U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the fiscal year ended June 30, 2005.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from _____ to ______
Commission file number 0-12641
DALRADA FINANCIAL CORPORATION
(Name of small business issuer in its charter)
DELAWARE 13-0021693
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9449 BALBOA AVENUE, SUITE 210
SAN DIEGO, CA 92123
(Address of principal executive offices)
Registrant's Telephone number, including area code: (858) 451-6120
Securities registered under 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Act: Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
Regulation S-B is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Yes [ ] No [X]
The issuer had revenues of $19,476,000 for the fiscal year ended June 30, 2005.
The aggregate market value of the voting stock held by non-affiliates on June
30, 2005 was approximately $2,153,000 based on the average of the bid and asked
prices of the issuer's common stock in the over-the-counter market on such date
as reported by the OTC Bulletin Board. As of June 30, 2005, 735,248,867 shares
of the issuer's Common Stock were outstanding. As of August 31, 2005,
752,908,407 shares of the issuer's Common Stock were outstanding.
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
(Check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
None
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: YES [ ] NO [X]
-1-
PART I
ITEM 1. DESCRIPTION OF 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)
277-5300.
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 and employee benefits. These financial
services relieve existing and potential customers of the burdens associated with
personnel management and control.
DRDF provides services through its wholly-owned subsidiaries and
division, SourceOne Group, Inc. ("SOG"), Master Staffing and Heritage Staffing;
in addition, through The Solvis Group, Inc., ("Solvis") a 90% owned subsidiary
that includes several operating units, including CallCenterHR(TM), 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 were
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 90% of Solvis. Also in July 2005, Solvis organized a wholly-owned
subsidiary, Imaging Tech, Inc., in order to separately pursue its remaining
imaging business.
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.
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.
-2-
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
through independent carriers 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.
-3-
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"), 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.
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.
-4-
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 Anaheim 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 of the Photomotion Images , 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. During fiscal
2005 the Company elected to fully reserve for the costs of the patents.
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."
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.
-5-
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.
ITEM 2. DESCRIPTION OF PROPERTY
DRDF owns no real property. Dalrada leases the facility at 9449 Balboa
Avenue, Suite 210, San Diego, California, 92123. This is a new five year lease
entered into on August 3, 2005 by the Christianson Group, a wholly-owned
subsidiary.. The facility is approximately 5,397 square feet and will serve as
our new corporate headquarters. Payments under the lease are currently $10.8
thousand per month.
Dalrada's, Source One Goup, Inc. subsidiary, leases the facility at
1520 Lewis Street, Anaheim California. This is a month-to-month agreement
entered into on December 15, 2004 with Employment Systems, Inc.. The facility is
approximately 10,000 square feet. Payments under the lease are currently $2
thousand per month.
Dalrada's, The Solvis Group subsidiary leases the facility at 1520
Lewis Street, Anaheim, California. This is month-to-month agreement entered on
December 15, 2004. The facility is approximately 10,000 square feet. Payments
under the lease are currently $6 thousand per month.
ITEM 3. LEGAL PROCEEDINGS
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 District 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 Company has reached a verbal
settlement with the plantiff., pending the completion of the signed agreement.
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.
-6-
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.
On September 7, 2005, the arbitrator from the American Arbitration Association
awarded to Accord Human Resources a judgment against Greenland Corporation and
the Company as the guarantor, an amount equaling $168. Legal counsel has
estimated that the claim could amount to as much as $214. The Company has
reserved $200 for the claim.
Throughout fiscal 2004 and 2005, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
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.
-7-
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) 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, 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
Year Ended June 30, 2006
First 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.
Transfer Agent and Registrar
----------------------------
DRDF's transfer agent is Atlas Stock Transfer, 5899 South State Street, Salt
Lake City, Utah 54107, (801)266-7151.
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 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.
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.
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.
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.
-8-
On October 9, 2003, 1,075,000 shares were issued to Weiss & Yourman 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.
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.
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.
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.
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.
On January 15, 2004, 7,481,989 shares were issued to Amro at $0.0124 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.
On February 2, 2004, 4,523,810 shares were issued to Bristol Capital at $0.0084
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.
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.
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 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.
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. 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 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.
On March 15, 2004, 13,121,275 shares were issued to Bristol Capital at $0.0049
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.
On March 16, 2004, 6,911,011 shares were issued to Balmore at $0.0088 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.
-9-
On May 10, 2004, two certificates for 20,000,000 and 16,000,000 for an aggregate
of 36,600,000 shares, were issued to Bicoastal Consulting Group at $0.003 per
share. 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
Bicoastal Consulting Group was a sophisticated investor with enough knowledge
and experience in business to evaluate the risks and merits of the investment.
On June 1, 2004, 300,000 shares were issued to Reid at $0.011 per share. 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 Reid was a
sophisticated investor with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
On June 2, 2004, 38,927,428 shares were issued to Bristol Investment Fund, Ltd.
as a partial conversion of $118,000 of principal at $0.003 per share. 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 June 2, 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
On June 2, 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.
On June 3, 2004, 24,524,070 shares were issued to the Stonestreet Limited
Partnership as a conversion of a convertible debenture valued at $98,000 of
principal at $0.004 per share. 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.
FISCAL YEAR 2005
----------------
On July 12, 2004, 38,000,000 shares were issued to the Longview Fund, LP as a
partial conversion of a convertible debenture valued at $175,560 of principal at
$0.00462 per share. 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 July 26, 2004, 450,000 shares were issued to Technipower, Inc, at $.005 per
share. 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 September 28, 2004 Allen, Sheridan and Temple were issued an aggregate of
1,500,000 shares at $0.0025 per share. 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 investors were sophisticated investors with enough
knowledge and experience in business to evaluate the risks and merits of the
investment.
On September 28, 2004, 10,108,706 shares were issued to Bristol Investment Fund,
Ltd. as a partial conversion of $17,500 of principal and $3,728.22 of interest
at $0.0021 per share. 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 October 19, 2004, David Whiteford , 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 David Whiteford, Michael Brann and Jason Brann were
sophisticated investors with enough knowledge and experience in business to
evaluate the risks and merits of the investment.
On October 19, 2004, 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.
-10-
On October 22, 2004, 28,427,032 shares were issued to Bristol Investment Fund,
Ltd., as a conversion of $35,000 of principal and $7,640.55 of interest at
$0.00147. 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 October 25, 2004, 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.
On October 25, 2004, 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.
On December 3, 2004, 23,757,224 shares were issued to Bristol Investment Fund,
Ltd. for conversion of $29,000 of principal and $6,635.84 of interest at
$0.00154 per share. 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 13, 2004, 21,121,413 shares were issued to Stonestreet Limited
Partnership at $0.00151 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.
On April 8, 2005, 46,852,670 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 June 13, 2005, 6,000,000 shares were issued to John Capezzuto at $0.005 per
share. 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 John
Capezzuto was a sophisticated investor with enough knowledge and experience in
business to evaluate the risks and merits of the investment.
Subsequent Issuances
--------------------
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.
-11-
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Form 10-KSB. The statements contained in this Report on Form 10-KSB 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.
OVERVIEW
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 services to
relieve some of the negative impact they have on the business operations of our
existing and potential customers. To this end, through strategic acquisitions,
we became a professional employer organization ("PEO").
We provide financial services principally through our wholly-owned SourceOne
Group, Inc. ("SOG") subsidiary. These units provide a broad range of financial
services, including: benefits and payroll administration, health and workers'
compensation insurance programs, personnel records management, and employer
liability management. Through our Jackson Staffing subsidiary (and MedicalHR and
CallCenterHR operating units), we provide temporary staffing services to small
and medium-sized businesses - primarily to call centers and medical facilities.
