the Company and Quik
Pix, Inc. (Incorporated by reference to Exhibit 99.5 of Form 8-K filed January
21, 2003.) *
10(ah) Closing Agreement, dated July 23, 2002, between the Company and Quik Pix, Inc.
(Incorporated by reference to Exhibit 99.6 of Form 8-K filed January 21, 2003.) *
10(ai) Stock Purchase Agreement among the Company, Greenland Corporation, and ExpertHR-
Oklahoma, dated March 18, 2003. (Incorporated by reference to Exhibit 10(j) to
Form 10-Q filed May 20, 3003). *
10(aj) Assignment of Patent between John Capezzuto and Quik Pix, Inc. dated January 14,
2003. *
10(ak) Promissory Note between the Company and John Capezzuto dated June 1, 2003
(signed June 9, 2003). *
10(al) Promissory Note between the Company and John Capezzuto dated June 9, 2003 *
10(am) Agreement and Assignment of Rights, dated February 1, 2003, between Accord Human
Resources, Inc. and Greenland Corporation, and Imaging Technologies.
(Incorporated by reference to Exhibit 10(k) of Form 10-KSB filed April 7, 2003
by Greenland Corporation.) *
10(an) Agreement and Assignment of Rights, dated March 1, 2003, between StaffPro
Leasing 2, Greenland Corporation, and ExpertHR. (Incorporated by reference to
Exhibit 10(l) of Form 10-KSB filed April 7, 2003 by Greenland Corporation.) *
10(ao) Promissory Note, dated March 1, 2003, payable to StaffPro Leasing 2 by Greenland
Corporation. (Incorporated by reference to Exhibit 10(k) of Form 10-KSB filed
April 7, 2003 by Greenland Corporation.) *
54
10(ap) Agreement to Acquire Shares between the Company and The Christensen Group, et
al, dated April 1, 2003. *
10(aq) Agreement and Assignment of Rights, dated October 24, 2003, between SourceOne
Group, Inc. and ePEO Link, incorporated by reference to Exhibit 10(a) of Form
10-Q, filed November 24, 2003. *
10(ar) Alpha Capital Aktiengsellschaft December 17, 2003 convertible note, incorporated
by reference to Exhibit 10(a) to Form 10-QSB, filed February 13, 2004. *
10(ar) Alpha Capital Aktiengsellschaft December 17, 2003 warrant, incorporated by
reference to Exhibit 10(b) to Form 10-QSB, filed February 13, 2004. *
10(as) Gamma Opportunity Capital Partners, LP December 17, 2003 convertible note,
incorporated by reference to Exhibit 10(c) to Form 10-QSB, filed February 13,
2004. *
10(at) Gamma Opportunity Capital Partners, LP December 17, 2003 warrant, incorporated
by reference to Exhibit 10(d) to Form 10-QSB, filed February 13, 2004. *
10(au) Longview Fund, LP December 17, 2003 convertible note, incorporated by reference
to Exhibit 10(e) to Form 10-QSB, filed February 13, 2004. *
10(av) Longview, LP December 17, 2003 warrant, incorporated by reference to Exhibit
10(f) to Form 10-QSB, filed February 13, 2004. *
10(aw) Stonestreet Limited Partnership December 17, 2003 convertible note, incorporated
by reference to Exhibit 10(g) to Form 10-QSB, filed February 13, 2004. *
10(ax) Stonestreet Limited Partnership December 17, 2003 warrant, incorporated by
reference to Exhibit 10(h) to Form 10-QSB, filed February 13, 2004. *
10(ay) Subscription Agreement December 17, 2003, incorporated by reference to Exhibit
10(i) to Form 10-QSB, filed February 13, 2004. *
10(az) Agreement of Acquisition between the Company and Quik Pix, Inc., dated April 16,
2004, incorporated by reference to Exhibit 10.1 to Form 10-QSB, filed May 19,
2004. *
23.1 Consent of Naccarato & Associates (Included in opinion filed as Exhibit 5.1) **
23.2 Consent of Pohl, McNabola, Berg & Company LLP **
All exhibits except those followed by an asterisk (*) are incorporated by reference only
and a copy is not included in this Form 10-K filing. Those exhibits followed by a double
asterisk (**) are included as part of this filing.
55
(b) REPORTS ON FORM 8-K
The Company's report on Form 8-K dated March 4, 2004
----------------------------------------------------
Item 2. Disposition of Assets
In January 2003, the Registrant ("ITEC" or the "Company) and Greenland
Corporation ("GRLC") completed a stock purchase transaction whereby ITEC became
the majority shareholder of GRLC. Since January 2003, GRLC has been a subsidiary
of ITEC.
The Company's report on Form 8-K dated June 3, 2005
---------------------------------------------------
Item 2.01 Acquisition or Disposition of Assets
On December 31, 2004 documents were drafted for the transfer of Dalrada
Financial Corporation's ("Dalrada") SOLVIS GROUP, a Michigan corporation (the
"Company") which includes all of the assets owned or leased by the Company and
used in the business of the Company including, but not limited to Client lists,
its subsidiaries, Vendor lists, Computer lists and/or programs and the
liabilities of the business, to Quik Pix Inc. ("QPIX"), a wholly owned
subsidiary of Dalrada. The effective date of the transfer was May 25, 2005.
The Company's report on Form 8-K dated September 14, 2005
---------------------------------------------------------
Item 5.02 Appointment of Principal Officer
On January 1, 2005, Randall Jones was appointed Chief Financial Officer of
Dalrada Financial Corporation.
56
UNDERTAKINGS
The undersigned registrant hereby undertakes that it will:
Undertaking (a)
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information set forth in
the registration statement; and arising after the effective date of the
registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration statement
Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424(b) under
the Securities Act if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of the Registration Fee" table in the
effective registration statement.
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
57
SIGNATURES
----------
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of San
Diego, CA, 92127.
Registrant: Dalrada Financial Corporation
Signature Title Date
- --------- ----- ----
By: /s/ Brian Bonar Chief Executive Officer September 27, 2005
------------------------- and Director
Brian Bonar
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, Brian Bonar as his attorney-in-fact, each
with full power of substitution and resubstitution, for him or her in any and
all capacities, to sign any and all amendments to this Annual Report on Form
10-K (including post-effective amendments), and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming that said
attorney-in-fact, or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form SB2 has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Brian Bonar Chairman of the Board of Directors, September 27, 2005
------------------------ Chief Executive Officer, and
Brian Bonar (Principal Executive Officer)
/s/ Robert A. Dietrich Director September 27, 2005
------------------------
Robert A. Dietrich
/s/ Eric W. Gaer Director September 27, 2005
------------------------
Eric W. Gaer
/s/ Stephen J. Fryer Director September 27, 2005
------------------------
Stephen J. Fryer
/s/ Richard H. Green Director September 27, 2005
------------------------
Richard H. Green
/s/ Randall Jones CFO and Principal Accounting Officer September 27, 2005
------------------------
Randall Jones
58
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheet - March 31, 2005 (unaudited) 3
Consolidated Statements of Operations - 3 and 9 months ended March 31, 2005 and 2004 (unaudited) 4
Consolidated Statements of Cash Flows - 9 months ended March 31, 2005 and 2004 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 7
ITEM 2. Management's Discussion and Analysis or Plan of Operations 15
ITEM 3. Controls and Procedures 22
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 23
ITEM 2. Unregistered Sale of Equity Securities and Use of Proceeds 23
ITEM 3. Defaults Upon Senior Securities 24
ITEM 4. Submission of Matters To A Vote of Security Holders 24
ITEM 5. Other Information 24
ITEM 6. Exhibits 24
SIGNATURES 24
CERTIFICATIONS 25
2
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(formerly Imaging Technologies Corporation)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
MARCH 31, 2005
---------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 295
Accounts receivable, net of allowance of $96 1,139
Inventories, net of reserve of $15 --
Prepaid expenses and other current assets 761
---------------
TOTAL CURRENT ASSETS 2,195
---------------
PATENT, net of accumulated amortization of $270 1,348
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $2,021 267
---------------
TOTAL ASSETS $ 3,810
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Borrowings under bank notes payable $ 3,220
Lines of credit 209
Notes payable, current portion (including related party note of $1,561) 2,113
Convertible debentures, net of discount of $5 809
Accounts payable 805
Obligations under capital lease 10
PEO payroll taxes and other payroll deductions 6,723
Other accrued expenses 10,419
---------------
TOTAL CURRENT LIABILITIES 24,308
---------------
CONVERTIBLE DEBENTURES, net of current portion and net of discounts of $198 163
NOTES PAYABLE, net of current portion (including related party note of $282) 500
CAPITAL LEASE, net of current portion 44
---------------
TOTAL LIABILITIES 25,015
---------------
MINORITY INTEREST --
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIT
Series A convertible, redeemable preferred stock, $1,000 par value,
7,500 shares authorized 420.5 shares issued and outstanding 420
Common stock; $0.005 par value; 1,000,000,000 shares
authorized; 682,396,197 shares issued and outstanding 3,412
Common stock warrants 475
Additional paid-in capital 82,823
Accumulated deficit (108,335)
---------------
TOTAL STOCKHOLDERS' DEFICIT (21,205)
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,810
===============
The accompanying notes are an integral part of these consolidated financial statements.
3
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(formerly Imaging Technologies Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED MARCH 31, 2005 AND 2004
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
MARCH MARCH MARCH MARCH
31, 2005 31, 2004 31, 2005 31, 2004
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES
Sales of products $ 137 $ 91 $ 468 $ 546
Software sales, licenses and royalties 9 30 48 66
Temporary staffing services 4,095 2,892 11,749 6,328
PEO Services 1,208 475 2,058 2,545
------------- ------------- ------------- -------------
TOTAL REVENUES 5,449 3,488 14,323 9,485
------------- ------------- ------------- -------------
COST OF REVENUES
Cost of products sold 23 28 59 156
Cost of software sales, licenses and royalties 1 -- 4 3
Cost of temporary staffing 3,591 2,663 10,539 5,657
Cost of PEO services 1,088 384 1,716 2,280
------------- ------------- ------------- -------------
TOTAL COST OF REVENUES 4,703 3,075 12,318 8,096
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
GROSS PROFIT 746 413 2,005 1,389
------------- ------------- ------------- -------------
OPERATING EXPENSES
Selling, general and administrative 904 (71) 2,870 4,006
Research and development -- -- -- --
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 904 (71) 2,870 4,006
------------- ------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS (158) 484 (865) (2,617)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES):
Interest and financing costs, net (394) (434) (1,208) (1,363)
Gain on extinguishment of debt 165 228 425 853
Gain resulting from reconciliation of payroll
tax liabilities to taxing authorities 454 -- 990 --
Other, net -- 1 -- (18)
------------- ------------- ------------- -------------
TOTAL OTHER INCOME (EXPENSE) 225 (205) 207 (528)
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
AND DISCONTINUED OPERATIONS 67 279 (658) (3,145)
PROVISION FOR INCOME TAXES -- -- -- --
------------- ------------- ------------- -------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 67 279 (658) (3,145)
------------- ------------- ------------- -------------
DISCONTINUED OPERATON:
Gain on disposition of discontinued operations -- 5,049 -- 5,049
Loss from operations of discontinued operation -- (693) -- (2,052)
------------- ------------- ------------- -------------
-- 4,356 -- 2,997
------------- ------------- ------------- -------------
NET INCOME (LOSS) 67 4,635 (658) (148)
PREFERRED STOCK DIVIDENDS (5) (5) (15) (15)
------------- ------------- ------------- -------------
NET INCOME (LOSS) ATTRIBUTED TO COMMON STOCKHOLDERS $ 62 $ 4,630 $ (673) $ (163)
============= ============= ============= =============
NET INCOME (LOSS) PER SHARE - BASIC
Continuing operations $ 0.00 $ 0.00 $ (0.00) $ (0.01)
Discontinued operations -- 0.01 -- 0.01
------------- ------------- ------------- -------------
$ 0.00 $ 0.01 $ (0.00) $ (0.00)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON EQUIVALENT SHARES
OUSTANDING - BASIC 682,396 348,926 635,914 292,602
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
4
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(formerly Imaging Technologies Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2005 AND 2004
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
NINE MONTHS ENDED
------------------------------------
MARCH 31, 2005 MARCH 31, 2004
--------------- ---------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (658) $ (3,145)
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 130 265
Stock issued for services 42 368
Amortization of debt discounts 305 626
Gain on forgiveness of inter-company debt from Greenland -- (1,375)
Gain resulting from reconciliation of payroll tax liabilities
to taxing authorities (990) --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (557) (21)
Prepaid expenses and other current assets (317) (13)
Other assets -- 38
Increase (decrease) in:
Accounts payable and accrued expenses (703) 230
PEO liabilities 2,562 1,467
--------------- ---------------
Net cash provided by (used in) operating activities from continuing operations (186) (1,560)
Net cash used in operating activities from discontinued operations -- (678)
--------------- ---------------
Net cash used in operating activities (186) (2,238)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (147) (158)
--------------- ---------------
Net cash used in investing activities from continuing operations (147) (158)
Net cash used in investing activities from discontinued operations -- --
--------------- ---------------
Net cash used in investing activities (147) (158)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in cash overdraft, net -- (87)
Line of credit, net 209 --
Net borrowings under bank notes payable -- (25)
Proceeds from sale of common stock -- 177
Proceeds from convertible debentures -- 800
Proceeds from notes payable 336 --
Repayments of notes payable (126) (165)
Repayments of capital lease obligations (19) (6)
--------------- ---------------
Net cash provided by (used in) financing activities from continuing operations 400 694
Net cash used in financing activities from discontinued operations -- 678
--------------- ---------------
Net cash provided by (used in) investing activities 400 1,372
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 67 (1,024)
CASH AND CASH EQUIVALENTS, Beginning of period 228 1,223
--------------- ---------------
CASH AND CASH EQUIVALENTS, End of period $ 295 $ 199
=============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
5
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(formerly Imaging Technologies Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED MARCH 31, 2005 AND 2004
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the nine months ended March 31, 2005, the Company issued: (1) 8,623,110
shares of its common stock for services valued at $42; (2) 20,880,130 shares of
its common stock for debt of $38; (3) 62,534,215 shares of its common stock for
penalties of $94; and (4) 38,000,000 shares of its common stock for the
conversion of convertible debentures in the amount of $175.
