-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KJhY+rQgJUOHoMwF9rqG4dLjLbsltZwYn6kyiBb9fxfaSro1vW2UUJydXET+1cNT 11MVLTAENLmnyd4Ii7xyJA== 0001011438-04-000310.txt : 20040923 0001011438-04-000310.hdr.sgml : 20040923 20040923105900 ACCESSION NUMBER: 0001011438-04-000310 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040923 DATE AS OF CHANGE: 20040923 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNIVERSAL DETECTION TECHNOLOGY CENTRAL INDEX KEY: 0000763950 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 952746949 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-09327 FILM NUMBER: 041042140 BUSINESS ADDRESS: STREET 1: 9300 WILSHIRE BOULEVARD, SUITE 308 CITY: BEVERLY HILLS STATE: CA ZIP: 90212 BUSINESS PHONE: 3102483655 MAIL ADDRESS: STREET 1: 9300 WILSHIRE BOULEVARD, SUITE 308 CITY: BEVERLY HILLS STATE: CA ZIP: 90212 FORMER COMPANY: FORMER CONFORMED NAME: POLLUTION RESEARCH & CONTROL CORP /CA/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: DASIBI ENVIRONMENTAL CORP DATE OF NAME CHANGE: 19900529 10KSB/A 1 form_10-ksba.txt UNITED STATES ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-KSB/A AMENDMENT NO. 1 --------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 COMMISSION FILE NUMBER 0-14266 UNIVERSAL DETECTION TECHNOLOGY (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) CALIFORNIA 95-2746949 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 9595 WILSHIRE BLVD., SUITE 700, BEVERLY HILLS, CALIFORNIA 90212 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) (310) 248-3655 (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK, NO PAR VALUE 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 [_] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will 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. [_] The issuer's revenues for its most recent fiscal year were $0. Based on the closing sale price on the OTC Bulletin Board on March 25, 2004, the aggregate market value of the registrant's common stock held by non-affiliates was approximately $31,599,465. For purposes of this computation, all directors and executive officers of the registrant are considered to be affiliates of the registrant, as well as individual shareholders holding more than 10% of the registrant's outstanding common stock. This assumption is not to be deemed an admission by the persons that they are affiliates of the registrant. The number of shares outstanding of the registrant's common stock as of March 25, 2004, was 39,501,132. Transitional Small Business Disclosure Format (check one): Yes [_] No [X] UNIVERSAL DETECTION TECHNOLOGY Form 10-KSB For the Fiscal Year Ended December 31, 2003 TABLE OF CONTENTS
PAGE PART II......................................................................................2 Item 6. Management's Discussion and Analysis or Plan of Operation..............2 Plan of Operation...............................................2 Summary of Significant Accounting Policies......................3 New Accounting Pronouncements...................................5 Results of Operations...........................................6 Liquidity and Capital Resources.................................7 Seasonality.....................................................8 Cautionary Statements and Risk Factors..........................8 Item 7. Financial Statements..................................................13
1 PURPOSE OF THIS AMENDMENT NO. 1. This Amendment No. 1 to our Form 10-KSB for the year ended December 31, 2003, is being filed to reflect a change that was made to our retained earnings and accrued expenses to correct a legal judgment recorded during the year ended December 31, 2002. We originally recorded the amount of damages sought by the plaintiff, rather than the amount of the final judgment. We have retroactively restated net loss for the year ended December 31, 2002, increasing the net loss from $1,980,718 to $2,143,218 due to an adjustment of $162,500. Accordingly, the December 31, 2003 financial statements have been restated in this Amendment No. 1 and an adjustment has been made to retained earnings and accrued expenses as of December 31, 2003 to correct the error. This Amendment No. 1 does not reflect events occurring after the filing of the original Form 10-KSB, or modify or update the disclosures therein in any way other than as required to reflect the amendment set forth below. PART II ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION PLAN OF OPERATION In August 2002, we entered into a technology affiliates agreement with JPL to develop technology for our bio-terrorism detection equipment. The agreement provides that JPL will develop its proprietary bacterial spore detection technology for integration into our existing aerosol monitoring system. We are entitled to receive a non-exclusive, royalty-free license to any technology developed under the terms of the agreement. We also have entered into a licensing agreement with Caltech whereby we obtained an exclusive license to sell products that incorporate the patented technology referenced in the agreement with JPL. We expect to complete an automated prototype by in the summer of 2004, and to begin testing sometime during the fall of 2004. We require immediate financing to repay our indebtedness and continue operations. We require approximately $1.7 million to repay indebtedness in the next twelve months and at least $1.5 million in the next six to twelve months to complete our existing prototype, engage in testing of the device, and revise the technology or reengineer the device as may be necessary or desirable and otherwise execute our business plan. We actively continue to pursue additional equity or debt financings but at the date hereof, do not have any funding commitments. Currently, our cash on hand, together with cash generated by operations, cannot sufficiently fund future operating losses and capital requirements. If we are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider steps that would protect our assets against our creditors. During the next twelve months we may purchase equipment to develop and manufacture our Anthrax Smoke Detector and we may hire approximately five employees, depending on the level of funding, if any, we receive, and our progress on the development of our Anthrax Smoke Detector. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of Universal Detection Technology and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION Revenue is recognized upon shipment of products. Title of goods is transferred when the products are shipped from our facility. Income not earned is recorded as deferred revenue. INVENTORIES Inventories are stated at the lower of cost (first-in first-out) basis or market. ADVERTISING EXPENSES We expense advertising costs as incurred. During the years ended December 31, 2003 and 2002, we did not have significant advertising costs. EQUIPMENT AND DEPRECIATION Equipment was recorded at cost less accumulated depreciation. Depreciation was provided for on the straight-line method over the estimated useful lives of the assets, generally five years. Total depreciation expense was $152 and $-0- for the years ended December 31, 2003 and 2002, respectively. STOCK-BASED COMPENSATION We account for stock based compensation in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." This standard requires us to adopt the "fair value" method with respect to stock-based compensation of consultants and other non-employees. We did not change our method of accounting with respect to employee stock options; we continue to account for these under the "intrinsic value" method and to furnish the pro-forma disclosures required by SFAS 123. VALUATION OF THE COMPANY'S COMMON STOCK Unless otherwise disclosed, all stock based transactions entered into by us have been valued at the market value of our common stock on the date the transaction was entered into or have been valued using the Black-Scholes Model to estimate the fair market value. 3 EARNINGS PER SHARE We compute earnings per common share in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS 128"). SFAS 128 simplifies the standards for computing earnings per share ("EPS") previously found in Accounting Principles Board Opinion No. 15, Earnings Per Share, and makes them more comparable to international EPS standards. SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS. In addition, SFAS 128 requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. However, that presentation is not required if the effect is antidilutive. Accordingly, that presentation has not been made. CASH EQUIVALENTS For purposes of reporting cash flows, we consider all short term, interest bearing deposits with original maturities of three months or less to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable, accounts payable, accrued expenses, notes payable and convertible debt approximate fair value because of the short maturity of these items. IMPAIRMENT OF LONG-LIVED ASSETS We evaluate our long-lived assets by measuring the carrying amounts of assets against the estimated undiscounted future cash flows associated with them. At the time the carrying value of those assets exceeds their fair value, impairment is recognized. To date, no adjustments to the carrying value of the assets has been made. RESEARCH AND SOFTWARE DEVELOPMENT COSTS In 2002, we entered into a technology affiliates agreement with NASA's Jet Propulsion Laboratory to develop technology for its bio-terrorism detection equipment. These costs are charged to expense as incurred. Research and development expenses were $199,000 and $82,000 for the years ended December 31, 2003 and 2002, respectively. INCOME TAXES Deferred income taxes are recorded to reflect the tax consequences in future years of temporary differences between the tax basis of the assets and liabilities and their financial statement amounts at the end of each reporting period. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the current period and the change during the period in deferred tax assets and liabilities. The deferred tax assets and liabilities have been netted to reflect the tax impact of temporary differences. At December 31, 2003 and 2002, a full valuation allowance has been established for the deferred tax asset as management believes that it is more likely than not that a tax benefit will not be realized. 4 USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATION Certain amounts reported in our financial statements for the year ended December 31, 2002, have been reclassified to conform to the current year presentation. NEW ACCOUNTING PRONOUNCEMENTS In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 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. Under the provisions of SFAS No. 148, companies that choose to adopt the accounting provisions of SFAS No. 123 will be permitted to select from three transition methods: Prospective method, Modified prospective method and Retroactive restatement method. The transition and annual disclosure provisions of SFAS No. 148 are effective for the fiscal years ending after December 15, 2002. Management does not anticipate the implementation of this Statement to have a material impact on the Company's financial statements. In April 2003, FASB issued SFAS No. 149, "Accounting for Derivative Instruments and Hedging Activities," which is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. This statement amends and clarifies financial accounting and reporting for derivative instruments including certain instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The adoption of this standard is not expected to have a material impact on our financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The adoption of this standard is not expected to have a material impact on our financial statements. 5 In December 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45") was issued. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 applies prospectively to guarantees the Company issues or modifies subsequent to December 31, 2002. We have historically not issued guarantees and therefore FIN 45 will not have a material effect on our financial statements. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," for certain entities which do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest ("variable interest entities"). Variable interest entities will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both, as a result of holding variable interests, which are ownership, contractual, or other pecuniary interests in an entity. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period. The Company's adoption of FIN 46 did not have any impact upon the Company's financial condition or results of operations. In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on Issue 00-21, "Accounting for Revenue Arrangements with Multiple-Deliverables" ("EITF 00-21"). EITF 00-21 addresses how to account for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The consensus mandates how to identify whether goods or services or both which are to be delivered separately in a bundled sales arrangement should be accounted for separately because they are "separate units of accounting." The guidance can affect the timing of revenue recognition for such arrangements, even though it does not change rules governing the timing or pattern of revenue recognition of individual items accounted for separately. The final consensus will be applicable to agreements entered into in fiscal years beginning after June 15, 2003, with early adoption permitted. Additionally, companies will be permitted to apply the consensus guidance to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, Accounting Changes. We do not believe the adoption of EITF 00-21 will have a material impact on our financial position or results of operations. RESULTS OF OPERATIONS 2003 COMPARED TO 2002 REVENUES. Revenues in 2003 were $0 compared to $30,000 in 2002. This decrease was due to the lack of any sales in 2003 compared to the sale of one prototype device during 2002. 6 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses totaled $1,655,863 in 2003 and $721,487 in 2002. The increase in selling, general and administrative expenses primarily is a result of a significant increase in our use of consultants and the payment of our officer's salary which had been waived from September 2001 through June 1, 2003, and a bonus. Selling, general and administrative expenses consist primarily of accounting fees, legal fees and bio-terrorism product consulting and marketing. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased to $199,000 in 2003 from $82,000 in 2002. This increase in research and development expenses was due to the additional payments made to JPL pursuant to our technology affiliates agreement. INCOME (LOSS) FROM OPERATIONS. Operating loss for 2003 was $4,725,153 compared to operating loss of $3,484,026 in 2002. This increase is primarily due to the increase in our selling, general and administrative expenses, marketing expenses, and our research and development expenses. We have reported the operations of Dasibi Environmental Corp. as discontinued operations. We sold Dasibi on March 25, 2002. Dasibi had assets of approximately $967,000 and liabilities of approximately $2,072,000 as of December 31, 2001 and a loss from operations from October 1, 2001 to December 31, 2001 of approximately $813,770. INTEREST EXPENSE. Interest expense decreased from $232,345 in 2002 to $208,063 in 2003. At December 31, 2003, we had an approximate net operating loss carry-forward of $12,500,000. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by (used in) our operating activities during 2003 was ($3,133,767), and during 2002 was ($555,062). Net cash provided by (used in) our investing activities during 2003 was ($153,892), and during 2002 was $0. Net cash provided by financing activities during 2003 was $3,293,240, and during 2001 was $421,626. Our total cash and cash equivalent balance at December 31, 2003, was $14,899, as compared to December 31, 2002, which was $9,318. Because of the low levels of our cash balances, we may not be able to continue operations at our current levels or at all. Our cash flow is dependent on development of products in a cost efficient manner that are commercially accepted on a timely basis, acceptance of our technology, the signing of contracts, collections, all of which are difficult to predict with accuracy. Historically, we have financed operations through private debt and the issuance of common stock. Since our financial position has deteriorated, financial institutions have been unwilling to lend to us and the cost of obtaining working capital from investors has been expensive. During fiscal 2003 and 2002 and through the date of this report, we have received debt financing upon various terms, as follows: 7 A. During April 2002, we borrowed $22,526, due the earlier of June 29, 2002, or upon us raising funds in excess of $30,000, bearing interest at 10% per annum. The lender has verbally agreed to extend the terms of the note to a date to be mutually agreed upon by the parties. B. During June 2002, we borrowed $35,000, due the earlier of September 10, 2002, or upon us raising funds in excess of $50,000, bearing interest at 10% per annum. If the loan was not repaid within 30 days after the due date, the holder was to receive 50,000 shares of our common stock. The note has not been repaid and the lender has verbally agreed to extend the terms of the note to a date to be mutually agreed upon by the parties. The 50,000 shares of our common stock have not been issued. C. From March 2003 to November 2003, we entered into 11 loans with affiliates and non-affiliates evidenced by promissory notes with an aggregate face amount of $450,000. The term of these loans ranges from 18 days to four months. The interest rates for these loans range from 5% to 18% per annum, and two of the loans bear no interest. We have repaid an aggregate of $95,000 in principal amounts of these notes as of December 31, 2003. Our working capital deficit at December 31, 2003, was $1,567,135. SEASONALITY We do not believe that our business is seasonal. CAUTIONARY STATEMENTS AND RISK FACTORS The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could suffer. In that event the trading price of our common stock could decline, and our shareholders may lose all or part of their investment in our common stock. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements. OUR INDEPENDENT AUDITORS' REPORT EXPRESSES DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. Our independent auditors' report, dated February 4, 2004, includes an explanatory paragraph relating to substantial doubt as to our ability to continue as a going concern, due to our working capital deficit at December 31, 2003, and the sale of our operating subsidiary. We have experienced operating losses since the date of the auditors' report and in prior years. We have been unable to pay all of our creditors and certain other obligations in accordance with their terms, and as a result, we are in default on certain debt obligations equaling approximately $550,000 as of December 31, 2003. These defaults currently restrict our ability to file registration statements in connection with capital-raising transactions on Form S-3, which may make it more difficult for us to raise additional capital. We have limited cash on hand and short-term investments and we do not expect to generate material cash from operations this year. We have attempted to raise additional capital through debt or equity financing and to date have had 8 limited success. If we are unable to obtain financing on terms acceptable to us, or at all, we will not be able to accomplish any or all of our initiatives and will be forced to consider steps that would protect our assets against our creditors. WE NEED ADDITIONAL CAPITAL TO FUND OUR RESEARCH AND DEVELOPMENT ACTIVITIES. IF WE OBTAIN FINANCING, EXISTING SHAREHOLDER INTERESTS MAY BE DILUTED, AND IF WE CANNOT OBTAIN ADEQUATE FINANCING, WE MAY CEASE OPERATIONS. The current down-trend in the financial markets have made it extremely difficult for us to raise additional capital for our research and development activities. If we cannot raise additional capital, we will not be able to pursue our business strategies as scheduled, or at all, and we may cease operations. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our shareholders will be diluted. In addition, any convertible securities issued may not contain a minimum conversion price, which may make it more difficult for us to raise financing and may cause the market price of our common stock to decline because of the indeterminable overhang that is created by the discount to market conversion feature. In addition, any new securities could have rights, preferences and privileges senior to those of our common stock. Furthermore, we cannot assure you that additional financing will be available when and to the extent we require or that, if available, it will be on acceptable terms. WE HAVE A HISTORY OF LOSSES AND WE DO NOT ANTICIPATE THAT WE WILL BE PROFITABLE IN FISCAL 2004. We do not anticipate having a product for sale until our Anthrax Smoke Detector is commercialized, which could take several more years. We have not been profitable in the past years and had an accumulated deficit of approximately $20.9 million as of December 31, 2003. During the fiscal 2003, we incurred a net loss of approximately $4.7 million. Achieving profitability depends upon numerous factors, including out ability to develop, market and sell commercially accepted products timely and cost-efficiently. We do not anticipate that we will be profitable in fiscal 2004. WE CANNOT GUARANTEE THAT OUR BIO-TERRORISM DETECTION DEVICE WILL WORK OR BE COMMERCIALLY VIABLE. Our product in development requires further research, development, laboratory testing and demonstration of commercial scale manufacturing before it can be proven to be commercially viable. Potential products that appear to be promising at early stages of development may not reach the market for a number of reasons. These reasons include the possibilities that the product may be ineffective, unsafe, difficult or uneconomical to manufacture on a large scale, fail to achieve market acceptance, or is precluded from commercialization by proprietary rights of third parties. We cannot predict with any degree of certainty when, or if, the research, development, testing and regulatory approval process (if required), will be completed. If our product development efforts are unsuccessful or if we are unable to develop a commercially viable product timely, we would need to consider steps to protect our assets against our creditors. OUR RELIANCE ON THIRD PARTIES FOR RESEARCH AND DEVELOPMENT MAY AFFECT OUR FUTURE PROSPECTS. 