In January 2003, we completed the acquisition of controlling interest
(approximately 85%) in the shares of Greenland Corporation whose shares are
traded on the NASD Electronic Bulletin Board under the symbol GRLC.
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. We no longer have an
affiliation with Greenland Corporation.
In January 2003, we completed the acquisition of a controlling interest (85%) in
the shares of Quik Pix, Inc. ("QPI"). QPI shares are traded on the National
Quotation Bureau Pink Sheets under the symbol QPIX. QPI is a visual marketing
support firm located in Anaheim, California. Its principal service is to provide
photographic and digital images mounted for customer displays in tradeshow and
other displays .Its principal product, PhotoMotion is a patented color medium of
multi-image transparencies. The process uses existing originals to create the
illusion of movement, and allows for six to five distinct images to be displayed
with an existing lightbox.
In September 2003, we hired two key persons and acquired the operations of the
temporary staffing service then owned by Jackson Staffing, LLC. In order to
formalize this arrangement, we entered into an acquisition agreement with
Jackson Staffing effective September 1, 2003 and accordingly, the financial
statements of Jackson Staffing from September 1, 2003 are included in our
financial statements.
In April 2004, we transferred our ColorBlind software technology to QPI.
ColorBlind 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. ColorBlind software
products are marketed internationally through direct distribution, resellers,
and on the internet through our color.com website.
-12-
Our business continues to experience operational and liquidity challenges.
Accordingly, year-to-year financial comparisons may be of limited usefulness now
and for the next several periods due to anticipated changes in our business as
these changes relate to potential acquisitions of new businesses and changes in
products and services.
On June 28, 2004, we completed an acquisition of certain assets of M&M Nursing
(M&M"). The purchase price was 5,000,000 shares of our common stock valued at
$31 plus the assumption of $204 of liabilities. M&M is a temporary staffing
agency primarily for nurses.
On April 4, 2005, we completed an acquisition of certain assets of Heritage
Staffing Group, Inc. ("Heritage"). The purchase price was $80 consisting of $20
in cash, a $45 note payable to the owner of Heritage and 5,000,000 warrants to
purchase shares of DRDF common stock valued at $14. Heritage is in the temporary
staffing business and we acquired certain assets of Heritage to complement our
other temporary staffing business.
On May 5, 2005 we established a self-insured worker's compensation program. In
connection with this self-insured program, we were required to establish a
worker's compensation deposit in the amount of $2,625. Our maximum exposure
under this self-insured worker's compensation program is $4,200 and we are
liable up to $250 per occurrence. We purchase coverage from a worker's
compensation insurer to cover additional losses above the policy limits. We
believe that we can expand our staffing business as a result of us establishing
this self-insured worker's compensation program
Our current strategy is: to expand our financial services businesses, including
PEO services and temporary staffing, and to continue to commercialize imaging
technologies, including PhotoMotion Images and ColorBlind color management
software through our QPI subsidiary.
To successfully execute our current strategy, we will need to improve our
working capital position. The report of our independent auditors accompanying
our June 30, 2005 financial statements included elsewhere in this Form 10KSB
includes an explanatory paragraph indicating there is a substantial doubt about
our ability to continue as a going concern, due primarily to our recent loss
from operations, the decreases in our working capital and net worth. In
addition, we are late in our filing of payroll tax returns for certain of our
PEO divisions and are delinquent on the payment of payroll tax withholdings. We
plan to overcome the circumstances that impact our ability to remain a going
concern through a combination of achieving profitability, raising additional
debt and equity financing, and renegotiating existing obligations. In addition,
we will continue to work with the Internal Revenue Service and State taxing
Authorities to reconcile and resolve all open accounts and issues.
In recent years, we have been working to reduce costs through the reduction in
staff and reorganizing our business activities. Additionally, we have sought to
reduce our debt through debt to equity conversions. We continue to pursue the
acquisition of businesses that will grow our business.
There can be no assurance that we 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 our capital requirements. Any additional
equity or convertible debt financings could result in substantial dilution to
our shareholders. If adequate funds are not available, we may be required to
delay, reduce or eliminate some or all of our planned activities, including any
potential mergers or acquisitions. Our inability to fund our capital
requirements would have a material adverse effect on the Company.
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,
-13-
primarily allowance for doubtful accounts, estimated fair value of equity
instruments used for compensation, estimated tax liabilities from 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
elsewhere in this Form l0-KSB.
REVENUE RECOGNITION
PEO SERVICE FEES AND WORKSITE EMPLOYEE PAYROLL COSTS
----------------------------------------------------
We recognize our 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
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.
RESULTS OF OPERATIONS (IN $000)
YEAR ENDED JUNE 30, 2005 COMPARED TO YEAR ENDED JUNE 30, 2004
-------------------------------------------------------------
REVENUES
Total revenues were $19,476 and $13,526 for the year ended June 30, 2005 and
2004, respectively; an increase of $5,950 (44%). The principal reason for the
increase is due to a full year of revenue from our temporary staffing division
for the year ended June 30, 2005 as compared to only ten months for the same
period in 2004 and an overall increase in revenue in our staffing division.
-14-
PEO SERVICES
PEO revenues were $1,930 and $2,607 for the year ended June 30, 2005 and 2004,
respectively; a decrease of $667 (26%) due primarily to the decrease in our PEO
customer base due to an increased focus by us to expand our temporary staffing
business.
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.
During fiscal 2005, Jackson Staffing and M&M Nursing were renamed Solvis Group,
Inc. Temporary Staffing revenues were $17,029 and $10,119 for the year ended
June 30, 2005 and 2004, respectively; an increase of $6,910 (68%). The principal
reason for the increase is due to a full year of revenue from our temporary
staffing division for the year ended June 30, 2005 as compared to only ten
months for the same period in 2004 and an overall increase in revenue in our
staffing division due to our focus to grow this segment of our business.
PRODUCTS
Sales of products were generated principally from our QPI subsidiary. Products
revenues were $447 and $764 for the year ended June 30, 2005 and 2004,
respectively; a decrease of $317 (41%). The decrease is principally due to lower
sales of photographic and digital images though our QPI subsidiary.
SOFTWARE
Software revenues were $70 and $36 for the year ended June 30, 2005 and 2004,
respectively; an increase of $34 (94%). 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 year ended June 30, 2005 and 2004 was $1,424 (74%
of PEO revenues) and $894 (34% 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 year ended June 30, 2005 and 2004 was
$15,010 (88% of temporary staffing revenue) and $9,209 (91% of temporary
staffing revenue), respectively. The significant increase is due to the increase
in temporary staffing revenue.
Cost of products sold for the year ended June 30, 2005 and 2004 were $93 (21% of
product sales) and $196 (26% of product sales), respectively.
Cost of software, licenses and royalties for the year ended June 30, 2005 and
2004 were $3 (4% of software, license and royalties revenue) and $3 (8% of
software, license and royalties revenue), respectively.
OPERATING EXPENSES
Operating expenses for the year ended June 30, 2005 and 2004 were $5,578 and
$4,196, respectively; an increase of $1,382 (33%). The increase is due to an
overall increase in our business as reflected in the 44% increase in revenues.
During the year ended June 30, 2005, we determined that the cost of the patent
was not recoverable and took a write-off related to the patent of $1,348.
-15-
OTHER INCOME AND EXPENSE
Interest expense and financing costs for the year ended June 30, 2005 and 2004
was $1,709 and $1,930 respectively; a decrease of $221 (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 year ended June 30,
2004 (there were fewer conversions during the year ended June 30, 2005) offset
by an increase due to the amount of debt outstanding.
