U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 2004
[_] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ____________ to ______________
For the Period Ended September 30, 2004
Commission file number 000-33415
CYBERLUX CORPORATION
(Name of Small Business Issuer in Its Charter)
Nevada 91-2048178
(State of Incorporation) (IRS Employer Identification No.)
4625 Creekstone Drive
Suite 100
Research Triangle Park
Durham, NC 27703
(Address of Principal Executive Offices)
(919) 474-9000
Issuer's Telephone Number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_]
As of September 30, 2004, the Company had 19,915,905 shares of its par value
$0.001 common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
CYBERLUX CORPORATION
INDEX
PART I FINANCIAL INFORMATION
ITEM 1 Consolidated Balance Sheets -September 30, 2004 (unaudited) and
December 31, 2003 3
Consolidated Statements of Operations - Three and Nine Months
Ended September 30, 2004 and 2003 (unaudited) and the of
Period May 17, 2000 (Date of Inception) Through September 30, 2004 4
Condensed Statement of (Deficiency) in Stockholders' Equity
For the Period From May 17, 2000 (Date of Inception) Through
September 30, 2004 5
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 2004 and 2003 (unaudited) and the Period From
May 17, 2000 (Date of Inception) Through September 30, 2004 10
Notes to Interim Financial Statements (unaudited) 12
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
ITEM 3 Controls and Procedures 27
PART II OTHER INFORMATION
ITEM 1 Legal proceedings 28
ITEM 2 Changes in securities and use of proceeds 28
ITEM 3 Defaults upon senior securities 28
ITEM 4 Submission of matters to a vote of security holders 28
ITEM 5 Other information 28
ITEM 6 Exhibits 28
SIGNATURES 30
EXHIBITS
2
ITEM 1. FINANCIAL STATEMENTS
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
SEPTEMBER 30 ,2004
(UNAUDITED) DECEMBER 31 ,2003
----------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 284,992 $ 16,247
Accounts receivable 49,297 --
----------- -----------
Total current assets 334,289 16,247
Property, plant and equipment, net of
accumulated depreciation of
$82,662 and $44,649, respectively 50,830 68,845
Other assets, net of accumulated
amortization of $7,797 and $0, respectively 216,765 236,000
Total Assets $ 601,884 $ 321,092
=========== ===========
LIABILITIES AND (DEFICIENCY) IN STOCKHOLDERS' EQUITY
Current liabilities:
Accrued interest $ 55,280 $ 104,976
Other accrued liabilities 226,628 296,388
Management fees payable - related party 272,838 996,508
Short term notes payable - shareholders 115,245 207,845
Convertible note payable (note D) 500,000 --
Short term notes payable 65,000 320,000
----------- -----------
Total current liabilities 1,234,991 1,925,717
Long Term liabilities 406,525 347,610
(Deficiency) in Stockholders' Equity:
Convertible preferred stock 801 1
Common stock 19,916 8,049
Additional paid-in capital 6,975,322 2,337,736
Subscription receivable -- (276,186)
Deficit accumulated during development stage (8,035,671) (4,021,835)
----------- -----------
(Deficiency) in stockholders' equity (1,039,632) (1,952,235)
----------- -----------
Total liabilities and (Deficiency) in Stockholders' Equity $ 601,884 $ 321,092
=========== ===========
See accompanying notes to the unaudited condensed financial information.
3
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Period
May 17, 2000
(date of
inception)
For the Three Months Ended For the Nine Ended Through
September 30, September 30, September 30,
2004 2003 2004 2003 2004
------------ ------------ ------------ ------------ ------------
Revenue $ 2,082 $ 87,375 $ 23,288 $ 87,375 $ 97,526
Cost of goods sold (15,724) (130,368) (32,111) (130,368) (194,095)
------------ ------------ ------------ ------------ ------------
Gross profit (loss) (13,642) (42,993) (8,823) (42,993) (96,569)
Operating Expenses
Depreciation and amortization 14,159 5,675 45,811 240,924 371,709
General and administrative expenses 589,083 319,289 2,505,898 880,155 5,096,206
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 603,242 324,964 2,551,709 1,121,079 5,467,915
(Loss) from Operations (616,884) (367,957) (2,560,532) (1,164,072) (5,564,484)
Other Income (expense) -- -- -- -- --
Interest Income 1 -- 63 -- 103
(935,041)
Interest Expense (598,741) (15,189) (653,367) (54,123)
Income tax (benefit) -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net Loss Before Preferred Dividend (1,215,624) (383,146) (3,213,836) (1,218,195) (6,499,422)
Preferred dividend (24,000) -- (48,000) -- (48,000)
Preferred dividend-Beneficia
conversion discount on
convertible preferred -- -- (800,000) -- (1,536,250)
Net loss attributable to
common shareholders $ (1,239,624) $ (383,146) $ (4,061,836) $ (1,218,195) $ (8,083,672)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding -
basic and fully diluted 19,388,317 7,626,979 17,080,605 7,148,468 n/a
============ ============ ============ ============ ============
Net (loss) per share - basic &
fully diluted $ (0.06) $ (0.05) $ (0.24) $ (0.17) n/a
============ ============ ============ ============ ============
See accompanying notes to the unaudited condensed financial information.
4
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE
PERIOD MAY 17,2000 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2004
STOCK DEFICIT TOTAL
SUBSCRIPTION ACCUMULATED (DEFICIENCY)
ADDITIONAL RECEIVABLE/ DURING IN
COMMON STOCK PREFERRED STOCK PAID IN RECEIVED IN DEVELOPMENT SHAREHOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL ADVANCE STAGE EQUITY
--------- --------- --------- --------- --------- --------- --------- ---------
Common shares issued in May, 2000 to
founders in exchange for cash at $0.01
per share 1,640,000 $ 1,640 -- -- $ 560 -- -- $ 2,200
Common shares issued in May, 2000 in
exchange for research and development
services valued at $.09 per share 750,000 750 -- -- 68,003 -- -- 68,753
Common shares issued in May, 2000 in
exchange for services valued @$.05
per share 875,000 875 -- -- 35,710 -- -- 36,585
Common shares issued in July, 2000 in
exchange for convertible debt at $.15
per share 288,000 288 -- -- 39,712 -- -- 40,000
Capital contributed by principal
shareholders -- -- -- -- 16,000 -- -- 16,000
Common shares issued in November, 2000
for cash in connection with private
placement $.15 per share 640,171 640 -- -- 95,386 -- -- 96,026
Common shares issued in November, 2000
in exchange for services valued @$.15
per share issued for consulting
services 122,795 123 -- -- 18,296 -- -- 18,419
Net loss -- -- -- -- -- -- (454,651) (454,651)
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2000 4,315,966 4,316 -- -- 273,667 -- (454,651) (176,668)
Common shares issued in January, 2000
in exchange for convertible debt at
$.15 per share 698,782 699 -- -- 104,118 -- -- 104,817
Stock options issued in May, 2001
valued @ $.15 per option in exchange
for services -- -- -- -- 52,500 -- -- 52,500
Warrant issued in May 2001, valued at
$0.15 per warrant in exchange for
placement of debt -- -- -- -- 75,000 -- -- 75,000
Common shares issued in September 2001
in exercise for warrant at $.15 per
share 3,000 3 -- -- 447 -- -- 450
Common shares issued in September 2001
for cash in connection with exercise
of warrant at $.10 per share 133,000 133 -- -- 13,167 -- -- 13,300
Common shares issued in November 2001
for cash in connection with exercise
of warrant at $.0001 per share 500,000 500 -- -- -- -- -- 500
Common shares issued in Nov, 01 on
exercise of options at $.0001 per share 350,000 350 -- -- -- -- -- 350
See accompanying notes to the unaudited condensed financial information.