9 We do not maintain our own laboratory and we do not employ our own researchers. We contract with third parties to conduct research and development activities and we expect to continue to do so in the future. Because we rely on third parties for our research and development activities, we have less direct control over those activities and cannot assure you that the research will be done properly or in a timely manner. Our inability to conduct research and development may delay or impair our ability to commercialize our technology. The cost and time to establish or locate an alternative research and development facility to develop our technology could have a materially adverse affect on our future prospects. OUR PRODUCTS MAY NOT BE COMMERCIALLY ACCEPTED WHICH WILL ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY. Our ability to enter into the bio-terrorism detection device market, establish brand recognition and compete effectively depends upon many factors, including broad commercial acceptance of our products. If our products are not commercially accepted, we will not recognize meaningful revenue and may not continue to operate. The success of our products will depend in large part on the breadth of information these products capture and the timeliness of delivery of that information. The commercial success of our products also depends upon the quality and acceptance of other competing products, general economic and political conditions and other tangible and intangible factors, all of which can change and cannot be predicted with certainty. We cannot assure you that our new products will achieve market acceptance or will generate significant revenue. THE MARKET FOR OUR PLANNED PRODUCT IS RAPIDLY CHANGING AND COMPETITIVE. NEW PRODUCTS MAY BE DEVELOPED BY OTHERS, WHICH COULD IMPAIR OUR ABILITY TO DEVELOP, GROW OR MAINTAIN OUR BUSINESS AND BE COMPETITIVE. Our industry is subject to rapid and substantial technological change. Developments by others may render our technology and planned product noncompetitive or obsolete, or we may be unable to keep pace with technological developments or other market factors. Competition from other biotechnology companies, universities, government research organizations and others diversifying into our field is intense and is expected to increase. Many of these entities have significantly greater research and development capabilities and budgets than we do, as well as substantially greater marketing, manufacturing, financial and managerial resources. These entities could represent significant competition for us. Our resources are limited and we may experience technical challenges inherent in developing our technology. Our competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competition. Our competitors may use different methods to detect biological pathogens in a manner that is more effective and less costly than our planned product and, therefore, represent a serious competitive threat to us. OUR COMMON SHARES HAVE BEEN DELISTED FROM THE NASDAQ SMALLCAP MARKET. On June 11, 2002, we were notified by The Nasdaq Stock Market that we did not meet the continued listing requirements of The Nasdaq SmallCap Market and our common shares were delisted on the close of business on June 19, 2002. Our common stock currently is trading on The Over the Counter Bulletin Board. It is more difficult to raise additional debt or equity 10 financing while trading on The Over the Counter Bulletin Board. If we are unable to raise additional financing, we will not be able to accomplish our business objectives and may consider steps to protect our assets against creditors. OUR OUTSTANDING OPTIONS AND WARRANTS MAY DILUTE OUR SHAREHOLDERS' INTERESTS. As of December 31, 2003, we have granted options and warrants to purchase a total of 11,834,560 shares of common stock that have not been exercised. To the extent these outstanding options and warrants are exercised, our shareholders' interests will be diluted. THE LOSS OF OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER MAY DISRUPT OUR BUSINESS. Our success depends in substantial part upon the services of Jacques Tizabi, our President, Chief Executive Officer and Chairman of the Board of Directors. The loss of or the failure to retain the services of Mr. Tizabi could adversely affect the development of our business and our ability to realize or sustain profitable operations. We do not maintain key-man life insurance on Mr. Tizabi and have no present plans to obtain this insurance. WE HAVE LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS OF OUR PRODUCTS. We regard all portions of the designs and technologies incorporated into our products as proprietary and attempt to protect them under trade secret laws. It may be possible for unauthorized third parties to copy certain portions of our products or to "reverse engineer" or otherwise obtain and use to our detriment information we regard as proprietary. The technology for our Anthrax Smoke Detector is being developed pursuant to our technology affiliates agreement with JPL, which is federally funded. The U.S. government has the right to use technologies that it has funded regardless of whether the technology has been licensed to a third party, and thus, has a non-exclusive, non-transferable, irrevocable, paid-up license to practice or have practiced any invention covered by our technology affiliates agreement with JPL. We cannot assure you that our competitors will not independently develop technologies that are substantially equivalent or superior to our technologies. WE MAY BE SUED BY THIRD PARTIES WHO CLAIM OUR PRODUCT INFRINGES ON THEIR INTELLECTUAL PROPERTY RIGHTS. DEFENDING AN INFRINGEMENT LAWSUIT IS COSTLY AND WE MAY NOT HAVE ADEQUATE RESOURCES TO DEFEND OURSELVES. We may be exposed to future litigation by third parties based on claims that our technology, product, or activity infringes on the intellectual property rights of others or that we have misappropriated the trade secrets of others. This risk is compounded by the fact that the validity and breadth of claims covered in technology patents in general and the breadth and scope of trade secret protection involves complex legal and factual questions for which important legal principles are unresolved. Any litigation or claims against us, whether or not valid, could result in substantial costs, could place a significant strain on our financial and managerial resources, and could harm our reputation. Our license agreement with Caltech requires that we pay the costs associated with initiating an infringement claim and defending claims by third parties for infringement, subject to certain offsets that may be allowed against amount we may owe to Caltech under the licensing agreement. In addition, intellectual property litigation or claims could force us to do one or more of the following: 11 o cease selling, incorporating, or using any of our technology and/or products that incorporate the challenged intellectual property, which could adversely affect our potential revenue; o obtain a license from the holder of the infringed intellectual property right, which license may be costly or may not be available on reasonable terms, if at all; or o redesign our products, which would be costly and time consuming. OUR STOCK PRICE IS VOLATILE. The trading price of our common stock fluctuates widely and in the future may be subject to similar fluctuations in response to quarter-to-quarter variations in our operating results, announcements of technological innovations or new products by us or our competitors, general conditions in the bio-terrorism detection device industry in which we compete and other events or factors. In addition, in recent years, broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. These broad market fluctuations also may adversely affect the future trading price of our common stock. OUR STOCK HISTORICALLY HAS BEEN THINLY TRADED. THEREFORE, SHAREHOLDERS MAY NOT BE ABLE TO SELL THEIR SHARES FREELY. The volume of trading in our common stock historically has been relatively light and a limited market presently exists for the shares. We have no analyst coverage of our securities. The lack of analyst reports about our stock may make it difficult for potential investors to make decisions about whether to purchase our stock and may make it less likely that investors will purchase our stock. We cannot assure you that our trading volume will increase, or that our historically light trading volume or any trading volume whatsoever will be sustained in the future. Therefore, we cannot assure you that our shareholders will be able to sell their shares of our common stock at the time or at the price that they desire, or at all. POTENTIAL ANTI-TAKEOVER TACTICS THROUGH ISSUANCE OF PREFERRED STOCK RIGHTS MAY BE DETRIMENTAL TO COMMON SHAREHOLDERS. We are authorized to issue up to 20,000,000 shares of preferred stock, of which none currently are issued and outstanding. The issuance of preferred stock does not require approval by the shareholders of our common stock. Our Board of Directors, in its sole discretion, has the power to issue preferred stock in one or more series and establish the dividend rates and preferences, liquidation preferences, voting rights, redemption and conversion terms and conditions and any other relative rights and preferences with respect to any series of preferred stock. Holders of preferred stock may have the right to receive dividends, certain preferences in liquidation and conversion and other rights, any of which rights and preferences may operate to the detriment of the shareholders of our common stock. Further, the issuance of any preferred stock having rights superior to those of our common stock may result in a decrease in the market price of the common stock and, additionally, could be used by our Board of Directors as an anti-takeover measure or device to prevent a change in our control. 12 ITEM 7. FINANCIAL STATEMENTS Our financial statements and related notes are set forth at pages F-1 through F-21. UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) INDEX TO FINANCIAL STATEMENTS PAGE Independent Auditors' Report F-2 Consolidated Balance Sheet F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Stockholders' Equity (Deficit) F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 F-1 AJ. ROBBINS, P.C. 216 SIXTEENTH STREET SUITE 600 DENVER, COLORADO 80202 INDEPENDENT AUDITORS' REPORT Audit Committee Universal Detection Technology (f/k/a Pollution Research and Control Corporation and Subsidiaries) Beverly Hills, California We have audited the accompanying consolidated balance sheet of Universal Detection Technology (formerly Pollution Research and Control Corp.) and Subsidiaries as of December 31, 2003, and the related statements of operations, changes in stockholders' equity (deficit), and cash flows for each of the years in the two year period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Universal Detection Technology (formerly Pollution Research and Control Corp.) and Subsidiaries as of December 31, 2003, and the results of its consolidated operations and its cash flows for each of the years in the two year period then ended in conformity with generally accepted accounting principles in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, it has a net working capital deficiency, and has a net capital deficiency that raises substantial doubt about the entity's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 14 to the financial statements, certain errors resulting in understatement of previously reported accrued expenses as of December 31, 2002, were discovered by management of the Company during the quarter ended June 30, 2004. Accordingly, the December 31, 2003 and 2002 financial statements have been restated and an adjustment has been made to retained earnings and accrued expenses as of December 31, 2003 and 2002 to correct the error. AJ. ROBBINS, PC CERTIFIED PUBLIC ACCOUNTANTS DENVER, COLORADO FEBRUARY 4, 2004 (Except for Note 14, as to which the date is July 27, 2004) F-2 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED BALANCE SHEET DECEMBER 31, 2003 (RESTATED) ASSETS
CURRENT ASSETS: Cash and cash equivalents $ 14,899 Restricted cash 100,233 Due from related parties 29,099 Bridge notes, related party 50,000 Inventories 20,000 Prepaid expenses 1,045,155 -------------- Total Current Assets 1,259,386 EQUIPMENT, NET 3,507 -------------- $ 1,262,893 ============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable, trade $ 112,759 Accrued liabilities 864,000 Notes payable, related party 40,000 Notes payable 1,517,526 Accrued interest expense 454,736 -------------- Total current liabilities 2,989,021 -------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, $.01 par value, 20,000,000 shares --- Authorized, -0- issued and outstanding Common stock, no par value, 480,000,000 shares Authorized, 35,002,197 issued and outstanding 15,705,055 Additional paid-in-capital 3,606,891 Accumulated (deficit) (21,038,074) -------------- Total stockholders' equity (deficit) (1,726,128) -------------- $ 1,262,893 ============== See accompanying notes to consolidated financial statements.