GAIN ON EXTINGUISHMENT OF DEBT
Gain on the extinguishment of debt was $829 and $1145 for the year ended June
30, 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 year ended June 30, 2005, we recorded as other income an adjustment
of accrued PEO payroll taxes payable of $1,895 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.
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, 2005 and the year ended June 30, 2004, we issued an additional
182,890,125 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 June 30, 2005, we had negative working capital of $26,780, a decrease in
working capital of $4,844 since June 30, 2004.
The Company is late on filing payroll tax returns and owes approximately 8.8
million in past due payroll taxes.
Net cash used in operating activities was $4,351 for the year ended June 30,
2005 as compared to net cash used in activities of $489 for the prior-year
period; a decrease of $3,862. The principal reason for the decrease was the
payment of the worker's compensation premium and the worker's compensation
deposit paid during the year ended June 30, 2005.
Cash provided by financing activities was $4,482 for the year ended June 30,
2005 as compared to $526 for the year ended June 30, 2005, an increase of $3,956
from the prior-year period. The primary reason for the increase was the issuance
of two notes payable totaling $3,710 to pay the worker's compensation premium
and deposit.
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 June 30, 2005, was
approximately $453.
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, 2005 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.
-16-
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.
During the fiscal year ended June 30, 2005 the Company recorded approximately
$463,000 in loss reserves.
OFF-BALANCE 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.
ITEM 7. Financial Statements
The report of our independent auditors and our financial statements are set
forth in this report beginning on Page F-1.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On September 3, 2003, the Registrant appointed Pohl, McNabola, Berg & Company,
LLP ("PMBC") as Dalrada Financial Corporation's ("DRDF," the "Registrant", or
the "Company") independent auditors upon the recommendation of its Audit
Committee.
ITEM 8A. Controls and Procedures.
(a) Our Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of the period ended June 30, 2005,
covered by this annual report (the "Evaluation Date"), and based on such
evaluation, such officers have concluded, as of the Evaluation Date, that our
disclosure controls and procedures were not effective in ensuring that all
information required to be disclosed in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms.
The material weaknesses in internal control over financial reporting resulting
from the Chief Executive Officer and Chief Financial Officer's evaluation are
described below. In addition there are inherent limitations to the effectiveness
of any system of disclosure controls and procedures. Even effective disclosure
controls and procedures can only provide reasonable assurance of achieving their
control objectives.
(b) Except as described below, during our fourth quarter of fiscal
2005, there were no changes made in our internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
-17-
Attached as Exhibits 31.1 and 31.2 to this annual report are certifications of
the Chief Executive Officer and Chief Financial Officer required in accordance
with Rule 13a-14(a) of the Exchange Act. This portion of the Company's annual
report includes the information concerning the controls evaluation referred to
in the certifications and should be read in conjunction with the certifications
for a more complete understanding of the topics presented.
In conjunction with their audit of our fiscal year 2005 consolidated financial
statements, PMB & Co., LLP (PMB), the Company's independent registered public
accounting firm, identified and orally reported to management and the Audit
Committee the material weaknesses under standards established by the Public
Company Accounting Oversight Board (PCAOB). A material weakness is a significant
deficiency, or combination of significant deficiencies, that results in more
than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. A significant deficiency
is a control deficiency, or combination of control deficiencies, that adversely
affects the Company's ability to initiate, authorize, record, process, or report
external financial data reliably in accordance with generally accepted
accounting principles such that there is a more than a remote likelihood that a
misstatement of the company's annual or interim financial statements that is
more than inconsequential will not be prevented or detected.
The material weaknesses were identified as:
(1) Planning and implementation of the Company's Accounting System; (2)
Financial Statement closing process; (3) Ineffective Information Technology
control environment, including the design of the Company's information security
and data protection controls; (4) Untimely detection and assessment of
impairment of intangible assets (i.e., patents where indicators of impairment
are present; (5) Inadequate review of the valuation of certain payroll tax
liabilities that resulted in post-closing journal entries to properly reflect
the Company's payroll tax liabilities; (6) Proper recording of conversion of
debt into shares of common stock, including the ability of certain managers to
record journal entries without adequate review or supporting documentation and
an inability by management to adequately review the issuance of common stock;
and, (7) Lack of the necessary depth of personnel with sufficient technical
accounting experience with U.S. GAAP to perform an adequate and effective
secondary review of technical accounting matters. The Company will continue to
evaluate the material weaknesses and will take all necessary action to correct
the internal control deficiencies identified. The Company will also further
develop and enhance its internal control policies, procedures, systems and staff
to allow it to mitigate the risk that material accounting errors might go
undetected and be included in its consolidated financial statements.
The Company contemplates undertaking a thorough review of its internal controls
as part of the Company's preparation for compliance with the requirements under
Section 404 of the Sarbanes-Oxley Act of 2002 and the Company is using this
review to further assist in identifying and correcting control deficiencies. At
this time, the Company has not completed its review of the existing controls and
their effectiveness. Unless and until the material weaknesses described above,
or any identified during this review, are completely remedied, evaluated and
tested, there can be no assurances that the Company will be able to assert that
its internal control over financial reporting is effective, pursuant to the
rules adopted by the SEC under Section 404, when those rules take effect.
ITEM 8B.
None
-18-
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The directors and executive officers of the Company, their ages and
positions with the Company as of June 30, 2004 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
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 and currently serves on the Audit Committee of the Board. For a
period of time during 2002 he served as Chief Accounting Officer and President
of Source One Group. He is currently a Director, COO and CFO of Security First
International Holdings, Inc. ("SFNH:PK"). During 2004 and 2005 he was President
and CEO of Energy Transfer Corporation, a privately held bio-energy company. In
2003 and 2004 he was Founder and Chief Financial Officer of Modofood USA, Inc.,
a privately held food technology enterprise. In 1998 he helped found Cyber Air
Communications, Inc. in which he served as a Director and President until 2002.
Mr. Dietrich has been performing investment banking and consulting services for
clients since 1990. Prior to that he has served as CEO, COO or CFO of privately
held middle market companies. He is an accounting graduate from Notre Dame and
possesses an MBA from U.of Detroit. He possesses a CPA certificate from
Illinois.
-19-
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 Managing Director for Grant Bettingen, Inc, a Newport
Beach, CA based full service Investment Banking firm. Mr. Fryer has also served
as CEO, Founder and President of World Comnet, Inc., which went public on the
Vancouver Stock Exchange and was Managing Director of Ventana International,
Inc., a venture capital and boutique investment-banking firm with over $150
million in capital. Previously, he was Chairman and CEO of Pen Interconnect,
Inc., an electronic circuit board manufacturer. Previously, he spent over 28
years in the computer business in the USA as well as Asia and Europe. He is a
graduate of the University of Southern California with a degree in Mechanical
Engineering and a minor in Economics.
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.
AUDIT COMMITTEE FINANCIAL EXPERT
The Audit Committee of the Board of Directors consists of Mr. Dietrich
and Dr. Green, both of whom are independent and qualify as financial experts
under SEC regulations.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires DRDF's
directors and executive officers, and persons who own more than 10% of a
registered class of DRDF's equity securities to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other DRDF equity securities. Officers, directors
and greater than 10% shareholders are required by SEC regulations to furnish
DRDF with copies of all Section 16(a) forms they file.
To DRDF's knowledge, based solely on its review of the copies of such
reports furnished to the company and written representations that no other
reports were required during the fiscal year ended June 30, 2005, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with.
BUSINESS ETHICS CONFLICTS OF INTERESTS POLICY
The Company has adopted a Policy Statement on Business Ethics and
Conflicts of Interest, which was approved by the Board of Directors, applicable
to all employees, which is attached as exhibit 33.1 to this report.