During the nine months ended March 31, 2004, the Company issued: (1) 7,445,000
shares of its common stock for services valued at $160,150; (2) 10,272,110
shares of its common stock for compensation valued at $140,332; (3) 25,297,220
shares of its common stock for debt of $471,542; and (4) 141,204,581 shares of
its common stock for the conversion of convertible debentures in the amount of
$1,342,464.
6
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(formerly Imaging Technologies Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Dalrada
Financial Corporation and Subsidiaries (the "Company" or "DRDF") have been
prepared pursuant to the rules of the Securities and Exchange Commission (the
"SEC") for quarterly reports on Form 10-QSB and do not include all of the
information and note disclosures required by accounting principles generally
accepted in the United States of America. These financial statements and notes
herein are unaudited, but in the opinion of management, include all the
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the Company's financial position, results of operations,
and cash flows for the periods presented. These financial statements should be
read in conjunction with the Company's audited financial statements and notes
thereto for the years ended June 30, 2004 included in the Company's annual
report on Form 10-KSB filed with the SEC. Interim operating results are not
necessarily indicative of operating results for any future interim period or for
the full year. The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All inter-company transactions have
been eliminated.
RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or retained earnings.
Comprehensive Income
--------------------
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for reporting and presentation of comprehensive income
and its components in a full set of financial statements. During the nine months
ended March 31, 2005 and 2004, the Company had no elements of comprehensive
income.
NOTE 2. GOING CONCERN CONSIDERATIONS
The accompanying unaudited consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. For the nine months
ended March 31, 2005, the Company had a net loss of $658. As of March 31, 2005,
the Company had a negative working capital deficiency of $22,113 and had a
stockholders' deficit of $21,205. In addition, the Company is in default on
certain note payable obligations, is being sued by numerous trade creditors for
nonpayment of amounts due and is late on its filings of payroll tax returns in
certain of its PEO division. The Company is also deficient in its payments
relating to payroll tax liabilities. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
The Company must obtain additional funds to provide adequate working capital and
finance operations. However, there can be no assurance that the Company will be
able to complete any additional debt or equity financings on favorable terms or
at all, or that any such financings, if completed, will be adequate to meet the
Company's capital requirements including compliance with the Imperial Bank
settlement agreement. Any additional equity or convertible debt financings could
result in substantial dilution to the Company's stockholders. If adequate funds
are not available, the Company may be required to delay, reduce or eliminate
some or all of its planned activities, including any potential mergers or
acquisitions. The Company's inability to fund its capital requirements would
have a material adverse effect on the Company. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
7
NOTE 3. STOCK BASED COMPENSATION
The Company accounts for employee stock options in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees". Under APB 25, the Company does not recognize compensation expense
related to options issued under the Company's employee stock option plans,
unless the option is granted at a price below market price on the date of grant.
In 1996, SFAS No. 123 "Accounting for Stock-Based Compensation", became
effective for the Company. SFAS No. 123, which prescribes the recognition of
compensation expense based on the fair value of options on the grant date,
allows companies to continue applying APB 25 if certain pro forma disclosures
are made assuming hypothetical fair value method, for which the Company uses the
Black-Scholes option-pricing model.
For non-employee stock based compensation, the Company recognizes an expense in
accordance with SFAS No. 123 and values the equity securities based on the fair
value of the security on the date of grant. For stock-based awards, the value is
based on the market value for the stock on the date of grant and if the stock
has restrictions as to transferability, a discount is provided for lack of
tradability. Stock option awards are valued using the Black-Scholes
option-pricing model.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans. The Company has opted
under SFAS No. 123 to disclose its stock-based compensation with no financial
effect. The pro forma effects of applying SFAS No. 123 in this initial phase-in
period are not necessarily representative of the effects on reported net income
or loss for future years. Had compensation expense for the Company's stock
option plans been determined based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed under SFAS
No. 123, the Company's pro forma net loss and net loss per share would have been
as follows for the nine months ended March 31, 2005 and 2004:
(In thousands, except share amounts) 2004 2003
----------- ----------
Net loss attributed to common stockholders
As reported $ (673) $ (163)
Compensation recognized under APB No. 25 -- --
Compensation recognized under SFAS No. 123 -- (825)
----------- ----------
Pro forma $ (673) $ (988)
=========== ==========
Basic earnings (loss) per share
As reported $ (0.00) $ (0.00)
Pro forma $ (0.00) $ (0.03)
This option valuation model requires input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of its employee stock options.
The weighted average fair value of the options granted during fiscal years 2004
and 2003 is estimated on the date of grant using the Black-Scholes
option-pricing model. All options granted in fiscal years 2004 and 2003 vested
immediately. The weighted average fair values and weighted average assumptions
used in calculating the fair values were as follows for the years ended June 30:
2004 2003
----------- ----------
Fair Value of options granted N/A $ 0.015
Risk free interest rate N/A 3.5%
Expected life (years) N/A 3
Expected volatility N/A 421%
Expected dividends N/A 0%
No options have been issued during fiscal year 2005.
8
NOTE 4. EARNINGS (LOSS) PER COMMON SHARE
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share are computed by dividing
income (loss) available to common stockholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share have not been presented
since the effect of the assumed conversion of options and warrants to purchase
common shares would have an anti-dilutive effect. The following potential common
shares have been excluded from the computation of diluted net loss per share for
the nine months ended March 31, 2005: warrants - 26,563,435 and stock options -
39,150,000.
Below is a computation of earnings per share for the three months ended March
31, 2004. Basic and diluted loss per share are the same for the nine months
ended March 31, 2004 and the three and nine months ended March 31, 2005:
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------------
2005 2004
-------------------------------------- ----------------------------------
INCOME/ PER INCOME/ PER
(LOSS) SHARES SHARE (LOSS) SHARES SHARE
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) from continuing operations $ 67 $ 279
Preferred stock dividends (5) (5)
--------- ---------
62 274
Discontinued operations -- 4,356
--------- ---------
Net income (loss) attributed to common
stockholders $ 62 $ 4,630
========= =========
Weighed shares outstanding 682,396 348,926
========= =========
Continuing operations $ 0.00 $ 0.00
Discontinued operations $ -- $ 0.01
--------- ---------
$ 0.00 $ 0.01
========= =========
DILUTED EARNINGS (LOSS) PER SHARE
Net income (loss) from continuing operations $ 67 $ 279
Preferred stock dividends (5) (5)
Interest on convertible debentures 25 41
Amortization of discounts on convertible
debentures 41 151
--------- ---------
128 466
Discontinued operations -- 4,356
--------- ---------
Net income (loss) attributed to common
stockholders $ 128 $ 4,822
========= =========
Weighed shares outstanding 682,396 348,926
========== ==========
Conversion of convertible debentures into
common stock 729,689 193,619
---------- ----------
1,412,085 542,545
========== ==========
Continuing operations $ 0.00 $ 0.00
Discontinued operations $ -- $ 0.01
--------- ---------
$ 0.00 $ 0.01
========= =========
9
NINE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------------
2005 2004
-------------------------------------- ----------------------------------
INCOME/ PER INCOME/ PER
(LOSS) SHARES SHARE (LOSS) SHARES SHARE
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) from continuing
operations $ (658) $ (3,145)
Preferred stock dividends (15) (15)
--------- ---------
(673) (3,160)
Discontinued operations -- 2,997
--------- ---------
Net income (loss) attributed to common
stockholders $ (673) $ (163)
========= =========
Weighed shares outstanding 635,914 292,602
Continuing operations $ (0.00) $ (0.01)
Discontinued operations $ -- $ 0.01
--------- ---------
$ (0.00) $ (0.00)
========= =========
DILUTED EARNINGS (LOSS) PER SHARE -- N/A
NOTE 5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, entitled INVENTORY COSTS -- AN
AMENDMENT OF ARB NO. 43, CHAPTER 4. SFAS No. 151 amends the guidance in ARB No.
43, Chapter 4, entitled INVENTORY PRICING [June 1953], to clarify the accounting
for "abnormal amounts" of idle facility expense, freight, handling costs, and
wasted material [spoilage]. Before revision by SFAS No. 151, the guidance that
existed in ARB No. 43 stipulated that these type items may be "so abnormal" that
the appropriate accounting treatment would be to expense these costs as incurred
[i.e., these costs would be current-period charges]. SFAS No. 151 requires that
these type items be recognized as current-period charges WITHOUT REGARD to
whether the "so abnormal" criterion has been met. Additionally, SFAS No. 151
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
adoption of SFAS 151 did not impact the consolidated financial statements.
10
In December 2004, the FASB issued SFAS No. 152, entitled ACCOUNTING FOR REAL
ESTATE TIME-SHARING TRANSACTIONS -- AN AMENDMENT OF FASB STATEMENTS NO. 66 AND
67. SFAS No. 152 amends SFAS No. 66 to reference the financial accounting and
reporting guidance for real estate time-sharing transactions that is provided in
AICPA Statement of Position 04-2. SFAS No. 152 also amends SFAS No. 67 to state
that the guidance for (a) incidental operations and (b) costs incurred to sell
real estate projects does not apply to real estate time-sharing transactions.
The accounting for those operations and costs is subject to the guidance of SOP
04-2. This statement is effective for financial statements for fiscal years
beginning after June 15, 2005. The adoption of SFAS 152 did not impact the
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, entitled EXCHANGES OF
NONMONETARY ASSETS -- AN AMENDMENT OF APB OPINION No.29. SFAS No. 153 amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The adoption of SFAS 153 did
not impact the consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised), entitled SHARE-BASED
PAYMENT. This revised Statement eliminates the alternative to use APB Opinion
No. 25's intrinsic value method of accounting that was provided in SFAS No. 123
as originally issued. Under Opinion 25, issuing stock options to employees
generally resulted in recognition of no compensation cost. This Statement
requires entities to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards. For public companies that file as a small business issuer, this
Statement is effective as of the beginning of the first interim or annual
reporting period that begins after December 15, 2005. The adoption of SFAS 123
(Revised) will impact the consolidated financial statements as the Company in
the future if it continues to issue equity instruments to employees.
NOTE 6. FACTORING LINES OF CREDIT
The Company's temporary staffing division entered into a factoring agreement
that expires in January 2007 and in renewable for successive periods of 12
months assuming certain conditions are met. The agreement provides for the
Company to sell to the factor accounts receivables at a discount of
approximately 2% for each 30 day period the balances remain unpaid.
NOTE 7. CONVERTIBLE NOTES PAYABLE
Listed below is a roll-forward schedule of the convertible debentures:
(In Thousands)
Balance at June 30, 2004 $ 871
Issuance of convertible debentures during the six months
ended March 31, 2005 --
Increase in debt discount and beneficial conversion feature --
Converted into common stock (175)
Amortization of value of warrants and preferential
conversion feature 276
---------
Balance at March 31, 2005 $ 972
=========
11
NOTE 8. NOTES PAYABLE
On July 1, 2004, the Company entered into two note payable obligations
aggregating $275,000 that bear interest at an annual rate of 40% and are due on
September 30, 2004. During the three months ended March 31, 2005, the Company
repaid $85,000 on these two notes. In addition, in connection with these two
notes payable, the Company issued to the holder a total of 5,000,000 warrants to
purchase shares of the Company's common stock for $0.005 per shares. The
estimated value of the warrants of $28,500 was determined using the
Black-Scholes option pricing model and the following assumptions: term of 5
years, a risk free interest rate of 3.5%, a dividend yield of 0% and volatility
of 426%. As of September 30, 2004, the entire $28,500 has been amortized to
financings costs in the accompanying consolidated statements of operations.
