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, 2004.
[ ] 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
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
9449 BALBOA AVENUE, SUITE 211
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 $13,525,000for the fiscal year ended June 30, 2004.
The aggregate market value of the voting stock held by non-affiliates on June
30, 2004 was approximately $4,943,550 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, 2004, 547,358,742 shares
of the issuer's Common Stock were outstanding. As of September 30 2004,
596,084,940 shares of the issuer's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: YES NO X
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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 211, San Diego, CA 92123. The Company's main phone number is (858)
451-6120.
We provide a variety of financial services to small and medium-size
businesses. These services allow our customers to outsource many human resources
tasks, including payroll processing, workers' compensation insurance, health
insurance, employee benefits, 401k investment services, personal financial
management, and income tax consultation. In November 2001, we began to provide
these financial services that relieve existing and potential customers of the
burdens associated with personnel management and control. To this end, the
Company, through strategic acquisitions, became a professional employer
organization ("PEO").
DRDF provides financial services principally through its wholly-owned
SourceOne Group, Inc. ("SOG") subsidiary, which includes several operating
units, including ProSportsHR , MedicalHR , and, CallCenterHR . These units
provide a broad range of financial services, including: benefits and payroll
administration, health and workers' compensation insurance programs, personnel
records management, employer liability management, and (in the case of MedicalHR
and CallCenterHR), temporary staffing services, to small and medium-sized
businesses.
In January 2003, we completed the acquisition of a controlling interest
approximating 88% of the shares of Greenland Corporation. Greenland shares are
traded on the NASD Electronic Bulletin Board under the symbol GRLC.
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.
In January 2003, we completed the acquisition of a controlling interest
(approximately 85%) in the shares of Quik Pix, Inc. ("QPI"). QPI shares are
traded on the National Quotation Bureau Pink Sheets under the symbol QPIX. QPI
is a visual marketing support firm located in Buena Park, California. QPI's
major source of revenues is in developing and mounting photographic and digital
images for use in display advertising for tradeshows and customer building
interiors. QPI also has a proprietary product PhotoMotion , 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.
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.
In prior years, we were principally involved in the development and
distribution of imaging products. Our core technologies are related to the
design and development of software products that improve the accuracy of color
reproduction. Our ColorBlind software provides color management to improve the
accuracy of color reproduction - especially as it relates to matching color
between different devices in a network, such as monitors and printers. These
products are now supported and distributed by QPI. Additionally, we market our
ColorBlind software products on the Internet through our color.com website.
MARKET OVERVIEW - FINANCIAL SERVICES
Our entry into the financial services business, in November 2001, was
through the acquisition of professional employer organizations ("PEO"). We are
expanding the services we provide beyond PEO services, which will include a
variety of products and services to employers and employees, and expanded
employee benefit programs such as payroll advances, life insurance, automated
payroll credit cards, and branded healthcare plans.
The PEO industry emerged in the early 1980's largely in response to the
burdens placed on small and medium-sized employers by the complex legal and
regulatory issues related to human resources management. While various service
providers were available to assist these businesses with specific tasks, PEOs
emerged as providers of a more comprehensive range of services relating to the
employer/employee relationship. In a PEO arrangement, the PEO assumes broad
aspects of the employer/employee relationship. Because PEOs provide
employee-related services to a large number of employees, they can achieve
economies of scale that allow them to perform employment-related functions more
efficiently, provide a greater variety of employee benefits and devote more
attention to human resources management.
We believe that the demand for our services is driven by (1) the trend by
small and medium-sized businesses toward outsourcing management tasks outside of
core competencies; (2) the difficulty of providing competitive health care and
related benefits to attract and retain employees; (3) the increasing costs of
health and workers' compensation insurance coverage and workplace safety
programs; and (4) complex regulation of labor and employment issues and the
related costs of compliance.
MARKET OVERVIEW - IMAGING PRODUCTS
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, a QPI technology, 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.
QPI offers 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 vast. 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
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FINANCIAL AND PEO SERVICES
The PEO business provides a broad range of services associated with human
resources management. These include benefits and payroll administration, health
and workers' compensation insurance 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 and workers' compensation claims reporting.
Benefit Plans Administration. We sponsor benefit plans including group
health coverage. 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.
Employer Liability Management. Under our Client Services Agreement ("CSA"),
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.
Client Service Agreement. All clients enter into our CSA, which establishes
our service fee. The CSA is subject to periodic adjustments to account for
changes in the composition of the client's workforce and statutory changes that
affect our costs. The CSA also establishes the division of responsibilities
between our Company and the client as co-employers. Pursuant to the CSA, 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. The client retains the employees' services and remains
liable for the purposes of certain government regulations.
Our PEO business represents a distribution channel for certain value-added
services, including a wide variety of employer and employee benefit programs
such as 401(k) plans, Section 125 cafeteria plans, legal services, tax
consulting, payroll advances, and other insurance programs. Our intention is to
expand our business through offering a variety of financial services.
The PEO 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 this 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
PEO firms. Each acquisition is expected to include retention of some existing
management and staff in order to assure continuity of operations.
We evaluate our PEO business as one segment even though our PEO products
are offered under various brand names.
COLOR MANAGEMENT SOFTWARE
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.
Our ColorBlind 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.
QPI - PHOTOMOTION
QPI's Photomotion Images 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.
COMPETITION
The markets for our products and services are 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.
The PEO business is also highly competitive, with approximately 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."
OPERATIONS
DRDF's corporate headquarters facility in San Diego, California houses most
of our administrative operations. PEO operations are conducted from the
Company's headquarters offices and small branch offices in Troy, Michigan and
Tustin, California. We have additional one year leases in Miami, Florida and
Phoenix, Arizona, each with two year renewal options.
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 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
DRDF's 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. QPI
holds the patent for Photomotion. 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.
We have obtained U.S. registration for several of our trade names or
trademarks, including ColorBlind, Photomotion, ExpertHR, MedicalHR,
CallCenterHR, and ProSportsHR. These trade names are used to distinguish our
products and services in the markets we serve.
If we fail to establish that we have not violated the asserted rights, we
could be prohibited from marketing the associated product and/or services, and
we could be liable for damages. We rely on a combination of trade secret,
copyright and trademark protection, and non-disclosure agreements to protect our
proprietary rights. Also see "Risks and Uncertainties."
EMPLOYEES
DRDF (including our subsidiaries) employed a total of 68 individuals worldwide
as of June 30, 2004. Of this number, 54 were involved in sales, marketing,
corporate administration and finance, and 14 were in engineering, research and
development, and technical support. There is no union representation for any of
DRDF's employees.
.
GOVERNMENT REGULATION
While many states do not explicitly regulate PEOs, over 20 states have
passed laws that have licensing or registration requirements for PEOs, and
several other states are considering such regulation. Such laws vary from state
to state, but generally provide for monitoring the fiscal responsibility of PEOs
and, in some cases, codify and clarify the co-employment relationship for
unemployment, workers' compensation, and other purposes under state law. DRDF
estimates that the annual costs of compliance with these regulations is
approximately $250,000.
GOING CONCERN CONSIDERATIONS
At June 30, 2004, and for the fiscal year then ended, we had a net loss and
negative working capital, which raise substantial doubt about our ability to
continue as a going concern. Our losses have resulted primarily from an
inability to achieve sales targets due to insufficient working capital and entry
into new business segments. Our ability to continue operations will depend on
positive cash flow from future operations and on our ability to raise additional
funds through equity or debt financing. We have reduced and/or discontinued some
of our operations and, if we are unable to raise or obtain needed funding, we
may be forced to discontinue operations.
For the year ended June 30, 2004, the Company experienced a net loss from
operations of $972 and as of June 30, 2004, the Company had a negative working
capital deficit of $21,936 and had a negative stockholders' deficit of $20,925.
In addition, the Company is in default on certain note payable obligations and
is being sued by numerous trade creditors for nonpayment of amounts due. The
Company is also delinquent in its payments relating to payroll tax liabilities.
These conditions raise substantial doubt about its ability to continue as a
going concern.
We plan to overcome the circumstances that impact our ability to remain a
going concern through a combination of increased revenues and decreased costs
with interim cash flow deficiencies being addressed through additional equity
financing. We have been able to reduce our costs by reducing our number of
employees and suspending unprofitable operations associated with the computer
printer business. We commenced a program to reduce our debt, which we will
address more aggressively in our current fiscal year, partially through
debt-to-equity conversions. Finally, we continue to pursue the acquisition of
business units that will be consistent with these measures.
RISKS AND UNCERTAINTIES
-------------------------
An investment in shares of DRDF's Common Stock involves a high degree of
risk. You should carefully consider the following information, which summarizes
all material risks, together with the other information contained in this
prospectus, before you decide to buy DRDF's common stock. If any of the
following risks actually occur, DRDF's business would likely suffer. In these
circumstances, the market price of DRDF's common stock could decline, and you
may lose all or part of your investment.
RISKS RELATING TO OUR BUSINESS:
-----------------------------------
IF WE ARE UNABLE TO SECURE FUTURE CAPITAL, WE WILL BE UNABLE TO CONTINUE OUR
OPERATIONS.
Our business has not been profitable in the past and it may not be
profitable in the future. We may incur losses on a quarterly or annual basis for
a number of reasons, some within and others outside our control. See "If our
quarterly performance continues to fluctuate ." The growth of our business will
require the commitment of substantial capital resources. If funds are not
available from operations, we will need additional funds. We may seek such
additional funding through public and private financing, including debt or
equity financing. Adequate funds for these purposes, whether through financial
markets or from other sources, may not be available when we need them. Even if
funds are available, the terms under which the funds are available to us may not
be acceptable to us. Insufficient funds may require us to delay, reduce or
eliminate some or all of our planned activities.
To successfully execute our current strategy, we will need to improve our
working capital position. The report of our independent auditors accompanying
the Company's June 30, 2003 financial statements includes an explanatory
paragraph indicating there is a substantial doubt about the Company's ability to
continue as a going concern, due primarily to the decreases in our working
capital and net worth. The Company plans to overcome the circumstances that
impact our ability to remain a going concern through a combination of increased
revenues and decreased costs, with interim cash flow deficiencies being
addressed through additional equity financing.
IF OUR QUARTERLY PERFORMANCE CONTINUES TO FLUCTUATE, IT MAY HAVE A NEGATIVE
IMPACT ON OUR BUSINESS.
Our quarterly operating results can fluctuate significantly depending on a
number of factors, any one of which could have a negative impact on our results
of operations. We may experience significant quarterly fluctuations in revenues
and operating expenses as we introduce new products and services. Accordingly,
any inaccuracy in our forecasts could adversely affect our financial condition
and results of operations. Demand for our products and services could be
adversely affected by a slowdown in the overall demand for imaging products
and/or financial and PEO services. Our failure to complete shipments during a
quarter could have a material adverse effect on our results of operations for
that quarter. Quarterly results are not necessarily indicative of future
performance for any particular period.
SINCE MANY OF OUR COMPETITORS HAVE GREATER FINANCIAL AND MARKETING RESOURCES
THAN WE DO, WE MAY EXPERIENCE A REDUCTION IN MARKET SHARE AND REVENUES.
The markets for our products and services are highly competitive and
rapidly changing. Some of our current and prospective competitors have
significantly greater financial, technical, and marketing resources than we do.
Our ability to compete in our markets depends on a number of factors, some
within and others outside our control. These factors include: the frequency and
success of product and services introductions by us and by our competitors, the
selling prices of our products and services and of our competitors' products and
services, the performance of our products and of our competitors' products,
product distribution by us and by our competitors, our marketing ability and the
marketing ability of our competitors, and the quality of customer support
offered by us and by our competitors.
The PEO industry is highly fragmented. While many of our competitors have
limited operations, there are several PEO companies equal or substantially
greater in size than ours. We also encounter competition from "fee-for-service"
companies such as payroll processing firms, insurance companies, and human
resources consultants. The large PEO companies have substantially more resources
than us and provide a broader range of resources than we do.
IF WE ACQUIRE COMPLEMENTARY BUSINESSES, WE MAY NOT BE ABLE TO EFFECTIVELY
INTEGRATE THEM INTO OUR CURRENT OPERATIONS, WHICH WOULD ADVERSELY AFFECT OUR
OVERALL FINANCIAL PERFORMANCE.
In order to grow our business, we may acquire businesses that we believe
are complementary. To successfully implement this strategy, we must identify
suitable acquisition candidates, acquire these candidates on acceptable terms,
integrate their operations and technology successfully with ours, retain
existing customers and maintain the goodwill of the acquired business. We may
fail in our efforts to implement one or more of these tasks. Moreover, in
pursuing acquisition opportunities, we may compete for acquisition targets with
other companies with similar growth strategies. Some of these competitors may be
larger and have greater financial and other resources than we do. Competition
for these acquisition targets likely could also result in increased prices of
acquisition targets and a diminished pool of companies available for
acquisition. Our overall financial performance will be materially and adversely
affected if we are unable to manage internal or acquisition-based growth
effectively. Acquisitions involve a number of risks, including: integrating
acquired products and technologies in a timely manner, integrating businesses
and employees with our business, managing geographically-dispersed operations,
reductions in our reported operating results from acquisition-related charges
and amortization of goodwill, potential increases in stock compensation expense
and increased compensation expense resulting from newly-hired employees, the
diversion of management attention, the assumption of unknown liabilities,
potential disputes with the sellers of one or more acquired entities, our
inability to maintain customers or goodwill of an acquired business, the need to
divest unwanted assets or products, and the possible failure to retain key
acquired personnel.
Client dissatisfaction or performance problems with an acquired business
could also have a material adverse effect on our reputation, and any acquired
business could significantly under-perform relative to our expectations. We
cannot be certain that we will be able to integrate acquired businesses,
products or technologies successfully or in a timely manner in accordance with
our strategic objectives, which could have a material adverse effect on our
overall financial performance.
In addition, if we issue equity securities as consideration for any future
acquisitions, existing stockholders will experience ownership dilution and these
equity securities may have rights, preferences or privileges superior to those
of our common stock.
IF WE ARE UNABLE TO DEVELOP AND/OR ACQUIRE NEW PRODUCTS IN A TIMELY MANNER, WE
MAY EXPERIENCE A SIGNIFICANT DECLINE IN SALES AND REVENUES, WHICH MAY HURT OUR
ABILITY TO CONTINUE OPERATIONS.
The markets for our products are characterized by rapidly evolving
technology, frequent new product introductions and significant price
competition. Consequently, short product life cycles and reductions in product
selling prices due to competitive pressures over the life of a product are
common. Our future success will depend on our ability to continue to develop new
versions of our ColorBlind software, and to acquire competitive products from
other manufacturers. We monitor new technology developments and coordinate with
suppliers, distributors and dealers to enhance our products and to lower costs.
If we are unable to develop and acquire new, competitive products in a timely
manner, our financial condition and results of operations will be adversely
affected.
IF WE ARE FOUND TO BE INFRINGING ON A COMPETITOR'S INTELLECTUAL PROPERTY RIGHTS
OR IF WE ARE REQUIRED TO DEFEND AGAINST A CLAIM OF INFRINGEMENT, WE MAY BE
REQUIRED TO REDESIGN OUR PRODUCTS OR DEFEND A LEGAL ACTION AT SUBSTANTIAL COSTS
TO US.
We currently hold only one patent through our QPI subsidiary for its
Photomotion product. Our software products are copyrighted. However, copyright
protection does not prevent other companies from emulating the features and
benefits provided by our software. We protect our software source code as trade
secrets and make our proprietary source code available to OEM customers only
under limited circumstances and specific security and confidentiality
constraints.
IF OUR DISTRIBUTORS REDUCE OR DISCONTINUE SALES OF OUR PRODUCTS, OUR BUSINESS
MAY BE MATERIALLY AND ADVERSELY AFFECTED.
Our products are marketed and sold through a distribution channel of value
added resellers, manufacturers' representatives, retail vendors, and systems
integrators. We have a small network of dealers and distributors in the United
States and internationally. We support our worldwide distribution network and
end-user customers through operations headquartered in San Diego.
Portions of our sales are made through distributors, who may carry
competing product lines. These distributors could reduce or discontinue sales of
our products, which could adversely affect us. These independent distributors
may not devote the resources necessary to provide effective sales and marketing
support of our products. In addition, we are dependent upon the continued
viability and financial stability of these distributors, many of which are small
organizations with limited capital. These distributors, in turn, are
substantially dependent on general economic conditions and other unique factors
affecting our markets.
INCREASES IN HEALTH INSURANCE PREMIUMS, UNEMPLOYMENT TAXES, AND WORKERS'
COMPENSATION RATES WILL HAVE A SIGNIFICANT EFFECT ON OUR FUTURE FINANCIAL
PERFORMANCE.