ITEM 10. Executive Compensation
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------- -------------------
OPTIONS/
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY OTHER SARS (#)
----------- ------ ----- --------
Brian Bonar 2005 $282,000 $0 0
Chairman, Board of Directors, 2004 $150,000 $0 0
President and C.E.O. 2003 $76,814 $0 15,000,000
James R. Downey, Jr.(1) 2004 $100,000 $20,000 -
Former Chief Operating Officer 2003 $79,000 9,500,000
and Chief Accounting Officer
Randall Jones 2005 120,000 40,000
Chief Financial Officer
-20-
(1) Mr. Downey joined the Company effective January 6, 2003 and resigned
effective January 31, 2004.
The following table provides information on Options/SARs granted in the
2004 Fiscal Year to the Named Officers.
Potential Realizable
Value at Assumed
Percent of Annual Rates of
Number of Total Stock Price
Securities Options/SARs Appreciation for
Underlying Granted to Exercise or Option Term (4)
Options/SARs Employees in Base Price Expiration ------------------
Name Granted (#) Fiscal Year ($/share) Date 5% ($) 10% ($)
---- ----------- ----------- --------- ---- ------ -------
Brian Bonar 7,000,000 23.7% $0.015 12/1/05 5,250 10,500
James R. Downey, Jr. (1) 0
(1) Mr. Downey resigned effective January 30, 2004
N/A
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table provides information on option exercises in the
2004 Fiscal Year by the Named Officers and the value of such Named Officers'
unexercised options at June 30, 2004. Warrants to purchase Common Stock are
included as options. No stock appreciation rights were held by them at the end
of the 2004 Fiscal Year.
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED ON VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SAR
NAME EXERCISE (#) REALIZED ($) OPTIONS/SAR'S AT FY-END (#) AT FISCAL YEAR END ($) (2)
------------------------ ------------ ------------ ------------------------------ --------------------------
----------- ------------- ----------- -------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Brian Bonar --- 8,000,000 --- $0 ---
James R. Downey, Jr. (1) --- --- 9,500,000 --- $0 ---
(1) Mr. Downey resigned effective January 30, 2004
N/A
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
-21-
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 2005 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.
Neither of these individuals was an officer or employee of the Company at any
time during the 2004 Fiscal Year.
ITEM 11. 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
Of Beneficial Owner Number of Shares
Owned (1) Beneficially owned Percent of class Percent of class
--------------------------------------- --------------------- ----------------- ----------------
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
--------------------------------------- --------------------- ----------------- ----------------
Director 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%
--------------------------------------- --------------------- ----------------- ----------------
-22-
(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.
(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 June 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 June 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 June 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 June 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 June 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.
-23-
(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.
ITEM 12. Certain Relationships and Related 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 $0 and $120 for the years ended June 30, 2005 and 2004,
respectively.
Transactions with Officers and Key Executives
---------------------------------------------
During the year ended June 30, 2004, common stock with an aggregate fair market
value of $8 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 the year ended June 30, 2004. The transaction is at fair value.
Warning Management Services, Inc.
---------------------------------
The Company's CEO and Chairman, Mr. Brian Bonar, is also the CEO and Chairman of
Warning Management Services, Inc. In addition, the Company's CFO, Mr. Randall A.
Jones, is also the CFO of Warning Management Services, 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.
-24-
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. During
the year ended June 30, 2005, the Company has invoiced Warning $390 for
management services and $45 for reimbursement of costs. Warning also paid
expenses of $38 on behalf of the Company. As of June 30, 2005, the Company has
an amount due to Warning of $194 that is included in current liabilities.
Kaire Holdings, Inc.
--------------------
The Company's Source One subsidiary processes the payroll for Effective Health,
Inc. which is a wholly-owned subsidiary of Kaire Holdings, Inc. The Company's
CFO, Mr. Randall A. Jones, is also the CFO of Kaire Holding, Inc.
-25-
ITEM 13. Exhibits, List and Reports in Form 8-K
a. Exhibits
3(a) Certificate of Incorporation of the Company, as amended, and
currently in effect. See also below (Incorporated by reference to
Exhibit 3(a) to 1988 Form 10-K) *
3(b) Certificate of Amendment of Certificate of Incorporation of the
Company, filed February 8, 1995, as amended, and currently in
effect (Incorporated by reference to Exhibit 3(b) to 1995 Form
10-K) *
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) *
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) *
-26-
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) *
-27-
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) *
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 D
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.) *
-28-
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.) *
10(op) Agreement to Acquire Shares between the Company and The Christensen
Group, et al, dated April 1, 2003. *
21 List of Subsidiaries of the Company *
31.1 Certification of the Chief Executive Officer pursuant to Rule **
13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002)
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002) **
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C.ss.1350 (Section 906 of the Sarbanes-Oxley Act of 2002) **
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C.ss.1350 (Section 906 of the Sarbanes-Oxley Act of 2002 **
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.
The Company will furnish a copy of any exhibit to a requesting shareholder upon
payment of the Company's reasonable expenses in furnishing such exhibit.
(b) Reports on Form 8-K
DATE SUBJECT
10/14/2003 Late filing of Form 10-KSB for fiscal year 2003, ended June 30,
2003
01/13/2004 Resignation of Thomas Brown as Senior Vice President and Chief
Financial Officer
03/04/2004 Disposition of Greenland Financial Corporation
05/24/2005 Transfer Solvis Group to Quik Pix, Inc. a wholly owed subsidiary
9/20/2005 Appointment of Chief Financial Officer
-29-
ITEM 14. Principal Accountant Fees and Services
The Company paid or accrued the following fees in each of the prior two
fiscal years to its independent certified public accountants, Pohl, McNabola
Berg & Company, LLP
For the Year Ended June 30,
2005 2004
---- ----
Audit Fees $110,000 $65,000
Audit-Related Fees $95,033 $22,085
Tax Fees $0.00 $-
All Other Fees $0.00 $7,848
-------------- ----- ------
Total Fees $205,033 $94,933
"Audit Fees" consisted of fees billed for services rendered for the audit of the
Company's annual financial statements and audit related fees are for review of
the financial statements included in the Company's quarterly reports on Form
10-QSB.
AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES
------------------------------------------------------
The Audit committee is in the process of establishing a pre-approval policy and
procedure.
PERCENTAGE OF HOURS EXPENDED
----------------------------
The amount of hours expended on the principal accountant's engagement to audit
the registrant's financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal accountant's
full-time, permanent employees was less than 50%.