NOTE 9. STOCKHOLDERS' DEFICIENCY
Stock Issuances
---------------
During the nine months ended March 31, 2005, DRDF issued the following:
o 8,623,110 shares of its common stock for legal, accounting and
consulting services valued at $42.
o 20,880,130 shares of its common stock for debt of $38;
o 62,534,215 shares of its common stock for penalties of $94;
and
o 38,000,000 shares of its common stock for the conversion of
convertible debentures in the amount of $175.
The value of the common stock issued was determined as follows:
o for services - the market value of the Company's common stock
at the date of issuance;
o for debt conversions - at contractually obligated amounts.
NOTE 10. SEGMENT INFORMATION
The Company managed and internally reported the Company's business has four
reportable segments, principally, (1) products and accessories, (2) software,
(3) temporary staffing, and (4) PEO services.
Segment information for the nine months ended March 31, 2005 is as follows:
(IN THOUSANDS)
TEMPORARY PEO
PRODUCTS SOFTWARE STAFFING SERVICES TOTAL
-------- -------- -------- -------- -----
9-months ended 3/31/05
----------------------
Revenues $ 468 $ 48 $ 11,749 $ 2,058 $ 14,323
Operating income (loss) (237) (357) (103) (168) (865)
9-months ended 3/31/04
----------------------
Revenues $ 546 $ 66 $ 6,328 $ 2,545 $ 9,485
Operating income (loss) (733) (2,999) 204 911 (2,617)
12
NOTE 11. DISPOSITION OF GREENLAND CORPORATION
In January 2004, the Company determined to discontinue operations of Greenland
Corporation, its professional employment business division, and sold its shares
in Greenland, back to Greenland. Effective March 1, 2004, the Company completed
the sale of Greenland. Effective March 1, 2004, four new directors were elected
to serve on Greenland's Board of Directors due to the resignation of the four
directors nominated by DRDF. The operations of Greenland have been shown as
discontinued operations in the accompanying consolidated statements of
operations.
The operations of Greenland for the six month period ended March 31, 2004 are
shown as discontinued operations.
NOTE 12. RELATED PARTY TRANSACTIONS
Warning Management Services, Inc.
The Company CEO and Chairman, Mr. Brian Bonar, is also the CEO and Chairman of
Warning Management, Inc. Warning a public company, located in Southern
California. Warning's operations consist of a modeling agency and providing
temporary staffing services to government agencies and private companies.
GUARANTEE OF INDEBTEDNESS OF WARNING
------------------------------------
As of September 8, 2004, Warning Management Services, Inc. ("Warning") purchased
all of the issued and outstanding shares of Employment Systems, Inc. ("ESI") for
$1,500. The purchase was $750 cash paid at the closing and a $750 note payable.
In connection with this transaction, the Company agreed to be a guarantor of the
$750 note payable. As inducement to enter into this guarantee, the Company was
given a non-cancelable 2-year payroll processing contract with ESI. Management
has evaluated this contingent liability and has determined that no loss is
anticipated as a result of this guarantee.
WARNING HAS A MONTH-TO-MONTH LEASE WITH THE COMPANY
---------------------------------------------------
Warning leases offices for its ESI subsidiary, on a month-to-month basis from
the Company that started in October 2004. Monthly rental expense will be
approximately $3 per month.
PEO SERVICES AGREEMENT WITH WARNING PROVIDES FOR A FEE AT PREVAILING MARKET RATE
--------------------------------------------------------------------------------
In April 2004, the Company entered into an Agreement to provide PEO services for
Warning. The Company receives from Warning a monthly administrative fee. The
Company recorded revenue totaling approximately $154 during the nine months
ended March 31, 2005
NOTE 13. GAIN RESULTING FROM RECONCILIATION OF PAYROLL TAX LIABILITES TO TAXING
AUTHORITIES
During the three and nine months ended March 31, 2005, the Company recorded an
adjustment to earnings of $454 and $990, respectively, resulting from a
reconciliation with the Internal Revenue Service and certain State taxing
authorities of the amounts due for delinquent payment of payroll tax
liabilities. The Company continually updates its estimate of the amount due
related to delinquent payroll taxes and penalties as it receives correspondence
or settlement agreements with the Internal Revenue Service and State taxing
authorities.
13
NOTE 14. OTHER ACCRUED EXPENSES
Other accrued expenses at March 31, 2005 consisted of the following as of:
Interest $ 3,655
Payroll and sales tax payable 658
IRS levy penalties and interest 387
Accrued salaries and related liabilities 624
Other 1,296
-------
$10,419
=======
NOTE 15. LITIGATION
On February 10, 2005, Berryman & Henigar Enterprises ("Plaintiff"), filed a
complaint in the Superior Court of California, County of San Diego, Case No.
GIC842610, against Warning Model Management, Inc. for breach of a promissory
note issued pursuant to terms and conditions of a certain stock purchase and
sale agreement dated September 9, 2004. The Company and its subsidiary,
Employment Systems, Inc. ("ESI"), each allegedly guaranteed payments on the
underlying promissory note. Plaintiff seeks principal damages of $750,000.00 in
that regard. Warning Model Management, Inc. has taken the position that
Plaintiff failed to disclose certain material information in the underlying
transaction which thereby negates the promissory note. As such, the guarantees
allegedly provided by the Company and ESI could thereby be invalided. Discovery
has commenced but is not complete at this time. Trial has not been set.
Management has fully cooperated in our investigation of the facts and we intend
to defend against the claims asserted.
On March 17, 2005, Greenland Corporation ("Plaintiff"), filed an amended
complaint in the Superior Court of California, County of San Diego, Case No.
GIC842605, against the Company and multiple other individuals and entities
resulting from a transaction as evidenced by the "Agreement to Acquire Shares"
dated August 9, 2002, whereby the Company obtained a controlling equity interest
in Plaintiff. Plaintiff contends that the Company engaged in various forms of
wrongdoing including breach of fiduciary duty, conversion, conspiracy and aiding
and abetting. The Company and each of its co-defendants have challenged the
legal sufficiency of Plaintiff's claims and allegations. However, the court has
not yet ruled on the multiple challenges although we believe that the claims
generally lack merit. Discovery has commenced but is not complete at this time.
Trial has not been set. Management has fully cooperated in our investigation of
the facts and we intend to continue with vigorous defense against the claims
asserted.
14
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report on Audited Consolidated Financial Statements F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of June 30, 2004 F-2
Consolidated Statements of Operations for the years
ended June 30, 2004 and 2003 F-4
Consolidated Statements of Stockholders' Deficit for
the years ended June 30, 2004 and 2003 F-6
Consolidated Statements of Cash Flows for the years
ended June 30, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Stockholders
Dalrada Financial Corporation
San Diego, California
We have audited the accompanying consolidated balance sheet of Dalrada Financial
Corporation and Subsidiaries as of June 30, 2004, and the related consolidated
statements of operations, stockholders' deficit and cash flows for years ended
June 30, 2004 and 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform the audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Dalrada
Financial Corporation and Subsidiaries as of June 30, 2004 and the consolidated
results of their operations and their consolidated cash flows for each of the
years ended June 30, 2004 and 2003, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
accompanying consolidated financial statements, for the year ended June 30, 2004
the Company experienced a net loss from operations of $4,355,000 and as of June
30, 2004, the Company had a negative working capital deficit of $21,760,000 and
had a negative stockholders' deficit of $20,844,000. In addition, the Company is
in default on certain note payable obligations and is being sued by numerous
trade creditors for nonpayment of amounts due. The Company is also deficient in
its payments relating to payroll tax liabilities. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plan in regard to these matters is also discussed in Note 1. These consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ POHL, McNABOLA, BERG & COMPANY, LLP
POHL, McNABOLA, BERG & COMPANY, LLP
CERTIFIED PUBLIC ACCOUNTANTS
San Francisco, California
October 1, 2004
F-1
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2004
(in thousands)
2004
-------
ASSETS
Current assets
Cash $ 228
Accounts receivable (net of reserve for bad debt of $66) 582
Inventories, net --
Prepaid expenses and other current assets 444
-------
Total Current Assets 1,254
Property and equipment, net of accumulated depreciation
of $1,994 and $2,607, respectively 160
Goodwill, net --
Patent, net of accumulated amortization of $180 1,438
Investment - PEO contracts --
Workers' compensation deposit and other assets --
-------
1,598
-------
Total Assets $2,852
=======
(continued)
The accompanying notes are an integral part of these financial statements.
F-2
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
CONSOLIDATED BALANCE SHEET (CONTINUED)
AS OF JUNE 30, 2004
(in thousands)
2004
----------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Borrowings under bank notes payable $ 3,220
Cash overdraft --
Short-term notes payable, including amounts due to
related parties of $1,525 1,847
Convertible debentures, net of discounts of $55
and $473, respectively 759
Shareholder advances --
Accounts payable 1,350
PEO payroll taxes and other payroll deductions 5,151
PEO accrued worksite employee
Capital lease - current 10
Other accrued expenses 10,853
----------
Total Current Liabilities 23,190
----------
Long Term Liabilities
Capital lease - long term portion 63
Convertible debentures - long term portion 112
Long-term notes payable, including amounts due to
related parties 412
----------
Total Long Term Liabilities 587
----------
Total Liabilities 23,777
----------
Preferred stock minority interest in subsidiary --
----------
Shareholders' Deficit
Series A convertible, redeemable preferred stock,
$1 par value, 7,500 shares authorized,
4205 shares issued and outstanding 420
Common stock, $0.005 par value, 1,000,000,000 shares
authorized; 552,358,742 shares issued and outstanding 2,762
Common stock warrants 475
Paid-in capital 83,095
Accumulated deficit (107,677)
----------
Total Shareholders' Deficit (20,925)
----------
Total Liabilities and Shareholders' Deficit $ 2,852
==========
The accompanying notes are an integral part of these financial statements.
F-3
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
(in thousands)
2004 2003
--------- ---------
Revenues
Sales of products $ 764 $ 924
Software sales, licenses and royalties 36 367
Temporary staffing services 10,119 --
PEO services 2,607 2,499
--------- ---------
Total Revenues 13,526 3,790
--------- ---------
Cost of Sales
Cost of products sold (196) (396)
Cost of software sales, licenses and royalties (3) (90)
Cost of temporary staffing (9,209) --
Cost of PEO services (894) (1,639)
Freight -- --
--------- ---------
Total Cost of Sales (10,302) (2,125)
--------- ---------
Gross Profit 3,224 1,665
--------- ---------
Operating Expenses
Selling, general and administrative 4,196 5,623
--------- ---------
Total Operating Expenses 4,196 5,623
--------- ---------
Income (loss) from operations (972) (3,958)
--------- ---------
(continued)
The accompanying notes are an integral part of these financial statements.
F-4
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
(in thousands)
2004 2003
---------- ----------
Other Income/(Expense):
Other 19 (2)
Interest income -- --
Gain/(Loss) on sale of assets (341) 27
Gain on settlement of debt 1,145 2,343
Gain on sale of securities -- --
Other expenses (11) (12)
Interest expense (1,930) (971)
Bad debt (10) (285)
Penalties and interest (795) (2,023)
Income tax levy -- (105)
---------- ----------
Total Other Income/(Expense) (1,923) (1,028)
---------- ----------
Loss before income taxes and discontinued operations (2,895) (4,986)
Income tax expense -- --
---------- ----------
Net loss from continuing operations (2,895) (4,986)
---------- ----------
Discontinued Operation:
Loss from operations of discontinued operation (2,052) (1,869)
Gain on disposition of discontinued operation 5,049 --
---------- ----------
Net income (loss) 102 (6,855)
Preferred stock dividends (21) (21)
---------- ----------
Net income (loss) attributed to common stockholders $ 81 (6,876)
========== ==========
Earnings (loss) per common share
Continuing operations $ (0.01) $ (0.05)
Discontinued operations 0.01 (0.02)
========== ==========
$ 0.00 $ (0.07)
========== ==========
Weighted average common shares, basic and diluted 331,004 97,153
========== ==========
The accompanying notes are an integral part of these financial statements.