F-3 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002 --------------- -------------- (RESTATED) REVENUE $ --- $ 30,000 COST OF GOODS SOLD --- 8,600 --------------- -------------- GROSS PROFIT --- 21,400 --------------- -------------- OPERATING EXPENSES: Selling, general and administrative 1,655,863 721,487 Marketing 1,932,512 45,000 Research and development 199,000 82,000 Loss on write-down of inventory --- 1,894,342 Loss on legal judgment --- 411,500 --------------- -------------- Total expenses 3,787,375 3,154,329 --------------- -------------- (LOSS) FROM OPERATIONS (3,787,375) (3,132,929) OTHER INCOME (EXPENSE): Interest income 726 --- Interest expense (208,063) (232,345) Amortization of loan fees (235,136) (5,752) Beneficial conversion feature of convertible debt (495,305) (113,000) --------------- -------------- Total other income (expense) (937,778) (351,097) --------------- -------------- (LOSS) FROM OPERATIONS BEFORE INCOME TAXES (4,725,153) (3,484,026) INCOME TAX EXPENSE --- --- --------------- -------------- (LOSS) FROM CONTINUING OPERATIONS (4,725,153) (3,484,026) DISCONTINUED OPERATIONS: (Loss) from operations of discontinued subsidiaries (less applicable income tax expense of $-0-) --- (149,745) Gain on disposal of subsidiaries, including provision of $-0- for operating losses during phase-out period less applicable income taxes of $-0- --- 1,490,553 --------------- -------------- TOTAL GAIN FROM DISCONTINUED OPERATIONS --- 1,340,808 --------------- -------------- NET (LOSS) $ (4,725,153) $ (2,143,218) =============== ============== NET (LOSS) PER SHARE - BASIC AND DILUTED: Continuing operations $ (0.23) $ (0.42) Discontinued operations: (Loss) from operations --- (0.02) Gain on disposal --- 0.18 --------------- -------------- $ (0.23) $ (0.26) =============== ============== WEIGHTED AVERAGE SHARES - BASIC AND DILUTED 20,919,845 8,212,300 =============== ============== See accompanying notes to consolidated financial statements.
F-4 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003
Total Stockholders' Common Stock Additional Accumulated Equity Shares Amount Paid-in-Capital (Deficit) (Deficit) ------------ ----------- --------------- ------------- -------------- BALANCE, DECEMBER 31, 2001 5,949,616 $ 9,789,742 $ 2,485,062 $ (14,169,703) $ (1,894,899) Conversion of convertible debt and accrued interest 2,072,464 505,238 --- --- 505,238 Stock based compensation for consulting services --- --- 111,112 --- 111,112 Common stock issued for services 730,000 154,250 --- --- 154,250 Stock issued in private placements, net of offering costs of $34,900 2,121,312 364,100 --- --- 364,100 Value of stock based compensation issued for sale of Dasibi --- --- 160,993 --- 160,993 Value of beneficial conversion feature of convertible debt --- --- 113,000 --- 113,000 Net (loss) for the year (Restated) --- --- --- (2,143,218) (2,143,218) ------------ ----------- --------------- ------------- -------------- BALANCE, DECEMBER 31, 2002 10,873,392 10,813,330 2,870,167 (16,312,921) (2,629,424) Common stock issued for services 3,357,000 1,181,280 --- --- 1,181,280 Common stock issued for loan fees 415,000 198,400 --- --- 198,400 Conversion of convertible debt and accrued interest 3,889,044 573,805 --- --- 573,805 Stock issued in private placements net of offering costs of $443,033 15,907,903 2,876,222 --- --- 2,876,222 Fair market value of repriced warrants --- --- 56,019 --- 56,019 Warrants issued for services --- --- 185,400 --- 185,400 Value of beneficial conversion feature of convertible debt --- --- 495,305 --- 495,305 Exercise of warrants 559,858 62,018 --- --- 62,018 Net (loss) for the year --- --- --- (4,725,153) (4,725,153) ------------ ----------- --------------- ------------- -------------- BALANCE, DECEMBER 31, 2003 35,002,197 $ 15,705,055 $ 3,606,891 (21,038,074) (1,726,128) ============ =========== =============== ============= ==============
See accompanying notes to consolidated financial statements. F-5 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002 --------------- --------------- (RESTATED) CASH FLOWS FROM (TO) OPERATING ACTIVITIES: Net (loss) from continuing operations (4,725,153) (3,484,026) Adjustments to reconcile net loss to net cash (used in) operations: Beneficial conversion feature of convertible debt 495,305 113,000 Stock issued for services 1,181,280 265,362 Stock issued for loan fees 198,400 --- Warrants issued for services 185,400 --- Fair market value of repriced warrants 56,019 --- Depreciation 152 --- Changes in operating assets and liabilities: Accounts receivable 30,000 (30,000) Due from related parties (29,099) --- Inventories --- 1,894,342 Prepaid expenses (999,217) (45,938) Accounts payable (126,701) 222,950 Accrued expenses 599,847 509,248 --------------- --------------- Net cash (used in) operating activities (3,133,767) (555,062) --------------- --------------- CASH FLOWS (TO) INVESTING ACTIVITIES: Purchase of equipment (3,659) --- Bridge note to related party (50,000) --- (Increase) in restricted cash (100,233) --- --------------- --------------- Net cash (used in) investing activities (153,892) --- --------------- --------------- CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Proceeds from issuance of common stock 3,319,255 399,000 Payment of offering costs (443,033) (34,900) Proceeds from exercise of warrants 62,018 --- Proceeds from notes payable 450,000 57,526 Payments on notes payable (95,000) --- --------------- --------------- Net cash provided by financing activities 3,293,240 421,626 --------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,581 (133,436) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,318 142,754 --------------- --------------- CASH AND CASH EQUIVALENTS, END OF PERIOD 14,899 9,318 =============== ===============
See accompanying notes to consolidated financial statements. F-6 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 1 - BUSINESS ACTIVITY Universal Detection Technology (formerly Pollution Research and Control Corp.), a California corporation, primarily designed, manufactured and marketed air pollution monitoring instruments, through its wholly-owned subsidiary Dasibi Environmental Corporation ("Dasibi"). The Company's wholly owned subsidiary Nutek, Inc. ("Nutek") is inactive. The Company's wholly owned subsidiary Logan Medical Devices, Inc. ("Logan") was renamed Dasibi China, Inc. ("Dasibi China") and is currently inactive. In March 2002, the Company sold Dasibi to one of its creditors in exchange for forgiveness of $1,500,000 in debt and accrued interest owed to the creditor. A non-exclusive license agreement for all of the Dasibi's technology was also granted to the Company. In May 2002, Dasibi vacated its premises and has suspended operations. Beginning in 2002, the Company began doing business as Universal Detection Technology and has focused its research and development efforts in developing a real time biological weapon detection device. On August 8, 2003, the shareholders approved the change of the name of Pollution Research and Control Corp. to Universal Detection Technology. To accelerate development of its initial biological weapon detection device, the Company has developed and is implementing a collaborative partnering strategy. Under this strategy, the Company identifies and partners with researchers and developers. The Company entered into a technology affiliates agreement with NASA's Jet Propulsion Laboratory ("JPL") to develop technology for its bio-terrorism detection equipment and a license agreement with the California Institute of Technology, ("CalTech"), which granted the Company an exclusive worldwide license to products that incorporate patent rights referenced in the above technology affiliates agreement. PRIOR PERIOD RESTATEMENT During the quarter ended June 30, 2004, a change was made to the retained earnings and accrued expenses of the Company to correct the legal judgment recorded during the year ended December 31, 2002. The Company originally recorded the amount of damages sought by the plaintiff, rather than the amount of the final judgment. The Company has retroactively restated the net loss for the year ended December 31, 2002, increasing the net loss from $1,980,718 to $2,143,218 due to an adjustment of $162,500. (See Note 14.) GOING CONCERN AND MANAGEMENT'S PLANS In March 2002, the Company sold its operating subsidiary, Dasibi Environmental Corp., and as of December 31, 2003 had a working capital deficit and a capital deficit. These conditions raise substantial doubt about its ability to continue as a going concern. Its ability to continue as a going concern is dependent upon its ability to develop additional sources of capital and ultimately achieve profitable operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company is currently devoting its efforts to raising capital and development and marketing of its bio-terrorism detection devices. The Company entered into a technology affiliates agreement with NASA's Jet Propulsion Laboratory ("JPL") to develop technology for its bio-terrorism detection equipment and a license agreement with the California Institute of Technology, which granted the Company an exclusive worldwide license to products that incorporate patent rights referenced in the above technology affiliates agreement. F-7 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of Universal Detection Technology and its wholly-owned subsidiaries (the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION Revenue will be recognized upon shipment of products. Title of goods is transferred when the products are shipped from the Company's facility. Income not earned will be recorded as deferred revenue. INVENTORIES Inventories are stated at the lower of cost (first-in first-out) basis or market. ADVERTISING EXPENSES The Company expenses advertising costs as incurred. During the years ended December 31, 2003 and 2002, the Company did not have significant advertising costs. EQUIPMENT AND DEPRECIATION Equipment is recorded at cost less accumulated depreciation. Depreciation is provided for on the straight-line method over the estimated useful lives of the assets, generally five years. Total depreciation expense was $152 and $-0- for the years ended December 31, 2003 and 2002, respectively. As of December 31, 2003, accumulated depreciation was $152. STOCK-BASED COMPENSATION The Company accounts for stock based compensation