-30-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DALRADA FINANCIAL CORPORATION
By: /s/ BRIAN BONAR
--------------------------------------------
Brian Bonar, Chief Executive Officer
Dated: October 13, 2005
By: /s/ BRIAN BONAR
--------------------------------------------
Brian Bonar, Acting Chief Accounting Officer
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 10-K 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, October 13, 2005
---------------------- Chief Executive Officer, and
Brian Bonar (PRINCIPAL EXECUTIVE OFFICER)
/s/ Robert A. Dietrich Director October 13, 2005
----------------------
Robert A. Dietrich
/s/ Eric W. Gaer Director October 13, 2005
----------------------
Eric W. Gaer
/s/ Stephen J. Fryer Director October 13, 2005
----------------------
Stephen J. Fryer
/s/ Richard H. Green Director October 13, 2005
----------------------
Richard H. Green
/s/ Randall Jones Chief Financial Officer October 13, 2005
----------------------
Randall Jones
-31-
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005 AND 2004
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, 2005 F-2
Consolidated Statements of Operations for the years
ended June 30, 2005 and 2004 F-4
Consolidated Statements of Stockholders' Deficit for
the years ended June 30, 2005 and 2004 F-6
Consolidated Statements of Cash Flows for the years
ended June 30, 2005 and 2004 F-7
Notes to Consolidated Financial Statements F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors and 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, 2005, and the related consolidated
statements of operations, stockholders' deficit and cash flows for years ended
June 30, 2005 and 2004. 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, 2005 and the consolidated
results of their operations and their consolidated cash flows for each of the
years ended June 30, 2005 and 2004, 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, 2005
the Company experienced a net loss from continuing operations of $4,218,000 and
as of June 30, 2005, the Company had a negative working capital deficit of
$26,780,000 and had a negative stockholders' deficit of $24,695,000. 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 12, 2005
F-1
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2005
(in thousands)
-----------
ASSETS
Current assets
Cash $ 171
Accounts receivable (net of reserve for bad debt of $51) 1,414
Prepaid worker's compensation premiums 1,130
Prepaid expenses and other current assets 1,040
-----------
Total Current Assets 3,755
Property and equipment, net of accumulated depreciation
of $2,071 258
Customer list, net of accumulated amortization of $6 66
Worker's compensation deposit 2,625
Other assets 11
-----------
Total Assets $ 6,715
===========
(continued)
The accompanying notes are an integral part of these financial statements.
F-2
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
JUNE 30, 2005
(in thousands)
2005
---------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Borrowings under bank notes payable $ 3,220
Cash overdraft 167
Factoring lines of credit 769
Short-term notes payable, including amounts due to
related parties of $1,727 5,269
Convertible debentures, net of discounts of $1 919
Accounts payable 1,310
PEO payroll taxes and other payroll deductions 8,775
Capital lease - current 10
Other accrued expenses 10,096
---------
Total Current Liabilities 30,535
---------
Long Term Liabilities
Capital lease - long term portion 42
Convertible debentures - long term portion, net of
discounts of $170 191
Long-term notes payable, including amounts due to
related parties of $425 642
---------
Total Long Term Liabilities 875
---------
Total Liabilities 31,410
---------
Minority interest in subsidiary --
---------
Shareholders' Deficit
Series A convertible, redeemable preferred stock,
$1 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; 735,248,867 shares issued and outstanding 3,676
Common stock warrants 475
Paid-in capital 82,629
Accumulated deficit (111,895)
---------
Total Shareholders' Deficit (24,695)
---------
Total Liabilities and Shareholders' Deficit $ 6,715
=========
The accompanying notes are an integral part of these financial statements.
F-3
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands)
2005 2004
-------- --------
Revenues
Sales of products $ 447 $ 764
Software sales, licenses and royalties 70 36
Temporary staffing services 17,029 10,119
PEO services 1,930 2,607
-------- --------
Total Revenues 19,476 13,526
-------- --------
Cost of Sales
Cost of products sold 93 196
Cost of software sales, licenses and royalties 3 3
Cost of temporary staffing 15,010 9,209
Cost of PEO services 1,424 894
-------- --------
Total Cost of Sales 16,530 10,302
-------- --------
Gross Profit 2,946 3,224
-------- --------
Operating Expenses
Selling, general and administrative 5,578 4,196
Impairment of patent 1,348 --
-------- --------
Total Operating Expenses 6,926 4,196
-------- --------
Loss from operations (3,980) (972)
-------- --------
(continued)
The accompanying notes are an integral part of these financial statements.
F-4
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands)
2005 2004
------------- -------------
Other Income/(Expense):
Other -- 19
Loss on sale of assets -- (341)
Gain on settlement of debt 829 1,145
Other expenses (11)
Interest expense (1,709) (1,930)
Bad debt -- (10)
Penalties (1,312) (795)
Gain resulting from reconciliation of payroll tax
liabilities to taxing authorities 1,895 --
------------- -------------
Total Other Income/(Expense) (297) (1,923)
------------- -------------
Loss before income taxes, minority interest
and discontinued operations (4,277) (2,895)
Income tax expense -- --
------------- -------------
Loss before minority interest and discontinued operations (4,277) (2,895)
Minority interest in subsidiary loss 59 --
------------- -------------
Net loss from continuing operations (4,218) (2,895)
------------- -------------
Discontinued Operation:
Loss from operations of discontinued operation -- (2,052)
Gain on disposition of discontinued operation -- 5,049
------------- -------------
Net income (loss) (4,218) 102
Preferred stock dividends (21) (21)
------------- -------------
Net income (loss) attributed to common stockholders $ (4,239) 81
============= =============
Earnings (loss) per common share
Continuing operations $ (0.01) $ (0.01)
Discontinued operations -- 0.01
============= =============
$ (0.01) $ 0.00
============= =============
Weighted average common shares, basic and diluted 658,436,000 331,004,000
============= =============
The accompanying notes are an integral part of these financial statements.
F-5
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
SERIES A COMMON ADDITIONAL
PREFERRED STOCK COMMON STOCK STOCK PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT WARRANTS CAPITAL DEFICIT TOTAL
------ -------- ----------- ------- -------- -------- --------- --------
(thousands) (thousands) (thousands) (thousands) (thousands) (thousands)
BALANCE, JUNE 30, 2003 420.5 420 181,232,063 906 475 80,898 (107,779) (25,080)
Issuance of common stock for: -
Cash - exercise of options 29,500,000 148 29 177
Business acquisition 6,329,478 31 30 61
Compensation 10,272,110 51 89 140
Services 7,745,000 39 123 162
Conversion of liabilities 317,280,091 1,587 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 420.5 420 552,358,742 2,762 475 83,095 (107,677) (20,925)
Issuance of common stock for:
Services 14,623,110 73 73
Conversion of liabilities 168,267,015 841 (449) 392
Value of warrants issued with notes
payable 28 28
Value of warrants issued in Heritage
acquisition 14 14
Contribution of Solvis Group, Inc. to
QPI resulting in minority interest (59) (59)
Net loss (4,218) (4,218)
------ -------- ----------- ------- -------- -------- --------- --------
BALANCE, JUNE 30, 2005 420.5 420 735,248,867 3,676 475 82,629 (111,895) (24,695)
====== ======== =========== ======= ======== ======== ========= ========
The accompanying notes are an integral part of these financial statements.
F-6
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands)
2005 2004
------- -------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss from continuing operations $(4,218) $(2,895)
Net income (loss) from discontinued operations -- 2,997
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 173 164
Write-off of patent 1,348 --
Stock issued for services 73 302
Amortization of debt discounts 337 1,011
Value of repriced options/warrants -- 141
Gain on settlement of debt (829) (1,145)
Gain resulting from reconciliation of payroll
liabilities
to taxing authorities (264) --
Loss attributed to minority interest (59) --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (832) (180)
Inventories -- 15
Prepaid worker's compensation premiums (1,130) --
Other current assets (596) (424)
Worker's compensation deposit (2,625) --
Other assets (11) 21
Increase (decrease) in:
Accounts payable and accrued expenses 394 585
PEO liabilities 3,888 787
------- -------
Net cash used in operating activities from continuing operations (4,351) 1,379
Net cash provided by (used in) operations of discontinued
operations -- (1,868)
------- -------
Net cash used in operating activities (4,351) (489)
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Cash paid for acquisition (20) --
Cash acquired with acquisition -- 104
Purchase of furniture and equipment (168) (93)
------- -------
Net cash provided by (used in) investing activities from
continuing operations (188) 11
Net cash used in investing activities of discontinued operations -- --
------- -------
Net cash provided by (used in) investing activities (188) 11
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Change in cash overdraft, net 167 (87)
Net borrowings under bank notes payable -- (25)
Proceeds from line of credit 4,092 --
Repayment on line of credit (3,323) --
Proceeds from sale of common stock -- 177
Proceeds from convertible debentures -- 800
Proceeds from issuance of notes
payable 3,990 --
Repayments of notes payable (423) (72)
Repayments of capital lease obligations (21) (267)
------- -------
Net cash provided by financing activities from continuing
operations 4,482 526
Net cash used in financing activities of discontinued operations -- --
------- -------
Net cash provided by financing activities 4,482 526
------- -------
CASH OF DISCONTINUED OPERATION -- --
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (57) 48
CASH AND CASH EQUIVALENTS, Beginning of period 228 180
------- -------
CASH AND CASH EQUIVALENTS, End of period $ 171 $ 228
======= =======
(continued)
The accompanying notes are an integral part of these financial statements.