5
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE
PERIOD MAY 17,2000 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2004
(CONTINUED)
STOCK DEFICIT TOTAL
SUBSCRIPTION ACCUMULATED (DEFICIENCY)
ADDITIONAL RECEIVABLE/ DURING IN
COMMON STOCK PREFERRED STOCK PAID IN RECEIVED IN DEVELOPMENT SHAREHOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL ADVANCE STAGE EQUITY
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Common shares issued in
December, 2001 in exchange
for convertible debt at
$.50 per share 133,961 134 -- -- 66,847 -- -- 66,981
Common shares issued in
December, 2001 in exchange
for debt at $.50 per share 17,687 17 -- -- -- -- 8,825 8,842
Net loss -- -- -- -- -- -- (636,274) (636,274)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2001 6,152,396 6,152 -- -- 594,571 -- (1,090,925) (490,202)
Common shares issued in
May, 2002 in exchange for
services valued at
$.70 per share 70,000 70 -- -- 49,928 -- -- 49,998
Common shares issued in
November, 2002 in exchange
for services valued at
$.25 per share 150,000 150 -- -- 37,350 -- -- 37,500
Common shares issued in
December, 2002 as rights
offerings at $0.25 per share 256,000 256 -- -- 63,744 -- -- 64,000
Subscription receivable
for 10,000 shares issued -- -- -- -- -- (2,500) -- (2,500)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss -- -- -- -- -- -- (700,104) (700,104)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 2002 6,628,396 6,628 -- -- 745,593 (2,500) (1,791,029) (1,041,308)
Common shares issued in
March, 2003 in connection
with exercise of options
at $.0001 per share 250,000 250 -- -- -- -- -- 250
Funds received for
stock subscription -- -- -- -- -- 2,500 -- 2,500
Common shares issued to
Cornell Capital Partners
in March 2003 in connection
with Loan Commitment valued
at $0.75 per share 300,000 300 -- -- 224,700 -- -- 225,000
Common shares issued in
March, 2003 in exchange for
services valued at
$0.75 per share 13,333 14 -- -- 9,987 -- -- 10,001
See accompanying notes to the unaudited condensed financial information.
6
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE
PERIOD MAY 17,2000 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2004
(CONTINUED)
STOCK DEFICIT TOTAL
SUBSCRIPTION ACCUMULATED (DEFICIENCY)
ADDITIONAL RECEIVABLE/ DURING IN
COMMON STOCK PREFERRED STOCK PAID IN RECEIVED IN DEVELOPMENT SHAREHOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL ADVANCE STAGE EQUITY
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Robrady Design Note was
converted into 196,120 shares
@.25 per share 196,120 196 -- -- 48,833 -- -- 49,029
Common Shares issued to Mark
Schmidt for services in June
2003. The 200,000 shares were
issued at $0.25 per share 200,000 200 -- -- 49,800 -- -- 50,000
Common shares issued to
Capital Funding Solutions
September 2003, 450,000 shares
were issued at $0.20 per share
Shares secure a sales factoring
agreement 450,000 450 -- -- 89,550 -- -- 90,000
Common shares issued in
November 2003 for consulting
services valued at $0.50 per
share 11,292 11 -- -- 5,634 -- -- 5,645
Convertible Preferred Shares
issued in December 2003 valued
at $5,000 per share, Class A -- -- 155 1 774,999 (276,186) -- 498,814
Warrants on convertible
preferred shares -- -- -- -- (347,610) -- -- (347,610)
Beneficial conversion discount
on convertible preferred shares -- -- -- -- 736,250 -- -- 736,250
Net (Loss) -- -- -- -- -- -- (2,230,806) (2,230,806)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003 8,049,141 8,049 155 1 2,337,736 (276,186) (4,021,835) (1,952,235)
Issuance of convertible
preferred shares Class B in
January 2004 for accrued
management fees at $1 per share -- -- 800,000 800 799,200 -- -- 800,000
Proceeds from subscriptions
Receivable -- -- -- -- -- 276,186 -- 276,186
Common Shares issued in
January, 2004 in exchange for
services at $0.37 per share 260,000 260 -- -- 95,940 -- -- 96,200
Common Shares issued in January
2004 in exchange for services
at $0.37 per share 225,000 225 -- -- 83,025 -- -- 83,250
Common Shares issued in January
2004 in exchange for services
valued at $0.37 per share 2,100,000 2,100 -- -- 774,900 -- -- 777,000
See accompanying notes to the unaudited condensed financial information.
7
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE
PERIOD MAY 17,2000 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2004
(CONTINUED)
STOCK DEFICIT TOTAL
SUBSCRIPTION ACCUMULATED (DEFICIENCY)
ADDITIONAL RECEIVABLE/ DURING IN
COMMON STOCK PREFERRED STOCK PAID IN RECEIVED IN DEVELOPMENT SHAREHOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL ADVANCE STAGE EQUITY
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Shares issued for note
payable at $0.25 in
January 2004 110,764 111 -- -- 27,580 -- -- 27,691
Shares issued for
consulting services
at $0.21 per share 1,200,000 1,200 -- -- 250,800 -- -- 252,000
Beneficial conversion
discount-preferred stock
dividend with respect
to convertible preferred
shares Class B -- -- -- -- 800,000 -- -- 800,000
Net loss -- -- -- -- -- -- (2,268,934) (2,268,934)
BALANCE AT MARCH 31, 2004 11,944,905 $ 11,945 800,155 $ 801 $ 5,169,181 $ -- $(6,290,769) $(1,108,842)
Warrants issued in
exchange for Services,
April 2004 -- -- -- -- 243,000 -- -- 243,000
Common shares canceled
for return of collateral
deposit with factor (450,000) (450) -- -- (89,550) -- -- (90,000)
Common shares issued for
cash in private placement
at $0.10 per share, May 2004 5,310,000 5,310 -- -- 525,690 -- -- 531,000
Class A Preferred shares
issued for cash at $5,000
per share, May 2004 -- -- 15.861 -- 79,308 -- -- 79,308
Warrants on convertible
preferred shares
Class A shares -- -- -- -- (58,915) -- -- (58,915)
Common shares issued in
exchange for note payable
at $0.10 per share,
June, 2004 50,000 50 -- -- 4,950 -- -- 5,000
Common Shares issued in
exchange for services
valued at $0.10 per share,
June 2004 1,560,000 1,560 -- -- 154,440 -- -- 156,000
Common Shares issued 2004
in exchange for services
valued at $0.10 per share,
June 2004 200,000 200 -- -- 19,800 -- -- 20,000
Subscriptions received in
advance for shares to
be issued -- -- -- -- -- 22,500 -- 22,500
Common Shares issued in
exchange for services
adjusted for issue prices -- -- -- -- (44,640) -- -- (44,640)
Net (Loss) -- -- -- -- -- -- (529,279) (529,279)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT JUNE 30, 2004 18,614,905 $ 18,615 800,171 $ 801 $ 6,003,264 $ 22,500 $(6,820,048) $ (774,868)
=========== =========== =========== =========== =========== =========== =========== ===========
See accompanying notes to the unaudited condensed financial information.