F-5
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
SERIES A PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
(thousands) (thousands)
BALANCE, JUNE 30, 2002 4,205 $ 420 21,929,365 $ 110
Issuance of common stock for:
Cash - exercise of options and warrants -- -- 750,000 4
Business acquisition -- -- 12,500,000 62
Compensation -- -- 4,190,000 21
Services -- -- 92,733,499 464
Conversion of liabilities -- -- 46,549,199 233
Exercise of warrants for services -- -- 2,580,000 12
Beneficial conversion on notes -- -- -- --
Value of warrants issued for services -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2003 4,205 420 181,232,063 906
Issuance of common stock for:
Cash - exercise of options -- -- 29,500,000 148
Business acquisition -- -- 6,329,478 31
Compensation -- -- 10,272,110 51
Services -- -- 7,745,000 39
Conversion of liabilities -- -- 317,280,091 1,587
Beneficial conversion on notes -- -- -- --
Value of warrants issued with notes -- -- -- --
Value of repriced options/warrants -- -- -- --
Net income -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2004 4,205 $ 420 552,358,742 2,762
============ ============ ============ ============
(CONTINUED)
COMMON ADDITIONAL
STOCK PAID-IN ACCUMULATED
WARRANTS CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------
(thousands) (thousands) (thousands) (thousands)
BALANCE, JUNE 30, 2002 $ 475 $ 79,492 $ (100,924) $ (20,427)
Issuance of common stock for:
Cash - exercise of options and warrants -- 29 -- 33
Business acquisition -- 63 -- 125
Compensation -- 21 -- 42
Services -- 783 -- 1,247
Conversion of liabilities -- 46 -- 279
Exercise of warrants for services -- 121 -- 133
Beneficial conversion on notes -- 273 -- 273
Value of warrants issued for services -- 70 -- 70
Net loss -- -- (6,855) (6,855)
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2003 475 80,898 (107,779) (25,080)
Issuance of common stock for:
Cash - exercise of options -- 29 -- 177
Business acquisition -- 30 -- 61
Compensation -- 89 -- 140
Services -- 123 -- 162
Conversion of liabilities -- 1,014 -- 2,601
Beneficial conversion on notes -- 557 -- 557
Value of warrants issued with notes -- 214 -- 214
Value of repriced options/warrants -- 141 -- 141
Net income -- -- 102 102
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2004 $ 475 $ 83,095 $ (107,677) $ (20,925)
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-6
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
(in thousands)
2004 2003
-------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss from continuing operations $(2,895) $(4,986)
Net income (loss) from discontinued operations 2,997 (1,869)
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 164 142
Write-down of fixed assets -- 54
Stock issued for services 302 1,318
Amortization of debt discounts 1,011 857
Value of services for exercise of warrants -- 133
Value of warrants issued for services -- 41
Value of repriced options/warrants 141 --
Gain on extinguishment of debt (1,145) (2,343)
Other -- (37)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (180) 1,149
Inventories 15 136
Prepaid expenses and other current assets (424) (6)
Other assets 21 (25)
Increase (decrease) in:
Accounts payable and accrued expenses 585 593
PEO liabilities 787 3,030
-------- --------
Net cash used in operating activities from continuing operations 1,379 (1,803)
Net cash provided by (used in) operations of discontinued
operations (1,868) 2,915
-------- --------
Net cash used in operating activities (489) 1,112
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Cash paid for acquisition -- (45)
Cash acquired with acquisition 104 --
Purchase of furniture and equipment (93) --
-------- --------
Net cash used in investing activities from continuing operations 11 (45)
Net cash used in investing activities of discontinued operations -- --
-------- --------
Net cash provided by (used in) investing activities 11 (45)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Change in cash overdraft, net (87) 87
Net borrowings under bank notes payable (25) --
Proceeds from sale of common stock 177 58
Proceeds from convertible debentures 800 100
Repayments of notes payable (72) (125)
Repayments of capital lease obligations (267) --
-------- --------
Net cash provided by financing activities from continuing
operations 526 120
Net cash used in financing activities of discontinued operations -- (7)
-------- --------
Net cash provided by financing activities 526 113
-------- --------
CASH OF DISCONTINUED OPERATION -- (1,043)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 48 137
CASH AND CASH EQUIVALENTS, Beginning of period 180 43
-------- --------
CASH AND CASH EQUIVALENTS, End of period $ 228 $ 180
======== ========
(continued)
The accompanying notes are an integral part of these financial statements.
F-7
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid $ -- $ --
======== ========
Income taxes paid $ -- $ --
======== ========
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of convertible debentures into common stock $ 2,026 $ 164
======== ========
Conversion of accounts payable and accrued liabilities
into common stock $ 575 $ 115
======== ========
Net assets acquired in business combinations:
Cash $ 104 $ --
Receivables 261 268
Other current assets -- 34
Property and equipment 25 101
Goodwill and other intangible assets -- 4,736
Accounts payable and accrued liabilities (102) (4,186)
Notes payable and capital lease (227) (846)
The accompanying notes are an integral part of these financial statements.
F-8
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements include the accounts of
Dalrada Financial Corporation ("DRDF" or the "Company"), f/k/a Imaging
Technologies Corporation, incorporated under the laws of the state of California
during March 1982 and subsequently reincorporated under the laws of the state of
Delaware during May 1983, and its following active wholly-owned subsidiaries
(there are ten inactive subsidiaries not listed):
a) SourceOne Group, Inc., ("SourceOne");
b) Jackson Staffing, Inc. ("Jackson"); and
c) The Christianson Group ("TCG");
Additionally, the Company operates one majority-owned subsidiary, Quik Pix, Inc.
("QPI", owned 85% by the Company).
All significant intercompany accounts and transactions have been eliminated.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. For the year ended June 30,
2004, the Company experienced a net loss from operations of $972 and as of June
30, 2004, the Company had a negative working capital deficit of $21,936 and had
a negative stockholders' deficit of $20,925. In addition, the Company is in
default on certain note payable obligations and is being sued by numerous trade
creditors for nonpayment of amounts due. The Company is also delinquent in its
payments relating to payroll tax liabilities. These conditions raise substantial
doubt about its ability to continue as a going concern.
NATURE OF BUSINESS
------------------
The Company business operations are as follows:
a) The Company is a financial services provider and a professional
employer organization (PEO) that provides comprehensive personnel
management services including benefits and payroll administration,
medical and workers' compensation insurance programs, personnel
records management, and employer liability management;
b) The Company also develops and mounts photographic and digital
images for use in display advertising for tradeshows, building
interiors, and other point-of-sale locations; and
c) The Company is a provider of temporary staffing services.
USE OF ESTIMATES
----------------
F-9
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect 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 reported periods. Significant estimates made by the Company's
management include but are not limited to recoverability of property and
equipment, payroll tax liabilities and proprietary products through future
operating profits. Actual results could materially differ from those estimates.
REVENUE RECOGNITION
-------------------
PEO SERVICE FEES AND WORKSITE EMPLOYEE PAYROLL COSTS
The Company recognizes its revenues associated with its PEO business pursuant to
EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent." The
Company's revenues are reported net of worksite employee payroll cost (net
method). Pursuant to discussions with the Securities and Exchange Commission
staff, the Company changed its presentation of revenues from the gross method to
an approach that presents its revenues net of worksite employee payroll costs
(net method) primarily because the Company is not generally responsible for the
output and quality of work performed by the worksite employees.
In determining the pricing of the markup component of the gross billings, the
Company takes into consideration its estimates of the costs directly associated
with its worksite employees, including payroll taxes, benefits and workers'
compensation costs, plus an acceptable gross profit margin. As a result, the
Company's operating results are significantly impacted by the Company's ability
to accurately estimate, control and manage its direct costs relative to the
revenues derived from the markup component of the Company's gross billings.
Consistent with its revenue recognition policy, the Company's direct costs do
not include the payroll cost of its worksite employees. The Company's direct
costs associated with its revenue generating activities are comprised of all
other costs related to its worksite employees, such as the employer portion of
payroll-related taxes, employee benefit plan premiums and workers' compensation
insurance premiums.
SALES OF PRODUCTS
Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with all applicable accounting regulations, including American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With
Respect to Certain Transactions. Revenue from products licensed to original
equipment manufacturers is recorded when OEMs ship licensed products while
revenue from certain license programs is recorded when the software has been
delivered and the customer is invoiced. Revenue from packaged product sales to
and through distributors and resellers is recorded when related products are
shipped. Maintenance and subscription revenue is recognized ratably over the
contract period. When the revenue recognition criteria required for distributor
and reseller arrangements are not met, revenue is recognized as payments are
received. Provisions are recorded for returns and bad debts. The Company's
software arrangements do not contain multiple elements, and the Company does not
offer post contract support.
F-10
TEMPORARY STAFFING
The Company records gross revenue for temporary staffing. The Company has
concluded that gross reporting is appropriate because the Company (i) has the
risk of identifying and hiring qualified employees, (ii) has the discretion to
select the employees and establish their price and duties and (iii) bears the
risk for services that are not fully paid for by customers. Temporary staffing
revenues are recognized when the services are rendered by the Company's
temporary employees. Temporary employees placed by the Company are the Company's
legal employees while they are working on assignments. The Company pays all
related costs of employment, including workers' compensation insurance, state
and federal unemployment taxes, social security and certain fringe benefits. The
Company assumes the risk of acceptability of its employees to its customers.
CONTINGENT LIABILITIES
The Company accrues and discloses contingent liabilities in its consolidated
financial statements in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 5, Accounting for Contingencies. SFAS No. 5 requires
accrual of contingent liabilities that are considered probable to occur and that
can be reasonably estimated. For contingent liabilities that are considered
reasonably possible to occur, financial statement disclosure is required,
including the range of possible loss if it can be reasonably determined. The
Company has disclosed in its audited financial statements several issues that it
believes are reasonably possible to occur, although it cannot determine the
range of possible loss in all cases. As these issues develop, the Company will
continue to evaluate the probability of future loss and the potential range of
such losses. If such evaluation were to determine that a loss was probable and
the loss could be reasonably estimated, the Company would be required to accrue
its estimated loss, which would reduce net income in the period that such
determination was made.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year's presentation. These
reclassifications had no effect on previously reported results of operations or
retained earnings.
CASH AND CASH EQUIVALENTS
-------------------------
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
----------------------------
The Company places its cash in what it believes to be credit-worthy financial
institutions. However, cash balances may exceed FDIC and SPIC insured levels at
various times during the year.
Financial instruments that could potentially subject the Company to
concentration of credit risk include accounts receivable. The Company generally
requires clients to pay invoices for service fees no later than one day prior to
the applicable payroll date. As such, the Company generally does not require
collateral.
F-11
Additionally, during 2004, all revenue derived from temporary staffing was from
one client.
Allowance Method Used to Record Bad Debts
-----------------------------------------
The Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts. The Company's estimate is based on historical collection
experience and a review of the current status of trade accounts receivable. It
is reasonably possible that the Company's estimate of the allowance for doubtful
accounts will change. Accounts receivable are presented net of an allowance for
doubtful accounts of $66 at June 30, 2004.
INVENTORY
Inventory are valued at the lower of cost or market; cost being determined by
the first-in, first-out method.
LONG-LIVED ASSETS
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation, including
amortization of assets recorded under capitalized leases, is generally computed
on a straight-line basis over the estimated useful lives of assets ranging from
three to seven years. Amortization of leasehold improvements is provided over
the initial term of the lease, on a straight-line basis. Maintenance, repairs,
and minor renewals and betterments are charged to expense.
The Company reviews the carrying value of property and equipment for impairment
whenever events and circumstances indicate that the carrying value of an asset
may not be recoverable from the estimated future cash flows expected to result
from its use and eventual disposition. In cases where undiscounted expected
future cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds the fair value
of assets. The factors considered by management in performing this assessment
include current operating results, trends and prospects, and the effects of
obsolescence, demand, competition, and other economic factors. Based on this
assessment, there was an impairment charge recorded of $64 for the year ended
June 30, 2003.
GOODWILL AND INTANGIBLE ASSETS
------------------------------
Long-lived assets are reviewed whenever indicators of impairment are present and
the undiscounted cash flows are not sufficient to recover the related asset
carrying amount. At June 30, 2003, intangible assets included the excess of the
investment in Greenland Corporation over the fair market of the net assets
acquired of approximately $2,822. The intangible assets were reviewed during
2003, in light of the Company's acquisition of Greenland Corp. and the resultant
decline in the market value of Greenland's stock. This review indicated that the
goodwill recorded as a result of the Greenland acquisition was impaired.
Consequently, the carrying value of the Greenland goodwill totaling $296 was
written off.
F-12
Patent Costs
------------
Patent costs include direct costs of obtaining the patent. Costs for new patents
are capitalized and amortized over the estimated useful life of the patent,
generally over the life of the patent on a straight-line method. The cost of
patents in process is not amortized until issuance. In the event of a patent
being superseded, the unamortized costs are written off immediately. Accumulated
amortization relating to the patent was approximately $180 and $60 for the years
ended June 30, 2004 and 2003, respectively.
ADVERTISING COSTS
The Company expenses advertising and promotion costs as incurred. During fiscal
2004 and 2003, the Company incurred advertising and promotion costs of
approximately $76 and $22, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
LOSS PER COMMON SHARE
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share are computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share have not been presented
since the effect of the assumed conversion of options and warrants and
convertible debt securities to purchase common shares would have an
anti-dilutive effect. The following potential common shares have been excluded
from the computation of diluted net loss per share for the years ended June 30,
2004 and 2003, respectively: warrants - 21,563,430 and 6,002,350; stock options
- - 39,150,000 and 34,158,100; and convertible securities of 210,896,000 and
174,530,000. The Company has no dilutive shares due to having a loss from
operations.