F-7
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands)
2005 2004
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid $ 137 $ --
======= =======
Income taxes paid $ -- $ --
======= =======
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of convertible debentures into common stock $ 241 $ 2,026
======= =======
Conversion of accounts payable and accrued liabilities
into common stock $ 151 $ 575
======= =======
Net assets acquired in business combinations:
Cash $ -- $ 104
Receivables -- 261
Property and equipment 7 25
Customer list 72 --
Accounts payable and accrued liabilities -- (102)
Notes payable and capital lease -- (227)
The accompanying notes are an integral part of these financial statements.
F-8
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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"), incorporated under the
laws of the state of California in March 1982 and subsequently reincorporated
under the laws of the state of Delaware in May 1983, and its following active
subsidiaries (there are ten inactive subsidiaries not listed):
a) SourceOne Group, Inc., ("SourceOne") - 100% owned by DRDF;
b) The Christianson Group ("TCG") - 100% owned by DRDF;
c) Quik Pix, Inc. ("QPI") - 85% owned by DRDF.
During the year ended June 30, 2005, the Company contributed its wholly-owned
subsidiary, Solvis Group, Inc. ("Solvis") f/k/a Jackson Staffing, Inc. to QPI.
As of June 30, 2005, Solvis is a wholly-owned subsidiary of QPI.
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,
2005, the Company experienced a net loss from continuing operations of $4,218
and as of June 30, 2005, the Company had a negative working capital deficit of
$26,780 and had a negative stockholders' deficit of $24,695. In addition, the
Company is in default on certain note payable obligations, delinquent on payroll
tax 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. Management believes that it can continue to raise
debt and equity financing to support its operations.
Nature of Business
------------------
The Company business operations are as follows:
a) The Company is 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 that
includes providing all related costs of employment, such as
workers' compensation insurance, state and federal unemployment
taxes, social security and certain fringe benefits.
F-9
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
Use of Estimates
----------------
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, reserves for contingent liabilities and
deferred taxes. 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
F-10
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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.
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 and responsibility 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.
Worker's Compensation
---------------------
During the year ended June 30, 2005, the Company established a self-insured
worker's compensation program. In connection with this self-insured program, the
Company was required to establish a worker's compensation deposit in the amount
of $2,625. The Company's maximum exposure under this self-insured worker's
compensation program is $4,200 and the Company is liable up to $250 per
occurrence. The Company purchases coverage from a worker's compensation insurer
to cover additional losses above the policy limits. Loss reserves from this
program amounted to $229 during the year ended June 30, 2005.
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.
F-11
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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.
Additionally, during 2004, all revenue derived from temporary staffing was from
one client and during 2005 96% of revenue derived from temporary staffing was
from two clients.
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 $51 at June 30, 2005. Accounts deemed uncollectible are
written off against the allowance.
Long-Lived Assets and Intangible Assets
---------------------------------------
In accordance with SFAS Nos. 142 and 144, long-lived assets to be held and used
are analyzed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS No. 142
relates to assets with an indefinite life where as SFAS 144 relates to assets
that can be amortized and the life determinable. The Company evaluates at each
balance sheet date whether events and circumstances have occurred that indicate
possible impairment. If there are indications of impairment, the Company uses
future undiscounted cash flows of the related asset or asset grouping over the
remaining life in measuring whether the assets are recoverable. In the event
such cash flows are not expected to be sufficient to recover the recorded asset
values, the assets are written down to their estimated fair value. Long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
value of asset less the cost to sell.
F-12
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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.
Customer lists
--------------
Customer lists includes customer purchased with the acquisition of certain
assets of Heritage Group, Inc. The customer lists are being amortized over their
estimated useful life of 36 months using the straight-line method. Amortization
expense for the fiscal years 2006, 2007 and 2008 is expected to be $24, $24, and
$18, respectively.
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. During the year ended June
30, 2005, the Company determined that the cost of the patent was not recoverable
and took a write-off related to the patent of $1,348.
Advertising Costs
-----------------
The Company expenses advertising and promotion costs as incurred. During fiscal
2005 and 2004, the Company incurred advertising and promotion costs of
approximately $135 and $76, 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
F-13
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
from the computation of diluted net loss per share for the years ended June 30,
2005 and 2004, respectively: warrants - 31,563,430 and 21,563,430; stock options
- 39,150,000 and 39,150,000; and convertible securities of 415,751,623 and
210,896,000. 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,
-------------------------------------------------------------------------
2005 2004
------------------------------------- ---------------------------------
INCOME/ PER INCOME/ PER
(LOSS) SHARES SHARE (LOSS) SHARES SHARE
(THOUSANDS) (THOUSANDS)
(THOUSANDS) (THOUSANDS)
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) from continuing operations $ (4,218) $ (2,895)
Preferred stock dividends (21) (21)
---------- ---------
(4,239) (2,916)
Discontinued operations -- 2,997
---------- ---------
Net income (loss) attributed to common
stockholders $ (4,239) $ 81
========== =========
Weighed shares outstanding 658,436 331,004
Continuing operations $ (0.01) $ (0.01)
Discontinued operations $ -- $ 0.01
-------- --------
$ (0.01) $ 0.00
======== ========
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").
Minority Interest
-----------------
On April 1, 2005, the Company contributed its wholly-owned subsidiary, Solvis,
to QPI. At that date, Solvis had a stockholders' equity of $393. As a result of
the Company contributing Solvis to an 85% owned subsidiary, the Company
recognized minority interest on its consolidated balance sheet in the amount of
$59. During the year ended June 30, 2005, QPI incurred a net loss of which 15%
is attributed to the minority interest. In the accompanying consolidated
statement of operations, the Company has only recognized the minority interests'
share of the net loss to the extent of the minority interest recorded on the
consolidated balance sheet. Recognizing the minority interests' entire share of
the net loss would have resulted in the recording of a minority interest
receivable.
F-14
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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
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, 2005 and 2004:
2005 2004
--------- --------
Net income (loss) attributed to common stockholders:
As reported $ (4,239) $ 81
Compensation recognized under APB 25 -- --
Compensation recognized under SFAS 123 -- (825)
--------- --------
Pro forma $ (4,239) $ (744)
========= ========
Basic loss per common share
As reported $ (0.01) $ 0.00
Pro forma $ (0.01) $ (0.00)
F-15
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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 2005
and 2004 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:
2005 2004
------------- ------------
Fair Value of options granted $ n/a $ 0.025
Risk free interest rate n/a 3.5%
Expected life (years) n/a 3
Expected volatility n/a 426%
Expected dividends n/a --
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.
Comprehensive Income
--------------------
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. The Company has four segment. (See Note 8).
F-16
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
Recent 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.
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) could impact the consolidated financial statements as the Company has
granted any equity instruments to employees in the past.