8
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF DEFICIENCY IN STOCKHOLDER'S EQUITY FOR THE
PERIOD MAY 17,2000 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2004
(CONTINUED)
STOCK DEFICIT TOTAL
SUBSCRIPTION ACCUMULATED (DEFICIENCY)
ADDITIONAL RECEIVABLE/ DURING IN
COMMON STOCK PREFERRED STOCK PAID IN RECEIVED IN DEVELOPMENT SHAREHOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL ADVANCE STAGE EQUITY
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Common shares issued in
exchange for services valued at
$0.40 per share, July, 2004 100,000 100 -- -- 39,900 -- -- 40,000
Common shares issued for cash
in private placement at $0.10
per share, July 2004 100,000 100 -- -- 9,900 (10,000) -- --
Common shares issued for
conversion of convertible
preferred A shares, August 2004 200,000 200 (4) -- (200) -- -- --
Common shares issued for
exercise of warrants at $0.25
per share, August 2004 701,000 701 -- -- 174,549 (12,500) -- 162,750
Warrants issued to consultants
for services -- -- -- -- 106,173 -- -- 106,173
Beneficial conversion feature
of convertible notes (Note D) -- -- -- -- 500,000 -- -- 500,000
Value of warrants attached to
convertible notes (Note D) -- -- -- -- 91,937 -- -- 91,937
Common shares issued for
exercise of warrants at $0.25
per share, September 2004 200,000 200 -- -- 49,800 -- -- 50,000
Net (Loss) -- -- -- -- -- -- (1,215,624) (1,215,624)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 2004 19,915,905 $ 19,916 800,167 $ 801 $ 6,975,322 $ -- $(8,035,672) $(1,039,631)
=========== =========== =========== =========== =========== =========== =========== ===========
See accompanying notes to the unaudited condensed financial information.
9
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Period
May 17, 2000
(date of
inception)
For the Nine Months Ended Through
September 30, September 30,
2004 2003 2004
----------- ----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) available to common stockholders $(4,013,836) $(1,218,195) $(8,035,671)
Depreciation and amortization 45,811 240,924 371,708
Beneficial conversion discount - preferred
stock dividend 800,000 -- 1,536,250
Amortization of debt discount - beneficial
conversion feature of convertible note (Note D) 500,000 -- 500,000
Amortization of debt discount - value of
warrants attached to convertible note (Note D) 91,937 -- 91,937
Stock options issued for consulting services -- 60,000 107,504
Shares issued for previously incurred debt 32,691 9,030 81,721
Warrants issued to consultants for services 349,173 -- 349,173
Shares issued/(canceled) for factoring deposit (90,000) 90,000 --
Loan extension write off -- -- 25,000
Preferred shares issued for conversion of
accrued management fees 723,670 -- 723,670
Preferred shares issued for previously
incurred debt 76,330 -- 76,330
Accrued expenses relating to escrow deposits -- 20,000 23,814
Shares issued for consulting services 1,367,810 -- 1,540,960
Share issued for research and development -- -- 68,753
(Increase)/ decrease in accounts receivable (11,862) -- (11,862)
(Increase)/ decrease in Due From Factor, net -- (18,710) --
(Increase) / decrease in inventory -- (8,208) --
Decrease (increase) in deposit -- 8,614 --
(Increase) decrease in prepaid expenses (89,101) -- (89,101)
(Increase) / decrease in other assets 63,105 -- (172,895)
Increase (decrease) in accrued interest (49,696) 21,041 55,280
(Decrease) increase in management fee payable
- related party (723,670) 424,418 272,838
Increase in accounts payable (69,760) 314,878 226,628
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (997,398) (56,208) (2,257,963)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (19,998) (33,000) (133,492)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (19,998) (33,000) (133,492)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments for) / proceeds from short-term
notes payable, net (255,000) -- 212,455
Proceeds from short-term notes
payable-shareholders (net) (92,600) 72,000 115,245
Issuance of preferred stock 79,308 -- 554,307
Capital contributed by shareholders 276,186 -- 292,186
Increase in convertible notes payable 500,000 -- 500,000
Receipts from subscriptions receivable -- 2,500 --
Issuance of common stock 778,247 250 1,002,254
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,286,141 74,750 2,676,447
----------- ----------- -----------
See accompanying notes to the unaudited condensed financial information.
10
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
Net increase in cash 268,,745 (14,458) 284,992
----------- ----------- -----------
Cash - beginning 16,247 26,086 --
----------- ----------- -----------
Cash - ending $ 284,992 $ 11,628 $ 284,992
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid 111,126 18,202 162,026
Income taxes paid -- -- --
Non Cash investing and financing activities:
Shares issued for research and development and
consulting $ -- $ -- $ 106,253
Shares issued for conversion of debt 32,691 9,030 346,384
Warrants issued in connection with financing -- -- 75,000
Warrants issued to consultants for services 349,173 -- 349,173
Options issued in connection with services -- -- 52,500
Shares issued in connection with services 1,367,810 60,000 1,540,960
Shares issued in connection with loan -- 225,000 225,000
Shares issued in connection with factoring (90,000) 90,000 --
Warrants issued (detachable) with convertible
preferred share 58,915 -- 406,525
Amortization of debt discount - beneficial
conversion feature of convertible note (Note D) 500,000 -- 500,000
Amortization of debt discount - value of
warrants attached to convertible note (Note D) 91,937 -- 91,937
Beneficial conversion discount on convertible
preferred shares 800,000 -- 1,536,250
Convertible preferred shares issued for
previously incurred debt 76,330 -- 76,330
Convertible preferred shares issued for
accrued management fees 723,670 -- 723,670
See accompanying notes to the unaudited condensed financial information
11
CYBERLUX CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
GENERAL
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Accordingly, the results from operations for the three-month period ended
September 30, 2004, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2004. The unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated December 31, 2003 financial statements and footnotes thereto
included in the Company's SEC Form 10-KSB.
BUSINESS AND BASIS OF PRESENTATION
Cyberlux Corporation (the "Company") is in the development stage and its effort
have been principally devoted to seeking profitable business opportunities. To
date the Company has incurred expenses and has sustained losses. Consequently,
its operations are subject to all risks inherent in the establishment of a new
business enterprise. For the period from inception through September 30 2004,
the Company has accumulated losses of $8,035,671.
STOCK BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended December 31, 2002 and
subsequent years.
12
NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note E):
For the three months ended For the nine months ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss attributable to common stockholders - $(1,239,624) $ (383,146) $(4,061,836) $(1,218,195)
as reported
Add: Total stock based employee compensation
expense as reported under intrinsic value method -- -- -- --
(APB. No. 25)
Deduct: Total stock based employee compensation
expense as reported under fair value based
method (SFAS No. 123) -- -- -- --
----------- ----------- ----------- -----------
Net loss - Pro Forma $(1,239,624) $ (383,146) $(4,061,836) $(1,218,195)
Net loss attributable to common stockholders - $(1,239,624) $ (383,146) $(4,061,836) $(1,218,195)
Pro forma
Basic (and assuming dilution) loss
per share - as reported $ (0.06) $ (0.05) $ (0.24) $ (0.17)
Basic (and assuming dilution)
loss per share - Pro forma $ (0.06) $ (0.05) (0.24) (0.17)
NEW ACCOUNTING PRONOUNCEMENTS
On June 30, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, Share-Based Payment, an amendment of FASB Statements No. 123
and 95, that would require companies to account for stock-based compensation to
employees using a fair value method as of the grant date. The proposed statement
addresses the accounting for transactions in which a Company receives employee
services in exchange for equity instruments such as stock options, or
liabilities that are based on the fair value of the Company's equity instruments
or that may be settled through the issuance of such equity instruments, which
includes the accounting for employee stock purchase plans. This proposed
statement would eliminate a Company's ability to account for share-based awards
to employees using APB Opinion 25, Accounting for Stock Issued to Employees but
would not change the accounting for transactions in which a company issues
equity instruments for services to non-employees or the accounting for employee
stock ownership plans. The proposed statement, if adopted, would be effective
for awards that are granted, modified, or settled in fiscal years beginning
after December 15, 2004. The Company is in the process of assessing the
potential impact of this proposed statement to the financial statements.