Health insurance premiums, state unemployment taxes, and workers'
compensation rates are, in part, determined by our PEO companies' claims
experience, and comprise a significant portion of our direct costs. We employ
risk management procedures in an attempt to control claims incidence and
structure our benefits contracts to provide as much cost stability as possible.
However, should we experience a large increase in claims activity, the
unemployment taxes, health insurance premiums, or workers' compensation
insurance rates we pay could increase. Our ability to incorporate such increases
into service fees to clients is generally constrained by contractual agreements
with our clients. Consequently, we could experience a delay before such
increases could be reflected in the service fees we charge. As a result, such
increases could have a material adverse effect on our financial condition or
results of operations.
WE CARRY SUBSTANTIAL LIABILITY FOR WORKSITE EMPLOYEE PAYROLL AND BENEFITS COSTS.
Under our client service agreements, we become a co-employer of worksite
employees and we assume the obligations to pay the salaries, wages, and related
benefits costs and payroll taxes of such worksite employees. We assume such
obligations as a principal, not merely as an agent of the client company. Our
obligations include responsibility for (a) payment of the salaries and wages for
work performed by worksite employees, regardless of whether the client company
makes timely payment to us of the associated service fee; and (2) providing
benefits to worksite employees even if the costs incurred by us to provide such
benefits exceed the fees paid by the client company. If a client company does
not pay us, or if the costs of benefits provided to worksite employees exceed
the fees paid by a client company, our ultimate liability for worksite employee
payroll and benefits costs could have a material adverse effect on the our
financial condition or results of operations.
AS A MAJOR EMPLOYER, OUR OPERATIONS ARE AFFECTED BY NUMEROUS FEDERAL, STATE, AND
LOCAL LAWS RELATED TO LABOR, TAX, AND EMPLOYMENT MATTERS.
By entering into a co-employer relationship with employees assigned to work
at client company locations, we assume certain obligations and responsibilities
of an employer under these laws. However, many of these laws (such as the
Employee Retirement Income Security Act ("ERISA") and federal and state
employment tax laws) do not specifically address the obligations and
responsibilities of non-traditional employers such as PEOs; and the definition
of "employer" under these laws is not uniform. Additionally, some of the states
in which we operate have not addressed the PEO relationship for purposes of
compliance with applicable state laws governing the employer/employee
relationship. If these other federal or state laws are ultimately applied to our
PEO relationship with our worksite employees in a manner adverse to us, such an
application could have a material adverse effect on our financial condition or
results of operations.
While many states do not explicitly regulate PEOs, over 20 states have
passed laws that have licensing or registration requirements for PEOs, and
several other states are considering such regulation. Such laws vary from state
to state, but generally provide for monitoring the fiscal responsibility of PEOs
and, in some cases, codify and clarify the co-employment relationship for
unemployment, workers' compensation, and other purposes under state law. There
can be no assurance that we will be able to satisfy licensing requirements of
other applicable relations for all states. Additionally, there can be no
assurance that we will be able to renew our licenses in all states.
THE MAINTENANCE OF HEALTH AND WORKERS' COMPENSATION INSURANCE PLANS THAT COVER
WORKSITE EMPLOYEES IS A SIGNIFICANT PART OF OUR BUSINESS.
The current health and workers' compensation contracts are provided by
vendors with whom we have an established relationship, and on terms that we
believe to be favorable. While we believe that replacement contracts could be
secured on competitive terms without causing significant disruption to our
business, there can be no assurance in this regard.
OUR STANDARD AGREEMENTS WITH PEO CLIENTS ARE SUBJECT TO CANCELLATION ON 60-DAYS
WRITTEN NOTICE BY EITHER THE COMPANY OR THE CLIENT.
Accordingly, the short-term nature of our client service agreements make us
vulnerable to potential cancellations by existing clients, which could
materially and adversely affect our financial condition and results of
operations. Additionally, our results of operations are dependent, in part, upon
our ability to retain or replace client companies upon the termination or
cancellation of our agreements.
A NUMBER OF PEO INDUSTRY LEGAL ISSUES REMAIN UNRESOLVED WITH RESPECT TO THE
CO-EMPLOYMENT AGREEMENT BETWEEN A PEO AND ITS WORKSITE EMPLOYEES, INCLUDING
QUESTIONS CONCERNING THE ULTIMATE LIABILITY FOR VIOLATIONS OF EMPLOYMENT AND
DISCRIMINATION LAWS.
Our client service agreement establishes a contractual division of
responsibilities between our clients and us for various personnel management
matters, including compliance with and liability under various government
regulations. However, because we act as a co-employer, we may be subject to
liability for violations of these or other laws despite these contractual
provisions, even if we do not participate in such violations. Although our
agreement provides that the client is to indemnify us for any liability
attributable to the conduct of the client, we may not be able to collect on such
a contractual indemnification claim, and thus may be responsible for satisfying
such liabilities. Additionally, worksite employees may be deemed to be our
agents, subjecting us to liability for the actions of such worksite employees.
IF THE SUPERIOR SECURITY INTEREST HELD BY IMPERIAL BANK IS REMOVED AND IF ALL OF
THE LAWSUITS CURRENTLY FILED WERE DECIDED AGAINST US AND/OR ALL THE JUDGMENTS
CURRENTLY OBTAINED AGAINST US WERE TO BE IMMEDIATELY COLLECTED, WE WOULD HAVE TO
CEASE OUR OPERATIONS.
Throughout fiscal 2002, 2003 and 2004, and through the date of this
filing, approximately fifty trade creditors have made claims and/or filed
actions alleging the failure of us to pay our obligations to them in a total
amount exceeding $3 million. These actions are in various stages of litigation,
with many resulting in judgments being entered against us. Several of those who
have obtained judgments have filed judgment liens on our assets. These claims
range in value from less than one thousand dollars to just over one million
dollars, with the great majority being less than twenty thousand dollars.
Should we be required to pay the full amount demanded in each of these claims
and lawsuits, we may have to cease our operations.
IF OUR OPERATIONS CONTINUE TO RESULT IN A NET LOSS, NEGATIVE WORKING CAPITAL AND
A DECLINE IN NET WORTH, AND WE ARE UNABLE TO OBTAIN NEEDED FUNDING, WE MAY BE
FORCED TO DISCONTINUE OPERATIONS.
For several recent periods, up through the present, we had a net loss and
negative working capital, which raises substantial doubt about our ability to
continue as a going concern. Our losses have resulted primarily from an
inability to achieve revenue targets due to insufficient working capital. Our
ability to continue operations will depend on positive cash flow, if any, from
future operations and on our ability to raise additional funds through equity or
debt financing. Although we have reduced our work force, suspended some of our
operations, and entered into new market segments (financial services), if we are
unable to achieve the necessary revenues or raise or obtain needed funding, we
may be forced to discontinue operations.
IF AN OPERATIONAL RECEIVER IS REINSTATED TO CONTROL OUR OPERATIONS, WE MAY NOT
BE ABLE TO CARRY OUT OUR BUSINESS PLAN.
On August 20, 1999, at the request of Imperial Bank, our primary lender,
the Superior Court, San Diego appointed an operational receiver to us. On August
23, 1999, the operational receiver took control of our day-to-day operations. On
June 21, 2000, the Superior Court, San Diego issued an order dismissing the
operational receiver as a part of a settlement of litigation with Imperial Bank
pursuant to the Settlement Agreement effective as of June 20, 2000. The
Settlement Agreement requires that we make monthly payments of $150,000 to
Imperial Bank until the indebtedness is paid in full. This agreement does not
require us to pay any interest unless we default on the settlement agreement and
fail to cure the default. Regardless, we have continued to accrue interest on
this debt until it has been paid and there is no possibility that such interest
will become due and payable. However, in the future, without additional funding
sufficient to satisfy Imperial Bank and our other creditors, as well as
providing for our working capital, there can be no assurances that an
operational receiver may not be reinstated. If an operational receiver is
reinstated, we will not be able to expand our products nor will we have complete
control over sales policies or the allocation of funds.
The penalty for noncompliance of the Settlement Agreement is a stipulated
judgment that allows Imperial Bank to immediately reinstate the operational
receiver and begin liquidation proceedings against us. Our current arrangement
with Imperial Bank is $50,000 a month. The remaining balance due is $3,144,750.
WE HAVE NOT REMAINED CURRENT IN OUR PAYMENT OF FEDERAL AND STATE INCOME AND
OTHER PAYROLL-RELATED TAXES WITHHELD IN OUR PEO BUSINESS.
We have not been able to remain current in our payments of federal and
state tax obligations related to our PEO operations. We are currently working
with the Internal Revenue Service and state agencies to resolve these issues and
establish repayment plans. If we are not able to establish repayment plans that
allow us to continue our operations, we may be forced to cease doing business in
the financial services marketplace. The amount due as of June 30, 2004 is
$5,237,408.
RISKS RELATING TO OUR STOCK:
-------------------------------
THE OVERHANG AFFECT FROM THE RESALE ON THE MARKET OF OUR SECURITIES ACQUIRED
THROUGH THE CONVERSION OF DEBENTURES COULD RESULT IN LOWER STOCK PRICES WHEN
CONVERTED
Overhang can translate into a potential decrease in DRDF's market price per
share. The common stock underlying unconverted debentures represents overhang.
These debentures are converted into common stock at a discount to the market
price providing the debenture holder the ability to sell his or her stock at or
below market and still make a profit, which is incentive for the holder to sell
the shares as quickly as possible to ensure as much profit as possible in case
the stock price falls. If the share volume cannot absorb the discounted shares,
DRDF's market price per share will likely decrease. As the market price
decreases, each subsequent conversion will require a larger quantity of shares.
SHORT SELLING COMMON STOCK BY WARRANT AND DEBENTURE HOLDERS MAY DRIVE DOWN THE
MARKET PRICE OF DRDF'S STOCK.
Warrant and debenture holders may sell shares of DRDF's common stock on the
market before exercising the warrant or converting the debenture. The stock is
usually offered at or below market since the warrant and debenture holders
receive stock at a discount to market. Once the sale is completed the holders
exercise or convert a like dollar amount of shares. If the stock sale lowered
the market price, upon exercise or conversion, the holders would receive a
greater number of shares than they would have absent the short sale. This
pattern may result in the spiraling down of DRDF's stock's market price.
THE MARKET PRICE OF OUR COMMON STOCK HISTORICALLY HAS FLUCTUATED SIGNIFICANTLY.
Our stock price could fluctuate significantly in the future based upon any
number of factors such as: general stock market trends, announcements of
developments related to our business, fluctuations in our operating results, a
shortfall in our revenues or earnings compared to the estimates of securities
analysts, announcements of technological innovations, new products or
enhancements by us or our competitors, general conditions in the markets we
serve, general conditions in the worldwide economy, developments in patents or
other intellectual property rights, and developments in our relationships with
our customers and suppliers.
In addition, in recent years the stock market in general, and the market for
shares of technology and other stocks have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. Similarly, the market price of our common stock may
fluctuate significantly based upon factors unrelated to our operating
performance.
DRDF'S COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN DRDF'S SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN
DRDF'S STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN DRDF'S
STOCK.
DRDF's shares of Common Stock are "penny stocks" as defined in the Exchange Act,
which are quoted in the over-the-counter market on the OTC Bulletin Board. As a
result, an investor may find it more difficult to dispose of or obtain accurate
quotations as to the price of the shares of the Common Stock being registered
hereby. In addition, the "penny stock" rules adopted by the Commission under
the Exchange Act subject the sale of the shares of the Common Stock to certain
regulations which impose sales practice requirements on broker-dealers. For
example, broker-dealers selling such securities must, prior to effecting the
transaction, provide their customers with a document that discloses the risks of
investing in such securities. Included in this document are the following:
- The bid and offer price quotes for the penny stock, and the number of
shares to which the quoted prices apply.
- The brokerage firm's compensation for the trade.
- The compensation received by the brokerages firm's salesperson for the
trade.
In addition, the brokerage firm must send the investor:
- Monthly account statement that gives an estimate of the value of each
penny stock in your account.
- A written statement of your financial situation and investment goals.
Legal remedies, which may be available to you, are as follows:
- If penny stocks are sold to you in violation of your rights listed above,
or other federal or state securities laws, you may be able to cancel your
purchase and get your money back.
- If the stocks are sold in a fraudulent manner, you may be able to sue the
persons and firms that caused the fraud for damages.
- If you have signed an arbitration agreement, however, you may have to
pursue your claim through arbitration.
If the person purchasing the securities is someone other than an accredited
investor or an established customer of the broker-dealer, the broker-dealer must
also approve the potential customer's account by obtaining information
concerning the customer's financial situation, investment experience and
investment objectives. The broker-dealer must also make a determination whether
the transaction is suitable for the customer and whether the customer has
sufficient knowledge and experience in financial matters to be reasonably
expected to be capable of evaluating the risk of transactions in such
securities. Accordingly, the Commission's rules may limit the number of
potential purchasers of the shares of the Common Stock.
Resale restrictions on transferring "penny stocks" are sometimes imposed by
some states, which may make transactions in our stock cumbersome and may reduce
the value of an investment in our stock.
Various state securities laws impose restrictions on transferring "penny
stocks" and as a result, investors in the Common Stock may have their ability to
sell their shares of the Common Stock impaired. For example, the Utah
Securities Commission prohibits brokers from soliciting buyers for "penny
stocks", which makes selling them more difficult.
DRDF'S ABSENCE OF DIVIDENDS OR THE ABILITY TO PAY THEM PLACES A LIMITATION ON
ANY INVESTORS' RETURN.
DRDF anticipates that for the foreseeable future, earnings will be retained
for the development of its business. Accordingly, DRDF does not anticipate
paying dividends on the common stock in the foreseeable future. The payment of
future dividends will be at the sole discretion of DRDF's Board of Directors and
will depend on DRDF's general business condition.
ITEM 2. DESCRIPTION OF PROPERTY
DRDF owns no real property. Dalrada leases the facility at 9449 Balboa
Avenue, Suite 211, San Diego, California, 92123. This is a four year lease
entered into on August 26, 2002 by the Christianson Group. The facility is
approximately 2,848 square feet and will serve as our new corporate
headquarters. Payments under the lease are currently $5,411.20 per month and
increase to $5,838.40 in 2005 and $5,980.80 in 2006.
Dalrada's, Employers Administration Goup, Inc. subsidiary, leases the
facility at 180 F. Main Street, Tustin California. This is a three year lease
entered into on July 15, 2003 by the Christianson Group. The facility is
approximately 1,700 square feet. Payments under the lease are currently
$2,380,00 per month.
Dalrada's, Quick Pix, Inc subsidiary leases the facility at 7050 Village
Drive, Suite E and F, Buena Park, California. This is three lease entered on
July 1, 2001. The facility is approximately 8,602 square feet. Payments under
the lease are currently $5,798.91 per month.
ITEM 3. LEGAL PROCEEDINGS
In October 1999, the law firms of Weiss & Yourman and Stull, Stull & Brody
made a public announcement that they had filed a lawsuit against the Company and
certain current and past officers and/or directors, alleging violation of
federal securities laws and, in November 1999, the lawsuit, filed in the name of
Nahid Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on the Company. In January 2003, the Company entered into
a Stipulation of Settlement with the plaintiffs. It agreed to pay the
plaintiffs 5,000,000 shares of common stock and $200 in cash. The Parties have
accepted the settlement. DRDF has issued the shares, and its insurance carrier
has paid the $200 cash payment. Pursuant to a hearing in May 2003 the Court
provided approval to the settlement.
On August 22, 2002, the Company was sued by its former landlord, Carmel
Mountain #8 Associates, L.P. or past due rent on its former facilities at 15175
Innovation Drive, San Diego, CA 92127.
DRDF was a party to a lawsuit filed by Symphony Partners, L.P. related to
its acquisition of SourceOne Group, LLC. As reported on Form 8-K, dated July
22, 2003, the plaintiffs sought payment of $702. In June 2003, the Company
entered into a settlement with the plaintiffs for a cash payment of $274, which
has been paid.
DRDF is one of dozens of companies sued by The Massachusetts Institute of
Technology, et al., related to a patent held by the plaintiffs that may be
related to part of the Company's ColorBlind software. Subsequent to the period
reported in this filing, in June 2003, the Company entered into a settlement
with the plaintiffs who have agreed to dismiss their claims against DRDF with
prejudice in exchange for a settlement fee payment of $10, which has been paid.
The Company has been sued in Illinois state court along with AIA/Mirriman,
its insurance brokers by the Arena Football League-2 ("AFS"). Damages payable
to AF2, should they win the suit, could exceed $700. The Company expects to
defend its position and rely on representations of its insurance brokers.
Throughout fiscal 2003 and 2004, and through the date of this filing, trade
creditors have made claims and/or filed actions alleging the failure of the
Company to pay its obligations to them in a total amount exceeding $3,000.