Below is a computation of earning (loss) per share:
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------
2004 2003
----------------------------------- -----------------------------------
INCOME/ PER INCOME/ PER
(LOSS) SHARES SHARE (LOSS) SHARES SHARE
-------- ------------- --------- -------- ------------ ---------
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) from continuing operations $(2,895) -- -- $(4,986) -- --
Preferred stock dividends (21) -- -- (21) -- --
-------- -------
(2,916) -- -- (5,007) -- --
Discontinued operations 2,997 -- -- (1,869) -- --
-------- --------
Net income (loss) attributed to common
stockholders $ 81 -- -- $(6,876) -- --
======== ========
Weighed shares outstanding -- 331,004,306 -- -- 97,153,849 --
Continuing operations -- -- $ (0.01) -- -- $ (0.05)
Discontinued operations -- -- $ 0.01 -- -- $ (0.02)
--------- ---------
-- -- $ 0.00 -- -- $ (0.07)
========= =========
F-13
DEBT DISCOUNTS
Debt discounts costs are principally the values attributed to the detachable
warrants issued in connection with the convertible debentures and the value of
the preferential conversion feature associated with the convertible debentures.
These debt issuance costs are accounted for in accordance with Emerging Issues
Task Force ("EITF") 00-27 issued by the Financial Accounting Standards Board
("FASB").
INCOME TAXES
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
The Company recognizes the amount of taxes payable or refundable for the current
year and recognizes deferred tax liabilities and assets for the expected future
tax consequences of events and transactions that have been recognized in the
Company's financial statements or tax returns. The Company currently has
substantial net operating loss carryforwards. The Company has recorded a 100%
valuation allowance against net deferred tax assets due to uncertainty of their
ultimate realization.
Stock Based Compensation
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined using the
fair value of stock-based compensation determined as of the date of grant and is
recognized over the periods in which the related services are rendered. The
statement also permits companies to elect to continue using the current
intrinsic value accounting method specified in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to account
for stock-based compensation. The Company has elected to use the intrinsic value
based method and has disclosed the pro forma effect of using the fair value
based method to account for its stock-based compensation issued to employees.
For options granted to employees where the exercise price is less than the fair
value of the stock at the date of grant, the Company recognizes an expense in
accordance with APB 25. For non-employee stock based compensation the Company
F-14
recognizes an expense in accordance with SFAS No. 123 and values the equity
securities based on the fair value of the security on the date of grant. For
stock-based awards the value is based on the market value for the stock on the
date of grant and if the stock has restrictions as to transferability a discount
is provided for lack of tradability. Stock option awards are valued using the
Black-Scholes option-pricing model.
If the Company had elected to recognize compensation expense based upon the fair
value at the grant date for awards under the Stock Option Plan consistent with
the methodology prescribed by SFAS No. 123, the Company's net loss and loss per
share would be reduced to the pro forma amounts indicated below for the years
ended June 30, 2004 and 2003:
2004 2003
-------- --------
Net income (loss) attributed to common stockholders:
As reported $ 81 $(6,876)
Compensation recognized under APB 25 -- --
Compensation recognized under SFAS 123 (825) (425)
-------- --------
Pro forma $ (744) $(7,301)
======== ========
Basic loss per common share
As reported $ 0.00 $ (0.07)
Pro forma $ (0.00) $ (0.08)
This option valuation model requires input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of its employee stock options.
The weighted average fair value of the options granted during fiscal years 2004
and 2003 is estimated on the date of grant using the Black-Scholes
option-pricing model. The weighted average fair values and weighted average
assumptions used in calculating the fair values were as follows for the years
ended June 30:
2004 2003
--------- --------
Fair Value of options granted $ 0.025 $ 0.015
Risk free interest rate 3.5% 3.5%
Expected life (years) 3 3
Expected volatility 426% 421%
Expected dividends - -
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including accounts
receivable, inventories, accounts payable, and accrued expenses, the carrying
amounts approximate fair value, due to their relatively short maturities. The
amounts owed for long-term debt also approximate fair value because current
interest rates and terms offered to the Company are at current market rates.
F-15
COMPREHENSIVE LOSS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting other comprehensive income
and its components in a financial statement. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustments and
unrealized gains and losses on available-for-sale securities. Comprehensive
income is not presented in the Company's financial statements since the Company
did not have any of the items of other comprehensive income in any period
presented.
SEGMENT DISCLOSURE
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," was issued, which changes the way public companies report
information about segments. SFAS No. 131, which is based on the selected segment
information, requires quarterly and entity-wide disclosures about products and
services, major customers, and the material countries in which the entity holds
assets and reports revenues.
Recent Accounting Pronouncements
--------------------------------
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (an interpretation of Accounting Research Bulletin
(ARB) No. 51, Consolidated Financial Statements). Interpretation 46 addresses
consolidation by business enterprises of entities to which the usual condition
of consolidation described in ARB-51 does not apply. The Interpretation changes
the criteria by which one company includes another entity in its consolidated
financial statements. The general requirement to consolidate under ARB-51 is
based on the presumption that an enterprise's financial statement should include
all of the entities in which it has a controlling financial interest (i.e.,
majority voting interest). Interpretation 46 requires a variable interest entity
to be consolidated by a company that does not have a majority voting interest,
but nevertheless, is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. A company that consolidates a variable interest entity
is called the primary beneficiary of that entity. In December 2003, the FASB
concluded to revise certain elements of FIN 46, primarily to clarify the
required accounting for interests in variable interest entities. FIN-46R
replaces FIN-46 that was issued in January 2003. FIN-46R exempts certain
entities from its requirements and provides for special effective dates for
entities that have fully or partially applied FIN-46 as of December 24, 2003. In
certain situations, entities have the option of applying or continuing to apply
FIN-46 for a short period of time before applying FIN-46R. In general, for all
entities that were previously considered special purpose entities, FIN 46 should
be applied for registrants who file under Regulation SX in periods ending after
March 31, 2004, and for registrants who file under Regulation SB, in periods
ending after December 15, 2004. The Company does not expect the adoption to have
a material impact on the Company's financial position or results of operations.
During April 2003, the FASB issued SFAS 149 - "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", effective for contracts entered
into or modified after September 30, 2003, except as stated below and for
hedging relationships designated after September 30, 2003. In addition, except
as stated below, all provisions of this Statement should be applied
prospectively. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
F-16
respective effective dates. In addition, paragraphs 7(a) and 23(a), which relate
to forward purchases or sales of when-issued securities or other securities that
do not yet exist, should be applied to both existing contracts and new contracts
entered into after September 30, 2003. The adoption of this statement had no
impact on the Company's consolidated financial statements.
During May 2003, the FASB issued SFAS 150 - "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective for public entities at the beginning of the first interim period
beginning after June 15, 2003. This Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a freestanding financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Some of the provisions of this Statement are
consistent with the current definition of liabilities in FASB Concepts Statement
No. 6, Elements of Consolidated Financial Statements. The adoption of this
statement had no impact on the Company's consolidated financial statements.
In December 2003, the FASB issued a revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" which replaces the
previously issued Statement. The revised Statement increases the existing
disclosures for defined benefit pension plans and other defined benefit
postretirement plans. However, it does not change the measurement or recognition
of those plans as required under SFAS No. 87, "Employers' Accounting for
Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
Specifically, the revised Statement requires companies to provide additional
disclosures about pension plan assets, benefit obligations, cash flows, and
benefit costs of defined benefit pension plans and other defined benefit
postretirement plans. Also, companies are required to provide a breakdown of
plan assets by category, such as debt, equity and real estate, and to provide
certain expected rates of return and target allocation percentages for these
asset categories. The Company has implemented this pronouncement and has
concluded that the adoption has no material impact to the consolidated financial
statements.
In December 2003, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104 supersedes
SAB 101, "Revenue Recognition in Consolidated Financial Statements." SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superseded as a result of the issuance
of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Consolidated
Financial Statements Frequently Asked Questions and Answers ("the FAQ") issued
with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition.
Selected portions of the FAQ have been incorporated into SAB 104. While the
wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the
revenue recognition principles of SAB 101 remain largely unchanged by the
issuance of SAB 104, which was effective upon issuance. The adoption of SAB 104
did not impact the consolidated financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT
The cost of property and equipment at June 30, 2004 consisted of the following:
Computer and other equipment $ 1,932
Office furniture and fixtures 151
Leasehold improvements 71
--------
2,154
Less accumulated depreciation and amortization (1,994)
--------
$ 160
========
Depreciation expense for the years ended June 30, 2004 and 2003 was $44 and $82,
respectively.
F-17
NOTE 3 - RELATED PARTY TRANSACTIONS
Transactions with a Director of the Company
-------------------------------------------
A director of the Company is a majority shareholder in a consulting firm that
provides management and public relations services to the Company. The Company
accrued consulting fees and expenses to this consulting firm in the amount of
approximately $120 and $120 for the years ended June 30, 2004 and 2003,
respectively.
Transactions with Officers and Key Executives
---------------------------------------------
During the years ended June 30, 2004 and 2003, common stock with an aggregate
fair market value of $8 and $60, respectively, was awarded to key executives as
compensation and advances.
During the year ended June 30, 2004, the Company issued 7,272,110 shares of
common stock to the Company's CEO as payment for accrued expenses and a note
payable in the aggregate amount of $109.
Transactions with a Related Party
---------------------------------
In April 2004, the Company had a PEO services client whose Chairman of the Board
is the Company's current CEO and Chairman. The Company received fees of $7
during 2004. The transaction is at fair value.
NOTE 4 - ACQUISITIONS AND DISPOSITIONS
Jackson Staffing, Inc.
----------------------
On September 1, 2003, DRDF completed its acquisition of 100% of the issued and
outstanding shares of common stock of Jackson Staffing, Inc. ("Jackson"). The
purchase price was 1,329,478 shares of DRDF common stock valued at $30.
Established in 2003, Jackson is a temporary staffing agency.
The operating results of Jackson beginning September 1, 2003 are included in the
accompanying consolidated statements of operations.
The total purchase price was valued at approximately $30 and is summarized as
follows in accordance with SFAS No. 141 and 142:
Cash $ 104
Receivables 28
Property and equipment 23
Accounts payable (19)
Accrued expenses (83)
Notes payable (23)
------
Purchase price $ 30
======
M&M Nursing
-----------
F-18
On June 28, 2004, DRDF completed its acquisition of certain assets of M&M
Nursing (M&M"). The purchase price was 5,000,000 shares of DRDF common stock
valued at $31 plus the assumption of $204 of liabilities. M&M is a temporary
staffing agency primarily for nurses.
The operating results of M&M beginning July 1, 2004 will included in the
accompanying consolidated statements of operations.
The total purchase price was valued at approximately $235 and is summarized as
follows in accordance with SFAS No. 141 and 142:
Receivables $ 233
Property and equipment 2
------------
Purchase price $ 235
============
The pro forma financial information that the consolidated operations of the
Company as if the Jackson and M&M acquisitions had occurred as of the beginning
of the periods presented is not presented since the operations of Jackson and
M&M prior to the acquisition by DRDF as immaterial.
GREENLAND CORPORATION
---------------------
Acquisition
On January 14, 2003, the Company completed the acquisition of shares,
representing controlling interest, of Greenland Corporation ("Greenland"). Under
the terms of the Greenland acquisition, DRDF acquired 19,183,390 shares of
common stock of Greenland and received warrants to purchase an additional
95,319,510 shares of Greenland common stock contingent upon the contribution of
certain PEO contracts to Greenland. The payment of the exercise price of the
warrants was made via the contribution of the required PEO contracts. The
purchase price was $2,225 in the form of a promissory note payable to Greenland
and is convertible into shares of DRDF common stock at the maturity date, the
number of which will be determined by a formula applied to the market price of
the shares at the time that the promissory note is converted. The promissory
note of $2,225 is payable to Greenland and is eliminated during the
consolidation.
The Company contributed the required PEO contracts to Greenland resulting in the
warrants being exercised. 115.1 million Greenland common shares were issued to
DRDF and delivered pursuant to the terms of the Closing Agreement. The
conditions of the exercise of warrants pursuant to the Closing Agreement were
met. Accordingly, DRDF held voting rights to 115.1 million shares of Greenland
common stock, representing approximately 85% of the total outstanding Greenland
common shares.
On January 14, 2003, four new directors were elected to serve on Greenland's
Board of Directors as nominees of DRDF
The purchase price was determined through analysis of Greenland's financial
reports as filed with the Securities and Exchange Commission and the potential
future performance of Greenland's ExpertHR subsidiary. The total purchase price
was arrived at through negotiations.
F-19
Greenland's ExpertHR subsidiary provides professional employer services (PEO) to
niche markets. Greenland's Check Central subsidiary is an information technology
company that has developed the Check Central Solutions' transaction processing
system software and related MAXcash(TM) Automated Banking Machine(TM) (ABM(TM)
kiosk designed to provide self-service check cashing and ATM-banking
functionality. Greenland's common stock trades on the OTC Bulletin Board under
the symbol GRLC.
Pursuant to the terms of the Agreement, the actual purchase price was $0, based
on the stated purchase price of $2,225 per the agreement less promissory note
payable to $2,225 to Greenland, which was eliminated in the consolidation.
The operating results of Greenland beginning January 14, 2003 are included in
the accompanying consolidated statements of operations.