In May 2005, the FASB issued SFAS No. 154, entitled ACCOUNTING CHANGES AND ERROR
CORRECTIONS--A REPLACEMENT OF APB OPINION NO. 20 AND FASB STATEMENT NO. 3. This
Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement
No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes
the requirements for the accounting for and reporting of a change in accounting
F-17
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
principle. This Statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. Opinion 20 previously required that most voluntary changes in
accounting principle be recognized by including in net income of the period of
the change the cumulative effect of changing to the new accounting principle.
This Statement requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. This Statement defines RETROSPECTIVE APPLICATION as the application of a
different accounting principle to prior accounting periods as if that principle
had always been used or as the adjustment of previously issued financial
statements to reflect a change in the reporting entity. This Statement also
redefines RESTATEMENT as the revising of previously issued financial statements
to reflect the correction of an error. The adoption of SFAS 154 did not impact
the consolidated financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT
The cost of property and equipment at June 30, 2005 consisted of the following:
Computer and other equipment $ 1,025
Office furniture and fixtures 1,233
Leasehold improvements 71
---------
2,329
Less accumulated depreciation and amortization (2,071)
---------
$ 258
=========
Depreciation expense for the years ended June 30, 2005 and 2004 was $77 and $44,
respectively. Leased equipment amounted to $56 as of June 30, 2005.
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 $0 and $120 for the years ended June 30, 2005 and 2004,
respectively.
Transactions with Officers and Key Executives
---------------------------------------------
During the year ended June 30, 2004, common stock with an aggregate fair market
value of $8 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.
F-18
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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 the year ended June 30, 2004. The transaction is at fair value.
Warning Management Services, Inc.
---------------------------------
The Company's CEO and Chairman, Mr. Brian Bonar, is also the CEO and Chairman of
Warning Management Services, Inc. In addition, the Company's CFO, Mr. Randall A.
Jones, is also the CFO of Warning Management Services, 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. During
the year ended June 30, 2005, the Company has invoiced Warning $390 for
management services and $45 for reimbursement of costs. Warning also paid
expenses of $38 on behalf of the Company. As of June 30, 2005, the Company has
an amount due to Warning of $194 that is included in current liabilities.
Kaire Holdings, Inc.
--------------------
The Company's Source One subsidiary processes the payroll for Effective Health,
Inc. which is a wholly-owned subsidiary of Kaire Holdings, Inc. The Company's
CFO, Mr. Randall A. Jones, is also the CFO of Kaire Holding, Inc.
NOTE 4 - ACQUISITIONS AND DISPOSITIONS
Heritage Staffing Group, Inc.
-----------------------------
F-19
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
On April 4, 2005, DRDF completed its acquisition of certain assets of Heritage
Staffing Group, Inc. ("Heritage"). The purchase price was $79 consisting of $20
in cash, a $45 note payable to the owner of Heritage and 5,000,000 warrants to
purchase shares of DRDF common stock valued at $14. Heritage is in the temporary
staffing business and the Company acquired certain assets of Heritage to
complement it other temporary staffing business.
The operating results of Heritage beginning April 4, 2005 are included in the
accompanying consolidated statements of operations.
The total purchase price was valued at $80 and is summarized as follows in
accordance with SFAS No. 141 and 142:
Computer equipment $ 4
Furniture and fixtures 3
Customer list 72
------
Purchase price $ 79
======
The customer list is being amortized over 36 months.
The pro forma financial information that the consolidated operations of the
Company as if the Heritage acquisition had occurred as of the beginning of the
periods presented is not presented since the operations of Heritage prior to the
acquisition by DRDF as immaterial.
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-20
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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
=========
During the year ended June 30, 2005, the operations of Jackson and M&M combined
and the combined companies were renamed the Solvis Group, Inc. ("Solvis"). Also
during the year ended June 30, 2005, the Company contributed its wholly-owned
subsidiary, Solvis to QPI. As of June 30, 2005, Solvis is a wholly-owned
subsidiary of QPI.
Greenland Corporation
---------------------
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
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.
F-21
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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
============
NOTE 5 - OTHER ACCRUED EXPENSES
Other accrued expenses at June 30, 2005 consisted of the following as of:
Accrued interest and penalties $ 3,923
Accrued judgments 3,377
Other taxes 160
Accrued salaries and related liabilities 784
Loss reserves 464
Other 1,388
------------
$ 10,096
============
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
F-22
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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, 2005, 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
-------------------------------------------------------
On July 1, 2004, the Company entered into two note payable obligations
aggregating $275 that bear interest at an annual rate of 40% and were due on
September 30, 2004. During the year ended June 30, 2005, the Company repaid $85
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 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 has been amortized to financings costs in the accompanying
consolidated statements of operations.
The following summarizes notes payable at June 30, 2005:
Payable to investor, 8% $ 150
Payable in connection with QPI acquisition 156
Payable to two investors, 40% 190
Payable to investor, 8% 37
Payable to related party 425
Payable in connection with Heritage acquisition 45
Payable to bank related to financing of worker's
compensation deposit 600
Payable to finance company related to financing of
worker's compensation premium and deposit 2,799
Payable to equipment finance companies 9
Payable to a former director, 16% 1,500
------------
5,911
Less current portion (5,269)
------------
Long-term portion $ 642
============
F-23
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
Notes payable mature as follows:
During the years ended June 30,
2006 $ 5,269
2007 642
-------------
$ 5,911
=============
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 borrow against factored accounts receivables at a discount of
approximately 2% for each 30 day period the balances remain unpaid. Customer
payments are made directly to the factoring company and there is full recourse
for uncollected accounts.
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
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
F-24
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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
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
F-25
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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
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
F-26
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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, 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
Issuance of convertible debentures during the year -
Converted into common stock (241)
Conversion of interest and penalties 171
Amortization of value of warrants 76
Amortization of value of preferential conversion feature 233
--------
Balance at June 30, 2005 $ 1,110
========
The weighted average interest rate on notes payable outstanding at June 30, 2005
and 2004, was 8.7% and 8.7%, respectively.
All the above mentioned convertible debentures are in default as the Company has
not registered the shares underlying the conversions on a registration statement
and certain of the notes are currently past due.
NOTE 7 - STOCKHOLDERS' DEFICIT
Amendment to the Certificate of Incorporation.
----------------------------------------------
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.
F-27
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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 2005 and 2004. As of June 30, 2005, the
accumulated dividend in arrears was approximately $453 on the Series A.
Common Stock Warrants
---------------------
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
COMMON
PRICE PER SHARE SHARES
---------------- ----------
JUNE 30, 2003 $0.20 - $10.00 6,002,350
Granted $0.02 16,000,000
Exercised -- --
Canceled $0.20 - $10.00 (438,920)
----------
JUNE 30, 2004 $0.02 - $1.50 21,563,430
Granted $0.003 - $0.005 10,000,000
Exercised -- --
Canceled -- --
----------
EXERCISABLE AT JUNE 30, 2005 31,563,430
----------
F-28
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
The weighted average remaining contractual life of warrants outstanding at June
30, 2005 is 2.97 years. The exercise prices for warrants outstanding at June 30,
2005 are as follows:
NUMBER OF EXERCISE
WARRANTS PRICE
------------ --------------
5,000,000 $0.003
5,000,000 $0.005
16,000,000 $0.021
5,563,430 $0.33 - $1.50
-----------
31,563,430
===========
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.
F-29
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
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.