These actions are in various stages of litigation, with many resulting in
judgments being entered against the Company. Several of those who have obtained
judgments have filed judgment liens on the Company's assets. These claims range
in value from less than one thousand dollars to just over one million dollars,
with the great majority being less than twenty thousand dollars.
In connection with the Company's acquisition of controlling interest of
Quik Pix, Inc., we are unaware of any pending litigation. From time to time, QPI
may be involved in litigation relating to claims arising out of its operations
in the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
We held an annual meeting of our shareholders on May 20, 2003 in San Diego,
California at our principal offices. The shareholders approved three proposals:
(1) the election of Messrs. Bonar, Dietrich, Fryer, and Gaer and Dr. Green as
directors, (2) the amendment of our Articles of Incorporation to increase the
authorized amount of common stock to 1,000,000,000 shares, and (3) the
appointment of Pohl, McNabola, Berg & Company, LLP of San Francisco, California
as our auditors. All three proposals passed.
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, 2003
First quarter . . . $0.05 $0.01
Second quarter. . . 0.04 0.01
Third quarter . . . 0.02 0.01
Fourth quarter. . . 0.02 0.01
Year ended June 30, 2004
First quarter . . . $0.04 $0.01
Second quarter. . . 0.04 0.02
Third quarter . . . 0.02 0.01
Fourth Quarter. . . 0.01 0.01
(b) As of June 30, 2004, there were approximately 447 registered
shareholders of DRDF's Common Stock.
(c) To date, the Company has not declared or paid dividends on its
Common Stock.
(d) Securities authorized for issuance under equity compensation plans.
None
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 2003
------------------
On July 8, 2002, 450,000 shares were issued to Technipower, Inc. at $0.16
per share in settlement of debt valued at $72,000. These shares were issued
pursuant to the exempt provided by Section 4(2) of the Securities Act of 1933,
as amended.
On October 10, 2002, 250,000 shares were issued to Gary Fong at $0.013 per
share for payment of rent, valued at $3,250. These shares were issued pursuant
to the exempt provided by Section 4(2) of the Securities Act of 1933, as
amended.
On November 11, 2002, 1,000,000 shares were issued to Michael Belletini at
$0.013 per share for employee compensation valued at $13,000. These shares were
issued pursuant to the exempt provided by Section 4(2) of the Securities Act of
1933, as amended.
On November 11, 2002, 1,000,000 shares were issued to David Stone at $0.013
per share for employee compensation valued at $13,000. These shares were issued
pursuant to the exempt provided by Section 4(2) of the Securities Act of 1933,
as amended.
On November 11, 2002, 1,000,000 shares were issued to David Valade at
$0.013 per share for employee compensation valued at $13,000. These shares were
issued pursuant to the exempt provided by Section 4(2) of the Securities Act of
1933, as amended.
On November 14, 2002, 500,000 shares were issued to Hiichiro Ogawa at
$0.012 per share for consulting services valued at $6,000. These shares were
issued pursuant to the exempt provided by Section 4(2) of the Securities Act of
1933, as amended.
On November 14, 2002, 437,500 shares were issued to Sayakp Torihara at
$0.012 per share for consulting services valued at $6,000. These shares were
issued pursuant to the exempt provided by Section 4(2) of the Securities Act of
1933, as amended.
On November 18, 2002, 198,379 shares were issued to Balmore Funds at $0.008
per share for conversion of a convertible debenture valued at $1,666. These
shares were issued pursuant to the exempt provided by Section 4(2) of the
Securities Act of 1933, as amended.
On December 20, 2002, 35,000,000 shares were issued to Guardtec, Inc. for
consulting services valued at $490,000. These shares were issued pursuant to
the exempt provided by Section 4(2) of the Securities Act of 1933, as amended.
On January 9, 2003 3,125,000 shares were issued to Sid Berman at $0.013 for
the acquisition of QPI, valued at $40,625. These shares were issued pursuant to
the exempt provided by Section 4(2) of the Securities Act of 1933, as amended.
On January 9, 2003 1,250,000 shares were issued to Lee Finger at $0.013 for
the acquisition of QPI, valued at $16,250. These shares were issued pursuant to
the exempt provided by Section 4(2) of the Securities Act of 1933, as amended.
On January 9, 2003 1,250,000 shares were issued to Hal Kirsch at $0.013 for
the acquisition of QPI, valued at $16,250. These shares were issued pursuant to
the exempt provided by Section 4(2) of the Securities Act of 1933, as amended.
On January 9, 2003, 500,000 shares were issued to Edie Youngman at $0.013
for the acquisition of QPI, valued at $6,500. These shares were issued pursuant
to the exempt provided by Section 4(2) of the Securities Act of 1933, as
amended.
On January 14, 2003, 5,000,000 shares were issued to Eun Hee Chung at
$0.012 for consulting services valued at $60,000. These shares were issued
pursuant to the exempt provided by Section 4(2) of the Securities Act of 1933,
as amended.
On January 14, 2003, 5,000,000 shares were issued to W.Y. Kim at $0.012 for
$60,000 in cash. These shares were issued pursuant to the exempt provided by
Section 4(2) of the Securities Act of 1933, as amended.
On March 3, 2003, 300,000 shares were issued to Steven Reid at $0.011 for
consulting services valued at $60,000. These shares were issued pursuant to the
exempt provided by Section 4(2) of the Securities Act of 1933, as amended.
On April 21, 2003, 1,000,000 shares were issued to Lester Brann at $0.011
per share for employee compensation valued at $11,000. These shares were issued
pursuant to the exempt provided by Section 4(2) of the Securities Act of 1933,
as amended.
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.
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.
On May 25, 2004, 13,954,855 shares were issued to Stonestreet Limited
Partnership at $0.00475 per share for conversion of a convertible debenture
valued at $65,000 plus $1,285.56 in interest. These shares were issued pursuant
to the exempt provided by Section 4(2) of the Securities Act of 1933, as
amended.
On May 25, 2004, 36,771,937 shares were issued to Balmore S.A at $0.0046526
per share for conversion of a convertible debenture valued at $140,000 and
$31,087.79 in interest. These shares were issued pursuant to the exempt
provided by Section 4(2) of the Securities Act of 1933, as amended.
On May 25, 2004, 27,500,000 shares were issued to Howard Schraub at $0.008
per share for conversion of a convertible debenture valued at $220,000. These
shares were issued pursuant to the exempt provided by Section 4(2) of the
Securities Act of 1933, as amended.
On May 25, 2004, 7,500,000 shares were issued to Blue Fin Corporation at
$0.008 per share for conversion of a convertible debenture valued at $60,000.
These shares were issued pursuant to the exempt provided by Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto appearing elsewhere in
this Annual Report on 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.
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 Buena Park, 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 three 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.
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.
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, 2004 financial statements included elsewhere in this Annual Report
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. 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 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.
RESTRUCTURING AND NEW BUSINESS UNITS
During the year ended June 30, 2003, we suspended our sales efforts related
to the resale of products from other manufacturers, including printers, copiers,
and other digital imaging products in order to concentrate on providing
financial services to small and medium-size businesses.
Additionally, in April 2004, we transferred our ColorBlind software
products and technologies to our QPI subsidiary in order to focus on financial
services and enable QPI to concentrate on imaging technology products and
services.
ACQUISITIONS, DISPOSITIONS AND SALE OF BUSINESS UNITS
In August 2002, we entered into an agreement to acquire controlling
interest in Greenland Corporation. Greenland shares are traded on the Electronic
Bulletin Board under the symbol GRLC. On January 14, 2003, we completed the
acquisition of shares, representing controlling interest, of Greenland. The
terms of the acquisitions were disclosed on Form 8-K filed January 21, 2003.
Pursuant to a mutual agreement between the Board of Directors of both
Greenland Corporation and us, Greenland has been separated from us, effective
February, 23, 2004. Under the separation agreement, Greenland forgave its note
receivable from us of $2,250,000 together with any accrued interest thereon in
consideration for our granting our acquisition rights to acquire ePEO Link to
Greenland. In addition, for returning 95,949,610 shares of Greenland common
stock acquired by us pursuant to our acquisition agreement with Greenland in
January 2003, Greenland forgave its inter-company account receivable from us,
which amount aggregated approximately $1,375,000. Further, the agreement
provided for us to effect the resignation of our Directors who also served on
the Board of Directors of Greenland, which was completed in March 2004.
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.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discuss our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, we evaluate our estimates and
judgments, including those related to allowance for doubtful accounts, value of
intangible assets and valuation of non-cash compensation. We base our estimates
and judgments on historical experiences and on various other factors that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The most significant
accounting estimates inherent in the preparation of our consolidated financial
statements include estimates as to the appropriate carrying value of certain
assets and liabilities which are not readily apparent from other sources,
primarily allowance for doubtful accounts, estimated fair value of equity
instruments used for compensation, estimated tax liabilities fro PEO operations
and estimated liabilities associated with Worker's Compensation liabilities.
These accounting policies are described at relevant sections in this discussion
and analysis and in the notes to the consolidated financial statements included
in our Annual Report on Form l0-K for the fiscal year ended June 30, 2004.
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 the 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
Revenues
--------
Total revenues were $13,526,000 and $3,790,000 for the years ended June 30,
2004 and 2003, respectively; an increase of $$9,736,000 (257%). The increase was
due primarily to the addition of temporary staffing services, which contributed
$10,119,000 of revenues for the year ended June 30, 2004.
PEO Services
PEO revenues were $2,607,000 and $2,499,000 for the years ended June 30,
2004 and 2003, respectively; an increase of $108,000 (4%) due primarily to the
small increase in our PEO customer base.
Temporary Staffing
In September 2003, we entered into an agreement to purchase a temporary
staffing business through the organization of CallCenterHR and MedicalHR and the
acquisition of Jackson Staffing. There were no revenues from temporary staffing
in the 2003 fiscal year and $10,119,000 for the year ended June 30, 2004.
Imaging Products
Sales of imaging products were generated principally from our QPI
subsidiary. Imaging Products revenues were $764,000 and $924,000 for the years
ended June 30, 2004 and 2003, respectively; a decrease of $160,000 (17%) due
primarily to the decrease in product sales as a result of the suspension of
sales and marketing activities associated with the resale of office products in
order to concentrate on color management products and services, including
ColorBlind software and PhotoMotion Images.
Software
Software revenues were $36,000 and $367,000 for the years ended June 30,
2004 and 2003, respectively; a decrease of $331,000 (90%). The reduction in
software revenues was due to a delay in completing certain versions of our
software which can be used with multiple computer operating systems. Revenues
from licenses and royalties for the periods were insignificant.
Royalties and licensing fees vary from quarter to quarter and are dependent
on the sales of products sold by OEM customers using our technologies. These
revenues continue to decline as we have elected to transfer our ColorBlind
software to QPI, which has accelerated product development and begun to
implement a more aggressive product sales program.
Cost of Products Sold
------------------------
Cost of PEO services for the years ended June 30, 2004 and 2003 $894,000
(34% of PEO revenues) and $1,639,000 (66% of PEO revenues), respectively. The
increase in gross profit is due primarily to us being able to provide more
profitable services to our PEO customers.
Costs of temporary staffing for the years ended June 30, 2004 was
$9,209,000 (91% of temporary staffing revenue). There was no such cost of
revenues in the prior-year period.
Cost of products sold for the year ended June 30, 2004 and 2003 were
$196,000 (26% of product sales) and $396,000 (43% of product sales),
respectively. Product sales continue to decline as we concentrate on other
products and services. The increase in margins is due primarily to changes in
product mix and our competitive position with customers.
Cost of software, licenses and royalties for the years ended June 30, 2004
and 2003 were $3,000 and $90,000, respectively The decrease is due primarily to
decreased business activity while awaiting the completion of new releases of
ColorBlind software. This represented 8% of revenue in 2004 and 25% of revenue
in 2003.
Operating Expenses
-------------------
Operating expenses have consisted primarily of salaries and commissions of
sales and marketing personnel, salaries and related costs for general corporate
functions, including finance, accounting, facilities and legal, advertising,
rent, depreciation and amortization, and other marketing related expenses, and
fees for professional services.
Operating expenses for the years ended June 30, 2004 and 2003 were
$4,196,000 and $5,623,000, respectively; a decrease of $1,427,000 (25%). The
significant decrease is due to a reduction of payroll and related benefits of
$1,491,000 due to a significant reduction in our personnel. Also, as disclosed
in "Significant Accounting Policies and Estimates", we rely on estimates for
such liabilities related to, among other areas, worker's compensation and
accrued payroll taxes. During the year ended June 30, 2004, we changed our
estimate of workers' compensation and accrued payroll taxes aggregating
approximately $2,500,000, which resulted in a negative general and
administrative expenses. These reduction in operating expenses were offset by
an increase in consulting expenses of $843,000 due to us using outside
consultants since we have reduce the number of full-time personnel.
Other Income and Expenses
----------------------------
Other income and expense, net for the years ended June 30, 2004 and 2003
was $1,923,000 and $1,028,000 respectively; an increase in other expenses of
$959,000 (99%) The increase is principally due to a decrease in other income
resulting from the gain on the settlement of debt. For the years ended June 30,
2004 and 2003, the gain on the settlement of debt was $1,145,000 and $2,343,000,
respectively; a decrease of $1,198,000 (51%) These gains are principally due to
the write off of old, stale accounts payable that our attorneys have advised us
that we have been released from these obligations. Pursuant to an opinion
provided by counsel, we elected to record these gains pursuant to the Statute of
Limitations in the State of California. Interest expense for the years ended
June 30, 2004 and 2003 was $1,930,000 and $1,493,000 respectively; an increase
of $437,000 (29%). The increase is principally due to the write off of the
unamortized debt discounts associated with the conversion of debentures into
common stock. Penalties and interest for the years ended June 30, 2004 and 2003
was $795,000 and $2,023,000 respectively; a decrease of $1,228,000 (61%). The
decrease is due to the pay down of the outstanding payroll liabilities
Liquidity and Capital Resources
----------------------------------
Historically, we have financed our operations primarily through cash
generated from operations, debt financing, and the sale of equity securities.
Additionally, in order to facilitate our growth and future liquidity, we have
made some strategic acquisitions.
As a result of some of our financing activities, there has been a
significant increase in the number of issued and outstanding shares. During the
year ended June 30, 2004, we issued an additional 371,126,679 shares. These
shares of common stock were issued primarily for corporate expenses in lieu of
cash, for acquisition of businesses, for the conversion of convertible
debentures and other debt, and for the exercise of warrants.
As of June 30, 2004, we had negative working capital of $21,936,000, an
increase in working capital of $6,510,000 since June 30, 2003. This increase was
due primarily to our disposition of Greenland Corporation, gains on the
disposition of debt, the conversion of debt to equity and a change in estimates
as previously discussed.
Net cash used in operating activities was $489,000 for the year ended June
30, 2004 as compared to net cash provided by operating activities of 1,112,000
for the prior-year period; a decrease of $1,601,000. The decrease was due
primarily to a decrease in current liabilities.
Cash provided by investing activities was $11,000 for the year ended June
30, 2004, an increase of $56,000 from the previous year.
We have no material commitments for capital expenditures. Our 5%
convertible preferred stock (which ranks prior to our common stock), carries
cumulative dividends, when and as declared, at an annual rate of $50.00 per
share. The aggregate amount of such dividends in arrears at June 30, 2004, was
approximately $420,000.
Our capital requirements depend on numerous factors, including market
acceptance of our products and services, the resources we devote to marketing
and selling our products and services, and other factors. The report of our
independent auditors accompanying our June 30, 2004 financial statements
includes an explanatory paragraph indicating there is a substantial doubt about
our ability to continue as a going concern, due primarily to the decreases in
our working capital and net worth.
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 Imaging Technologies Corporation's ("ITEC," the
"Registrant", or the "Company") independent auditors upon the recommendation of
its Audit Committee.
The ITEC Audit Committee interviewed a number of candidates, including
Stonefield Josephson, Inc., its prior independent auditors. The Audit Committee
determined that it was in the best interests of the Company to engage a new
independent auditor to perform services for ITEC and its subsidiaries, two of
whose shares are publicly traded.
Stonefield Josephson's audit report on the financial statements of
the Company as of June 30, 2002 expressed its uncertainty as to the
Company's ability to continue as a going concern. They cited recurring
losses from operations, the Company's working capital deficiency, and limited
cash resources. These circumstances were also present in the financial
statements of the Company as of March 31, 2003 and in financial
statements for several consecutive reporting periods. The Company expects that
this condition will be reported in its audited financial statements for the
fiscal year ended June 30, 2003. PMBC has been engaged to perform the audit for
this fiscal year ended June 30, 2003.
The Registrant believes there were no disagreements with Stonefield
Josephson within the meaning of Instruction 4 to Item 304 of Regulation S-K on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure in connection with the audit of the
Company's financial statements for the period ended June 30, 2002, or for any
subsequent interim period, which disagreements, if not resolved to their
satisfaction, would have caused Stonefield Josephson to make reference to the
subject matter of the disagreements in connection with its report.