The total purchase price was valued at approximately $0 and is summarized and
allocated as follows in accordance with SFAS No. 141 and 142:
Other current assets $ 4
Property and equipment 90
Other non-current assets 18
Accounts payable and accrued
expenses, and other current liabilities (3,202)
Other long-term liabilities (28)
Goodwill 3,118
--------
Purchase price $ --
========
The excess purchase price was allocated to goodwill, as there were no other
identifiable intangible assets of Greenland in which to allocate part of the
purchase price.
The pro forma consolidated results of operations have not been presented as if
the acquisition of Greenland, Inc. had occurred at July 1, 2002, due to the sale
of Greenland stock back to Greenland effective March 1, 2004. The pro forma
information is not meaningful due to sale of Greenland.
ExpertHR of Oklahoma
--------------------
Effective April 1, 2003, the Company formed a wholly-owned subsidiary of
Greenland Corporation, ExpertHR Oklahoma. Subsequent to its formation, the new
Company purchased a group of PEO clients for $921 of convertible preferred stock
of Greenland Corporation. ExpertHR of Oklahoma, Inc., at that time, was a newly
formed corporation whose only asset was the PEO contracts purchased by
Greenland. The entire purchase price of the purchased contracts of $921 was
allocated to contracts and was amortized over the expected life of the contracts
of 5 years.
DISPOSITION
In January 2004, the Company determined to discontinue operations of Greenland,
Inc., its professional employment business division, and sold its shares in
Greenland, Inc., back to Greenland. Effective March 1, 2004, the Company
completed the sale of Greenland. Effective March 1, 2004, four new directors
were elected to serve on Greenland's Board of Directors due to the resignation
of the four directors nominated by DRDF
F-20
The terms of the sale are as follows: the Company returned all common shares of
Greenland except for 19,183,390 restricted common shares; assign or grant all
rights, title and interest the Company had in acquiring any or all interest in
ePEO Link, Inc. to Greenland; Greenland canceled a convertible promissory note
in the amount of $2.225 issued by the Company to Greenland; and Greenland agreed
to forgive and cancel the inter-company transfer debt of the Company to
Greenland of approximately $1,300.
Greenland's revenues were $5,211 for the period starting July 1, 2003 to
February 29, 2004, and were $400 for the period January 14, 2003 to June 30,
2003. The results of operations of Greenland have been reported separately as
discontinued operations.
The assets sold consisted primarily of accounts receivable, deposits, property
and equipment, and other assets. The Greenland also assumed all accounts payable
and accrued liabilities.
The following is a summary of the net assets sold at February 29, 2004:
February 29, 2004
-----------------
Assets:
Cash $ --
Accounts receivable 406
Other current assets 135
Property and equipment, net 77
Other assets 3,830
-----------------
Total assets $ 4,448
Liabilities:
Accounts payable $ 1,237
Notes payable 830
PEO payroll taxes and payroll deduction 3,993
Accrued liabilities 1,265
Other non-current liabilities 798
-----------------
Total liabilities $ 8,123
-----------------
Net liabilities of discontinued operations $ 3,675
=================
Quik Pix, Inc.
--------------
On January 14, 2003, DRDF completed its acquisition of approximately 85% of the
issued and outstanding shares of common stock of Quik Pix, Inc. ("QPI"). The
purchase price was 12,500,000 shares of DRDF restricted common stock valued at
$125. In addition, DRDF agreed to pay $45 to a shareholder of QPI.
Established in 1982, QPI is a visual marketing support firm. Its principal
product, PhotoMotion, is patented. PhotoMotion is a unique color medium that
uses existing originals to create the illusion of movement and allows for three
to five distinct images to be displayed with an existing light box. QPI visual
marketing products are sold to a range of clientele including advertisers and
their agencies.
The purchase price was determined through analysis of QPI's financial condition
and the potential future performance of its business operations. The total
purchase price was arrived at through negotiations.
Pursuant to the terms of the Agreement, the actual purchase price was $170 based
on the fair value of the common stock issued of $125 and the payable of $45 to a
shareholder of QPI.
F-21
The operating results of QPI beginning January 14, 2003 are included in the
accompanying consolidated statements of operations.
The total purchase price was valued at approximately $170 and is summarized as
follows in accordance with SFAS No. 141 and 142:
Other current assets $ 280
Property and equipment 11
Other non-current assets 18
Accounts payable and accrued
expenses, and other current liabilities (865)
Other long-term liabilities (892)
Patent 1,618
--------
Purchase price $ 170
========
The excess purchase price of $1,618 was allocated to QPI's patent. QPI has a
patent related to PhotoMotion images, which expires in July 2020. This
intangible asset is being amortized over the remaining life of the patent.
Dream Canvas Technology, Inc.
-----------------------------
The Company completed the acquisition of Dream Canvas Technology, Inc. (DCT) in
October 2002 and paid the sum of $40 with the issuance of 100,000 shares of its
common stock. In December 2002 the Company sold DCT to Baseline Worldwide
Limited for $75 in cash.
NOTE 5 - OTHER ACCRUED EXPENSES
Other accrued expenses at June 30, 2004 consisted of the following as of:
Interest $ 3,220
Payroll and sales tax payable 591
IRS levy penalties and interest 387
Accrued judgments 3,674
Other taxes 948
Accrued salaries and related liabilities 923
Other 1,130
--------
$10,873
========
F-22
NOTE 6 - DEBT
BORROWINGS UNDER BANKS NOTES PAYABLE
On June 6, 2000, the Company entered into a settlement agreement with Imperial
Bank ("Imperial"). Under this agreement, the Company would pay $150 per month
until the balance was paid in full. Payments have been reduced to $100 per month
through January 2002 and further reduced to $50 subsequent to January 2002.
During the year ended June 30, 2002, the Company paid $1,023 toward this
obligation. Due to the uncertainty regarding the Company's ability to meet its
obligations and certain defaults under this agreement, the debt has been
classified as current. The debt is accruing interest at 5.75% per annum, which
will be waived if all principal payments are made timely. The debt is
collateralized by substantially all assets of the Company.
As of June 30, 2004, the Company owed Export-Import Bank ("ExIm") $1,730 plus
interest under a Working Capital Guarantee Facility whereby Imperial made a
demand upon ExIm who responded by making a claim payment to Imperial. The note
bears interest at 10% per annum. ExIm has made a demand for immediate payment
and note is currently in default.
The following is a summary of the borrowings under bank notes payable at June
30, 2004:
Imperial $1,490
Export-Import Bank 1,730
-------
Total $3,220
=======
NOTES PAYABLE, INCLUDING AMOUNTS DUE TO RELATED PARTIES
The following summarizes notes payable at June 30, 2004:
Payable to investor, 8% $ 76
Payable in connection with QPI acquisition 376
Payable to individual, 10% 14
Payable to related party 293
Payable to a former director, 16% 1,500
--------
2,259
Less current portion (1,847)
--------
Long-term portion $ 412
========
Notes payable mature as follows:
During the years ended June 30,
2005 $ 1,847
2006 412
2007 --
--------
$ 2,259
========
Convertible Debentures
----------------------
On December 12, 2000, the Company entered into a Convertible Note Purchase
Agreement with Amro International, S.A., Balmore Funds, S.A. and Celeste Trust
Reg. Pursuant to this agreement, the Company sold to each of the purchasers
convertible promissory notes in the aggregate principal amount of $850 bearing
F-23
interest at the rate of eight percent (8%) per annum, due December 12, 2003,
each convertible into shares of the Company's common stock. Interest shall be
payable, at the option of the purchasers, in cash or shares of common stock. At
any time after the issuance of the notes, each note is convertible into such
number of shares of common stock as is determined by dividing (a) that portion
of the outstanding principal balance of the note as of the date of conversion by
(b) the lesser of (x) an amount equal to seventy percent (70%) of the average
closing bid prices for the three (3) trading days prior to December 12, 2000 and
(y) an amount equal to seventy percent (70%) of the average closing bid prices
for the three (3) trading days having the lowest closing bid prices during the
thirty (30) trading days prior to the conversion date. The Company has
recognized interest expense of $364 relating to the beneficial conversion
feature of the above notes. Additionally, the Company issued a warrant to each
of the purchasers to purchase 502,008 shares of the Company's common stock at an
exercise price equal to $1.50 per share.
On July 26, 2001, the Company entered into a convertible note purchase agreement
with certain investors whereby the Company sold to the investors a convertible
debenture in the aggregate principal amount of $1,000 bearing interest at the
rate of eight percent (8%) per annum, due July 26, 2004, convertible into shares
of the Company's common stock. Interest is payable, at the option of the
investor, in cash or shares of the Company's common stock. The note is
convertible into such number of shares of the Company's common stock as is
determined by dividing (a) that portion of the outstanding principal balance of
the note by (b) the conversion price. The conversion price equals the lesser of
(x) $1.30 and (y) 70% of the average of the 3 lowest closing bid prices during
the 30 trading days prior to the conversion date. Additionally, the Company
issued a warrant to the investor to purchase 769,231 shares of the Company's
common stock at an exercise price equal to $1.30 per share. The investor may
exercise the warrant through July 26, 2006. In accordance with EITF 00-27, the
Company first determined the value of the note and the fair value of the
detachable warrants issued in connection with this convertible debenture. The
proportionate value of the note and the warrants is $492 and $508, respectively.
The value of the note was then allocated between the note and the preferential
conversion feature, which amounted to $0 and $492, respectively.
On September 21, 2001, the Company entered into a convertible note purchase
agreement with an investor whereby the Company sold to the investor a
convertible promissory note in the aggregate principal amount of $300 bearing
interest at the rate of eight percent (8%) per annum, due September 21, 2004,
convertible into shares of the Company's common stock. Interest is payable, at
the option of the investor, in cash or shares of the Company's common stock. The
note is convertible into such number of shares of the Company's common stock as
is determined by dividing (a) that portion of the outstanding principal balance
of the note by (b) the conversion price. The conversion price equals the lesser
of (x) $0.532 And (y) 70% of the average of the 3 lowest closing bid prices
during the 30 trading days prior to the conversion date. Additionally, the
Company issued a warrant to the investor to purchase 565,410 shares of the
Company's common stock at an exercise price equal to $0.76 Per share. The
investor may exercise the warrant through September 21, 2006. In December 2001,
$70 of this note was converted into 209,039 shares of common stock. In
accordance with EITF 00-27, the Company first determined the value of the note
and the fair value of the detachable warrants issued in connection with this
convertible debenture. The proportionate value of the note and the warrants is
$106 and $194, respectively. The value of the note was then allocated between
the note and the preferential conversion feature, which amounted to $0 and $106,
respectively.
On November 7, 2001, the Company entered into a convertible note purchase
agreement with an investor whereby the Company sold to the investor a
convertible promissory note in the aggregate principal amount of $200 bearing
interest at the rate of eight percent (8%) per annum, due November 7, 2004,
convertible into shares of the Company's common stock. Interest is payable, at
the option of the investor, in cash or shares of the Company's common stock. The
note is convertible into such number of shares of the Company's common stock as
is determined by dividing (a) that portion of the outstanding principal balance
of the note by (b) the conversion price. The conversion price equals the lesser
of (x) $0.532 and (y) 70% of the average of the 3 lowest closing bid prices
F-24
during the 30 trading days prior to the conversion date. Additionally, the
Company issued a warrant to the investor to purchase 413,534 shares of the
Company's common stock at an exercise price equal to $0.76 per share. The
investor may exercise the warrant through November 7, 2006. In accordance with
EITF 00-27, the Company first determined the value of the note and the fair
value of the detachable warrants issued in connection with this convertible
debenture. The proportionate value of the note and the warrants is $92 and $108,
respectively. The value of the note was then allocated between the note and the
preferential conversion feature, which amounted to $0 and $92, respectively.
On January 22, 2002, the Company entered into a convertible note purchase
agreement with an investor whereby the Company sold to the investor a
convertible promissory note in the aggregate principal amount of $500 bearing
interest at the rate of eight percent (8%) per annum, due January 22, 2003,
convertible into shares of the Company's common stock. Interest is payable, at
the option of the investor, in cash or shares of the Company's common stock. The
note is convertible into such number of shares of the Company's common stock as
is determined by dividing (a) that portion of the outstanding principal balance
of the note by (b) the conversion price. The conversion price equals the lesser
of (x) $0.332 and (y) 70% of the average of the 3 lowest closing bid prices
during the 30 trading days prior to the conversion date. Additionally, the
Company issued a warrant to the investor to purchase 3,313,253 shares of the
Company's common stock at an exercise price equal to $0.332 per share. The
investor may exercise the warrant through January 22, 2009. In accordance with
EITF 00-27, the Company first determined the value of the note and the fair
value of the detachable warrants issued in connection with this convertible
debenture. The proportionate value of the note and the warrants is $101 and
$399, respectively. The value of the note was then allocated between the note
and the preferential conversion feature, which amounted to $0 and $101,
respectively.