NOTE B - COMMON STOCK
In January, 2004, the Company collected the balance of its previously recognized
subscriptions receivable of $276,186.
In January, 2004, the Company issued 260,000 shares of its common stock in
exchange for services totaling $96,200. The stock issued was valued at
approximately $0.37 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In January, 2004, the Company issued 225,000 shares of its common stock in
exchange for services totaling $83,250. The stock issued was valued at
approximately $.0.37 per share, which represents the fair value of the stock
issued, which did not differ materially from the value of the services rendered.
In January, 2004, the Company issued 2,100,000 shares of its common stock in
exchange for services totaling $777,000. The stock issued was valued at
approximately $0.37 per share, which represents the fair value and which did not
differ materially from the value of the services rendered.
In January, 2004, the holder of a $27,691 note payable exchanged the unpaid
principal together with accrued interest for 110,764 shares at $0.25 per share
of the Company's common stock.
In January, 2004, the Company issued 1,200,000 shares of its common stock for
cash at $0.21 per share for $252,000.
13
NOTE B - COMMON STOCK (CONTINUED)
In April, 2004 the Company received back and cancelled 450,000 shares of common
stock for return of collateral deposit with a creditor previously valued at
$90,000.
During the period ended June 30, 2004, the Company issued warrants to
consultants for services for $243,000 which represents the fair value of the
warrants issued, which did not differ materially from the value of the services
rendered.
In May, 2004 the Company issued 5,310,000 shares of common stock at $0.10 per
share for private placement for cash. In connection with the offering , the
investors received a warrant to purchase the Company's common stock for each
share of common stock purchased ( "Class A Warrants ") The warrants have an
exercise price of $0.25 per share and expire June 30, 2004.
In May, 2004 the Company issued 50,000 shares of common stock at $0.10 per share
on conversion of notes payable.
In June, 2004 the Company issued 1,760,000 shares of common stock in exchange
for services rendered to the Company valued at $176,000. The shares were issued
at $0.10 per share which represents the fair value of the stock issued which did
not materially differ from the value of the services rendered.
In June 2004, the Company received cash $22,500 in connection with a
subscription to acquire shares of the Company's common stock. In July 2004, the
Company issued 100,000 shares of common stock at $0.10 per share.
In July, 2004 the Company issued 100,000 shares of common stock in exchange for
services rendered to the Company valued at $40,000. The shares were issued at
$0.40 per share which represents the fair value of the stock issued which did
not materially differ from the value of the services rendered.
In August 2004, the Company issued 701,000 shares of common stock against
exercise of warrants at $0.25 per share for $150,250 in cash and balance $12,500
was adjusted out of cash received in June 2004.
In August 2004, the Company issued 200,000 shares of common stock for exercise
of warrants at $0.25 per share for cash.
In August 2004, holders of 4 preferred shares series A exercised their rights to
convert into 200,000 shares of common stock.
In September 2004, the Company recognized and measured an aggregate of $500,000
of the proceeds, which is equal to the intrinsic value of the imbedded
beneficial conversion feature, to additional paid in capital and expensed as
interest.
In September 2004, the Company recognized the value attributable to the warrants
in the amount of $91,937 to additional paid in capital and as interest expenses.
During the three months ended September 30, 2004, the Company issued warrants to
consultants for services for $106,173 which represents the fair value of the
warrants issued, which did not differ materially from the value of the services
rendered.
14
NOTE C - CONVERTIBLE PREFERRED STOCK
SERIES A PREFERRED STOCK
In May 2004, the Company issued 15.861 Series A Preferred shares, par value
$0.001 per share, at $5,000 per share in exchange for $79,308. The Series A
Preferred shares are convertible at the option of the holder to 50,000 shares of
the Company's common stock for each share of Series A Preferred stock. The
Series A Preferred holders also received two (2) warrants ("Series A and Series
B Warrants") to purchase 50,000 shares of Common Stock, per warrant, for each
share of Series A Preferred (or fraction thereof) issued. The Series A Warrants
shall have an exercise price per share equal to $0.25 and shall expire in three
(3) years. The Series B Warrants shall have an exercise price per share equal to
$1.05 and shall expire five (5) years, subject to the number of number of shares
acquired pursuant to the Series A Warrants. In August 2004, holders of 4
preferred shares series A exercised their rights to convert into 200,000 shares
of common stock.
SERIES B PREFERRED STOCK
In January, 2004, the Company issued 800,000 shares of its preferred stock B in
lieu of certain accrued management services fee payable and notes payable
including interest payable thereon totaling $800,000 to officers of the company
The stock issued was valued at approximately $1.00 per share, which represents
the fair value of the stock. The shares of preferred stock are convertible into
common shares at $0.20 per share which was amended in April 2004 to $0.10 per
share. In connection with the transaction, the Company recorded beneficial
conversion discount of $800,000 - preferred dividend relating to the issuance of
convertible preferred stock.
NOTE D - CONVERTIBLE NOTES PAYABLE
A summary of convertible notes payable at September 30, 2004 is as follows:
On September 23, 2004, interest at 10%, mature two years from the date of
issuance, and are convertible into the Company's common stock, at the lower
of a)$0.72; b)50% of the average of the three lowest intraday trading prices
for the common stock.. The full principal amount of the secured convertible notes
is due upon a default under the terms of secured convertible notes. The note is
secured on substantially all of the Company's assets, including the assets of
wholly owned subsidiaries, and intellectual property. During the period ended $ 500,000
September 30, 2004, a total of $0 of convertible note was converted to common
stock of the Company.
Less: current portion 500,000
---------
$ --
=========
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for
Convertible Securities with a Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded
beneficial conversion feature present in the convertible note. The Company
allocated a portion of the proceeds equal to the intrinsic value of that feature
to additional paid in capital. During the period ended September 30, 2004, the
Company recognized and measured an aggregate of $500,000 of the proceeds, which
is equal to the intrinsic value of the imbedded beneficial conversion feature,
to additional paid in capital and a discount against the convertible note. The
debt discount attributed to the beneficial conversion feature is expensed
immediately as interest expense since note can be converted in to common shares
at any time.
15
NOTE D - CONVERTIBLE NOTES PAYABLE (CONTINUED)
In connection with the placement of the convertible note, the Company issued
non-detachable warrants granting the holders the right to acquire 750,000 shares
of the Company's common stock at $0.50 per share. In accordance with Emerging
Issues Task Force Issue 00-27, Application of Issue No. 98-5 to Certain
Convertible Instruments ("EITF - 0027"), the Company recognized the value
attributable to the warrants in the amount of $91,937 to additional paid in
capital and a discount against the convertible note. The Company valued the
warrants in accordance with EITF 00-27 using the Black-Scholes pricing model and
the following assumptions: contractual terms of 5 years, an average risk free
interest rate of 1.01%, a dividend yield of 0%, and volatility of 127%. The debt
discount attributed to the value of the warrants issued is expensed as interest
expense.