in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). This standard requires the Company to adopt the "fair value" method with respect to stock-based compensation of consultants and other non-employees and allows for use of the intrinsic value method for stock-based compensation of employees under Accounting Principles Board Opinion No. 25. Had compensation cost for the Company's stock-based compensation plans been determined using the fair value of the options at the grant date as prescribed by SFAS 123, the Company's pro forma net loss and loss per common share would be as follows: FOR THE YEAR ENDED DECEMBER 31, 2003 2002 ---- ---- Net (loss): As reported $ $ (4,725,153) (2,143,218) Stock based employee compensation (as recorded): --- --- Stock based employee compensation (fair value method): 1,995,000 --- -------------- ------------- Proforma $ (6,720,153) $(2,143,218) ============== ============= Basic and diluted (loss) per share: As reported $ (0.23) $ (0.26) ============== ============= Proforma $ (0.32) $ (0.26) ============== ============= F-8 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) VALUATION OF THE COMPANY'S COMMON STOCK Unless otherwise disclosed, all stock based transactions entered into by the Company have been valued at the market value of the Company's common stock on the date the transaction was entered into or have been valued using the Modified Black-Scholes European Model to estimate the fair market value. EARNINGS PER COMMON SHARE The Company computes earnings per common share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). The Statement requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding. The computation of diluted loss per share is similar to the basic loss per share computation except the denominator is increased to include the number of additional shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, the numerator is adjusted for any changes in income or loss that would result from the assumed conversions of those potential shares. However, such presentation is not required if the effect is antidilutive. Accordingly, the diluted per share amounts do not reflect the impact of warrants and options or convertible debt outstanding for 11,834,560 and 10,201,038 shares at December 31, 2003 and 2002, respectively because the effect of each is antidilutive. CASH EQUIVALENTS For purposes of reporting cash flows, the Company considers all short term, interest bearing deposits with original maturities of three months or less to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash, accounts receivable, notes receivable, accounts payable, accrued expenses and notes payable approximate fair value because of the short maturity of these items. IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates its long-lived assets by measuring the carrying amounts of assets against the estimated undiscounted future cash flows associated with them. At the time the carrying value of such assets exceeds the fair value of such assets, impairment is recognized. To date, no adjustments to the carrying value of the assets have been made. RESEARCH AND DEVELOPMENT COSTS In 2002, the Company entered into a technology affiliates agreement with NASA's Jet Propulsion Laboratory ("JPL") to develop technology for its bio-terrorism detection equipment. These costs are charged to expense as incurred. Research and development expenses were $199,000 and $82,000 for the years ended December 31, 2003 and 2002, respectively. F-9 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES Deferred income taxes are recorded to reflect the tax consequences in future years of temporary differences between the tax basis of the assets and liabilities and their financial statement amounts at the end of each reporting period. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the current period and the change during the period in deferred tax assets and liabilities. The deferred tax assets and liabilities have been netted to reflect the tax impact of temporary differences. At December 31, 2003 and 2002, a full valuation allowance has been established for the deferred tax asset as management believes that it is more likely than not that a tax benefit will not be realized. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATION Certain amounts reported in the Company's financial statements for the year ended December 31, 2002 have been reclassified to conform to the current year presentation. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 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. Under the provisions of SFAS No. 148, companies that choose to adopt the accounting provisions of SFAS No. 123 will be permitted to select from three transition methods: Prospective method, Modified prospective method and Retroactive restatement method. The transition and annual disclosure provisions of SFAS No. 148 are effective for the fiscal years ending after December 15, 2002. Management does not anticipate the implementation of this Statement to have a material impact on the Company's financial statements. In April 2003, FASB issued SFAS No. 149, "Accounting for Derivative Instruments and Hedging Activities," which is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. This statement amends and clarifies financial accounting and reporting for derivative instruments including certain instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The adoption of this standard is not expected to have a material impact on the Company's financial statements. F-10 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity," which is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The adoption of this standard is not expected to have a material impact on the Company's financial statements. In December 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45") was issued. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 applies prospectively to guarantees the Company issues or modifies subsequent to December 31, 2002. The Company has historically not issued guarantees and therefore FIN 45 will not have a material effect on its financial statements. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," for certain entities which do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest ("variable interest entities"). Variable interest entities will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both, as a result of holding variable interests, which are ownership, contractual, or other pecuniary interests in an entity. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period. The Company's adoption of FIN 46 did not have any impact upon the Company's financial condition or results of operations. In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on Issue 00-21, "Accounting for Revenue Arrangements with Multiple-Deliverables" ("EITF 00-21"). EITF 00-21 addresses how to account for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The consensus mandates how to identify whether goods or services or both which are to be delivered separately in a bundled sales arrangement should be accounted for separately because they are "separate units of accounting." The guidance can affect the timing of revenue recognition for such arrangements, even though it does not change rules governing the timing or pattern of revenue recognition of individual items accounted for separately. The final consensus will be applicable to agreements entered into in fiscal years beginning after June 15, 2003 with early adoption permitted. Additionally, companies will be permitted to apply the consensus guidance to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, Accounting Changes. The Company does not believe the adoption of EITF 00-21 will have a material impact on the Company's financial position or results of operations. F-11 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 3 - INVENTORIES As part of the sale of Dasibi, the Company arranged with Dasibi that Dasibi would continue to house the inventory that was assigned to the Company. During the second quarter of 2002, Dasibi vacated its manufacturing space, and moved the inventory that was assigned to the Company to a location unknown to the Company. The Company currently is in the process of reviewing its rights under the circumstances and has been unsuccessful in locating the inventory. At December 31, 2002, the inventory was written down to reflect the loss. Remaining inventory consists entirely of finished goods. NOTE 4 - ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK At December 31, 2002, the accounts receivable balance from one customer was $30,000, or 100% of the total accounts receivable balance. During 2003, the product was returned and is being used by the Company for research and development activities so the receivable was written off to research and development expense. The Company maintains all cash in bank accounts, which at times may exceed federally insured limits. The Company has not experienced a loss in such accounts. NOTE 5 - NOTES PAYABLE, RELATED PARTY During the year ended December 31, 2003, the company borrowed cash for operating expenses on a short-term basis from certain related entities, Astor and JRT Holdings. JRT Holdings is a company in which the Company's President and CEO has a 50% equity interest. The Company borrowed a total of $85,000 during the year ended December 31, 2003 and repaid a total of $45,000. Notes payable, related party consists of the following at December 31, 2003:
Notes payable to JRT Holdings, interest at 9% per annum; principal and interest due April 2004, unsecured, converted from debenture $ 20,000 Note payable to JRT Holdings, interest at 6% per annum, principal and interest due February 2004, unsecured, effective rate of interest, which includes loan fees is 45.7% 20,000 ----------- Total notes payable, related party $ 40,000 ===========
F-12 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