On August 5, 2002, the Company entered into a convertible note purchase
agreement with an investor in the aggregate principal amount of $100 bearing
interest at the rate of eight percent (8%) per annum, due August 5, 2005,
convertible into shares of the Company's common stock. Interest is payable, at
the option of the investor, in cash or shares of the Company's common stock. The
note is convertible into such number of shares of the Company's common stock as
is determined by dividing (a) that portion of the outstanding principal balance
of the note by (b) the conversion price. The conversion price equals the lesser
of (x) $0.03 and (y) 70% of the average of the 3 lowest closing bid prices
during the 30 trading days prior to the conversion date. In accordance with EITF
00-27, the value of the note was allocated between the note and the preferential
conversion feature, which amounted to $57 and $43, respectively.
On January 31, 2003, the Company entered into a convertible note purchase
agreement with an investor whereby the Company converted a previous advance from
the investor into a convertible promissory note in the aggregate principal
amount of $150 bearing interest at the rate of eight percent (8%) per annum, due
January 31, 2005, convertible into shares of the Company's common stock.
Interest is payable, at the option of the investor, in cash or shares of the
Company's common stock. The note is convertible into such number of shares of
the Company's common stock as is determined by dividing (a) that portion of the
outstanding principal balance of the note by (b) the conversion price. The
conversion price equals the lesser of (x) $0.0226 and (y) 70% of the average of
the 3 lowest closing bid prices during the 30 trading days prior to the
conversion date. In accordance with EITF 00-27, the value of the note was
allocated between the note and the preferential conversion feature, which
amounted to $86 and $64, respectively.
On April 1, 2003, the Company entered into a convertible note purchase
agreements with three investors whereby the Company converted a previous
advances from the investors into a convertible promissory notes in the aggregate
principal amount of $390 bearing interest at the rate of eight percent (8%) per
annum, due April 1, 2005, convertible into shares of the Company's common stock.
Interest is payable, at the option of the investor, in cash or shares of the
Company's common stock. The note is convertible into such number of shares of
F-25
the Company's common stock as is determined by dividing (a) that portion of the
outstanding principal balance of the note by (b) the conversion price. The
conversion price equals the lesser of (x) $0.0226 and (y) 70% of the average of
the 3 lowest closing bid prices during the 30 trading days prior to the
conversion date. In accordance with EITF 00-27, the value of the note was
allocated between the note and the preferential conversion feature, which
amounted to $223 and $167, respectively.
On December 17, 2003, the Company entered into convertible note purchase
agreements with four investor, whereby the Company sold to the investors
convertible promissory notes in the aggregate principal amount of $800 bearing
interest at the rate of eight percent (8%) per annum, due December 17, 2006,
convertible into shares of the Company's common stock. Interest is payable, at
the option of the investor, in cash or shares of the Company's common stock. The
note is convertible into such number of shares of the Company's common stock as
is determined by dividing (a) that portion of the outstanding principal balance
of the note by (b) the conversion price. The conversion price equals the lesser
of (x) $0.02 and (y) 70% of the average of the 3 lowest closing bid prices
during the 30 trading days prior to the conversion date. Additionally, the
Company issued a warrant to the investor to purchase 16,000 shares of the
Company's common stock at an exercise price equal to $0.02 per share. The
investor may exercise the warrant through December 17, 2008. In accordance with
EITF 00-27, the Company first determined the value of the notes and the fair
value of the detachable warrants issued in connection with these convertible
debentures. The proportionate value of the notes and the warrants is $586 and
$214, respectively. The value of the notes was then allocated between the notes
and the preferential conversion feature, which amounted to $30 and $556,
respectively.
Below is a roll-forward schedule of the convertible debentures:
Balance at June 30, 2002 $ 803
Issuance of convertible debentures during the year 640
Converted into common stock (164)
Value of preferential conversion feature (274)
Amortization of value of warrants 477
Amortization of value of preferential conversion feature 375
--------
Balance at June 30, 2003 1,857
Issuance of convertible debentures during the year 800
Converted into common stock (2,026)
Value of preferential conversion feature (557)
Value of warrants issued with convertible debentures (214)
Amortization of value of warrants 388
Amortization of value of preferential conversion feature 623
--------
Balance at June 30, 2004 $ 871
========
The weighted average interest rate on notes payable outstanding at June 30, 2004
and 2003, was 8.7% and 8.7%, respectively.
NOTE 7 - STOCKHOLDERS' DEFICIT
Amendment to the Certificate of Incorporation.
----------------------------------------------
On September 28, 2001, the Company's shareholders authorized an amendment to the
Certificate of Incorporation to: (i) effect a stock combination (reverse split)
of the Company's common stock in an exchange ratio to be approved by the Board,
ranging from one (1) newly issued share for each ten (10) outstanding shares of
common stock to one (1) newly issued share for each twenty (20) outstanding
shares of common stock (the "Reverse Split"); and (ii) provide that no
F-26
fractional shares or scrip representing fractions of a share shall be issued,
but in lieu thereof, each fraction of a share that any shareholder would
otherwise be entitled to receive shall be rounded up to the nearest whole share.
There will be no change in the number of the Company's authorized shares of
common stock and no change in the par value of a share of Common Stock.
On September 28, 2001, the Company's shareholders approved a Board proposal to
amend the Certificate of Incorporation to increase the number of shares of
common stock that the Company is authorized to issue from 200,000,000 to
500,000,000 shares.
On August 9, 2002, the Company's board of directors approved and affected a 1
for 20 reverse stock split. All share and per share data have been retroactively
restated to reflect this stock split.
On May 14, 2004, the Company's shareholders approved a Board proposal to amend
the Certificate of Incorporation to increase the number of shares of common
stock that the Company is authorized to issue from 500,000,000 to 1,000,000,000
shares.
5% SERIES A CONVERTIBLE, REDEEMABLE PREFERRED STOCK
Holders of the 5% convertible preferred stock ("Series A") are entitled to
receive, when and as declared by the Board of Directors, but only out of amounts
legally available for the payment thereof, cumulative cash dividends at the
annual rate of $50.00 per share, payable semi-annually.
The 5% convertible preferred stock is convertible, at any time, into shares of
the Company's common stock, at a price of $17.50 per common share. This
conversion price is subject to certain anti-dilution adjustments, in the event
of certain future stock splits or dividends, mergers, consolidations or other
similar events. In addition, the Company shall reserve, and keep reserved, out
of its authorized but un-issued shares of common stock, sufficient shares to
effect the conversion of all shares of the 5% convertible preferred stock.
In the event of any involuntary or voluntary liquidation, dissolution or winding
up of the affairs of the Company, the 5% convertible preferred shareholders
shall be entitled to receive $1 per share, together with accrued dividends, to
the date of distribution or payment, whether or not earned or declared.
The 5% convertible preferred stock is callable, at the Company's option, at call
prices ranging from $1,050 to $1,100 per share. No call on the 5% convertible
preferred stock was made during fiscal 2004 and 2003. As of June 30, 2004, the
accumulated dividend in arrears was approximately $432 on the Series A.
COMMON STOCK WARRANTS
In fiscal 2003, the Company also issued 2,830,300 warrants to certain
consultants. The exercise prices of the warrants range from $0.05 to $0.10. All
these warrants were exercised during fiscal 2003. The value of these warrants
was estimated at $70 using the Black-Scholes option-pricing model. The following
assumptions were used: average risk-free interest rate of 3.5%; expected life of
0.25 years; dividend yield of 0%; and expected volatility of 179%.
F-27
In connection with certain convertible debentures issued during fiscal 2004, the
Company issued to the debenture holders warrants to purchase up to 16,000,000
shares of its common stock at an exercise price of $0.02. The warrants expire on
December 17, 2008. The value of these warrants was estimated at $305. The
Black-Scholes option-pricing model was used to determine the value of these
warrants. The following assumptions were used: average risk-free interest rate
of 3.5%; expected life of 5 years; dividend yield of 0%; and expected volatility
of 426%. The value was then compared to the value of the underlying convertible
debenture and the proportionate value was assigned to the detachable warrants
and the underlying convertible debenture.
The following is a summary of the warrant activity:
UNDERLYING
PRICE PER SHARE COMMON SHARES
--------------- -------------
JUNE 30, 2002 $0.20 - $11.40 6,102,350
Granted $0.05 - $0.10 2,830,000
Exercised $0.05 - $0.10 (2,830,000)
Canceled $11.40 (100,000)
-------------
JUNE 30, 2003 $0.20 - $10.00 6,002,350
Granted $0.02 16,000,000
Exercised (0)
Canceled $0.20 - $10.00 (438,920)
-------------
EXERCISABLE AT JUNE 30, 2004 $0.02 - $1.50 21,563,430
-------------
The weighted average remaining contractual life of warrants outstanding at June
30, 2004 is 4.24 years. Of the warrants exercisable at June 30, 2004, 16,000,000
have an exercise price of $0.02 And the remaining 5,563,430 have an exercise
price ranging from $0.33 To $1.50.
For warrants granted during the year ended June 30, 2003 where the exercise
price was less than the stock price at the date of the grant, the
weighted-average fair value of such options was $0.025 and the weighted-average
exercise price of such options was $0.0558. In connection with the issuance of
these warrants, the Company recognized an expense of $70. The fair value of
these warrants was determined using the Black-Scholes pricing model.
F-28
COMMON STOCK OPTION PLANS
In July 1984 ("1984 Plan"), November 1987 ("1988 Plan") and September, 1996
("1997 Plan"), the Company adopted stock option plans, under which incentive
stock options and non-qualified stock options may be granted to employees,
directors, and other key persons, to purchase shares of the Company's common
stock, at an exercise price equal to no less than the fair market value of such
stock on the date of grant, with such options exercisable in installments at
dates typically ranging from one to not more than ten years after the date of
grant.
Under the terms of the 1988 and 1997 Plans, loans may be made to option holders,
which permit the option holders to pay the option price, upon exercise, in
installments. A total of 10,600 and 50,000 shares of common stock are authorized
for issuance under the 1988 and 1997 Plans, respectively.
No shares are available for future issuance under the 1984 Plan due to the
expiration of the plan during 1994. As of June 30, 1999, options to acquire 100
shares were outstanding under the 1984 Plan and options to acquire 33,500 shares
remained available for grant under the 1988 and 1997 Plans.
In addition, the Board of Directors, outside the 1984, 1988 and 1997 Plans
("Outside Plan"), granted to employees, directors and other key persons of DRDF
or its subsidiaries options to purchase shares of the Company's common stock, at
an exercise price equal to no less than the fair market value of such stock on
the date of grant. Options are exercisable in installments at dates typically
ranging from one to not more than ten years after the date of grant.
In October 1995, the Board of Directors authorized the exercise price for
employee options and warrants to be reduced to the current market value.
Accordingly, the exercise price on an aggregate of 911 and 13,750 options under
the 1988 and Outside Plans, respectively, were canceled and reissued at an
exercise price of $20.00 per share.
The 1997 Employee Stock Purchase Plan ("Purchase Plan") was approved by the
Company's shareholders in September 1996. The Purchase Plan permits employees to
purchase the Company's common stock at a 15% discounted price. The Purchase Plan
is designed to encourage and assist a broad spectrum of employees of the Company
to acquire an equity interest in the Company through the purchase of its common
stock. It is also intended to provide participating employees the tax benefits
under Section 421 of the Code. The Purchase Plan covers an aggregate of 25,000
shares of the Company's common stock.
All employees, including executive officers and directors who are employees,
customarily employed more than 20 hours per week and more than five months per
year by the Company are eligible to participate in the Purchase Plan on the
first enrollment date following employment. However, employees who hold,
directly or through options, five percent or more of the stock of the Company
are not eligible to participate.
F-29
Participants may elect to participate in the Purchase Plan by contributing up to
a maximum of 15 percent of their compensation, or such lesser percentage as the
Board may establish from time to time. Enrollment dates are the first trading
day of January, April, July and October or such other dates as may be
established by the Board from time to time. On the last trading day of each
December, March, June and September, or such other dates as may be established
by the Board from time to time, the Company will apply the funds then in each
participant's account to the purchase of shares. The cost of each share
purchased is 85 percent of the lower of the fair market value of common stock on
(i) the enrollment date or (ii) the purchase date. The length of the enrollment
period may not exceed a maximum of 24 months. No participant's right to acquire
shares may accrue at a rate exceeding $25 of fair market value of common stock
(determined as of the first trading day in an enrollment period) in any calendar
year. No shares have been issued under the Purchase Plan.
2001 Stock Option and Stock Purchase Plans.
-------------------------------------------
The Company's shareholders approved the 2001 Stock Option Plan, pursuant to
which 5,000,000 shares of common stock are reserved for issuance to eligible
employees and directors of, and consultants to, the Company or any of its
subsidiaries. Upon expiration, cancellation or termination of unexercised
options, the shares of the Company's Common Stock subject to such options will
again be available for the grant of options under the 2001 Stock Option Plan.
Options granted under the 2001 Stock Option Plan may either be incentive or
nonqualified stock options.
The Company's shareholders approved the 2001 Stock Purchase Plan, as amended,
which enables eligible employees to purchase in the aggregate up to 2,500,000
shares of common stock.