During the fiscal years ended June 30, 2000, 2001, 2002, and through the
present, there have been no reportable events (as defined in Item 304(a)(1)(v)
of Regulation S-K) of the type required to be disclosed by that section. The
Company has not consulted with any other independent auditors regarding either
(i) the application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Company's financial statements; or (ii) any matter that was either the
subject matter of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation
S-K and the related instructions) or a reportable event (as defined in Item
304(a)(1)(v) of Regulation S-K).
A letter of Stonefield Josephson addressed to the Securities and Exchange
Commission is included as Exhibit 16 to the Form 8-K. Such letter states that
such firm agrees with the statements made by the Company in this Item 4.
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 end of the period covered by this annual
report (the "Evaluation Date"). Based on such evaluation, such officers have
concluded that, as of the Evaluation Date, our disclosure controls and
procedures are effective in alerting them on a timely basis to material
information relating to our Company (including our consolidated subsidiaries)
required to be included in our reports filed or submitted under the Exchange
Act.
(b) Changes in Internal Controls over Financial Reporting. During the
most recent fiscal year, there have not been any significant changes in our
internal controls over financial reporting or in other factors that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
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. . . . 57 1995 Director and Chief Executive Officer
Richard H. Green . 68 2000 Director
Robert A. Dietrich 59 2000 Director
Eric W. Gaer . . . 56 2000 Director
Stephen J. Fryer . 66 2000 Director
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. Mr. Dietrich is President and CEO of Cyberair Communications Inc., a
privately-held telecommunications company with strategic interests in Internet
communications and "bandwidth" expansion technologies, as well as domestic and
international telephone services, in Irvine, California. Recently, Mr. Dietrich
was named President and CEO of Semper Resources Corporation, a public natural
resources holding company in Irvine, California. From 1996 to 2000, Mr. Dietrich
was Managing Director and CFO of Ventana International, Ltd., Irvine,
California, a venture capital and private investment-banking firm. From 1990 to
1994, Mr. Dietrich was Vice President and Chief Financial Officer of CEI, Inc.,
in Santa Ana, California, a commercial furnishings firm, prior to joining
Ventana. Mr. Dietrich is a graduate of the University of Notre Dame, with a
bachelor's degree in accounting, and the University of Detroit, with a master's
degree in finance. He served as a lieutenant in the U.S. Navy's Atlantic Command
Operations Control Center.
Eric W. Gaer has served as a director since March 2000. Since 1998, Mr. Gaer
has been the President and CEO of Arroyo Development Corporation, a
privately-held, San Diego-based management consulting company. From 1996 to
1998, he was Chairman, President and CEO of Greenland Corporation, a
publicly-held high technology company in San Diego, California. In 1995, he was
CEO of Ariel Systems, Inc., a privately-held engineering development company in
Vista, California. Over the past 25 years, Mr. Gaer has served in executive
management positions at a variety of high-technology companies, including ITEC,
Daybreak Technologies, Inc., Venture Software, Inc., and Merisel, Inc. In 1970,
he received a Bachelor of Arts degree in mass communications from California
State University, Northridge.
Stephen J. Fryer has served as a director of the Company since March 2000. He
is currently Chairman of the Board and CEO of Pen Interconnect, Inc. ("Pen"), a
---
high technology company in Irvine, California. He began his employment service
at Pen in 1997 as Senior Vice President of Sales and Marketing. At Pen, he
became a director in 1995 and was appointed President and CEO in 1998. From
1989 to 1996, Mr. Fryer was a principal in Ventana International, Ltd., a
venture capital and private investment-banking firm in Irvine, California. He
has over 28 years experience in the computer industry in the United States, Asia
and Europe. Mr. Fryer graduated from the University of California in 1960 with
a bachelor's degree in mechanical engineering.
EXECUTIVE OFFICERS
The executive officers of the Company as of June 30, 2004, are as follows:
NAME . . . AGE POSITION
----------- ---------------------------------- ---------------------------
Chairman of the Board of Directors
Brian Bonar 57 and Chief Executive Officer
Brian Bonar is also a director of the Company. See above for a discussion
of Mr. Bonar's business experience.
AUDIT COMMITTEE FINANCIAL EXPERT
The Audit Committee of the Board of Directors consists of Mr. Dietrich, Dr.
Green and Mr. Fryer, 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, 2004, 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 99.1 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. . . . . . . . . . . . 2004 $ 157,500 $ 150,000 -
Chairman, Board of Directors,. . . 2003 $ 275,000 $ 76,814 15,000,000
President and C.E.O. . . . . . . . 2002 $ 230,000 1,750,000
James R. Downey, Jr.(1). . . . . . 2004 $ 100,000 $ 20,000 -
Chief Operating Officer and Chief. 2003 $ 79,000 9,500,000
Accounting Officer
(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.
Number of Percent of Potential Realizable
Securities Total Value at Assumed
Underlying Options/SARs Annual Rates of
Options/SARs Granted to Exercise or Stock Price
Granted (#) Employees in Base Price Expiration Appreciation for
Name . . . . . . . . . . Fiscal Year ($/share) Date Option Term (4)
------------------------ ---------------
5% ($) 10% ($)
-------------
Brian Bonar. . . . . . . 7,000,000 23.7% $ 0.015 12/1/05 5,250 10,500
James R. Downey, Jr. (1) -
(1) Mr. Downey resigned effective January 30, 2004
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
COMPENSATION OF DIRECTORS
Each member of the Board of Directors of the Company receives a fee of $500
from the Company for each meeting attended.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE-IN-CONTROL
ARRANGEMENTS
None
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Gaer and Green.
Neither of these individuals was an officer or employee of the Company at any
time during the 2004 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 the best of the
Company's knowledge with respect to the beneficial ownership of Common Stock as
of June 30, 2004, by (i) all persons who are beneficial owners of five percent
(5 percent) or more of the Common Stock, (ii) each director, and (iii) all
current directors and executive officers individually and as a group. Unless
otherwise indicated, each of the shareholders has sole voting and investment
power with respect to the shares beneficially owned, subject to community
property laws, where applicable. The address for each person listed is in care
of DRDF at 9449 Balboa Avenue, Suite 211, San Diego, CA 92123.
NAME . . . . . . . . . . . NO. SHARES PERCENT OF CLASS (1)
-------------------------- ---------- --------------------
Brian Bonar (2). . . . . . 19,007,500 3.5%
Robert A. Dietrich (3) . . 11,637,500 2.1%
Stephen J. Fryer (4) . . . 7,453,250 1.4%
Eric W. Gaer (5) . . . . . 9,936,000 1.8%
Richard Green (6). . . . . 9,969,500 1.8%
All current directors and
executive officers
(group of 5) . . . . . . . 58,003,750 10.6%
(1) Percentage of ownership is based on 547,358,742shares of Common Stock
outstanding on June 30, 2004. Shares of Common Stock subject to stock options,
warrants and convertible securities which are currently exercisable or
convertible or will become exercisable or convertible within 60 days after June
30, 2004 are deemed outstanding for computing the percentage of the person or
group holding such options, warrants or convertible securities but are not
deemed outstanding for computing the percentage of any other person or group.
(2) Includes 12,000,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after November
14, 2003.
(3) Includes 9,125,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after November
14, 2003.
(4) Includes 4,875,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after November
14, 2003.
(5) Includes 7,375,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after November
14, 2003.
(6) Includes 40,750,000 shares issuable upon exercise of warrants that are
currently exercisable or will become exercisable within 60 days after November
14, 2003.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended June 30, 2004, the Company accrued consulting
expenses of $60,000 due Arroyo Development Corporation, owned by Mr. Eric Gaer,
a member of the Board of Directors. There was no officer or director
indebtedness to the Company.
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) *
10(e) Agreement to Acquire Shares, dated December 1, 2000, between ITEC and
Quik Pix, Inc.
(Incorporated by reference to Form 10-Q for the period ended September 30,
2000) and
subsequently cancelled. *
10(f) Agreement to Acquire Shares, dated December 17, 2000, between ITEC and
Pen Internconnect,
Inc. (Incorporated by reference to Form 10-Q for the period ended September 30,
2000) and
subsequently cancelled. *
10(g) Share Purchase Agreement, dated December 1, 2000, between ITEC and
EduAdvantage.com, Inc.
(Incorporated by reference to Form 10-Q for the period ended September 30,
2000) *
10(h) Convertible Promissory Note dated September 21, 2001 between the
Company and Stonestreet
Limited Partnership. (Incorporated by reference to Exhibit 10(u) of 2001 Form
10-K) *
10(i) Convertible Note Purchase Agreement dated September 21, 2001 between
the Company and
Stonestreet Limited Partnership. (Incorporated by reference to Exhibit 10(v) of
2001 Form 10-K) *
10(j) Registration Rights Agreement dated September 21, 2001 between the
Company and Stonestreet
Limited Partnership. (Incorporated by reference to Exhibit 10(w) of 2001 Form
10-K) *
10(k) Form of Warrant to Purchase 11,278,195 Shares of Common Stock of ITEC,
dated September 21,
2001, between ITEC and Stonestreet Limited Partnership. (Incorporated by
reference to Exhibit
10(x) of 2001 Form 10-K) *
10(l) Asset Purchase Agreement, dated October 25, 2001, among the Company
and Lisa Lavin, Gary J.
Lavin, and Roland A. Fernando. (Incorporated by reference to Exhibit 10(a) to
September 2001
Form 10-Q) *
10(m) Audited Financial Statements of SourceOne Group, LLC. (Incorporated by
reference to Form 8-K
filed on January 25, 2002) *
10(n) Secured Convertible Debenture issued by the Company to Bristol
Investment Fund, Ltd., dated
January 22, 2002. (Incorporated by reference to Exhibit 10(a) of December 2001
Form 10-Q) *
10(o) Securities Purchase Agreement between the Company and Bristol
Investment Fund, Ltd., dated
January 22, 2002. (Incorporated by reference to Exhibit 10(b) of December 2001
Form 10-Q) *
10(p) Registration Rights Agreement between the Company and Bristol
Investment Fund, Ltd., dated
January 22, 2002. (Incorporated by reference to Exhibit 10(c) of December 2001
Form 10-Q) *
10(q) Transaction Fee Agreement between the Company and Alexander Dunham
Securities, Inc., dated
January 22, 2002. (Incorporated by reference to Exhibit 10(d) of December 2001
Form 10-Q) *
10(r) Stock Purchase Warrant issued to Alexander Dunham Securities, Inc.,
dated January 22, 2002.
(Incorporated by reference to Exhibit 10(e) of December 2001 Form 10-Q)
*
10(s) Stock Purchase Warrant issued to Bristol Investment Fund, Ltd., dated
January 22, 2002.
(Incorporated by reference to Exhibit 10(f) of December 2001 Form 10-Q)
*
10(t) Security Agreement between the Company and Bristol Investment Fund,
Ltd., dated January 22,
2002. (Incorporated by reference to Exhibit 10(g) of December 2001 Form 10-Q)
*
10(u) Convertible Promissory Note between the Company and Stonestreet
Limited Partnership, dated
November 7, 2001. (Incorporated by reference to Exhibit 10(h) of December 2001
Form 10-Q) *
10(v) Convertible Note Purchase Agreement between the Company and
Stonestreet Partnership, dated
November 7, 2001. (Incorporated by reference to Exhibit 10(i) of December 2001
Form 10-Q) *
10(w) Registration Rights Agreement between the Company and Stonestreet
Limited Partnership, dated
November 7, 2001. (Incorporated by reference to Exhibit 10(j) of December 2001
Form 10-Q) *
10(x) Stock Purchase Warrant issued to Stonestreet Limited Partnership,
dated November 7, 2001
. (Incorporated by reference to Exhibit 10(k) of December 2001 Form 10-Q
*
10(y) Acquisition Agreement between the Company and Dream Canvas, Inc.,
dated May 17, 2002;
subject to completion of its terms. (Incorporated by reference to Exhibit 10(y)
of Form 10-K filed
November 18, 2002.) *
10(z) Closing Agreement between the Company and Quik Pix, Inc., dated July
23, 2002, subject to
completion of its terms. (Incorporated by reference to Exhibit 10(z) of Form
10-K filed November
18, 2002.) *
10(aa) Agreement to Acquire Shares between the Company and Greenland
Corporation, dated August 5,
2002, subject to completion of its terms.(Incorporated by reference to Exhibit
10(aa) to Form 10-K filed
November 18, 2002.) *
10(ab) Acquisition Agreement, dated December 13, 2002, between the Company
and Baseline Worldwide,
Limited. (Incorporated by reference to Exhibit 99.3 of Form 8-K filed December
19, 2002.) *
10(ac) Secured Promissory Note in the amount of $2,250,000 issued by the
Company to Greenland
Corporation, dated January 7, 2003. (Incorporated by reference to Exhibit 99.1
of Form 8-K filed
January 21, 2003.) *
10(ad) Security Agreement, dated January 7, 2003, between the Company and
Greenland Corporation.
(Incorporated by reference to Exhibit 99.2 of Form 8-K filed January 21, 2003.)
*
10(ae) Agreement to Acquire Shares, dated August 9, 2002 between the Company
and Greenland
Corporation. (Incorporated by reference to Exhibit 99.3 of Form 8-K filed
January 21, 2003.) *
10(af) Closing Agreement, dated January 7, 2003, between the Company and
Greenland
Corporation. (Incorporated by reference to Exhibit 99.4 of Form 8-K filed
January 21, 2003.) *
10(ag) Share Acquisition Agreement, dated June 12, 2002, between the Company
and Quik Pix,
Inc. (Incorporated by reference to Exhibit 99.5 of Form 8-K filed January 21,
2003.) *
10(ah) Closing Agreement, dated July 23, 2002, between the Company and Quik
Pix,
Inc. (Incorporated by reference to Exhibit 99.6 of Form 8-K filed January 21,
2003.) *
10(ai) Stock Purchase Agreement among the Company, Greenland Corporation,
and ExpertHR-
Oklahoma, dated March 18, 2003. (Incorporated by reference to Exhibit 10(j) to
Form 10-Q filed
May 20, 3003). *
10(aj) Assignment of Patent between John Capezzuto and Quik Pix, Inc. dated
January 14, 2003. *
10(ak) Promissory Note between the Company and John Capezzuto dated June 1,
2003
(signed June 9, 2003) *
10(al) Promissory Note between the Company and John Capezzuto dated June 9,
2003 *
10(am) Agreement and Assignment of Rights, dated February 1, 2003, between
Accord Human Resources,
Inc. and Greenland Corporation, and Imaging Technologies. (Incorporated by
reference to Exhibit
10(k) of Form 10-KSB filed April 7, 2003 by Greenland Corporation.)
*
10(an) Agreement and Assignment of Rights, dated March 1, 2003, between
StaffPro Leasing 2, Greenland
Corporation, and ExpertHR. (Incorporated by reference to Exhibit 10(l) of Form
10-KSB filed
April 7, 2003 by Greenland Corporation.) *
10(ao) Promissory Note, dated March 1, 2003, payable to StaffPro Leasing 2
by Greenland Corporation
. (Incorporated by reference to Exhibit 10(k) of Form 10-KSB filed April 7, 2003
by Greenland
Corporation.) *
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 **
23.1 Consent of Independent Accountants - Boros & Farrington **
23.2 Consent of Independent Accountants - Stonefield Josephson, Inc.
**
23.3
31.1 Consent of Independent Accountants - Pohl, McNabola, Berg and Company
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
33.1
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
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,
2004 2003
---------------------------- -------
Audit Fees . . . . $ 65,000 $73,000
Audit-Related Fees $ 22,085 $ -
Tax Fees . . . . . $ - $ -
All Other Fees . . $ 7,848 $ -
Total Fees . . . . $ 94,933 $73,000
"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.
During the year ended June 30, 2003, the Company paid its predecessor
auditiors, Stonefield and Josephson, Inc., $35,000. The predecessor auditors
completed the review of the quarterly reports filed on Form 10Q.
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%.
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, 2004
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
-------------------------------------- ------------------------------ ----
Chairman of the Board of Directors,. October 13, 2004
/s/ Brian Bonar. . . . . . . . . . . . Chief Executive Officer, and
--------------------------------------
Brian Bonar. . . . . . . . . . . . . . Acting Chief Financial Officer
(Principal Executive Officer)
/s/ Robert A. Dietrich . . . . . . . . October 13, 2004
--------------------------------------
Robert A. Dietrich
Director
/s/ Eric W. Gaer . . . . . . . . . . . October 13, 2004
--------------------------------------
Eric W. Gaer
Director
/s/ Stephen J. Fryer . . . . . . . . . October 13, 2004
--------------------------------------
Stephen J. Fryer
Director
/s/ Richard H. Green . . . . . . . . . October 13, 2004
--------------------------------------
Richard H. Green
Director
EXHIBIT 31.1
CERTIFICATIONS
I, Brain Bonar, certify that:
1. I have reviewed this annual report on Form 10-KSB of Dalrada Financial
Corporation (the "Company");
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of circumstances under which such statements were
made, not misleading with respect to the period covered by this report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Company as of,
and for, the periods presented in this report.