NOTE 6 - NOTES PAYABLE Notes payable consisted of the following at December 31, 2003: Notes payable to individuals, interest at 11% per annum, principal and interest due June 2001, unsecured $ 150,000 Notes payable to individuals, interest at 12% per annum, principal and interest due June 2001, unsecured 150,000 Notes payable, interest at 12% per annum, principal and interest due October 2004, unsecured, converted from debenture 200,000 Notes payable, interest at 9% per annum, principal and interest due October 2004, unsecured, converted from debenture 100,000 Note payable, interest at 18% per annum, principal and interest due June 2000, and verbally extended, unsecured 200,000 Demand note under Ex-Im Bank authorization at Wall Street Journal Prime rate +3.0% per annum (7% at December 31, 2003), matured June 30, 2002 previously secured by Dasibi customer line of credit 250,000 Bridge loan payable, interest of 10% per annum, principal and interest due June 2002 and verbally extended, unsecured 22,526 Bridge loan payable, interest of 10% per annum, principal and interest due September 2002 and verbally extended, unsecured 35,000 Notes payable, interest at 18% per annum, due May 2003 and verbally extended, unsecured, effective interest, which includes loan fees is 72.6% 75,000 Notes payable, interest at 18% per annum, due August 2003 and verbally extended, unsecured, effective interest, which includes loan fees is 154.2% ** 60,000 Notes payable, interest at 10% per annum, due in December 2003 and verbally extended, unsecured, effective interest, which includes values ascribed to stock compensation granted and other loan fees is 638.1% ** 100,000 Notes payable, interest at 10% per annum, due in February 2004, unsecured, effective interest, which includes values ascribed to stock compensation granted and other loan fees is 314.9% ** 100,000 Note payable, interest at 10% per annum, due June 2002 and verbally extended, unsecured 75,000 ----------- Total notes payable $ 1,517,526 ===========
In February 2004, the notes payable indicated with "**" totaling $260,000, plus related accrued interest of $12,630, were paid in full. Certain notes are past due and in default. F-13 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 6 - NOTES PAYABLE (CONTINUED) During the year ended December 31, 2003, certain convertible debt holders converted debt of $485,000 into 3,258,887 shares of the Company's common stock. In addition, certain convertible debt holders converted $88,805 of accrued interest on the convertible debt to 630,157 shares of the Company's common stock. Convertible debt of $320,000 was converted to non-convertible notes payable. In October 2003, as incentive to certain debenture holders, the Company agreed to convert the debentures to the Company's common stock at $.15 per share rather than at 70% to 80% of market price per the terms of the debentures. In connection with these transactions, the Company recorded $495,305 as an expense for the beneficial conversion feature. In October 2003, certain debenture holders agreed in principle to novate the $320,000 of convertible debentures and enter into non-convertible notes payable with extended due dates ranging from six months to one year. During the year ended December 31, 2002, certain convertible debt holders converted $435,000 to 1,801,252 shares of the Company's common stock. In addition, certain convertible debt holders converted $70,238 of accrued interest on the convertible debt to 271,212 shares of the Company's common stock. In March 2002, the holder of $450,000 of convertible debt agreed to extend the due date of the debt to February 23, 2004 and the Company agreed to reduce the conversion rate on the convertible debt from 85% of the market price of the Company's common stock to 70% of the market price of the Company's common stock. The Company recorded $113,000 as an expense for the beneficial conversion feature of the new conversion rate. During 2002, $250,000 was converted and the remaining outstanding debt balance was $200,000 as of December 31, 2002. NOTE 7 - INCOME TAXES The income tax provision (benefit) for the years ended December 31, 2003 and 2002 differs from the computed expected provision (benefit) at the federal statutory rate for the following reasons:
2003 2002 --------------- -------------- Computed expected income tax provision (benefit) $ (1,606,000) $ (673,000) Net operating loss carryforward increased 1,356,000 964,000 Accrued litigation --- 85,000 Stock-based expenses 82,000 93,000 Beneficial conversion feature of convertible debt 168,000 38,000 Gain on disposal of subsidiary --- (507,000) --------------- -------------- Income tax provision (benefit) $ --- $ --- =============== ==============
F-14 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 7 - INCOME TAXES (CONTINUED) The components of the deferred tax assets and (liabilities) as of December 31, 2003 were as follows: Deferred tax assets: Temporary differences: Net operating loss carryforward $ 5,002,000 Valuation allowance (5,002,000) -------------- Net long-term deferred tax asset $ --- ============== The components of the deferred tax (expense) benefit were as follows for the years ended December 31, 2003 and 2002: December 31, 2003 2002 ----------- ---------- Deferred tax assets: Accrued expenses --- $ (83,000) Depreciation --- (4,000) Increase in net operating loss carryforward 1,723,000 1,356,000 Change in valuation allowance (1,723,000) (1,335,000) Loss on previous joint venture investment with Logan --- 66,000 ----------- ---------- $ --- $ --- =========== ========== As of December 31, 2003, the Company has net operating loss carryforwards available to offset future taxable income of approximately $12,500,000 expiring in 2005 through 2023. NOTE 8- STOCKHOLDERS' EQUITY PREFERRED STOCK The Company is authorized to issue up to 20,000,000 shares of preferred stock, $.01 par value per share in series to be designated by the Board of Directors. No preferred shares are issued. COMMON STOCK On August 8, 2003, the stockholders approved an increase in the number of shares of common stock authorized to 480,000,000 from 30,000,000. SALES OF COMMON STOCK During the year ended December 31, 2003, the Company sold 15,907,903 shares of common stock for a total of $3,319,255, $50,000 of which had been received prior to December 31, 2002, and had been recorded as a liability. The Company paid placement fees totaling $443,033 which includes $157,634 in placement fees to another company in which its President and CEO has an equity interest and $285,399 in placement fees to an unrelated company. Certain investors received warrants to purchase 349,300 shares of common stock at prices ranging from $0.27 to $0.65 per share. F-15 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 8- STOCKHOLDERS' EQUITY (CONTINUED) During the year ended December 31, 2002 the Company sold 2,121,312 shares of common stock for $399,000, $50,000 of which had been received prior to December 31, 2001 and had been recorded as a liability. The Company paid a $34,900 placement fee to a company controlled by its President and CEO. Certain investors received warrants to purchase 1,214,843 shares of common stock at prices ranging from $0.225 to $0.63 per share. STOCK ISSUED FOR SERVICES During August 2003, the Company entered into two agreements for strategic business planning, financial advisory, investor relations and public relations services. As compensation, the Company issued a total of 3,000,000 shares of its common stock to the consultants, valued at $1,110,000, the fair market value of the stock on the effective date of the agreements, which amount is being amortized over the one-year term of the agreements. As of December 31, 2003, the Company has recorded $740,000 as a prepaid expense and expensed $370,000 as consulting fees. On January 6, 2003, the Company entered into an agreement with an individual to provide consulting services through January 6, 2004 in connection with the Company's corporate business development and strategy. As compensation for services received, the Company issued 300,000 unrestricted shares of its common stock valued at $60,000 based upon the price of the Company's common stock on the date of issuance. The Company recognized $60,000 in related expenses. During 2003, the Company issued an additional 57,000 shares of its common stock to individuals for various consulting services rendered. The stock was valued at $11,280 based upon the price of the Company's common stock on the date of issuance. The Company recognized $11,280 in related expenses In February 2002, the Company entered into an agreement with an individual to provide consulting services through December 31, 2002 in connection with the Company's corporate business development and strategy. As compensation for services received, the Company issued 50,000 unrestricted shares of its common stock valued at $21,500 based upon the price of the Company's common stock on the date of issuance. The Company recognized $21,500 in related expenses. In August 2002, the agreement was amended and extended through June 30, 2003. An additional 50,000 unrestricted shares of the Company's common stock were issued as consideration. The shares were valued at $9,500 based on the price of the Company's common stock on the date of issuance. As of December 31, 2003, $9,500 had been expensed as consulting fees. During 2002, the Company issued an additional 630,000 shares of its common stock to individuals for various consulting services rendered. The stock was valued at $123,250 based upon the price of the Company's common stock on the date of issuance. The Company recognized $123,250 in related expenses. ISSUANCE OF OPTIONS AND WARRANTS On October 18, 2003, the Company issued warrants to purchase 600,000 shares of common stock at an exercise price of $0.60 per share to two individuals for services to be rendered during the period through October 15, 2004. The warrants expire October 15, 2008. The warrants were valued at $185,400, the fair market value using the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 3.32%, volatility was estimated at 93.5% and the expected life was five years. The amount was recorded as a prepaid expense and is being amortized over the term of the service period. F-16 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 8- STOCKHOLDERS' EQUITY (CONTINUED) In December 2002, the Company issued warrants to purchase 200,000 shares of its common stock for $0.26 per share, expiring in 2005 and valued at $31,438 in connection with an agreement for advisory board and product development services. The Company has recorded this amount as a prepaid consulting expense and is amortizing the expense over the two-year term of the contract. In estimating the expense, the Company used the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 