STOCK OPTION ACTIVITY
The following is a summary of the stock option activity:
STOCK OPTION PLANS
PRICE PER UNDERLYING
SHARE COMMON SHARES
-------------------- -----------------
JUNE 30, 2000 $18.20 - $169.00 11,750
Granted $2.80 - $6.80 --
Exercised $2.80 - $23.80 --
Canceled $18.20 - $169.00 (3,650)
-----------------
JUNE 30, 2001 $6.80 - $150.00 8,100
Granted $0.60 - $0.60 2,750,000
Exercised $0.20 - $2.00 (2,744,500)
Canceled --
-----------------
F-30
JUNE 30, 2002 $0.60 - $150.00 13,600
Granted $0.01 - $0.015 34,150,000
Exercised --
Canceled (5,500)
-----------------
JUNE 30, 2003 $0.01 - $28.20 34,158,100
Granted $.01 - $0.025 34,500,000
Exercised $0.01 - $0.025 (29,500,000)
Canceled $28.20 (8,100)
-----------------
EXERCISABLE AT JUNE 30, 2004 $0.01 -0.025 39,150,000
-----------------
The weighted average remaining contractual life of options outstanding issued
under the Stock Option Plans is 1.98 years at June 30, 2004.
For options granted during the year ended June 30, 2004 where the exercise price
was equal to the stock price at the date of the grant, the weighted-average fair
value of such options was $0.025 and the weighted-average exercise price of such
options was $0.025. In connection with the issuance of these options, the
Company recognized an expense of $0 related since the exercise price was equal
to the value of the Company's stock at the date of issuance. During the year
ended June 30, 2004, the Company repriced certain options that were previously
issued and recorded a charge to earnings in the amount of $141.
For options granted during the year ended June 30, 2003 where the exercise price
was less than the stock price at the date of the grant, the weighted-average
fair value of such options was $0.012 and the weighted-average exercise price of
such options was $0.0124. In connection with the issuance of these options, the
Company recognized an expense of $0 related since the exercise price was equal
to the value of the Company's stock at the date of issuance.
COMMON STOCK ISSUED FOR SERVICES AND COMPENSATION
The table below shows all the issuances of common stock for services during the
year ended June 30, 2004 and 2003. The value of the services was derived by
multiplying the market value of the Company's common stock at the date a
transaction for services was entered into by the number of shares issued.
FISCAL 2004
ISSUE SHARES
DATE DESCRIPTION ISSUED VALUE
1/7/2004 Strategic planning/marketing 75,000 $ 1,500
6/1/2004 Strategic planning/marketing 300,000 1,500
7/31/2003 Strategic planning/marketing 100,000 2,000
9/17/2003 Strategic planning/marketing 120,000 2,400
12/29/2003 Strategic planning/marketing 250,000 2,500
12/10/2003 Professional services 175,000 2,625
1/7/2004 Strategic planning/marketing 150,000 3,000
12/31/2003 Strategic planning/marketing 500,000 5,000
12/10/2003 Professional services 1,075,000 16,125
8/1/2003 Strategic planning/marketing 5,000,000 125,000
----------- -----------
7,745,000 $ 161,650
=========== ===========
F-31
FISCAL 2003
ISSUE SHARES
DATE DESCRIPTION ISSUED VALUE
07/01/02 Strategic planning/marketing 450,000 $ 72,000
07/08/02 Strategic planning/marketing 79,688 12,431
08/15/02 Strategic planning/marketing 500,000 25,000
08/19/02 Strategic planning/marketing 150,000 7,500
09/09/02 Strategic planning/marketing 1,500,000 79,500
09/18/02 Strategic planning/marketing 3,000,000 93,000
09/23/02 Strategic planning/marketing 100,000 2,200
09/24/02 Strategic planning/marketing 250,000 4,750
10/10/02 Strategic planning/marketing 2,310,900 23,109
10/10/02 Strategic planning/marketing 3,000,000 30,000
10/29/02 Strategic planning/marketing 15,000,000 150,000
11/12/02 Strategic planning/marketing 937,500 18,750
12/13/02 Strategic planning/marketing 400,000 12,000
12/17/02 Professional services 1,000,000 10,000
12/17/02 Strategic planning/marketing 4,000,000 40,000
12/17/02 Strategic planning/marketing 45,000,000 450,000
01/03/03 Strategic planning/marketing 500,000 5,000
01/07/03 Strategic planning/marketing 686,667 10,300
01/08/03 Strategic planning/marketing 2,000,000 30,000
02/10/03 Professional services 533,333 8,000
03/03/03 Strategic planning/marketing 300,000 3,000
04/10/03 Strategic planning/marketing 1,000,000 10,000
06/10/03 Strategic planning/marketing 4,333,333 65,000
06/23/03 Strategic planning/marketing 5,702,079 85,531
----------- -----------
92,733,500 $1,247,071
=========== ===========
NOTE 8 - SEGMENT AND GEOGRAPHIC INFORMATION
During fiscal 2004 and 2003, the Company managed and internally reported the
Company's business as four (4) reportable segments as follows:
F-32
(1) professional employer organization
(2) temporary staffing
(3) imaging products;
(4) imaging software;
Segment information for the fiscal year ended June 30, 2004 and 2003, was as
follows:
PEO TEMPORARY IMAGING IMAGING
BUSINESS STAFFING PRODUCTS SOFTWARE TOTAL
SELECTED STATEMENT OF OPERATIONS ACTIVITY:
Fiscal year ended June 30, 2004
Revenues $ 2,607 $ 10,119 $ 764 $ 36 $ 13,526
Cost of revenues (894) (9,209) (196) (3) (10,302)
Gross profit 1,713 910 568 33 3,224
Fiscal year ended June 30, 2003
Revenues $ 2,499 $ -- $ 924 $ 367 $ 3,790
Cost of revenues (1,639) -- (396) (90) (2,125)
Gross profit 860 -- 528 277 1,665
As of and during the years ended June 30, 2004 and 2003, no customer accounted
for more than 10% of consolidated accounts receivable or total consolidated
revenues. During 2004, all revenue derived from temporary staffing was from one
client.
Net sales from principal geographic areas were as follows:
2004 2003
-------- --------
Europe $ -- $ 367
Domestic sales 13,526 3,423
-------- --------
Total sales $13,526 $ 3,790
======== ========
NOTE 9 - INCOME TAXES
The Company's provision for income taxes is accounted for in accordance with
SFAS 109. SFAS 109 requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under the SFAS 109 asset and liability
method, deferred tax assets and liabilities are determined based upon the
difference between the financial statement and tax bases of assets and
liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is then provided for
deferred tax assets that are more likely than not to not be realized.
F-33
The provision (benefit) for income taxes is as follows for the years ended June
30:
2004 2003
----------- -----------
Current - State $ -- $ --
Deferred benefit -- --
----------- -----------
$ -- $ --
=========== ===========
The components of deferred income taxes are as follows at June 30:
2004 2003
--------- ---------
Deferred tax assets
Net operating loss carryforwards $ 37,600 $ 37,100
Other 500 500
--------- ---------
38,100 37,600
Valuation allowance (38,100) (37,600)
--------- ---------
$ -- $ --
========= =========
The Company's federal and state net operating loss carryforwards expire in
various years through 2017. The Company has made numerous equity issuances that
could result in limitations on the annual utilization of the Company's net
operating loss carryforwards. The Company has not performed an analysis to
determine the effect of such changes.
The provision for income taxes results in an effective rate that differs from
the federal statutory rate. Reconciliation between the actual tax provision and
taxes computed at the statutory rate is as follows for the years ended June 30,
2004:
Tax Percentage
Federal Tax $ 35,360 34.0%
State tax 6,240 6.0%
Penalties 304,300 292.6%
Reserves 5,100 4.9%
Discontinued operations (551,480) (530.3%)
Repriced options 47,940 46.1%
Net operating loss 152,540 146.7%
---------- ---------
$ -- 0%
========== =========
Reconciliation between the actual tax provision and taxes computed at the
statutory rate is as follows for the years ended June 30, 2003:
Tax Percentage
Federal Tax $ (2,331) (34.0%)
State tax (411) (6.0%)
Penalties 688 10.0%
Reserves 157 2.4%
Discontinued operations 552 8.0%
Repriced options 65 0.9%
Net operating loss 1,280 18.7%
---------- ---------
$ -- 0%
========== =========
F-34
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENT
The Company leases its operating facilities under a lease agreement that expires
in March 2007. In addition, the Company leases other facilities and equipment
under operating and capital short-term leases.
Total rental expense was approximately $242 and $306 for the years ended June
30, 2004 and 2003, respectively.
Future minimum lease payments under non-cancelable capital and operating leases
with initial or remaining terms of one year or more are as follows:
Capital Operating
Leases Leases
--------- ---------
YEAR ENDING JUNE 30,
2005 $ 21 $ 123
2006 15 116
2007 11 46
2008 11 --
2009 30 --
--------- ---------
Net Minimum Lease Payments $ 88 $ 104
=========
Less: Amounts Representing Interest (15)
---------
Present Value of Net Minimum Lease Payments 73
Less: Current Portion (10)
---------
Long-Term Portion $ 63
=========
LEGAL MATTERS
In October 1999, the law firms of Weiss & Yourman and Stull, Stull & Brody made
a public announcement that they had filed a lawsuit against the Company and
certain current and past officers and/or directors, alleging violation of
federal securities laws and, in November 1999, the lawsuit, filed in the name of
Nahid Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on the Company. In January 2003, the Company entered into a
Stipulation of Settlement with the plaintiffs. It agreed to pay the plaintiffs
5,000,000 shares of common stock and $200 in cash. The Parties have accepted the
settlement. DRDF has issued the shares, and its insurance carrier has paid the
$200 cash payment. Pursuant to a hearing in May 2003 the Court provided approval
to the settlement.
On August 22, 2002, the Company was sued by its former landlord, Carmel Mountain
#8 Associates, L.P. or past due rent on its former facilities at 15175
Innovation Drive, San Diego, CA 92127.
DRDF was a party to a lawsuit filed by Symphony Partners, L.P. related to its
acquisition of SourceOne Group, LLC. As reported on Form 8-K, dated July 22,
2003, the plaintiffs sought payment of $702. In June 2003, the Company entered
into a settlement with the plaintiffs for a cash payment of $274, which has been
paid.
F-35
DRDF is one of dozens of companies sued by The Massachusetts Institute of
Technology, et al., related to a patent held by the plaintiffs that may be
related to part of the Company's ColorBlind software. Subsequent to the period
reported in this filing, in June 2003, the Company entered into a settlement
with the plaintiffs who have agreed to dismiss their claims against DRDF with
prejudice in exchange for a settlement fee payment of $10, which has been paid.
The Company has been sued in Illinois state court along with AIA/Mirriman, its
insurance brokers by the Arena Football League-2 ("AFS"). Damages payable to
AF2, should they win the suit, could exceed $700. The Company expects to defend
its position and rely on representations of its insurance brokers.
Throughout fiscal 2003 and 2004, and through the date of this filing, trade
creditors have made claims and/or filed actions alleging the failure of the
Company to pay its obligations to them in a total amount exceeding $3,000. These
actions are in various stages of litigation, with many resulting in judgments
being entered against the Company. Several of those who have obtained judgments
have filed judgment liens on the Company's assets. These claims range in value
from less than one thousand dollars to just over one million dollars, with the
great majority being less than twenty thousand dollars.
In connection with the Company's controlling interest of Quik Pix, Inc., the
Company is not aware of any pending litigation.
From time to time, the Company is involved in litigation relating to claims
arising out of their operations in the normal course of business.
NOTE 11 - GAIN ON EXTINGUISHMENT OF DEBT
During the year ended June 30, 2004, the Company recognized a gain on
extinguishment of debt of $1,145. This gain resulted primarily from the write
off of stale accounts payable. The Company, based upon an opinion provided by
independent legal counsel, has been released as the obligator of these
liabilities. Accordingly, management has elected to adjust its accounts payable
and to classify such adjustments as extinguishment of debt.
During the year ended June 30, 2003, the Company recognized a gain on
extinguishment of debt of $2,367. This gain resulted primarily from the write
off of stale accounts payable as discussed below, as well as a gain on a
settlement of a long-term note payable of $702, which was settled for $274 in
cash resulting in a gain of $428. With respect to the write-off of accounts
payable, the Company reviewed its accounts payable and determined that $1,942
was associated with unsecured creditors. The Company, based upon an opinion
provided by independent legal counsel, has been released as the obligator of
these liabilities. Accordingly, management has elected to adjust its accounts
payable and to classify such adjustments as extinguishment of debt.
NOTE 12 - SUBSEQUENT EVENTS
From July 1, 2004 to September 30, 2004, the Company issued 50,058,676 shares of
its common stock to consultants, for warrant exercises, for conversion of
convertible debt, and for the reduction of debt.
The Company also borrowed $245 from an investor to fund the acquisition of M&M
Nursing.
Quik Pix, Inc., issued 1,000,000 shares of its common stock for settlement of a
debt.
F-36