NOTE E - WARRANTS TO PURCHASE COMMON STOCK
The following condensed table summarizes the changes in warrants outstanding and
the related prices for the shares of the Company's common stock issued to
consultants and shareholders at September 30, 2004.
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
-------------------- --------------------
WEIGHTED AVERAGE WEIGHED WEIGHTED
NUMBER REMAINING CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ------------ -------------- ----------- --------------
$ 0.10 91,500 5 $ 0.10 91,500 $ 0.10
0.20 705,000 4 0.20 705,000 0.20
0.25 10,101,564 3 0.25 10,101,564 0.25
0.50 1,050,000 4 0.50 1,050,000 0.50
1.05 8,643,064 3 1.05 8,643,064 1.05
---------- ----------
20,591,128 2.86 20,591,128
========== ==== ==========
Transactions involving the Company's warrant issuance are summarized as follows:
Number of Weighted Average
Shares Price Per Share
------ ---------------
Outstanding at December 31, 2003 15,895,000 $ 0.25
Granted 4,696,128 $ 0.36
Exercised -- --
Canceled or expired -- --
---------- ----------
Outstanding at June 30, 2004 20,591,128 $ 0.60
========== ==========
The weighted-average fair value of warrants granted to consultants during the
period ended September 30, 2004 and 2003 and the weighted-average significant
assumptions used to determine those fair values, using a Black-Scholes option
pricing model are as follows:
2004 2003
---------- ----------
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 1.01% n/a
Expected stock price volatility 127% n/a
Expected dividend payout -- --
Expected option life-years (a) 3- 4 years n/a
(a) The expected option life is based on contractual expiration dates
The estimated value of the warrants granted to consultants was in lieu of cash
compensation for services performed. The amount of the expense charged to
operations in connection with granting the warrants to consultants was $349,173
and $0 during the period ended September 30, 2004 and 2003, respectively.
16
NOTE F - COMMITMENTS AND CONTIGENCIES
On September 23, 2004, the Company entered into a Securities Purchase Agreement
with investors for the sale of (i) $1,500,000 in secured convertible notes and
(ii) warrants to purchase 2,250,000 shares of Company's common stock. The
secured convertible notes bear interest at 10%, mature two years from the date
of issuance, and are convertible into Company's common stock, at the investors'
option, at the lower of a)$0.72; b)50% of the average of the three lowest
intraday trading prices for the common stock on the Over-The-Counter Bulletin
Board for the 20 trading days before but not including the conversion date. The
full principal amount of the secured convertible notes are due upon a default
under the terms of secured convertible notes. In addition, the Company granted
the investors a security interest in substantially all of Company's assets,
including the assets of Company's wholly owned subsidiaries, and intellectual
property. The warrants are exercisable until five years from the date of
issuance at a purchase price of $0.50 per share. The investors may exercise the
warrants on a cashless basis if the shares of common stock underlying the
warrants are not then registered pursuant to an effective registration
statement. In the event the investors exercise the warrants on a cashless basis,
then we will not receive any proceeds. In addition, the exercise price of the
warrants will be adjusted in the event we issue common stock at a price below
market, with the exception of any securities issued as of the date of the
warrants or issued in connection with the secured convertible notes issued
pursuant to the Securities Purchase Agreement. As of September 30 2004, the
Company has received $500,000 for convertible note payable.
NOTE G - SUBSEQUENT EVENTS
Company's plan to increase the number of authorized shares of common stock from
100,000,000 shares to 300,000,000 shares.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion contains forward-looking statements that are subject to
significant risks and uncertainties about us, our current and planned products,
our current and proposed marketing and sales, and our projected results of
operations. There are several important factors that could cause actual results
to differ materially from historical results and percentages and results
anticipated by the forward-looking statements. The Company has sought to
identify the most significant risks to its business, but cannot predict whether
or to what extent any of such risks may be realized nor can there be any
assurance that the Company has identified all possible risks that might arise.
Investors should carefully consider all of such risks before making an
investment decision with respect to the Company's stock. The following
discussion and analysis should be read in conjunction with the financial
statements of the Company and notes thereto. This discussion should not be
construed to imply that the results discussed herein will necessarily continue
into the future, or that any conclusion reached herein will necessarily be
indicative of actual operating results in the future. Such discussion represents
only the best present assessment from our Management.
GENERAL OVERVIEW
We are in the development stage and our efforts have been principally
devoted to designing, developing manufacturing and marketing advanced lighting
systems that utilize white (and other) light emitting diodes as illumination
elements.
We are developing and marketing new product applications of diodal
illumination(TM) that demonstrate added value over traditional lighting systems.
Using proprietary technology, we are creating a family of products for emergency
and security lighting offer extended light life and greater cost effectiveness
than other existing forms of illumination. We are expanding our marketing
activity into channels of retail, commercial and institutional sales.
Our target markets include long-term interim lighting needs in hotels,
hospitals, nursing homes, airports, shopping centers and multiple family
complexes; long-term evacuation solutions for theaters, office and public
buildings; reduced maintenance cost solutions for property managers as applied
to walkway, corridor or landscape lighting; and certain sensitive applications
for the military.
On April 27, 2004, we received an initial purchase order from the City of
Cleveland for the pilot phase implementation of our Emergency Lighting
Augmentation System project. The nature and purpose of our Emergency Lighting
Augmentation System is its ability to provide up to 60 hours of light in
bathrooms, stairwells, elevators, corridors, equipment rooms and interior
offices from its custom constant charge battery pack and expandable lighting
element configuration. The system retrofits into existing fluorescent fixtures
where its patented sensor differentiates between power off at a wall switch and
a power outage in the building's electrical system. We concluded the pilot phase
in June 2004 and are working on proposals to extend our installation of our
Emergency Lighting Augmentation System for the Cleveland municipality including
the Cleveland Hopkins International Airport.
During the second quarter of 2004, we met with officials from the State of
New York who expressed interest in our long-term interim lighting solutions. We
also met with security administrators of the Metropolitan Transit Authority and
the Port Authority in the City of New York. The Metropolitan Transit Authority
requested that we submit a proposal to provide long term interim lighting pilot
installations in New York City's subway system to include passenger platforms,
rail cars and tunnel accesses. We anticipate a similar proposal request from the
Port Authority relative to Newark, LaGuardia and JFK airports and the Port
Authority Holland Tunnel system.
Although, we have been focused on emergency lighting due to power grid
failures and blackout concerns expressed by Homeland Security officials, we have
also made advances from the retail segment of our business. For the Christmas
retail season, we are developing a camping light positioning and are marketing
the "CampLamp" to major national retailers. In addition, our Home Safety Light
is continuing to gain sales acceptance across the broad retail channel and we
anticipate launching the next generation of Home Safety Light for the Christmas
season.
18
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires us
to make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our consolidated financial statements; we believe the following
critical accounting policies involve the most complex, difficult and subjective
estimates and judgments:
o stock-based compensation; and
o revenue recognition.
STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148 - Accounting for
Stock-Based Compensation - Transition and Disclosure. This statement amends SFAS
No. 123 - Accounting for Stock-Based Compensation, providing alternative methods
of voluntarily transitioning to the fair market value based method of accounting
for stock based employee compensation. FAS 148 also requires disclosure of the
method used to account for stock-based employee compensation and the effect of
the method in both the annual and interim financial statements. The provisions
of this statement related to transition methods are effective for fiscal years
ending after December 15, 2002, while provisions related to disclosure
requirements are effective in financial reports for interim periods beginning
after December 31, 2002.
The Company elected to continue to account for stock-based compensation
plans using the intrinsic value-based method of accounting prescribed by APB No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Under the provisions of APB No. 25, compensation expense is measured at the
grant date for the difference between the fair value of the stock and the
exercise price.
REVENUE RECOGNITION
For revenue from product sales, the Company recognizes revenue in
accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the selling price is fixed
and determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectibility of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue for which
the product has not been delivered or is subject to refund until such time that
the Company and the customer jointly determine that the product has been
delivered or no refund will be required.
RESULTS OF OPERATIONS
REVENUES
We have generated operating revenues from operations of $97,526 from our
inception. We believe we will begin earning revenues from operations in our
second year of actual operation as the Company transitions from a development
stage company to that of an active growth and acquisition stage company
COSTS AND EXPENSES
From our inception through September 30, 2004, we have generated revenues of
$97,526 from operations. We have incurred losses of $6,499,422 during this
period. These expenses were associated principally with equity-based
compensation to employees and consultants, product development costs and
professional services.
19
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, we had a working capital deficit of $900,702. As a
result of our operating losses from our inception through September 30, 2004, we
generated a cash flow deficit of $2,257,963 from operating activities. Cash
flows used in investing activities was $133,492 during the period May 17, 2000
(date of our inception) through September 30, 2004. We met our cash requirements
during this period through the private placement of $1,848,747, through the
issuance of our common and preferred stock, and $712,455 from the issuance of
notes payable and advances of $115,245, net of repayments, to our officers and
shareholders and advances.
While we have raised capital to meet our working capital and financing needs in
the past, additional financing is required in order to meet our current and
projected cash flow deficits from operations and development.
By adjusting our operations and development to the level of capitalization, we
believe we have sufficient capital resources to meet projected cash flow
deficits through the next twelve months. However, if thereafter, we are not
successful in generating sufficient liquidity from operations or in raising
sufficient capital resources, on terms acceptable to us, this could have a
material adverse effect on our business, results of operations, liquidity and
financial condition.
Our independent certified public accountant has stated in their report included
in our December 31, 2003 Form 10-KSB, as amended, that we have incurred
operating losses in the last two years, and that we are dependent upon
management's ability to develop profitable operations. These factors among
others may raise substantial doubt about our ability to continue as a going
concern.
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors on September 23, 2004 for the
sale of (i) $1,500,000 in secured convertible notes and (ii) warrants to buy
2,250,000 shares of our common stock. We filed a registration statement
pertaining to the resale of the common stock underlying these secured
convertible notes and warrants was filed on October 13, 2004. The investors are
obligated to provide us with an aggregate of $1,500,000 as follows:
o $500,000 was disbursed on September 23, 2004;
o $500,000 was disbursed on October 20; and
o $500,000 will be disbursed within five days of the registration
statement being declared effective.
Accordingly, we have received a total of $1,000,000 pursuant to the Securities
Purchase Agreement. The proceeds received from the sale of the secured
convertible notes will be used for business development purposes, working
capital needs, pre-payment of interest, payment of consulting and legal fees and
purchasing inventory.
The secured convertible notes bear interest at 10%, mature two years from the
date of issuance, and are convertible into our common stock, at the investors'
option, at the lower of (i) $0.72 or (ii) 50% of the average of the three lowest
intraday trading prices for the common stock on a principal market for the 20
trading days before but not including the conversion date. The full principal
amount of the secured convertible notes is due upon default under the terms of
secured convertible notes. The warrants are exercisable until five years from
the date of issuance at a purchase price of $0.50 per share. In addition, the
conversion price of the secured convertible notes and the exercise price of the
warrants will be adjusted in the event that we issue common stock at a price
below the fixed conversion price, below market price, with the exception of any
securities issued in connection with the Securities Purchase Agreement. The
conversion price of the secured convertible notes and the exercise price of the
warrants may be adjusted in certain circumstances such as if we pay a stock
dividend, subdivide or combine outstanding shares of common stock into a greater
or lesser number of shares, or take such other actions as would otherwise result
in dilution of the selling stockholder's position. The selling stockholders have
contractually agreed to restrict their ability to convert or exercise their
warrants and receive shares of our common stock such that the number of shares
of common stock held by them and their affiliates after such conversion or
exercise does not exceed 4.9% of the then issued and outstanding shares of
common stock. In addition, we have granted the investors a security interest in
substantially all of our assets and intellectual property and registration
rights.
20
Since the conversion price will be less than the market price of the common
stock at the time the secured convertible notes are issued, we anticipate
recognizing a charge relating to the beneficial conversion feature of the
secured convertible notes during the quarter in which they are issued, including
the third quarter of fiscal 2004 when $500,000 of secured convertible notes were
issued.
We will still need additional investments in order to continue operations to
cash flow break even. Additional investments are being sought, but we cannot
guarantee that we will be able to obtain such investments. Financing
transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. However, the trading price of
our common stock and the downturn in the U.S. stock and debt markets could make
it more difficult to obtain financing through the issuance of equity or debt
securities. Even if we are able to raise the funds required, it is possible that
we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force
us to seek alternative financing. Further, if we issue additional equity or debt
securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. If additional financing is not available
or is not available on acceptable terms, we will have to curtail our operations
again.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
On June 30, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, Share-Based Payment, an amendment of FASB Statements No. 123
and 95, that would require companies to account for stock-based compensation to
employees using a fair value method as of the grant date. The proposed statement
addresses the accounting for transactions in which a Company receives employee
services in exchange for equity instruments such as stock options, or
liabilities that are based on the fair value of the Company's equity instruments
or that may be settled through the issuance of such equity instruments, which
includes the accounting for employee stock purchase plans. This proposed
statement would eliminate a Company's ability to account for share-based awards
to employees using APB Opinion 25, Accounting for Stock Issued to Employees but
would not change the accounting for transactions in which a company issues
equity instruments for services to non-employees or the accounting for employee
stock ownership plans. The proposed statement, if adopted, would be effective
for awards that are granted, modified, or settled in fiscal years beginning
after December 15, 2004. The Company is in the process of assessing the
potential impact of this proposed statement to the financial statements.
NON-GAAP FINANCIAL MEASURES
The financial statements appearing in this quarterly report on Form 10-QSB do
not contain any financial measures which are not in accordance with generally
accepted accounting procedures.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), as revised December 2003. This
interpretation of Accounting Research Bulletin No. 51, Condensed Consolidated
Financial Statements, addresses consolidation by business enterprises of
variable interest entities (VIEs) that either: (1) do not have sufficient equity
investment at risk to permit the entity to finance its activities without
additional subordinated financial support, or (2) the equity investors lack an
essential characteristic of a controlling financial interest. This
interpretation applies immediately to VIEs created after January 31, 2003. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to VIEs in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The application of FIN 46 did not have a material
effect on our consolidated financial statements.
INFLATION
In the opinion of management, inflation has not had a material effect on the
Company's financial condition or results of its operations
21
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not maintain off-balance sheet arrangements nor does it
participate in non-exchange traded contracts requiring fair value accounting
treatment.