2.63%, volatility was estimated at 93%, and the expected life was three years. In January 2002, the Company issued options to purchase 250,000 shares of its common stock at prices ranging from $1.00 to $2.00 per share, expiring in 2006 and valued at $79,674 for public relations services. In estimating the expense, the Company used the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 3.99%, volatility was estimated at 103%, and the expected life was four years. REPRICED AND EXERCISED WARRANTS In February 2003, the Company agreed to reprice warrants to purchase 300,000 shares of common stock related to outstanding debt from $2.25 and $4.50 per share to $0.12 per share. The repriced warrants were valued at $30,000, the fair market value using the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 1.19%, volatility was estimated at 93% and the expected life was one day. The value of the repriced warrants was expensed as loan fees. The warrants to purchase 300,000 shares of common stock were immediately exercised for proceeds of $36,000. During the second quarter of 2003, the Company agreed to reprice warrants to purchase 260,191 shares of common stock issued as incentive to exercise warrants from $4.00 per share to $0.10 per share. The repriced warrants were valued at $26,019, the fair market value using the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 1.12%, volatility was estimated at 91% and the expected life was one day. The value of the repriced warrants was expensed as stock based compensation. The warrants to purchase 259,858 shares of common stock were exercised for proceeds of $26,018. STOCK COMPENSATION PLAN Effective October 2001, the Company adopted the 2001 Employee Stock Compensation Plan (the "2001 Plan"), which provides for the issuance of the Company's common stock to selected officers, directors, employees, and consultants of the Company. 1,100,000 shares are reserved for issuance under the 2001 Plan. Unless terminated sooner, the 2001 Plan will terminate on June 1, 2005. STOCK OPTION PLAN During 2003, the Company adopted the 2003 Stock Incentive Plan ("the Plan"), which provides for the granting of stock and options to selected officers, directors, employees and consultants of the Company. 4,500,000 shares are reserved for issuance under the Plan for the granting of options. Unless terminated sooner, the Plan will terminate on June 22, 2013. The options issued under the Plan may be exercisable to purchase stock for a period of up to ten years from the date of grant. Incentive stock options granted pursuant to this Plan may not have an option price that is less than the fair market value of the stock on the date of grant. Incentive stock options granted to significant stockholders shall have an option price of not less than 110% of the fair market value of the stock on the date of grant. To date, no options have been granted under the Plan. F-17 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 8- STOCKHOLDERS' EQUITY (CONTINUED) The following table summarizes the activity of options and warrants under all agreements and plans for the two years ended December 31, 2003:
Number of Weighted Average Exercise --------------------------- ------------------------- Options Warrants Price Amount ------------ ----------- -------- ------------ Outstanding, December 31, 2001 1,894,821 1,606,938 $ 1.75 $ 6,121,004 Granted 960,446 1,414,843 .64 1,508,492 Expired/cancelled (153,250) (626,331) 1.17 (912,506) ------------ ----------- -------- ------------ Outstanding, December 31, 2002 2,702,017 2,395,450 1.32 6,716,990 Granted 6,800,000 949,300 .35 2,740,320 Repriced warrants exercised --- (559,858) 3.76 (2,102,445) Expired/cancelled (163,000) (289,349) 3.06 (1,382,879) ------------ ----------- -------- ------------- Outstanding, December 31, 2003 9,339,017 2,495,543 $ .50 $ 5,971,986 ============ =========== ======== =============
The following table summarizes information about stock options and warrants outstanding at December 31, 2003:
OPTIONS AND WARRANTS - ------------------------------------------------------------------------------------------- OUTSTANDING EXERCISABLE WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF REMAINING AVERAGE AVERAGE EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE ---------------- ------------ ------------- --------- ------------ ------------ $0.225 to $0.33 9,122,925 8.32 $0.323 9,122,925 $0.323 $0.35 to $0.525 405,862 1.00 $0.442 405,86 $0.442 $0.55 to $0.65 995,356 3.27 $0.594 995,356 $0.594 $0.875 to $1.00 1,057,142 0.98 $0.912 1,057,142 $0.912 $2.00 to $3.10 253,275 1.73 $2.244 253,275 $2.244 --------------- ------------ ------------ ----------- --------- ------------ $0.225 to $3.10 11,834,560 6.85 $ 0.50 11,834,56 $0.50 =============== ============ ============ =========== ========= ============
The weighted average exercise price of options at their grant date during the year ended December 31, 2003 where the exercise price equaled the market price on the grant date, was $0.33. No such options were granted during the year ended December 31, 2002. The weighted average exercise price of options at their grant date during the years ended December 31, 2003 and 2002, where the exercise price exceeded the market price on the grant date, was $0.55, and $0.65. The weighted average exercise price of options at their grant date during the years ended December 31, 2003 and 2002, where the exercise price was less than the market price on the grant date, was $0.37, and $0.38. F-18 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 8- STOCKHOLDERS' EQUITY (CONTINUED) The weighted average fair values of options at their grant date during the year ended December 31, 2003 where the exercise price equaled the market price on the grant date, were $0.29. The weighted average fair value of options at their grant date during the years ended December 31, 2003 and 2002, where the exercise price exceeded the market price on the grant date, was $0.55 and $0.14. The weighted average fair value of options at their grant date during the years ended December 31, 2003 and 2002, where the exercise price was less than the market price on the grant date, was $0.35 and $0.35. The estimated fair value of each option granted is calculated using the Modified European Black-Scholes option-pricing model. The weighted average assumptions used in the model were as follows: 2003 2002 ----------- ------------ Risk-free interest rate 4.29% 2.86% Volatility 93.41% 96.36% Expected life 9.27 years 2.59% Dividend yield 0.00% 0.00% NOTE 9- STOCK-BASED COMPENSATION The Company accounts for stock based compensation in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The standard requires the Company to adopt the "fair value" method with respect to stock-based compensation of consultants and other non-employees, which resulted in charges to operations of $54,345 and $79,674 during the years ended December 31, 2003 and 2002 respectively. Effective August 18, 2003, the board of directors of the Company granted an option to the President and CEO to purchase 6,800,000 shares of the Company's common stock at $0.33 per share, the closing price on the date of the grant. The option expires in ten years and is fully vested and immediately exercisable on the date of grant. The fair value of the option is estimated at $1,995,000 based on the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 4.49%, volatility was estimated at 93.5% and the expected life was ten years. NOTE 10 - COMMITMENTS AND CONTINGENCIES LEGAL JUDGMENT The Company leased its facilities under a long-term non-cancelable operating lease. The Company assigned the lease to Dasibi in March 2002. The Company was named in a lawsuit to collect past due rent. In November 2002, a judgment was entered against the Company for a total of $411,500, which has been accrued. (See Note 14.) EMPLOYMENT AGREEMENT In September 2001, the Company entered into an employment agreement with an individual serving in the capacity of Chairman of the Board, Chief Executive Officer and President of the Company. According to the agreement, there shall always be a minimum of at least five years remaining on the term of the agreement. Base salary is $250,000 to be adjusted on an annual basis, with an as yet undetermined cash bonus plan, provisions for use of a luxury automobile, club memberships, and insurance plans. In addition, as inducement to retain the services of the Officer, the Company granted the Officer options to purchase 1,150,000 shares of its common stock exercisable at $.30 per share. The Officer had waived claim to his cash compensation until June 1, 2003. In August 2003, the Board of Directors approved a bonus of $416,667 for the officer. The future minimum salary payable to the officer is $1,250,000. F-19 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED) LITIGATION The Company is a party to a number of lawsuits arising in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's operations, cash flows or financial position. LICENSE AGREEMENT On September 30, 2003, the Company entered into a license agreement with CalTech whereby CalTech granted us an exclusive, royalty-bearing license to make, use, and sell all products that incorporate the technology that was developed under the Technology Affiliates Agreement with JPL and is covered by related patents. In addition, the grant includes a nonexclusive, royalty-bearing license to make derivative works of the technology. The Company is required to make quarterly royalty payments to CalTech, ranging from 2% to 4% of net revenues for each licensed product made, sold, licensed, distributed, or used by the Company and 35% of net revenues that the Company receives from sublicensing the licensed products. A minimum annual royalty of $10,000 is due to CalTech on August 1, 2005 and each anniversary thereof. The minimum royalty will be offset by the abovementioned royalty payments, if any. NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION No cash was paid for income taxes during the years ended December 31, 2003 or 2002. Cash paid for interest was $747 and $7,661 during the years ended December 31, 2003 and 2002, respectively. NOTE 12 - SALE OF SUBSIDIARY AND DISCONTINUED OPERATIONS In March 2002, the Company entered into an agreement to sell Dasibi to one of its note holders in exchange for $1,500,000 of debt owed to the creditor. The