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) disclosed in this report any change in the Company's internal
control over financial reporting that occurred during the Company's most recent
fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting;
5. The Company's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Company's auditors and the audit committee of Company's board of directors (or
persons performing the equivalent functions);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal controls
over financial reporting.
Date: October 13, 2004
/s/ Brian Bonar
Brian Bonar
Chief Executive Officer
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report on Audited Consolidated Financial Statements F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of June 30, 2004 F-2
Consolidated Statements of Operations for the years ended June 30, 2004 and
2003 F-3
Consolidated Statements of Stockholders' Deficit for the years ended June
30,
2004 and 2003 F-5
Consolidated Statements of Cash Flows for the years ended June 30, 2004 and
2003 F-6
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Stockholders
Dalrada Financial Corporation
San Diego, California
We have audited the accompanying consolidated balance sheet of Dalrada Financial
Corporation and Subsidiaries as of June 30, 2004, and the related consolidated
statements of operations, stockholders' deficit and cash flows for years ended
June 30, 2004 and 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Dalrada
Financial Corporation and Subsidiaries as of June 30, 2004 and the consolidated
results of their operations and their consolidated cash flows for each of the
years ended June 30, 2004 and 2003, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the accompanying consolidated financial statements, for the year ended June 30,
2004 the Company experienced a net loss from operations of $4,355,000 and as of
June 30, 2004, the Company had a negative working capital deficit of $21,760,000
and had a negative stockholders' deficit of $20,844,000. In addition, the
Company is in default on certain note payable obligations and is being sued by
numerous trade creditors for nonpayment of amounts due. The Company is also
deficient in its payments relating to payroll tax liabilities. These conditions
raise substantial doubt about its ability to continue as a going concern.
Management's plan in regard to these matters is also discussed in Note 1. These
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ POHL, McNABOLA, BERG & COMPANY, LLP
POHL, McNABOLA, BERG & COMPANY, LLP
CERTIFIED PUBLIC ACCOUNTANTS
San Francisco, California
October 1, 2004
F-1
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2004
(in thousands)
2004
-----------------
ASSETSS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 228
Accounts receivable (net of reserve for bad debt of $66) . . . . . . . . . . . 582
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . 444
-----------------
Total Current Assets. . . . . . . . . . . . . . . . . . . . . . . . . . 1,254
Property and equipment, net of accumulated depreciation of $1994 and
2,607, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Patent, net of accumulated amortization of $180 . . . . . . . . . . . . . . . . . 1,438
Investment - PEO contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Investment - PEO contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . -
-----------------
1,598
-----------------
Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,852
=================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Borrowings under bank notes payable. . . . . . . . . . . . . . . . . . . . . . $ 3,220
Cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Short-term notes payable, including amounts due to related parties of $1,525 . 1,847
Convertible debentures, net of discounts of $55 and $473, respectively . . . . 759
Shareholder advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,350
PEO payroll taxes and other payroll deductions . . . . . . . . . . . . . . . . 5,151
PEO accrued worksite employee. . . . . . . . . . . . . . . . . . . . . . . . . -
Capital lease - current. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,853
-----------------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . 23,190
-----------------
Long Term Liabilities:
Capital lease - long term portion. . . . . . . . . . . . . . . . . . . . . . . 63
Convertible debentures - long term portion . . . . . . . . . . . . . . . . . . 112
Long-term notes payable, including amounts due to related parties. . . . . . . 412
-----------------
Total Long Term Liabilities . . . . . . . . . . . . . . . . . . . . . . 587
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,777
-----------------
Preferred stock minority interest in subsidiary . . . . . . . . . . . . . . . . . -
Shareholders' Deficit
Series A convertible, redeemable preferred stock, $1 par value,
7,500 shares authorized; 4205 shares issued and outstanding . . . . . . . . 420
Common stock, $0.005 par value, 1,000,000,000 shares authorized;
552,358,742 shares issued and outstanding . . . . . . . . . . . . . . . . . 2,762
Common stock warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,095
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (107,677)
-----------------
Total Shareholders' Deficit . . . . . . . . . . . . . . . . . . . . . . (20,925)
-----------------
Total Liabilities and Shareholders' Deficit . . . . . . . . . . . . . . $ 2,852
=================
The accompanying notes are an integral part of these financial statements.
F-2
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
(in thousands)
2004 2003
------------------- ---------------
Revenues:
Sales of products . . . . . . . . . . . . . . . . . . . . . $ 764 $ 924
Software sales, licenses and royalties. . . . . . . . . . . 36 367
Temporary staffing services . . . . . . . . . . . . . . . . 10,119 -
PEO services. . . . . . . . . . . . . . . . . . . . . . . . 2,607 2,499
------------------- ---------------
Total revenues . . . . . . . . . . . . . . . . . . . . . 13,526 3,790
------------------- ---------------
Cost of Sales:
Cost of products sold . . . . . . . . . . . . . . . . . . . (196) (396)
Cost of software sales, licenses and royalties. . . . . . . (3) (90)
Cost of temporary staffing. . . . . . . . . . . . . . . . . (9,209) -
Cost of PEO services. . . . . . . . . . . . . . . . . . . . (894) (1,639)
Freight . . . . . . . . . . . . . . . . . . . . . . . . . . - -
------------------- ---------------
Total cost of sales. . . . . . . . . . . . . . . . . . . 3,224 1,665
Operating expenses:
Selling, general and administrative . . . . . . . . . . . . 4,196 5,623
------------------- ---------------
Total operating expenses . . . . . . . . . . . . . . . . 4,196 5,623
------------------- ---------------
Income (loss) from operations. . . . . . . . . . . . (972) (3,958)
------------------- ---------------
Other Income/(Expense):
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 (2)
Interest income . . . . . . . . . . . . . . . . . . . . . . - -
Gain (Loss) on sale of assets . . . . . . . . . . . . . . . (341) 27
Gain on settlement of debt. . . . . . . . . . . . . . . . . 1,145 2,343
Gain on sale of securities. . . . . . . . . . . . . . . . . - -
Other expenses. . . . . . . . . . . . . . . . . . . . . . . (11) (12)
Interest expense. . . . . . . . . . . . . . . . . . . . . . (1,930) (971)
Bad debt. . . . . . . . . . . . . . . . . . . . . . . . . . (10) (285)
Penalties and interest. . . . . . . . . . . . . . . . . . . (795) (2,023)
Income tax levy . . . . . . . . . . . . . . . . . . . . . . - (105)
------------------- ---------------
(1,923) (1,028)
------------------- ---------------
Loss before income taxes and discontinued operations (2,895) (4,986)
------------------- ---------------
Income tax expense . . . . . . . . . . . . . . . . . . . . . . - -
------------------- ---------------
Net loss from continuing operations. . . . . . . . . (2,895) (4,986)
------------------- ---------------
Discontinued Operations:
Loss from operations of discontinued operation. . . . . . . (2,052) (1,869)
Gain on disposition of discontinued operations. . . . . . . 5,049 -
------------------- ---------------
Net income (loss)s . . . . . . . . . . . . . . . . . . . . . . 102 (6,855)
Preferred stock dividends. . . . . . . . . . . . . . . . . . . (21) (21)
------------------- ---------------
Net income (loss) attributed to common stockholders. . . . . . $ 81 $ (6,876)
=================== ===============
Earnings (loss) per common share . . . . . . . . . . . . . . . $ (0.01) $ (0.05)
Continuing operations . . . . . . . . . . . . . . . . . . . 0.01 (0.02)
=================== ===============
Discontinued operations . . . . . . . . . . . . . . . . . . $ 0.00 $ (0.07)
=================== ===============
Weighted average common shares, basic and diluted. . . . . . . 331,004 97,153
The accompanying notes are an integral part of these financial statements.
F-3
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
COMMON ADDITIONAL
SERIES A PREFERRED STOCK COMMON STOCK STOCK PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT WARRANTS
------------------------- -------------- ------------ ------------ -------------
(thousands) (thousands) (thousands) (thousands) (thousands)
BALANCE, JUNE 30, 2002 . . . . . . . . . . 4,205 $ 420 21,929,365 $ 110 $ 475
Issuance of common stock for:. . . . . . . -
Cash - exercise of options and warrants 750,000 4 29 33
Business acquisition. . . . . . . . . . 12,500,000 62 63 125
Compensation. . . . . . . . . . . . . . 4,190,000 21 21 42
Services. . . . . . . . . . . . . . . . 92,733,499 464 783 1,247
Conversion of liabilities . . . . . . . 46,549,199 233 46 279
Exercise of warrants for services . . . 2,580,000 12 121 133
Beneficial conversion on notes . . . . . . 273 273
Value of warrants issued for services. . . 70 70
Net loss . . . . . . . . . . . . . . . . . (6,855) (6,855)
BALANCE, JUNE 30, 2003 . . . . . . . . . . 4,205 420 181,232,063 906 475
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 . . . . . . . . . . 4,205 $ 420 552,358,742 2,762 $ 475
CAPITAL DEFICIT TOTAL
------------ ---------- ---------
(thousands)
BALANCE, JUNE 30, 2002 . . . . . . . . . . $ 79,492 $(100,924) $(20,427)
Issuance of common stock for:
Cash - exercise of options and warrants
Business acquisition
Compensation
Services
Conversion of liabilities
Exercise of warrants for services
Beneficial conversion on notes
Value of warrants issued for services
Net loss
BALANCE, JUNE 30, 2003 . . . . . . . . . . 80,898 (107,779) (25,080)
Issuance of common stock for:
Cash - exercise of options
Business acquisition
Compensation
Services
Conversion of liabilities
Beneficial conversion on notes
Value of warrants issued with notes
Value of repriced options/warrants
Net income
BALANCE, JUNE 30, 2004 . . . . . . . . . . $ 83,095 $(107,677) $(20,925)
The accompanying notes are an integral part of these financial statements.
F-4
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
(in thousands)
2004 2003
----------------- ------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss from continuing operations . . . . . . . . . . . . . . . $ (2,895) $ (4,986)
Net income (loss) from discontinued operations. . . . . . . . . . 2,997 (1,869)
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation and amortization. . . . . . . . . . . . . . . . . 164 142
Write-down of fixed assets . . . . . . . . . . . . . . . . . . - 54
Stock issued for services. . . . . . . . . . . . . . . . . . . 302 1,318
Amortization of debt discounts . . . . . . . . . . . . . . . . 1,011 857
Value of services for exercise of warrants . . . . . . . . . . - 133
Value of warrants issued for services. . . . . . . . . . . . . - 41
Value of repriced options/warrants . . . . . . . . . . . . . . 141 -
Gain on extinguishment of debt . . . . . . . . . . . . . . . . (1,145) (2,343)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (37)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . (180) 1,149
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 15 136
Prepaid expenses and other current assets. . . . . . . . . . . (424) (6)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 21 (25)
Increase (decrease) in:
Accounts payable and accrued expenses. . . . . . . . . . . . . 585 593
PEO liabilities. . . . . . . . . . . . . . . . . . . . . . . . 787 3,030
----------------- ------------------
Net cash used in operating activities from continuing operations . . 1,379 (1,803)
Net cash provided by (used in) operations of discontinued operations (1,868) 2,915
----------------- ------------------
Net cash used in operating activities. . . . . . . . . . . . . . . . (489) 1,112
----------------- ------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Cash paid for acquisition . . . . . . . . . . . . . . . . . . . . - (45)
Cash acquired with acquisition. . . . . . . . . . . . . . . . . . 104 -
Purchase of furniture and equipment . . . . . . . . . . . . . . . (93) -
----------------- ------------------
Net cash used in investing activities from continuing operations . . 11 (45)
Net cash used in investing activities of discontinued operations . . - -
----------------- ------------------
Net cash provided by (used in) investing activities. . . . . . . . . 11 (45)
----------------- ------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Change in cash overdraft, net . . . . . . . . . . . . . . . . . . (87) 87
Net borrowings under bank notes payable . . . . . . . . . . . . . (25) -
Proceeds from sale of common stock. . . . . . . . . . . . . . . . 177 58
Proceeds from convertible debentures. . . . . . . . . . . . . . . 800 100
Repayments of notes payable . . . . . . . . . . . . . . . . . . . (72) (125)
Repayments of capital lease obligations . . . . . . . . . . . . . (267) -
----------------- ------------------
Net cash provided by financing activities from continuing operations 526 120
Net cash used in financing activities of discontinued operations . . - -
----------------- ------------------
Net cash provided by financing activities. . . . . . . . . . . . . . 526 113
----------------- ------------------
CASH OF DISCONTINUED OPERATION . . . . . . . . . . . . . . . . . . . - (1,043)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . . . . 48 137
CASH AND CASH EQUIVALENTS, Beginning of period . . . . . . . . . . . 180 43
----------------- ------------------
CASH AND CASH EQUIVALENTS, End of period . . . . . . . . . . . . . . $ 228 $ 180
================= ==================
(continued)
The accompanying notes are an integral part of these financial statements.
F-5
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
(in thousands)
2004 2003
--------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest Paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
=============== =============
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
=============== =============
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of convertible debentures into common stock . . . . . . . . . $ 2,026 $ 164
=============== =============
Conversion of accounts payable and accrued liabilities into common stock $ 575 $ 115
=============== =============
Net assets acquired in business combinations:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 104 $ -
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261 268
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . - 34
Property and equipment. . . . . . . . . . . . . . . . . . . . . . . . 25 101
Goodwill and other intangible assets. . . . . . . . . . . . . . . . . - 4,736
Accounts payable and accrued liabilities. . . . . . . . . . . . . . . (102) (4,186)
Notes payable and capital lease . . . . . . . . . . . . . . . . . . . (227) (846)
The accompanying notes are an integral part of these financial statements.
F-6
DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
(F/K/A IMAGING TECHNOLOGIES CORPORATION)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
-----------------------
The accompanying consolidated financial statements include the accounts of
Dalrada Financial Corporation ("DRDF" or the "Company"), f/k/a Imaging
Technologies Corporation, incorporated under the laws of the state of California
during March 1982 and subsequently reincorporated under the laws of the state of
Delaware during May 1983, and its following active wholly-owned subsidiaries
(there are ten inactive subsidiaries not listed):
a) SourceOne Group, Inc., ("SourceOne");
b) Jackson Staffing, Inc. ("Jackson"); and
c) The Christianson Group ("TCG");
Additionally, the Company operates one majority-owned subsidiary, Quik Pix, Inc.
("QPI", owned 85% by the Company).
All significant intercompany accounts and transactions have been eliminated.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. For the year ended June 30,
2004, the Company experienced a net loss from operations of $972 and as of June
30, 2004, the Company had a negative working capital deficit of $21,936 and had
a negative stockholders' deficit of $20,925. In addition, the Company is in
default on certain note payable obligations and is being sued by numerous trade
creditors for nonpayment of amounts due. The Company is also delinquent in its
payments relating to payroll tax liabilities. These conditions raise
substantial doubt about its ability to continue as a going concern.
Nature of Business
--------------------
The Company business operations are as follows:
a) The Company is a financial services provider and a professional employer
organization (PEO) that provides comprehensive personnel management services
including benefits and payroll administration, medical and workers' compensation
insurance programs, personnel records management, and employer liability
management;
b) The Company also develops and mounts photographic and digital images for
use in display advertising for tradeshows, building interiors, and other
point-of-sale locations; and
c) The Company is a provider of temporary staffing services.
Use of Estimates
------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reported periods. Significant estimates made by the Company's
management include but are not limited to recoverability of property and
equipment, payroll tax liabilities and proprietary products through future
operating profits. Actual results could materially differ from those estimates.
Revenue Recognition
--------------------
PEO Service Fees and Worksite Employee Payroll Costs
The Company recognizes its revenues associated with its PEO business pursuant to
EITF 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent." The
Company's revenues are reported net of worksite employee payroll cost (net
method). Pursuant to discussions with the Securities and Exchange Commission
staff, the Company changed its presentation of revenues from the gross method to
an approach that presents its revenues net of worksite employee payroll costs
(net method) primarily because the Company is not generally responsible for the
output and quality of work performed by the worksite employees.
In determining the pricing of the markup component of the gross billings, the
Company takes into consideration its estimates of the costs directly associated
with its worksite employees, including payroll taxes, benefits and workers'
compensation costs, plus an acceptable gross profit margin. As a result, the
Company's operating results are significantly impacted by the Company's ability
to accurately estimate, control and manage its direct costs relative to the
revenues derived from the markup component of the Company's gross billings.