TRENDS, RISKS AND UNCERTAINTIES
We have sought to identify what we believe to be the most significant risks to
our business, but we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to our Common Stock.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
We provide the following cautionary discussion of risks, uncertainties and
possible inaccurate assumptions relevant to our business and our products. These
are factors that we think could cause our actual results to differ materially
from expected results. Other factors besides those listed here could adversely
affect us.
WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE, WHICH MAY NEGATIVELY IMPACT OUR
ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES.
We incurred net losses of $1,494,556 for the year ended December 31, 2003
and $1,336,970 for the year ended December 31, 2002. For the three months ended
September 30, 2004, we incurred a net loss of $1,239,624. We cannot assure you
that we can achieve or sustain profitability on a quarterly or annual basis in
the future. Our operations are subject to the risks and competition inherent in
the establishment of a business enterprise. There can be no assurance that
future operations will be profitable. Revenues and profits, if any, will depend
upon various factors, including whether we will be able to continue expansion of
our revenue. We may not achieve our business objectives and the failure to
achieve such goals would have an adverse impact on us.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING OUR BUSINESS OPERATIONS WILL BE
HARMED AND IF WE DO OBTAIN ADDITIONAL FINANCING OUR THEN EXISTING SHAREHOLDERS
MAY SUFFER SUBSTANTIAL DILUTION.
We will require additional funds to sustain and expand our sales and
marketing activities. We anticipate that we will require up to approximately
$900,000 to fund our continued operations for the next twelve months, depending
on revenue from operations. Additional capital will be required to effectively
support the operations and to otherwise implement our overall business strategy.
There can be no assurance that financing will be available in amounts or on
terms acceptable to us, if at all. The inability to obtain additional capital
will restrict our ability to grow and may reduce our ability to continue to
conduct business operations. If we are unable to obtain additional financing, we
will likely be required to curtail our marketing and development plans and
possibly cease our operations. Any additional equity financing may involve
substantial dilution to our then existing shareholders.
OUR INDEPENDENT AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO
CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN FUTURE
FINANCING.
In their report dated April 6, 2004, our independent auditors stated that
our financial statements for the year ended December 31, 2003 were prepared
assuming that we would continue as a going concern. Our ability to continue as a
going concern is an issue raised as a result of losses for the years ended
December 31, 2003 and 2002 in the amounts of $1,494,556 and 1,336,970,
respectively. We continue to experience net operating losses. Our ability to
continue as a going concern is subject to our ability to generate a profit
and/or obtain necessary funding from outside sources, including obtaining
additional funding from the sale of our securities, increasing sales or
obtaining loans and grants from various financial institutions where possible.
Our continued net operating losses increases the difficulty in meeting such
goals and there can be no assurances that such methods will prove successful.
22
IF WE ARE UNABLE TO RETAIN THE SERVICES OF MESSRS. EVANS, SCHMIDT OR RINGO, OR
IF WE ARE UNABLE TO SUCCESSFULLY RECRUIT QUALIFIED MANAGERIAL AND SALES
PERSONNEL HAVING EXPERIENCE IN BUSINESS, WE MAY NOT BE ABLE TO CONTINUE OUR
OPERATIONS.
Our success depends to a significant extent upon the continued service of
Mr. Donald F. Evans, our Chief Executive Officer, Mr. Mark D. Schmidt, our
President and Mr. John Ringo, our Secretary and Corporate Counsel. Loss of the
services of Messrs. Evans, Schmidt or Ringo could have a material adverse effect
on our growth, revenues, and prospective business. We do not maintain key-man
insurance on the life of Messrs. Evans or Ringo. In addition, in order to
successfully implement and manage our business plan, we will be dependent upon,
among other things, successfully recruiting qualified managerial and sales
personnel having experience in business. Competition for qualified individuals
is intense. There can be no assurance that we will be able to find, attract and
retain existing employees or that we will be able to find, attract and retain
qualified personnel on acceptable terms.
OUR PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS OWN A CONTROLLING INTEREST IN
OUR VOTING STOCK AND INVESTORS WILL NOT HAVE ANY VOICE IN OUR MANAGEMENT.
Our officers and directors, in the aggregate, hold approximately 83.3% of
the voting rights of all outstanding shares of capital stock. As a result, these
stockholders, acting together, will have the ability to control substantially
all matters submitted to our stockholders for approval, including:
o election of our board of directors;
o removal of any of our directors;
o amendment of our certificate of incorporation or bylaws; and
o adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving
us.
As a result of their ownership and positions, our directors and executive
officers collectively are able to influence all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. In addition, sales of significant amounts of shares held
by our directors and executive officers, or the prospect of these sales, could
adversely affect the market price of our common stock. Management's stock
ownership may discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
MANY OF OUR COMPETITORS ARE LARGER AND HAVE GREATER FINANCIAL AND OTHER
RESOURCES THAN WE DO AND THOSE ADVANTAGES COULD MAKE IT DIFFICULT FOR US TO
COMPETE WITH THEM.
The lighting and illumination industry is extremely competitive and
includes several companies that have achieved substantially greater market
shares than we have, and have longer operating histories, have larger customer
bases, and have substantially greater financial, development and marketing
resources than we do. If overall demand for our products should decrease it
could have a materially adverse affect on our operating results.
OUR TRADEMARK AND OTHER INTELLECTUAL PROPERTY RIGHTS MAY NOT BE ADEQUATELY
PROTECTED OUTSIDE THE UNITED STATES, RESULTING IN LOSS OF REVENUE.
We believe that our trademarks, whether licensed or owned by us, and other
proprietary rights are important to our success and our competitive position. In
the course of our international expansion, we may, however, experience conflict
with various third parties who acquire or claim ownership rights in certain
trademarks. We cannot assure that the actions we have taken to establish and
protect these trademarks and other proprietary rights will be adequate to
prevent imitation of our products by others or to prevent others from seeking to
block sales of our products as a violation of the trademarks and proprietary
rights of others. Also, we cannot assure you that others will not assert rights
in, or ownership of, trademarks and other proprietary rights of ours or that we
will be able to successfully resolve these types of conflicts to our
satisfaction. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent, as do the laws of the United States.
23
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR SECURED CONVERTIBLE NOTES,
SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANTS THAT MAY BE AVAILABLE FOR
FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK.
As of September 22, 2004, we had 19,915,905 shares of common stock issued
and outstanding, secured convertible notes outstanding that may be converted
into an estimated 3,750,938 shares of common stock at current market prices,
series A convertible preferred stock convertible into 8,543,032 shares of common
stock, and outstanding warrants to purchase 21,834,064 shares of common stock.