purchaser assumed all liabilities of Dasibi as of the date of the agreement. The Company retained ownership of the inventory of Dasibi without limitations. Subsequent to the sale of Dasibi, the inventory was moved by Dasibi to a location unknown to the Company and the inventory has been written down to reflect the loss. The Company had granted options to the purchaser of the subsidiary to purchase the Company's common stock as follows: 50,000 at $0.25 per share, 100,000 at $0.50 per share, 528,571 at $0.875 per share, 100,000 at $1.00 per share and 21,875 at $3.10 per share. The options are vested immediately and expire in March 2005. The options are valued at the fair market value of $160,993 on the date of grant utilizing the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 4.73%, volatility was estimated at 99.86%, and the expected life was three years. The Company was granted a perpetual non-exclusive license for all products, software, technologies and other intellectual property (including the use of the name Dasibi and Dasibi Environmental Corp.) of Dasibi throughout the world with the exception of the Peoples Republic of China. As a result of the sale of Dasibi, the Company has reported the operations of Dasibi as discontinued operations. The Company sold Dasibi on March 18, 2002 in a transaction that closed on March 25, 2002. Dasibi had assets of approximately $967,000 and liabilities of approximately $2,072,000 as of December 31, 2001. The Company recorded a gain on the sale of Dasibi of $1,490,553 because the liabilities assumed by the purchaser exceed the fair market value of the assets transferred in the sale. F-20 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 12 - SALE OF SUBSIDIARY AND DISCONTINUED OPERATIONS (CONTINUED) Certain information with respect to discontinued operations of Dasibi is as follows: 2002 -------------- Net sales $ --- Cost of sales --- -------------- Gross profit --- Operating expenses 149,745 -------------- (Loss) before income tax expense (149,745) Income tax expense --- -------------- (Loss) from discontinued operations $ (149,745) ============== NOTE 13 - RELATED PARTY TRANSACTIONS Effective June 1, 2003, the Company entered into an agreement with Astor Capital, Inc. ("Astor"), a company in which its President and Chief Executive Officer has a 50% equity interest and is a co-founder and managing partner. The agreement requires the Company to pay $25,000 per month for investment banking and strategic advisory services as well as a 10% fee for all debt and equity financing raised by the Company. During 2003 the Company paid Astor approximately $378,000 in related expenses. In September 2003, the Company loaned $20,000 to NT Media Corp. of California, Inc. ("NT Media"), a related party entity in which Astor has a 6.4% equity interest and whose Director, Ali Moussavi, is a 50% partner in Astor. The bridge note is due upon the sooner of October 15, 2003, or upon NT Media raising additional funds of more than $50,000, and bears interest at the rate of 6%. The note has been extended by mutual consent and must be repaid from financing before any other creditor. In December 2003, the Company advanced another $10,000 and $20,000 under agreements, which provide for interest at 6% per annum and are due upon the sooner of February 24 and 29, 2004, respectively, or upon NT Media raising additional funds of more than $50,000. There is accrued interest of $445 due on these notes as of December 31, 2003. Restricted cash consists of a certificate of deposit, which guarantees an irrevocable letter of credit. The letter of credit has been provided for the benefit of Astor. During the year ended December 31, 2003, the Company advanced $28,654 to Astor. The Company and Astor intend to enter into a sub-lease agreement during the first quarter of 2004. The Company's restricted cash currently guaranteeing its letter of credit for the benefit of Astor will be incorporated as a condition of the sub-lease agreement when executed. The amounts currently due from Astor will be applied to a lease deposit when the sub-lease is executed. F-21 UNIVERSAL DETECTION TECHNOLOGY AND SUBSIDIARIES (FORMERLY POLLUTION RESEARCH AND CONTROL CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 NOTE 14 - PRIOR PERIOD RESTATEMENT The Company leased its facilities under a long-term non-cancelable operating leases. The Company assigned the lease to Dasibi in March 2002. The Company was named in a lawsuit to collect past due rent. In November 2002, a judgment was entered against the Company for a total of $411,500, which has been accrued. During the quarter ended June 30, 2004, a change was made to the retained earnings and accrued expenses of the Company to correct the legal judgment recorded during the year ended December 31, 2002. The Company originally recorded the amount of damages sought by the plaintiff, rather than the amount of the final judgment. The Company has retroactively restated net loss for the year ended December 31, 2002, increasing the net loss from $1,980,718 to $2,143,218 due to an adjustment of $162,500. NOTE 15 - SUBSEQUENT EVENTS Subsequent to year end, the Company sold 2,219,187 shares of its common stock for proceeds of $884,927. The Company paid placement fees totaling $91,783, which includes $26,504 paid to Astor. F-22 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 17, 2004 UNIVERSAL DETECTION TECHNOLOGY By: /s/ Jacques Tizabi ----------------------------------------------- Jacques Tizabi, President, Chief Executive Officer and Chairman of the Board of Directors In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: September 17, 2004 */s/ Jacques Tizabi ----------------------------------------------- Jacques Tizabi, President, Chief Executive Officer, Acting Chief Financial Officer and Chairman of the Board of Directors (Principal Executive, Financial and Accounting Officer) Date: September 17, 2004 * ----------------------------------------------- Michael Collins, Secretary and Director Date: September 17, 2004 * ----------------------------------------------- Matin Emouna, Director * By /s/ Jacques Tizabi ------------------------------------ Jacques Tizabi, attorney-in-fact F-23
EXHIBIT INDEX Item NUMBER DESCRIPTION 3.1 Articles of Incorporation of A. E. Gosselin Engineering, Inc. (now the Registrant) (incorporated herein by reference to Exhibit 3(a) to the Amendment No. 1 to the Registration Statement on Form 10 of Dasibi Environmental Corporation). 3.2 Certificate of Amendment of Articles of Incorporation of A. E. Gosselin Engineering, Inc. (now the Registrant) (incorporated herein by reference to Exhibit 3(a) to the Amendment No. 1 to the Registration Statement on Form 10 of Dasibi Environmental Corporation). 3.3 Certificate of Amendment of Articles of Incorporation of Dasibi Environmental Corp. (now the Registrant) (incorporated herein by reference to Exhibit 3(a) to the Amendment No. 1 to the Registration Statement on Form 10 of Dasibi Environmental Corporation). 3.4 Amended and Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.4 of the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2001, filed on April 15, 2002). 10.1 Binding letter of Intent dated March 19, 2002, by and between Registrant and Steven Sion (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on March 22, 2002). 10.2* Employment Agreement by and between Registrant and Jacques Tizabi dated September 25, 2001 (incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-QSB for the Quarter Ended March 31, 2002, filed on May 20, 2002). 10.3 Technology Affiliates Agreement by and between Registrant and California Institute of Technology, dated August 6, 2002. (incorporated herein by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002, filed on April 15, 2003). 10.4 Licensing Agreement by and between Universal Detection Technology and California Institute of Technology, dated September 30, 2003 (incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-QSB for the Quarter Ended September 30, 2003, filed on November 19, 2003). 10.5 Agreement for Investment Banking and Advisory Services, by and between the Registrant and Astor Capital, Inc., dated June 1, 2003. 14.1 Code of Business Conduct and Ethics of Registrant. 21.1 List of Subsidiaries of Registrant. 31.1 Certification of Principal Executive and Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Principal Executive and Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - ------------------------ * Management contract or compensatory plan or arrangement.
F-24 EX-31 2 exhibit_31-1.txt EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND ACTING CHIEF FINANCIAL OFFICER OF UNIVERSAL DETECTION TECHNOLOGY I, Jacques Tizabi, certify that: 1. I have reviewed this annual report on Form 10-KSB/A of Universal Detection Technology; 2. Based on my knowledge, this annual 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 the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this annual report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and we 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 small business issuer, 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 small business issuer's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and c) Disclosed in this annual report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial data and have identified for the small business issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: September 17, 2004 By: /s/ Jacques Tizabi -------------------------------------- Jacques Tizabi Principal Executive Officer and Acting Chief Financial Officer 16 EX-32 3 exhibit_32-1.txt EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND ACTING CHIEF FINANCIAL OFFICER OF UNIVERSAL DETECTION TECHNOLOGY This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the Annual Report on Form 10-KSB/A (the "Form 10-KSB/A") for the year ended December 31, 2003, of Universal Detection Technology (the "Issuer"). I, Jacques Tizabi, the Chief Executive Officer and Acting Chief Financial Officer of the Issuer, certify that to the best of my knowledge: (i) the Form 10-KSB/A fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (ii) the information contained in the Form 10-KSB/A fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Dated: September 17, 2004. /s/ Jacques Tizabi ----------------------------- Name: Jacques Tizabi -----END PRIVACY-ENHANCED MESSAGE-----