Consistent with its revenue recognition policy, the Company's direct costs do
not include the payroll cost of its worksite employees. The Company's direct
costs associated with its revenue generating activities are comprised of all
other costs related to its worksite employees, such as the employer portion of
payroll-related taxes, employee benefit plan premiums and workers' compensation
insurance premiums.
Sales of Products
Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with all applicable accounting regulations, including American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, With
Respect to Certain Transactions. Revenue from products licensed to original
equipment manufacturers is recorded when OEMs ship licensed products while
revenue from certain license programs is recorded when the software has been
delivered and the customer is invoiced. Revenue from packaged product sales to
and through distributors and resellers is recorded when related products are
shipped. Maintenance and subscription revenue is recognized ratably over the
contract period. When the revenue recognition criteria required for distributor
and reseller arrangements are not met, revenue is recognized as payments are
received. Provisions are recorded for returns and bad debts. The Company's
software arrangements do not contain multiple elements, and the Company does not
offer post contract support.
F-8
Temporary Staffing
The Company records gross revenue for temporary staffing. The Company has
concluded that gross reporting is appropriate because the Company (i) has the
risk of identifying and hiring qualified employees, (ii) has the discretion to
select the employees and establish their price and duties and (iii) bears the
risk for services that are not fully paid for by customers. Temporary staffing
revenues are recognized when the services are rendered by the Company's
temporary employees. Temporary employees placed by the Company are the
Company's legal employees while they are working on assignments. The Company
pays all related costs of employment, including workers' compensation insurance,
state and federal unemployment taxes, social security and certain fringe
benefits. The Company assumes the risk of acceptability of its employees to its
customers.
CONTINGENT LIABILITIES
The Company accrues and discloses contingent liabilities in its consolidated
financial statements in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 5, Accounting for Contingencies. SFAS No. 5 requires
accrual of contingent liabilities that are considered probable to occur and that
can be reasonably estimated. For contingent liabilities that are considered
reasonably possible to occur, financial statement disclosure is required,
including the range of possible loss if it can be reasonably determined. The
Company has disclosed in its audited financial statements several issues that it
believes are reasonably possible to occur, although it cannot determine the
range of possible loss in all cases. As these issues develop, the Company will
continue to evaluate the probability of future loss and the potential range of
such losses. If such evaluation were to determine that a loss was probable and
the loss could be reasonably estimated, the Company would be required to accrue
its estimated loss, which would reduce net income in the period that such
determination was made.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year's presentation. These
reclassifications had no effect on previously reported results of operations or
retained earnings.
Cash and Cash Equivalents
----------------------------
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
-------------------------------
The Company places its cash in what it believes to be credit-worthy financial
institutions. However, cash balances may exceed FDIC and SPIC insured levels at
various times during the year.
Financial instruments that could potentially subject the Company to
concentration of credit risk include accounts receivable. The Company generally
requires clients to pay invoices for service fees no later than one day prior to
the applicable payroll date. As such, the Company generally does not require
collateral.
Additionally, during 2004, all revenue derived from temporary staffing was from
one client.
Allowance Method Used to Record Bad Debts
-----------------------------------------------
The Company provides an allowance for doubtful accounts equal to the estimated
uncollectible amounts. The Company's estimate is based on historical collection
experience and a review of the current status of trade accounts receivable. It
is reasonably possible that the Company's estimate of the allowance for doubtful
accounts will change. Accounts receivable are presented net of an allowance for
doubtful accounts of $66 at June 30, 2004.
F-9
INVENTORY
Inventory are valued at the lower of cost or market; cost being determined by
the first-in, first-out method.
LONG-LIVED ASSETS
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation, including
amortization of assets recorded under capitalized leases, is generally computed
on a straight-line basis over the estimated useful lives of assets ranging from
three to seven years. Amortization of leasehold improvements is provided over
the initial term of the lease, on a straight-line basis. Maintenance, repairs,
and minor renewals and betterments are charged to expense.
The Company reviews the carrying value of property and equipment for impairment
whenever events and circumstances indicate that the carrying value of an asset
may not be recoverable from the estimated future cash flows expected to result
from its use and eventual disposition. In cases where undiscounted expected
future cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds the fair value
of assets. The factors considered by management in performing this assessment
include current operating results, trends and prospects, and the effects of
obsolescence, demand, competition, and other economic factors. Based on this
assessment, there was an impairment charge recorded of $64 for the year ended
June 30, 2003.
Goodwill and Intangible Assets
---------------------------------
Long-lived assets are reviewed whenever indicators of impairment are present and
the undiscounted cash flows are not sufficient to recover the related asset
carrying amount. At June 30, 2003, intangible assets included the excess of the
investment in Greenland Corporation over the fair market of the net assets
acquired of approximately $2,822. The intangible assets were reviewed during
2003, in light of the Company's acquisition of Greenland Corp. and the resultant
decline in the market value of Greenland's stock. This review indicated that
the goodwill recorded as a result of the Greenland acquisition was impaired.
Consequently, the carrying value of the Greenland goodwill totaling $296 was
written off.
Patent Costs
-------------
Patent costs include direct costs of obtaining the patent. Costs for new
patents are capitalized and amortized over the estimated useful life of the
patent, generally over the life of the patent on a straight-line method. The
cost of patents in process is not amortized until issuance. In the event of a
patent being superseded, the unamortized costs are written off immediately.
Accumulated amortization relating to the patent was approximately $180 and $60
for the years ended June 30, 2004 and 2003, respectively.
ADVERTISING COSTS
The Company expenses advertising and promotion costs as incurred. During fiscal
2004 and 2003, the Company incurred advertising and promotion costs of
approximately $76 and $22, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
F-10
LOSS PER COMMON SHARE
The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share are computed by dividing
income (loss) available to common shareholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share have not been presented
since the effect of the assumed conversion of options and warrants and
convertible debt securities to purchase common shares would have an
anti-dilutive effect. The following potential common shares have been excluded
from the computation of diluted net loss per share for the years ended June 30,
2004 and 2003, respectively: warrants - 21,563,430 and 6,002,350; stock options
- 39,150,000 and 34,158,100; and convertible securities of 210,896,000 and
174,530,000. The Company has no dilutive shares due to having a loss from
operations.
Below is a computation of earning (loss) per share:
YEAR ENDED JUNE 30,
2004
------------
INCOME/. . . . . . . . . . . . . . . . . . . . . . PER INCOME/ PER
(LOSS) . . . . . . . . . . . . . . . . . . . . . . SHARES SHARE (LOSS) SHARES SHARE
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) from continuing operations $ (2,895) $ (4,986)
Preferred stock dividends (21) (21)
------------- ------------
(2,916)
Discontinued operations 2,997 (1,869)
Net income (loss) attributed to common stockholders $ 81 $ (6,876)
============= ============
Weighed shares outstanding 331,004,306 97,153,849
Continuing operations $ (0.01) $ (0.05)
Discontinued operations $ 0.01 $ (0.02)
------------- ------------
$ 0.00
============
2003
--------
INCOME/
(LOSS)
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) from continuing operations
Preferred stock dividends
(5,007)
Discontinued operations
Net income (loss) attributed to common stockholders
Weighed shares outstanding
Continuing operations
Discontinued operations
$ (0.07)
========
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").
F-11
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, 2004 and 2003:
2004 2003
--------------- ---------------
Net income (loss) attributed to common stockholders:
As reported . . . . . . . . . . . . . . . . . . . $ 81 $ (6,876)
Compensation recognized under APB 25. . . . . . . - -
Compensation recognized under SFAS 123. . . . . . (825) (425)
--------------- ---------------
Pro forma. . . . . . . . . . . . . . . . . $ (744) $ (7,301)
=============== ===============
Basic loss per common share:
As reported . . . . . . . . . . . . . . . . . . . $ 0.00 $ (0.07)
Pro forma . . . . . . . . . . . . . . . . . . . . $ (0.00) $ (0.08)
F-12
This option valuation model requires input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of its employee stock options.
The weighted average fair value of the options granted during fiscal years 2004
and 2003 is estimated on the date of grant using the Black-Scholes
option-pricing model. The weighted average fair values and weighted average
assumptions used in calculating the fair values were as follows for the years
ended June 30:
2004 2003
------- -------
Fair Value of options granted. $0.025 $0.015
Risk free interest rate. . . . 3.5% 3.5%
Expected life (years). . . . . 3 3
Expected volatility. . . . . . 426% 421%
Expected dividends . . . . . . - -
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including accounts
receivable, inventories, accounts payable, and accrued expenses, the carrying
amounts approximate fair value, due to their relatively short maturities. The
amounts owed for long-term debt also approximate fair value because current
interest rates and terms offered to the Company are at current market rates.
COMPREHENSIVE LOSS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting other comprehensive income and its
components in a financial statement. Comprehensive income, as defined, includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustments and unrealized
gains and losses on available-for-sale securities. Comprehensive income is not
presented in the Company's financial statements since the Company did not have
any of the items of other comprehensive income in any period presented.
SEGMENT DISCLOSURE
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," was issued, which changes the way public companies report
information about segments. SFAS No. 131, which is based on the selected
segment information, requires quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenues.
F-13
Recent Accounting Pronouncements
----------------------------------
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (an interpretation of Accounting Research Bulletin
(ARB) No. 51, Consolidated Financial Statements). Interpretation 46 addresses
consolidation by business enterprises of entities to which the usual condition
of consolidation described in ARB-51 does not apply. The Interpretation changes
the criteria by which one company includes another entity in its consolidated
financial statements. The general requirement to consolidate under ARB-51 is
based on the presumption that an enterprise's financial statement should include
all of the entities in which it has a controlling financial interest (i.e.,
majority voting interest). Interpretation 46 requires a variable interest
entity to be consolidated by a company that does not have a majority voting
interest, but nevertheless, is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity. In December
2003, the FASB concluded to revise certain elements of FIN 46, primarily to
clarify the required accounting for interests in variable interest entities.
FIN-46R replaces FIN-46 that was issued in January 2003. FIN-46R exempts
certain entities from its requirements and provides for special effective dates
for entities that have fully or partially applied FIN-46 as of December 24,
2003. In certain situations, entities have the option of applying or continuing
to apply FIN-46 for a short period of time before applying FIN-46R. In general,
for all entities that were previously considered special purpose entities, FIN
46 should be applied for registrants who file under Regulation SX in periods
ending after March 31, 2004, and for registrants who file under Regulation SB,
in periods ending after December 15, 2004. The Company does not expect the
adoption to have a material impact on the Company's financial position or
results of operations.
During April 2003, the FASB issued SFAS 149 - "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", effective for contracts entered
into or modified after September 30, 2003, except as stated below and for
hedging relationships designated after September 30, 2003. In addition, except
as stated below, all provisions of this Statement should be applied
prospectively. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, paragraphs 7(a) and 23(a), which
relate to forward purchases or sales of when-issued securities or other
securities that do not yet exist, should be applied to both existing contracts
and new contracts entered into after September 30, 2003. The adoption of this
statement had no impact on the Company's consolidated financial statements.
During May 2003, the FASB issued SFAS 150 - "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective for public entities at the beginning of the first interim period
beginning after June 15, 2003. This Statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a freestanding financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. Some of the provisions of this Statement are
consistent with the current definition of liabilities in FASB Concepts Statement
No. 6, Elements of Consolidated Financial Statements. The adoption of this
statement had no impact on the Company's consolidated financial statements.
In December 2003, the FASB issued a revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" which replaces the
previously issued Statement. The revised Statement increases the existing
disclosures for defined benefit pension plans and other defined benefit
postretirement plans. However, it does not change the measurement or
recognition of those plans as required under SFAS No. 87, "Employers' Accounting
for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." Specifically, the revised Statement requires companies to provide
additional disclosures about pension plan assets, benefit obligations, cash
flows, and benefit costs of defined benefit pension plans and other defined
benefit postretirement plans. Also, companies are required to provide a
breakdown of plan assets by category, such as debt, equity and real estate, and
to provide certain expected rates of return and target allocation percentages
for these asset categories. The Company has implemented this pronouncement and
has concluded that the adoption has no material impact to the consolidated
financial statements.
F-14
In December 2003, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB 104 supersedes
SAB 101, "Revenue Recognition in Consolidated Financial Statements." SAB 104's
primary purpose is to rescind accounting guidance contained in SAB 101 related
to multiple element revenue arrangements, superseded as a result of the issuance
of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables."
Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Consolidated
Financial Statements Frequently Asked Questions and Answers ("the FAQ") issued
with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition.
Selected portions of the FAQ have been incorporated into SAB 104. While the
wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the
revenue recognition principles of SAB 101 remain largely unchanged by the
issuance of SAB 104, which was effective upon issuance. The adoption of SAB 104
did not impact the consolidated financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT
The cost of property and equipment at June 30, 2004 consisted of the following:
Computer and other equipment $ 1,932
Office furniture and fixtures 151
Leasehold improvements 71
--
2,154
Less accumulated depreciation and amortization (1,994)
-------
$ 160
= ===
Depreciation expense for the years ended June 30, 2004 and 2003 was $44 and $82,
respectively.
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 $70 and $120 for the years ended June 30, 2004 and 2003,
respectively.
Transactions with Officers and Key Executives
--------------------------------------------------
During the years ended June 30, 2004 and 2003, common stock with an aggregate
fair market value of $8 and $60, respectively, was awarded to key executives as
compensation and advances.
During the year ended June 30, 2004, the Company issued 7,272,110 shares of
common stock to the Company's CEO as payment for accrued expenses and a note
payable in the aggregate amount of $109.
Transactions with a Related Party
-------------------------------------
In April 2004, the Company had a PEO services client whose Chairman of the Board
is the Company's current CEO and Chairman. The Company received fees of $7
during 2004. The transaction is at fair value.
NOTE 4 - ACQUISITIONS AND DISPOSITIONS
Jackson Staffing, Inc.
------------------------
On September 1, 2003, DRDF completed its acquisition of 100% of the issued and
outstanding shares of common stock of Jackson Staffing, Inc. ("Jackson"). The
purchase price was 1,329,478 shares of DRDF common stock valued at $30.
Established in 2003, Jackson is a temporary staffing agency.
F-15
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
------------
On June 28, 2004, DRDF completed its acquisition of certain assets of M&M
Nursing (M&M"). The purchase price was 5,000,000 shares of DRDF common stock
valued at $31 plus the assumption of $204 of liabilities. M&M is a temporary
staffing agency primarily for nurses.
The operating results of M&M beginning July 1, 2004 will included in the
accompanying consolidated statements of operations.
The total purchase price was valued at approximately $235 and is summarized as
follows in accordance with SFAS No. 141 and 142:
Receivables. . . . . . $233
Property and equipment 2
----
Purchase price . . . . $235
----
The pro forma financial information that the consolidated operations of the
Company as if the Jackson and M&M acquisitions had occurred as of the beginning
of the periods presented is not presented since the operations of Jackson and
M&M prior to the acquisition by DRDF as immaterial.
Greenland Corporation
----------------------
Acquisition
On January 14, 2003, the Company completed the acquisition of shares,
representing controlling interest, of Greenland Corporation ("Greenland").
Under the terms of the Greenland acquisition, DRDF acquired 19,183,390 shares of
common stock of Greenland and received warrants to purchase an additional
95,319,510 shares of Greenland common stock contingent upon the contribution of
certain PEO contracts to Greenland. The payment of the exercise price of the
warrants was made via the contribution of the required PEO contracts. The
purchase price was $2,225 in the form of a promissory note payable to Greenland
and is convertible into shares of DRDF common stock at the maturity date, the
number of which will be determined by a formula applied to the market price of
the shares at the time that the promissory note is converted. The promissory
note of $2,225 is payable to Greenland and is eliminated during the
consolidation.
F-16
The Company contributed the required PEO contracts to Greenland resulting in the
warrants being exercised. 115.1 million Greenland common shares were issued to
DRDF and delivered pursuant to the terms of the Closing Agreement. The
conditions of the exercise of warrants pursuant to the Closing Agreement were
met. Accordingly, DRDF held voting rights to 115.1 million shares of Greenland
common stock, representing approximately 85% of the total outstanding Greenland
common shares.
On January 14, 2003, four new directors were elected to serve on Greenland's
Board of Directors as nominees of DRDF
The purchase price was determined through analysis of Greenland's financial
reports as filed with the Securities and Exchange Commission and the potential
future performance of Greenland's ExpertHR subsidiary. The total purchase price
was arrived at through negotiations.
Greenland's ExpertHR subsidiary provides professional employer services (PEO) to
niche markets. Greenland's Check Central subsidiary is an information
technology company that has developed the Check Central Solutions' transaction
processing system software and related MAXcash Automated Banking Machine (ABM
kiosk designed to provide self-service check cashing and ATM-banking
functionality. Greenland's common stock trades on the OTC Bulletin Board under
the symbol GRLC.