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:
F-30
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
STOCK OPTION PLANS
PRICE PER UNDERLYING
SHARE COMMON SHARES
-------------- -----------
JUNE 30, 2003 $0.01 - $28.20 34,158,100
Granted $0.01 - $0.025 34,500,000
Exercised $0.01 - $0.025 (29,500,000)
Canceled $28.20 (8,100)
-----------
JUNE 30, 2004 $0.01 - $0.025 39,150,000
Granted - -
Exercised - -
Canceled - -
-----------
EXERCISABLE AT JUNE 30, 2005 $0.01 - $0.025 39,150,000
-----------
The weighted average remaining contractual life of options outstanding issued
under the Stock Option Plans is 0.98 years at June 30, 2005. The exercise prices
for options outstanding at June 30, 2005 are as follows:
NUMBER OF EXERCISE
OPTIONS PRICE
---------- --------
6,000,000 $0.010
7,650,000 $0.015
25,500,000 $0.025
----------
39,150,000
==========
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.
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, 2005 and 2004. 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.
F-31
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
FISCAL 2005
ISSUE SHARES
DATE DESCRIPTION ISSUED AMOUNT
7/26/04 Strategic planning/marketing 450,000 $ 2
9/28/04 Strategic planning/marketing 1,500,000 8
10/19/04 Strategic planning/marketing 1,673,110 8
10/25/05 Strategic planning/marketing 5,000,000 25
6/13/05 Professional services 6,000,000 30
----------- -------
14,623,110 $ 73
=========== =======
FISCAL 2004
ISSUE SHARES
DATE DESCRIPTION ISSUED AMOUNT
1/7/2004 Strategic planning/marketing 75,000 $ 1
6/1/2004 Strategic planning/marketing 300,000 2
7/31/2003 Strategic planning/marketing 100,000 2
9/17/2003 Strategic planning/marketing 120,000 2
12/29/2003 Strategic planning/marketing 250,000 3
12/10/2003 Professional services 175,000 3
1/7/2004 Strategic planning/marketing 150,000 3
12/31/2003 Strategic planning/marketing 500,000 5
12/10/2003 Professional services 1,075,000 16
8/1/2003 Strategic planning/marketing 5,000,000 125
----------- -------
7,745,000 $ 162
=========== =======
NOTE 8 - SEGMENT AND GEOGRAPHIC INFORMATION
During fiscal 2005 and 2004, the Company managed and internally reported the
Company's business as four (4) reportable segments as follows:
(1) professional employer organization (2) temporary staffing
(3) imaging products; (4) imaging software;
F-32
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
Segment information for the fiscal year ended June 30, 2005 and 2004, was as
follows:
PEO TEMPORARY IMAGING IMAGING
BUSINESS STAFFING PRODUCTS SOFTWARE TOTAL
SELECTED STATEMENT OF OPERATIONS ACTIVITY:
Fiscal year ended June 30, 2005
Revenues 1,930 17,029 447 70 19,476
Cost of revenues 1,424 15,010 93 3 16,530
Gross profit 506 2,019 354 67 2,946
Impairment of patent -- -- 1,348 -- 1,348
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
During 2004, all revenue derived from temporary staffing was from one client and
during 2005 96% of revenue derived from temporary staffing was from two clients.
At June 30, 2005, 36% of the accounts receivable balance is due from these two
clients.
All sales were made in the United States of America
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.
The provision (benefit) for income taxes is as follows for the years ended June
30:
2005 2004
------ -------
Current - State $ - $ -
Deferred benefit - -
------ -------
$ - $ -
====== =======
F-33
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
The components of deferred income taxes are as follows at June 30:
2005 2004
---------- ----------
Deferred tax assets
Net operating loss carryforwards $ 38,927 $ 37,600
Other 524 500
---------- ----------
39,451 38,100
Valuation allowance (39,451) (38,100)
---------- ----------
$ -- $ --
========== ==========
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 year ended June 30,
2005:
Tax Percentage
Federal Tax $ (1,434) 34.0%
State tax (253) 6.0%
Penalties 306 (7.3)
Other 59 (1.4%)
Net operating loss 1,322 (31.3%)
---------- ---------
$ -- 0%
========== =========
Reconciliation between the actual tax provision and taxes computed at the
statutory rate is as follows for the year ended June 30, 2004:
Tax Percentage
Federal Tax $ 35 34.0%
State tax 6 6.0%
Penalties 304 292.6%
Reserves 5 4.9%
Discontinued operations (551) (530.3%)
Repriced options 48 46.1%
Net operating loss 153 146.7%
--------- ----------
$ -- 0%
========= ==========
At June 30, 2005, the Company had federal and state net operating loss ("NOL")
carryforwards of approximately $94,000,000 and $73,000,000, respectively.
Federal NOLs could, if unused, expire in varying amounts in the years 2010
through 2020.
F-34
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Lease Commitment
----------------
The Company leases its operating facilities under lease agreements that expire
through August 2010. In addition, the Company leases other facilities and
equipment under operating and capital short-term leases.
Total rental expense was approximately $299 and $242 for the years ended June
30, 2005 and 2004, 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,
2006 $ 15 $ 275
2007 15 275
2008 15 275
2009 15 230
2010 3 207
--------- ---------
Net Minimum Lease Payments $ 63 $ 1,262
=========
Less: Amounts Representing Interest (11)
--------
Present Value of Net Minimum Lease Payments 52
Less: Current Portion (10)
--------
Long-Term Portion $ 42
========
Legal Matters
-------------
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 District 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.
F-35
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 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 Company has reached a verbal settlement with
the plaintiff., pending the completion of the signed agreement.
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.
Throughout fiscal 2004 and 2005, 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 $1,000 to just over $1,000,000, with the great majority being
less than $20,000.
On September 7, 2005, the arbitrator from the American Arbitration Association
awarded to Accord Human Resources a judgment against Greenland Corporation and
the Company as the guarantor, an amount equaling $168. Legal counsel has
estimated that the claim could amount to as much as $214. The Company has
reserved $200 for the claim.
The Company is currently in dispute with one of its investors regarding the pay
down of a convertible note payable with shares of the Company's common stock
issued during the year ended June 30, 2005. The Company has currently reserved
$263 regarding this dispute and is hopeful that the matter can be resolved
amicably.
>From time to time, the Company is involved in litigation relating to claims
arising out of their operations in the normal course of business.
F-36
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2005 AND 2004
(in thousands, except share information)
NOTE 11 - GAIN ON SETTLEMENT OF DEBT
During the years ended June 30, 2005 and 2004, the Company recognized a gain on
settlement of debt of $829 and $1,145, respectively. 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 settlement of debt.
NOTE 12 - GAIN RESULTING FROM RECONCILIATION OF PAYROLL TAX LIABILITIES TO
TAXING AUTHORITIES
During the year ended June 30, 2005, the Company recorded an adjustment to
earnings of $1,895, 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.
The Company is delinquent in filing its payroll tax returns and owes $8,683 in
delinquent payroll tax payments, interest and penalties.
NOTE 13 - SUBSEQUENT EVENTS
On July 18, 2005, the Company entered into an agreement with World Wide
Personnel Services of California, Inc. whereby the Company purchased 51% issued
and outstanding stock of World Wide for $1,000 in cash plus warrants to purchase
1,000,000 shares of the Company's common stock.
On September 21, 2005, the Company entered into an agreement with PointMark
Staffing, Inc. whereby the Company purchased all of the issued and outstanding
stock of PointMark for $2,500 in cash.
On July 12, 2005, 17,659,540 shares of the Company's common stock were issued to
Bristol Investment Fund, Ltd. at $0.001267 per share for conversion of a
convertible debenture valued at $22.
Subsequent to June 30, 2005, the Company entered into three new operating lease
agreements for office space in California, Michigan and Toronto, Canada. The
terms of the leases are from 41 to 60 months and the minimum lease payment due
under these new operating lease agreements are included in Note 10.
F-37