Additionally, we have an obligation to sell secured convertible notes
outstanding that may be converted into an estimated 7,501,876 shares of common
stock at current market prices and issue warrants to purchase 1,500,000 shares
of common stock in the near future. In addition, the number of shares of common
stock issuable upon conversion of the outstanding secured convertible notes may
increase if the market price of our stock declines. All of the shares, including
all of the shares issuable upon conversion of the notes and preferred stock and
upon exercise of our warrants, may be sold without restriction. The sale of
these shares may adversely affect the market price of our common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE SECURED CONVERTIBLE NOTES AND
SERIES A CONVERTIBLE PREFERRED STOCK AND EXERCISE OF OUTSTANDING WARRANTS MAY
CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the secured convertible notes
and series A convertible preferred stock and exercise of warrants may result in
substantial dilution to the interests of other stockholders since the selling
stockholders may ultimately convert and sell the full amount issuable on
conversion. Although AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., and New Millennium Partners II, LLC may not convert their
secured convertible notes and/or exercise their warrants if such conversion or
exercise would cause them to own more than 4.9% of our outstanding common stock,
this restriction does not prevent AJW Partners, LLC, AJW Qualified Partners,
LLC, AJW Offshore, Ltd., and New Millennium Partners II, LLC from converting
and/or exercising some of their holdings and then converting the rest of their
holdings. In this way, AJW Partners, LLC, AJW Qualified Partners, LLC, AJW
Offshore, Ltd., and New Millennium Partners II, LLC could sell more than this
limit while never holding more than this limit. There is no upper limit on the
number of shares that may be issued which will have the effect of further
diluting the proportionate equity interest and voting power of holders of our
common stock, including investors in this offering.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE
NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR
RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF
REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE
OF SUBSTANTIAL ASSETS.
In September 2004, we entered into a Securities Purchase Agreement for the
sale of an aggregate of $1,500,000 principal amount of secured convertible
notes. The secured convertible notes are due and payable, with 10% interest, two
years from the date of issuance, unless sooner converted into shares of our
common stock. Although we currently have $500,000 secured convertible notes
outstanding, the investors are obligated to purchase additional secured
convertible notes in the aggregate of $1,000,000. In addition, any event of
default such as our failure to repay the principal or interest when due, our
failure to issue shares of common stock upon conversion by the holder, our
failure to timely file a registration statement or have such registration
statement declared effective, breach of any covenant, representation or warranty
in the Securities Purchase Agreement or related convertible note, the assignment
or appointment of a receiver to control a substantial part of our property or
business, the filing of a money judgment, writ or similar process against our
company in excess of $50,000, the commencement of a bankruptcy, insolvency,
reorganization or liquidation proceeding against our company and the delisting
of our common stock could require the early repayment of the secured convertible
notes, including a default interest rate of 15% on the outstanding principal
balance of the notes if the default is not cured with the specified grace
period. We anticipate that the full amount of the secured convertible notes will
be converted into shares of our common stock, in accordance with the terms of
the secured convertible notes. If we were required to repay the secured
convertible notes, we would be required to use our limited working capital and
raise additional funds. If we were unable to repay the notes when required, the
note holders could commence legal action against us and foreclose on all of our
assets to recover the amounts due. Any such action would require us to curtail
or cease operations.
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IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE
TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR
STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
25
RECENT ACCOUNTING PRONOUNCEMENTS
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, Share-Based Payment, an amendment of FASB Statements No. 123
and 95, that would require companies to account for stock-based compensation to
employees using a fair value method as of the grant date. The proposed statement
addresses the accounting for transactions in which a company receives employee
services in exchange for equity instruments such as stock options, or
liabilities that are based on the fair value of the company's equity instruments
or that may be settled through the issuance of such equity instruments, which
includes the accounting for employee stock purchase plans. This proposed
statement would eliminate a company's ability to account for share-based awards
to employees using APB Opinion 25, Accounting for Stock Issued to Employees but
would not change the accounting for transactions in which a company issues
equity instruments for services to non-employees or the accounting for employee
stock ownership plans. The proposed statement, if adopted, would be effective
for awards that are granted, modified, or settled in fiscal years after December
15, 2004. The Company is in the process of assessing the potential impact of
this proposed statement to the financial statements.
PRODUCT RESEARCH AND DEVELOPMENT
We anticipate performing further research and development for our exiting
products during the next twelve months. Those activities include the ReliaBright
Emergency Lighting Augmentation System, ReliaBright Solo, Bright Owl Home Safety
Light, Bright Owl Mini, Night Owl Power Outage Adapter and VersaBright Area
Light These projected expenditures are dependent upon our generating revenues
and obtaining sources of financing in excess of our existing capital resources.
There is no guarantee that we will be successful in raising the funds required
or generating revenues sufficient to fund the projected costs of research and
development during the next twelve months
TRENDS, RISKS AND UNCERTAINTIES
We have sought to identify what we believe to be the most significant risks to
our business, but we cannot predict whether, or to what extent, any of such
risks may be realized nor can we guarantee that we have identified all possible
risks that might arise. Investors should carefully consider all of such risk
factors before making an investment decision with respect to our Common Stock.
26
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: As of September 30, 2004, the
Company's management carried out an evaluation, under the supervision of the
Company's Chief Executive Officer and the Chief Financial Officer of the
effectiveness of the design and operation of the Company's system of disclosure
controls and procedures pursuant to the Securities and Exchange Act, Rule
13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective, as of the date of their
evaluation, for the purposes of recording, processing, summarizing and timely
reporting material information required to be disclosed in reports filed by the
Company under the Securities Exchange Act of 1934.
CHANGES IN INTERNAL CONTROLS: There were no changes in internal controls over
financial reporting, known to the Chief Executive Officer or Chief Financial
Officer that occurred during the period covered by this report that has
materially affected, or is likely to materially effect, the Company's internal
control over financial reporting.
27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse affect on our business,
financial condition or operating results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On July 14, 2004, we issued 100,000 shares of our Common Stock to John
Hanemaayer at $0.10 per share. This issuance was exempt from registration
pursuant to Section 4(2) of the Securities Act.
On July 15, 2004, we issued 100,000 stock purchase warrants exercisable at $0.20
per share to Michael G. Konicek for services rendered. This issuance was exempt
from registration pursuant to Section 4(2) of the Securities Act.
On July 30, 2004, we issued 100,000 shares of our Common Stock to David Bomberg
pursuant to a consulting agreement. This issuance was a private transaction
pursuant to Section 4(2) of the Securities Act.
On August 24, 2004, we issued 701,000 shares of our Common Stock against
exercise of warrants at $0.25 per share. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act.
On August 24, 2004, holders of 4 shares of our Series A Convertible Preferred
Stock exercised their rights to convert into 200,000 shares of our Common Stock.
This issuance was exempt from registration pursuant to Section 4(2) of the
Securities Act.
On September 17, 2004, we issued 200,000 shares of our Common Stock against
exercise of warrants at $0.25 per share. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act.
On September 17,2004, we issued 150,000 stock purchase warrants to Donald B.
Hutton for services rendered at $0.25 per share. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act.
On September 23, 2004, pursuant to a securities purchase agreement, we issued
277,500, 120,000, 330,000 and 22,500 stock purchase warrants to AJW Offshore,
LTD, AJW Partners, LLC, AJW Qualified Partners, LLC and New Millenium Capital
Partners II, LLC, respectively, all of which have an exercise price of $0.50.
This issuance was exempt from registration pursuant to Section 4(2) of the
Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
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ITEM 6. EXHIBITS
31.1 - Certification of Chief Executive Officer pursuant to Rule
13a-14 and Rule 15d-14(a), promulgated under the Securities and
Exchange Act of 1934, as amended
31.2 - Certification of Chief Financial Officer pursuant to Rule
13a-14 and Rule 15d 14(a), promulgated under the Securities and
Exchange Act of 1934, as amended
32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Executive Officer)
32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Financial Officer)
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CYBERLUX CORPORATION
Date: November 16, 2004 By: /S/ DONALD F. EVANS
--------------------
Donald F. Evans
Chief Executive Officer
Date: November 16, 2004 By: /S/ DAVID D. DOWNING
---------------------
David D. Downing
Chief Financial Officer
30