Pursuant to the terms of the Agreement, the actual purchase price was $0, based
on the stated purchase price of $2,225 per the agreement less promissory note
payable to $2,225 to Greenland, which was eliminated in the consolidation.
The operating results of Greenland beginning January 14, 2003 are included in
the accompanying consolidated statements of operations.
The total purchase price was valued at approximately $0 and is summarized and
allocated as follows in accordance with SFAS No. 141 and 142:
Other current assets. . . . . . . . . . . . $ 4
Property and equipment. . . . . . . . . . . 90
Other non-current assets. . . . . . . . . . 18
Accounts payable and accrued
expenses, and other current liabilities (3,202)
Other long-term liabilities . . . . . . . . (28)
Goodwill. . . . . . . . . . . . . . . . . . 3,118
--------
Purchase price. . . . . . . . . . . . . . . $ -
--------
The excess purchase price was allocated to goodwill, as there were no other
identifiable intangible assets of Greenland in which to allocate part of the
purchase price.
The pro forma consolidated results of operations have not been presented as if
the acquisition of Greenland, Inc. had occurred at July 1, 2002, due to the sale
of Greenland stock back to Greenland effective March 1, 2004. The pro forma
information is not meaningful due to sale of Greenland.
F-17
ExpertHR of Oklahoma
----------------------
Effective April 1, 2003, the Company formed a wholly-owned subsidiary of
Greenland Corporation, ExpertHR Oklahoma. Subsequent to its formation, the new
Company purchased a group of PEO clients for $921 of convertible preferred stock
of Greenland Corporation. ExpertHR of Oklahoma, Inc., at that time, was a newly
formed corporation whose only asset was the PEO contracts purchased by
Greenland. The entire purchase price of the purchased contracts of $921 was
allocated to contracts and was amortized over the expected life of the contracts
of 5 years.
Disposition
In January 2004, the Company determined to discontinue operations of Greenland,
Inc., its professional employment business division, and sold its shares in
Greenland, Inc., back to Greenland. Effective March 1, 2004, the Company
completed the sale of Greenland. Effective March 1, 2004, four new directors
were elected to serve on Greenland's Board of Directors due to the resignation
of the four directors nominated by DRDF
The terms of the sale are as follows: the Company returned all common shares of
Greenland except for 19,183,390 restricted common shares; assign or grant all
rights, title and interest the Company had in acquiring any or all interest in
ePEO Link, Inc. to Greenland; Greenland canceled a convertible promissory note
in the amount of $2.225 issued by the Company to Greenland; and Greenland agreed
to forgive and cancel the inter-company transfer debt of the Company to
Greenland of approximately $1,300.
Greenland's revenues were $5,211 for the period starting July 1, 2003 to
February 29, 2004, and were $400 for the period January 14, 2003 to June 30,
2003. The results of operations of Greenland have been reported separately as
discontinued operations.
The assets sold consisted primarily of accounts receivable, deposits, property
and equipment, and other assets. The Greenland also assumed all accounts
payable and accrued liabilities.
The following is a summary of the net assets sold at February 29, 2004:
February 29, 2004
------------------
Assets:
Cash $-
Accounts receivable. . . . . . . . . . . 406
Other current assets . . . . . . . . . . 135
Property and equipment, net. . . . . . . 77
Other assets . . . . . . . . . . . . . . 3,830
------------------
Total assets . . . . . . . . . . . . . . . $ 4,448
Liabilities:
Accounts payable . . . . . . . . . . . . $ 1,237
Notes payable. . . . . . . . . . . . . . 830
PEO payroll taxes and payroll deduction. 3,993
Accrued liabilities. . . . . . . . . . . 1,265
Other non-current liabilities. . . . . . 798
------------------
Total liabilities. . . . . . . . . . . . . $ 8,123
------------------
Net liabilities of discontinued operations $ 3,675
==================
F-18
Quik Pix, Inc.
----------------
On January 14, 2003, DRDF completed its acquisition of approximately 85% of the
issued and outstanding shares of common stock of Quik Pix, Inc. ("QPI"). The
purchase price was 12,500,000 shares of DRDF restricted common stock valued at
$125. In addition, DRDF agreed to pay $45 to a shareholder of QPI.
Established in 1982, QPI is a visual marketing support firm. Its principal
product, PhotoMotion, is patented. PhotoMotion is a unique color medium that
uses existing originals to create the illusion of movement and allows for three
to five distinct images to be displayed with an existing light box. QPI visual
marketing products are sold to a range of clientele including advertisers and
their agencies.
The purchase price was determined through analysis of QPI's financial condition
and the potential future performance of its business operations. The total
purchase price was arrived at through negotiations.
Pursuant to the terms of the Agreement, the actual purchase price was $170 based
on the fair value of the common stock issued of $125 and the payable of $45 to a
shareholder of QPI.
The operating results of QPI beginning January 14, 2003 are included in the
accompanying consolidated statements of operations.
The total purchase price was valued at approximately $170 and is summarized as
follows in accordance with SFAS No. 141 and 142:
Other current assets. . . . . . . . . . . $ 280
Property and equipment. . . . . . . . . . 11
Other non-current assets. . . . . . . . . 18
Accounts payable and accrued
expenses, and other current liabilities (865)
Other long-term liabilities . . . . . . . (892)
Patent. . . . . . . . . . . . . . . . . . 1,618
-------
Purchase price. . . . . . . . . . . . . . $ 170
=======
The excess purchase price of $1,618 was allocated to QPI's patent. QPI has a
patent related to PhotoMotion images, which expires in July 2020. This
intangible asset is being amortized over the remaining life of the patent.
Dream Canvas Technology, Inc.
--------------------------------
The Company completed the acquisition of Dream Canvas Technology, Inc. (DCT) in
October 2002 and paid the sum of $40 with the issuance of 100,000 shares of its
common stock. In December 2002 the Company sold DCT to Baseline Worldwide
Limited for $75 in cash.
F-19
NOTE 5 - OTHER ACCRUED EXPENSES
Other accrued expenses at June 30, 2004 consisted of the following as of:
Interest . . . . . . . . . . . . . . . . $ 3,220
Payroll and sales tax payable. . . . . . 591
IRS levy penalties and interest. . . . . 387
Accrued judgments. . . . . . . . . . . . 3,674
Other taxes. . . . . . . . . . . . . . . 948
Accrued salaries and related liabilities 923
Other. . . . . . . . . . . . . . . . . . 1,130
----------
$ 10,873
==========
NOTE 6 - DEBT
BORROWINGS UNDER BANKS NOTES PAYABLE
On June 6, 2000, the Company entered into a settlement agreement with Imperial
Bank ("Imperial"). Under this agreement, the Company would pay $150 per month
until the balance was paid in full. Payments have been reduced to $100 per
month through January 2002 and further reduced to $50 subsequent to January
2002. During the year ended June 30, 2002, the Company paid $1,023 toward this
obligation. Due to the uncertainty regarding the Company's ability to meet its
obligations and certain defaults under this agreement, the debt has been
classified as current. The debt is accruing interest at 5.75% per annum, which
will be waived if all principal payments are made timely. The debt is
collateralized by substantially all assets of the Company.
As of June 30, 2004, the Company owed Export-Import Bank ("ExIm") $1,730 plus
interest under a Working Capital Guarantee Facility whereby Imperial made a
demand upon ExIm who responded by making a claim payment to Imperial. The note
bears interest at 10% per annum. ExIm has made a demand for immediate payment
and note is currently in default.
The following is a summary of the borrowings under bank notes payable at June
30, 2004:
Imperial . . . . . $1,490
Export-Import Bank 1,730
------
Total. . . . . $3,220
======
NOTES PAYABLE, INCLUDING AMOUNTS DUE TO RELATED PARTIES
The following summarizes notes payable at June 30, 2004:
Payable to investor, 8% . . . . . . . . . . $ 76
Payable in connection with QPI acquisition. 376
Payable to individual, 10%. . . . . . . . . 14
Payable to related party. . . . . . . . . . 293
Payable to a former director, 16% . . . . . 1,500
2,259
--------
Less current portion. . . . . . . . . . . . (1,847)
Long-term portion . . . . . . . . . . . . . $ 412
--------
F-20
Notes payable mature as follows:
During the years ended June 30,
2005. . . . . . . . . . . . . . $1,847
------
2006. . . . . . . . . . . . . . 412
2007. . . . . . . . . . . . . . -
2,259
================================
Convertible Debentures
-----------------------
On December 12, 2000, the Company entered into a Convertible Note Purchase
Agreement with Amro International, S.A., Balmore Funds, S.A. and Celeste Trust
Reg. Pursuant to this agreement, the Company sold to each of the purchasers
convertible promissory notes in the aggregate principal amount of $850 bearing
interest at the rate of eight percent (8%) per annum, due December 12, 2003,
each convertible into shares of the Company's common stock. Interest shall be
payable, at the option of the purchasers, in cash or shares of common stock. At
any time after the issuance of the notes, each note is convertible into such
number of shares of common stock as is determined by dividing (a) that portion
of the outstanding principal balance of the note as of the date of conversion by
(b) the lesser of (x) an amount equal to seventy percent (70%) of the average
closing bid prices for the three (3) trading days prior to December 12, 2000 and
(y) an amount equal to seventy percent (70%) of the average closing bid prices
for the three (3) trading days having the lowest closing bid prices during the
thirty (30) trading days prior to the conversion date. The Company has
recognized interest expense of $364 relating to the beneficial conversion
feature of the above notes. Additionally, the Company issued a warrant to each
of the purchasers to purchase 502,008 shares of the Company's common stock at an
exercise price equal to $1.50 per share.
On July 26, 2001, the Company entered into a convertible note purchase agreement
with certain investors whereby the Company sold to the investors a convertible
debenture in the aggregate principal amount of $1,000 bearing interest at the
rate of eight percent (8%) per annum, due July 26, 2004, convertible into shares
of the Company's common stock. Interest is payable, at the option of the
investor, in cash or shares of the Company's common stock. The note is
convertible into such number of shares of the Company's common stock as is
determined by dividing (a) that portion of the outstanding principal balance of
the note by (b) the conversion price. The conversion price equals the lesser of
(x) $1.30 and (y) 70% of the average of the 3 lowest closing bid prices during
the 30 trading days prior to the conversion date. Additionally, the Company
issued a warrant to the investor to purchase 769,231 shares of the Company's
common stock at an exercise price equal to $1.30 per share. The investor may
exercise the warrant through July 26, 2006. In accordance with EITF 00-27, the
Company first determined the value of the note and the fair value of the
detachable warrants issued in connection with this convertible debenture. The
proportionate value of the note and the warrants is $492 and $508, respectively.
The value of the note was then allocated between the note and the preferential
conversion feature, which amounted to $0 and $492, respectively.
On September 21, 2001, the Company entered into a convertible note purchase
agreement with an investor whereby the Company sold to the investor a
convertible promissory note in the aggregate principal amount of $300 bearing
interest at the rate of eight percent (8%) per annum, due September 21, 2004,
convertible into shares of the Company's common stock. Interest is payable, at
the option of the investor, in cash or shares of the Company's common stock.
The note is convertible into such number of shares of the Company's common stock
as is determined by dividing (a) that portion of the outstanding principal
balance of the note by (b) the conversion price. The conversion price equals
the lesser of (x) $0.532 and (y) 70% of the average of the 3 lowest closing bid
prices during the 30 trading days prior to the conversion date. Additionally,
the Company issued a warrant to the investor to purchase 565,410 shares of the
Company's common stock at an exercise price equal to $0.76 per share.
The investor may exercise the warrant through September 21, 2006. In December
2001, $70 of this note was converted into 209,039 shares of common stock. In
accordance with EITF 00-27, the Company first determined the value of the note
and the fair value of the detachable warrants issued in connection with this
convertible debenture.
F-21
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
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.
F-22
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
investor may exercise the warrant through December 17, 2008. In accordance with
EITF 00-27, the Company first determined the value of the notes and the fair
value of the detachable warrants issued in connection with these convertible
debentures. The proportionate value of the notes and the warrants is $586 and
$214, respectively. The value of the notes was then allocated between the notes
and the preferential conversion feature, which amounted to $30 and $556,
respectively.
Below is a roll-forward schedule of the convertible debentures:
Balance at June 30, 2002 . . . . . . . . . . . . . . . . $ 803
Issuance of convertible debentures during the year . . . 640
Converted into common stock. . . . . . . . . . . . . . . (164)
Value of preferential conversion feature . . . . . . . . (274)
Amortization of value of warrants. . . . . . . . . . . . 477
Amortization of value of preferential conversion feature 375
--------
Balance at June 30, 2003 . . . . . . . . . . . . . . . . 1,857
Issuance of convertible debentures during the year . . . 800
Converted into common stock. . . . . . . . . . . . . . . (2,026)
Value of preferential conversion feature . . . . . . . . (557)
Value of warrants issued with convertible debentures . . (214)
Amortization of value of warrants. . . . . . . . . . . . 388
Amortization of value of preferential conversion feature 623
--------
Balance at June 30, 2004 . . . . . . . . . . . . . . . . $ 871
========
The weighted average interest rate on notes payable outstanding at June 30, 2004
and 2003, was 8.7% and 8.7%, respectively.
F-23
NOTE 7 - STOCKHOLDERS' DEFICIT
Amendment to the Certificate of Incorporation.
---------------------------------------------------
On September 28, 2001, the Company's shareholders authorized an amendment to the
Certificate of Incorporation to: (i) effect a stock combination (reverse split)
of the Company's common stock in an exchange ratio to be approved by the Board,
ranging from one (1) newly issued share for each ten (10) outstanding shares of
common stock to one (1) newly issued share for each twenty (20) outstanding
shares of common stock (the "Reverse Split"); and (ii) provide that no
fractional shares or scrip representing fractions of a share shall be issued,
but in lieu thereof, each fraction of a share that any shareholder would
otherwise be entitled to receive shall be rounded up to the nearest whole share.
There will be no change in the number of the Company's authorized shares of
common stock and no change in the par value of a share of Common Stock.
On September 28, 2001, the Company's shareholders approved a Board proposal to
amend the Certificate of Incorporation to increase the number of shares of
common stock that the Company is authorized to issue from 200,000,000 to
500,000,000 shares.
On August 9, 2002, the Company's board of directors approved and affected a 1
for 20 reverse stock split. All share and per share data have been
retroactively restated to reflect this stock split.
On May 14, 2004, the Company's shareholders approved a Board proposal to amend
the Certificate of Incorporation to increase the number of shares of common
stock that the Company is authorized to issue from 500,000,000 to 1,000,000,000
shares.
5% SERIES A CONVERTIBLE, REDEEMABLE PREFERRED STOCK
Holders of the 5% convertible preferred stock ("Series A") are entitled to
receive, when and as declared by the Board of Directors, but only out of amounts
legally available for the payment thereof, cumulative cash dividends at the
annual rate of $50.00 per share, payable semi-annually.
The 5% convertible preferred stock is convertible, at any time, into shares of
the Company's common stock, at a price of $17.50 per common share. This
conversion price is subject to certain anti-dilution adjustments, in the event
of certain future stock splits or dividends, mergers, consolidations or other
similar events. In addition, the Company shall reserve, and keep reserved, out
of its authorized but un-issued shares of common stock, sufficient shares to
effect the conversion of all shares of the 5% convertible preferred stock.
In the event of any involuntary or voluntary liquidation, dissolution or winding
up of the affairs of the Company, the 5% convertible preferred shareholders
shall be entitled to receive $1 per share, together with accrued dividends, to
the date of distribution or payment, whether or not earned or declared.
The 5% convertible preferred stock is callable, at the Company's option, at call
prices ranging from $1,050 to $1,100 per share. No call on the 5% convertible
preferred stock was made during fiscal 2004 and 2003. As of June 30, 2004, the
accumulated dividend in arrears was approximately $432 on the Series A.
COMMON STOCK WARRANTS
In fiscal 2003, the Company also issued 2,830,300 warrants to certain
consultants. The exercise prices of the warrants range from $0.05 to $0.10.
All these warrants were exercised during fiscal 2003. The value of these
warrants was estimated at $70 using the Black-Scholes option-pricing model. The
following assumptions were used: average risk-free interest rate of 3.5%;
expected life of 0.25 years; dividend yield of 0%; and expected volatility of
179%.
F-24
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:
PRICE PER SHARE UNDERLYING COMMON SHARES
----------------- -------------------------
JUNE 30, 2002. . . . . . . . $ 0.20 - $11.40 6,102,350
Granted. . . . . . . . . . $ 0.05 - $0.10 2,830,000
Exercised. . . . . . . . . $ 0.05 - $0.10 (2,830,000)
Canceled . . . . . . . . . $ 11.40 (100,000)
JUNE 30, 2003. . . . . . . . $ 0.20 - $10.00 6,002,350
Granted . . . . . . . . $ 0.02 16,000,000
Exercised . . . . . . . (0)
Canceled. . . . . . . . $ 0.20 - $10.00 (438,920)
EXERCISABLE AT JUNE 30, 2004 $ 0.02 - $1.50 21,563,430
=========================
The weighted average remaining contractual life of warrants outstanding at June
30, 2004 is 4.24 years. Of the warrants exercisable at June 30, 2004,
16,000,000 have an exercise price of $0.02 and the remaining 5,563,430 have an
exercise price ranging from $0.33 to $1.50.
For warrants granted during the year ended June 30, 2003 where the exercise
price was less than the stock price at the date of the grant, the
weighted-average fair value of such options was $0.025 and the weighted-average
exercise price of such options was $0.0558. In connection with the issuance of
these warrants, the Company recognized an expense of $70. The fair value of
these warrants was determined using the Black-Scholes pricing model.
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.
F-25
In addition, the Board of Directors, outside the 1984, 1988 and 1997 Plans
("Outside Plan"), granted to employees, directors and other key persons of DRDF
or its subsidiaries options to purchase shares of the Company's common stock, at
an exercise price equal to no less than the fair market value of such stock on
the date of grant. Options are exercisable in installments at dates typically
ranging from one to not more than ten years after the date of grant.
In October 1995, the Board of Directors authorized the exercise price for
employee options and warrants to be reduced to the current market value.
Accordingly, the exercise price on an aggregate of 911 and 13,750 options under
the 1988 and Outside Plans, respectively, were canceled and reissued at an
exercise price of $20.00 per share.
The 1997 Employee Stock Purchase Plan ("Purchase Plan") was approved by the
Company's shareholders in September 1996. The Purchase Plan permits employees
to purchase the Company's common stock at a 15% discounted price. The Purchase
Plan is designed to encourage and assist a broad spectrum of employees of the
Company to acquire an equity interest in the Company through the purchase of its
common stock. It is also intended to provide participating employees the tax
benefits under Section 421 of the Code. The Purchase Plan covers an aggregate
of 25,000 shares of the Company's common stock.
All employees, including executive officers and directors who are employees,
customarily employed more than 20 hours per week and more than five months per
year by the Company are eligible to participate in the Purchase Plan on the
first enrollment date following employment. However, employees who hold,
directly or through options, five percent or more of the stock of the Company
are not eligible to participate.
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.
F-26
STOCK OPTION ACTIVITY
The following is a summary of the stock option activity:
STOCK OPTION PLANS
PRICE PER
SHARE UNDERLYING COMMON SHARES
-------------------------
JUNE 30, 2000. . . . . . . . $ 18.20 - $169.00 11,750
Granted . . . . . . . . $ 2.80 - $6.80 -
Exercised . . . . . . . $ 2.80 - $23.80 -
Canceled. . . . . . . . $ 18.20 - $169.00 (3,650)
JUNE 30, 2001. . . . . . . . $ 6.80 - $150.00 8,100
Granted . . . . . . . . $ 0.60 - $0.60 2,750,000
Exercised . . . . . . . $ 0.20 - $2.00 (2,744,500)
Canceled. . . . . . . . -
JUNE 30, 2002. . . . . . . . $ 0.60 - $150.00 13,600
Granted. . . . . . . . . . . $ 0.01 - $0.015 34,150,000
Exercised. . . . . . . . . . -
Canceled . . . . . . . . . . (5,500)
JUNE 30, 2003. . . . . . . . $ 0.01 - $28.20 34,158,100
Granted . . . . . . . . $ .01 - $0.025 34,500,000
Exercised . . . . . . . $ 0.01 - $0.025 (29,500,000)
Canceled. . . . . . . . $ 28.20 (8,100)
EXERCISABLE AT JUNE 30, 2004 $ 0.01 -0.025 39,150,000
-------------------------
The weighted average remaining contractual life of options outstanding issued
under the Stock Option Plans is 1.98 years at June 30, 2004.
For options granted during the year ended June 30, 2004 where the exercise price
was equal to the stock price at the date of the grant, the weighted-average fair
value of such options was $0.025 and the weighted-average exercise price of such
options was $0.025. In connection with the issuance of these options, the
Company recognized an expense of $0 related since the exercise price was equal
to the value of the Company's stock at the date of issuance. During the year
ended June 30, 2004, the Company repriced certain options that were previously
issued and recorded a charge to earnings in the amount of $141.
For options granted during the year ended June 30, 2003 where the exercise price
was less than the stock price at the date of the grant, the weighted-average
fair value of such options was $0.012 and the weighted-average exercise price of
such options was $0.0124. In connection with the issuance of these options, the
Company recognized an expense of $0 related since the exercise price was equal
to the value of the Company's stock at the date of issuance.
COMMON STOCK ISSUED FOR SERVICES AND COMPENSATION
The table below shows all the issuances of common stock for services during the
year ended June 30, 2004 and 2003. The value of the services was derived by
multiplying the market value of the Company's common stock at the date a
transaction for services was entered into by the number of shares issued.
F-27
FISCAL 2004
-----------------------------
ISSUE . . . . . . SHARES
DATE. . . . . . . DESCRIPTION ISSUED VALUE
1/7/2004. . . . . Strategic planning/marketing 75,000 $ 1,500
6/1/2004. . . . . Strategic planning/marketing 300,000 1,500
7/31/2003 . . . . Strategic planning/marketing 100,000 2,000
9/17/2003 . . . . Strategic planning/marketing 120,000 2,400
12/29/2003. . . . Strategic planning/marketing 250,000 2,500
12/10/2003. . . . Professional services 175,000 2,625
1/7/2004. . . . . Strategic planning/marketing 150,000 3,000
12/31/2003. . . . Strategic planning/marketing 500,000 5,000
12/10/2003. . . . Professional services 1,075,000 16,125
8/1/2003. . . . . Strategic planning/marketing 5,000,000 125,000
7,745,000 $ 161,650
FISCAL 2003
ISSUE. . . . . . SHARES
DATE . . . . . . DESCRIPTION ISSUED VALUE
07/01/02 . . . . Strategic planning/marketing 450,000 $ 72,000
07/08/02 . . . . Strategic planning/marketing 79,688 12,431
08/15/02 . . . . Strategic planning/marketing 500,000 25,000
08/19/02 . . . . Strategic planning/marketing 150,000 7,500
09/09/02 . . . . Strategic planning/marketing 1,500,000 79,500
09/18/02 . . . . Strategic planning/marketing 3,000,000 93,000
09/23/02 . . . . Strategic planning/marketing 100,000 2,200
09/24/02 . . . . Strategic planning/marketing 250,000 4,750
10/10/02 . . . . Strategic planning/marketing 2,310,900 23,109
10/10/02 . . . . Strategic planning/marketing 3,000,000 30,000
10/29/02 . . . . Strategic planning/marketing 15,000,000 150,000
11/12/02 . . . . Strategic planning/marketing 937,500 18,750
12/13/02 . . . . Strategic planning/marketing 400,000 12,000
12/17/02 . . . . Professional services 1,000,000 10,000
12/17/02 . . . . Strategic planning/marketing 4,000,000 40,000
12/17/02 . . . . Strategic planning/marketing 45,000,000 450,000
01/03/03 . . . . Strategic planning/marketing 500,000 5,000
01/07/03 . . . . Strategic planning/marketing 686,667 10,300
01/08/03 . . . . Strategic planning/marketing 2,000,000 30,000
02/10/03 . . . . Professional services 533,333 8,000
03/03/03 . . . . Strategic planning/marketing 300,000 3,000
04/10/03 . . . . Strategic planning/marketing 1,000,000 10,000
06/10/03 . . . . Strategic planning/marketing 4,333,333 65,000
06/23/03 . . . . Strategic planning/marketing 5,702,079 85,531
92,733,500 $ 1,247,071
F-28
NOTE 8 - SEGMENT AND GEOGRAPHIC INFORMATION
During fiscal 2004 and 2003, the Company managed and internally reported the
Company's business as four (4) reportable segments as follows:
(1) professional employer organization
(2) temporary staffing
(3) imaging products;
(4) imaging software;
Segment information for the fiscal year ended June 30, 2004 and 2003, was as
follows:
PEO TEMPORARY IMAGING IMAGING
BUSINESS STAFFING PRODUCTS SOFTWARE TOTAL
SELECTED STATEMENT OF OPERATIONS ACTIVITY:
Fiscal year ended June 30, 2004
Revenues . . . . . . . . . . . . . . . . $ 2,607 $ 10,119 $ 764 $ 36 $ 13,526
Cost of revenues . . . . . . . . . . . . (894) (9,209) (196) (3) (10,302)
Gross profit . . . . . . . . . . . . . . . 1,713 910 568 33 3,224
Fiscal year ended June 30, 2003
Revenues . . . . . . . . . . . . . . . . $ 2,499 $ - $ 924 $ 367 $ 3,790
Cost of revenues . . . . . . . . . . . . (1,639) - (396) (90) (2,125)
Gross profit . . . . . . . . . . . . . . . 860 - 528 277 1,665
As of and during the years ended June 30, 2004 and 2003, no customer accounted
for more than 10% of consolidated accounts receivable or total consolidated
revenues. During 2004, all revenue derived from temporary staffing was from one
client.
Net sales from principal geographic areas were as follows:
2004 2003
------- ------
Europe . . . . $ - $ 367
------- ------
Domestic sales 13,526 3,423
Total sales . $13,526 $3,790
------- ------
NOTE 9 - INCOME TAXES
The Company's provision for income taxes is accounted for in accordance with
SFAS 109. SFAS 109 requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under the SFAS 109 asset and liability
method, deferred tax assets and liabilities are determined based upon the
difference between the financial statement and tax bases of assets and
liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is then provided for
deferred tax assets that are more likely than not to not be realized.
F-29
The provision (benefit) for income taxes is as follows for the years ended June
30:
2004 2003
----- -----
Current - State. $ - $ -
Deferred benefit - -
$ - $ -
----- -----
The components of deferred income taxes are as follows at June 30:
2004 2003
--------- ---------
Deferred tax assets
Net operating loss carryforwards $ 37,600 $ 37,100
Other. . . . . . . . . . . . . . 500 500
38,100 37,600
Valuation allowance. . . . . . . . (38,100) (37,600)
$ - $ -
--------- ---------
The Company's federal and state net operating loss carryforwards expire in
various years through 2017. The Company has made numerous equity issuances that
could result in limitations on the annual utilization of the Company's net
operating loss carryforwards. The Company has not performed an analysis to
determine the effect of such changes.
The provision for income taxes results in an effective rate that differs from
the federal statutory rate. Reconciliation between the actual tax provision and
taxes computed at the statutory rate is as follows for the years ended June 30,
2004:
Tax Percentage
---------- -----------
Federal Tax . . . . . . $ 35,360 34.0%
State tax . . . . . . . 6,240 6.0%
Penalties . . . . . . . 304,300 292.6%
Reserves. . . . . . . . 5,100 4.9%
Discontinued operations (551,480) (530.3%)
Repriced options. . . . 47,940 46.1%
Net operating loss. . . 152,540 1.46.7%
- 0%
---------- -----------
Reconciliation between the actual tax provision and taxes computed at the
statutory rate is as follows for the years ended June 30, 2003:
F-30
Tax Percentage
-------- -----------
Federal Tax . . . . . . $(2,331) (34.0%)
State tax . . . . . . . (411) (6.0%)
Penalties . . . . . . . 688 10.0%
Reserves. . . . . . . . 157 2.4%
Discontinued operations 552 8.0%
Repriced options. . . . 65 0.9%
Net operating loss. . . 1,280 18.7%
$ - 0%
-------- -----------
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENT
The Company leases its operating facilities under a lease agreement that expires
in March 2007. In addition, the Company leases other facilities and equipment
under operating and capital short-term leases.
Total rental expense was approximately $242 and $306 for the years ended June
30, 2004 and 2003, respectively.
Future minimum lease payments under non-cancelable capital and operating leases
with initial or remaining terms of one year or more are as follows:
Capital Leases Operating Leases
---------------- -----------------
YEAR ENDING JUNE 30,
2005. . . . . . . . . . . . . . . . . . . . $ 21 $ 123
2006. . . . . . . . . . . . . . . . . . . . 15 116
2007. . . . . . . . . . . . . . . . . . . . 11 46
2008. . . . . . . . . . . . . . . . . . . . 11 -
2009. . . . . . . . . . . . . . . . . . . . 30 -
Net Minimum Lease Payments. . . . . . . . . $ 88 $ 104
---------------- -----------------
Less: Amounts Representing Interest. . . . (15)
Present Value of Net Minimum Lease Payments 73
----------------
Less: Current Portion. . . . . . . . . . . (10)
Long-Term Portion . . . . . . . . . . . . . $ 63
----------------
LEGAL MATTERS
In October 1999, the law firms of Weiss & Yourman and Stull, Stull & Brody made
a public announcement that they had filed a lawsuit against the Company and
certain current and past officers and/or directors, alleging violation of
federal securities laws and, in November 1999, the lawsuit, filed in the name of
Nahid Nazarian Behfarin, on her own behalf and others purported to be similarly
situated, was served on the Company. In January 2003, the Company entered into
a Stipulation of Settlement with the plaintiffs. It agreed to pay the
plaintiffs 5,000,000 shares of common stock and $200 in cash. The Parties have
accepted the settlement. DRDF has issued the shares, and its insurance carrier
has paid the $200 cash payment. Pursuant to a hearing in May 2003 the Court
provided approval to the settlement.
F-31
On August 22, 2002, the Company was sued by its former landlord, Carmel Mountain
#8 Associates, L.P. or past due rent on its former facilities at 15175
Innovation Drive, San Diego, CA 92127.
DRDF was a party to a lawsuit filed by Symphony Partners, L.P. related to its
acquisition of SourceOne Group, LLC. As reported on Form 8-K, dated July 22,
2003, the plaintiffs sought payment of $702. In June 2003, the Company entered
into a settlement with the plaintiffs for a cash payment of $274, which has been
paid.
DRDF is one of dozens of companies sued by The Massachusetts Institute of
Technology, et al., related to a patent held by the plaintiffs that may be
related to part of the Company's ColorBlind software. Subsequent to the period
reported in this filing, in June 2003, the Company entered into a settlement
with the plaintiffs who have agreed to dismiss their claims against DRDF with
prejudice in exchange for a settlement fee payment of $10, which has been paid.
The Company has been sued in Illinois state court along with AIA/Mirriman, its
insurance brokers by the Arena Football League-2 ("AFS"). Damages payable to
AF2, should they win the suit, could exceed $700. The Company expects to defend
its position and rely on representations of its insurance brokers.
Throughout fiscal 2003 and 2004, and through the date of this filing, trade
creditors have made claims and/or filed actions alleging the failure of the
Company to pay its obligations to them in a total amount exceeding $3,000.
These actions are in various stages of litigation, with many resulting in
judgments being entered against the Company. Several of those who have obtained
judgments have filed judgment liens on the Company's assets. These claims range
in value from less than one thousand dollars to just over one million dollars,
with the great majority being less than twenty thousand dollars.
In connection with the Company's controlling interest of Quik Pix, Inc., the
Company is not aware of any pending litigation.
From time to time, the Company is involved in litigation relating to claims
arising out of their operations in the normal course of business.
NOTE 11 - GAIN ON EXTINGUISHMENT OF DEBT
During the year ended June 30, 2004, the Company recognized a gain on
extinguishment of debt of $1,145. This gain resulted primarily from the write
off of stale accounts payable. The Company, based upon an opinion provided by
independent legal counsel, has been released as the obligator of these
liabilities. Accordingly, management has elected to adjust its accounts payable
and to classify such adjustments as extinguishment of debt.
During the year ended June 30, 2003, the Company recognized a gain on
extinguishment of debt of $2,367. This gain resulted primarily from the write
off of stale accounts payable as discussed below, as well as a gain on a
settlement of a long-term note payable of $702, which was settled for $274 in
cash resulting in a gain of $428. With respect to the write-off of accounts
payable, the Company reviewed its accounts payable and determined that $1,942
was associated with unsecured creditors. The Company, based upon an opinion
provided by independent legal counsel, has been released as the obligator of
these liabilities. Accordingly, management has elected to adjust its accounts
payable and to classify such adjustments as extinguishment of debt.
NOTE 12 - SUBSEQUENT EVENTS
From July 1, 2004 to September 30, 2004, the Company issued 50,058,676 shares of
its common stock to consultants, for warrant exercises, for conversion of
convertible debt, and for the reduction of debt.
The Company also borrowed $245 from an investor to fund the acquisition of M&M
Nursing.
Quik Pix, Inc., issued 1,000,000 shares of its common stock for settlement of a
debt.
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