-----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, VA0LH3s0yG4WssSdiB159gwpAs+0eBZbiQd0AFC5d8/zyWM5XnPyGQmcDQH0JXt2 oFEOL43Plt3ubhGZ43ncLA== 0001019687-02-000061.txt : 20020413 0001019687-02-000061.hdr.sgml : 20020413 ACCESSION NUMBER: 0001019687-02-000061 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20020115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIONIX CORP /UT/ CENTRAL INDEX KEY: 0000764667 STANDARD INDUSTRIAL CLASSIFICATION: MACHINE TOOLS, METAL CUTTING TYPES [3541] IRS NUMBER: 870428526 STATE OF INCORPORATION: UT FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 002-95626-D FILM NUMBER: 2509869 BUSINESS ADDRESS: STREET 1: 9272 JERONIMO RD STREET 2: SUITE 108 CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 9494549283 MAIL ADDRESS: STREET 1: 9272 JERONIMO RD STREET 2: SUITE 108 CITY: MISSION VIEJO STATE: CA ZIP: 92618 FORMER COMPANY: FORMER CONFORMED NAME: AUTOMATIC CONTROL CORP /NV DATE OF NAME CHANGE: 19960422 FORMER COMPANY: FORMER CONFORMED NAME: CORONADO CAPITAL CORP DATE OF NAME CHANGE: 19950111 FORMER COMPANY: FORMER CONFORMED NAME: SIONIX CORP DATE OF NAME CHANGE: 19960214 10KSB 1 sionix_10k-093001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended September 30, 2001 Commission File No.2-95626-D SIONIX CORPORATION (Name of small business issuer in its charter) UTAH 87-0428526 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 9272 JERONIMO ROAD, SUITE 108, IRVINE, CA 92618 (Address of principal executive offices) (Zip Code) Issuer's Telephone Number: (949) 454-9283 Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK, PAR VALUE $.001 PER SHARE (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 12 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 there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is 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. [X] The issuer's revenues for the year ended September 30, 2001 were $0. The aggregate market value of the voting stock held by non-affiliates as of September 30, 2001, computed based on the average of the bid and ask prices reported on the OTC Bulletin Board, was $9,035,630. As of September 30, 2001, there were 62,688,698 shares of Common Stock of the issuer outstanding. Documents Incorporated by Reference: NONE Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] PART I ITEM 1. DESCRIPTION OF BUSINESS. GENERAL. Sionix Corporation (the "Company") designs and plans to manufacture and market equipment for improving the treatment of water for commercial, industrial and public water treatment facilities. The Company's principal activities have been in the areas of research, development and testing of its products. The Company was incorporated in Utah in 1996, and its executive offices and principal operations are located at 9272 Jeronimo Road, Irvine, California 92618. Its telephone number is (949) 454-9283, and its website is located at www.sionix.com. INDUSTRY BACKGROUND. The purification and treatment of municipal drinking water and wastewater to eliminate contaminants injurious to health and the environment is a worldwide concern. In 1995, the world spent an estimated $335 billion for the purification of drinking water, wastewater treatment and treatment of industrial process water and fluids. World spending for drinking water purification and municipal wastewater treatment only is estimated to reach $300 billion per year (plus another $200 billion for industrial treatment needs) by year 2000. STRATEGY. The Company was formed to develop advanced water treatment technology for public and private potable drinking water systems and wastewater treatment systems, as well as industrial systems. In the United States alone there are approximately 200,000 public rural water districts, the great majority of which serve populations of less then 10,000, and are considered "small public water systems". The Company believes that a substantial portion of these districts operate in violation of the U.S. Safe Drinking Water Act, and those numbers are expected to increase as more stringent Environmental Protection Agency rules for small public water systems become effective. In addition, urbanization in the third world and the spread of agricultural activities has increased the demand for public water systems. The company has targeted (1) small to medium public water districts that provide communities with drinking water or sewage treatment service and (2) water reclamation systems of commercial-industrial clients that create and dispose of contaminated wastewater. PRODUCTS. Sionix Modular Solids Separator Filtration System. Dissolved Air Flotation ("DAF") technology is an established method for water treatment. The Company's DAF Particle Separator utilizes and refines this technology for a highly efficient pre-treatment process using ordinary oxygen. In addition, it helps ordinary filters meet new EPA Safe Drinking Water Act (SDWA) regulations and eliminates potentially cancer-causing disinfection by-product precursors while reducing the risk of bacterial or parasitic contamination, particularly THM's, cryptosporidium and giardia. The Company's patented equipment systems are designed for quick installation, easy access for simple maintenance and to be cost-effective for even the smallest water utilities or commercial applications. A major problem facing the water treatment industry is the difficulty in monitoring and disposing of microscopic parasites such as Cryptosporidium (4-5 microns) and Giardia cysts (7-12 microns), common chlorine-resistant organisms that have infected millions of people in the United States. Sand-anthracite water filtration beds, in use in most of the nation's public water districts, will not filter out these parasites and experience frequent breakthroughs of Cryptosporidium sized particles. The Company uses a more efficient method of saturating recirculated post-filter water with excess dissolved air, and injecting this excess air in the form of microscopic bubbles in a DAF particle separator. Pressurized water can hold an excess amount of dissolved air and forms microscopic bubbles when injected into water, which has a lower pressure. A booster pump recirculates a small amount (approximately 10%) of the post-filtered water through the dissolved air-saturation system. Oxygen and nitrogen molecules are transferred directly into the recirculated high-pressure water without forming air bubbles. This method of transferring air into water is 100% efficient, and reduces the amount of energy required to saturate recirculated water with excess dissolved air. The Sionix DAF separator provides a denser concentration of white water bubbles. This process requires less energy than a conventional system, and a fraction of the floor space. In general, water districts using sand-anthracite filters cannot meet the new EPA Surface Water Treatment rules without a massive increase in on-site chemical filter-aids, additional filtering and the installation of ozone or other disinfection equipment. Plant operators must continually test raw influent water to adjust chemical filter aid dosage properly. Chemical and metal (alum) filter-aids increase sludge volume and landfill disposal problems. Each basic DAF module has a flow-through of 200 gallons per minute (288,000 gallons per day), an amount necessary to supply all the drinking and potable water requirements for approximately 2,400 people. And because modules can be manifolded to meet any gallon per day requirement, many larger facilities can benefit by this technology. The Company's systems include automatic computer controls to optimize ozone concentration levels and reduces monthly energy costs. Higher ozone contact concentration levels using smaller sized generators are possible if most of the algae are removed first by DAF. Extended contact time increases collision rate of ionized ozone molecules with negatively charged organic suspended particles. By utilizing the Sionix DAF particle separator to pre-treat the feedwater, less energy is required to create the appropriate amount of ozone. By creating a turbulent flow of water and gas within the mixing chamber, the Company has achieved a much higher saturation with less ozone (and a minimum of excess ozone) than in other mixing methods. This equipment was designed to match flow-throughs with the Sionix DAF particle separator, can also be manifolded to create more flow-through, is installed, not constructed, and can be used with or without the DAF system, depending on the quality of the feedwater. THE JOINT VENTURE. In October 2000 the Company entered into a joint venture arrangement with the Environmental Products Division of Hoffinger Industries ("Hoffinger"), through the development of a limited liability company known as EPD/Sionix Joint Venture, LLC. Hoffinger is a privately held corporation which develops and manufactures commercial water filtration systems and equipment for pools, water parks, and drinking water systems, as well as above ground swimming pools, pumps, filters, and accessories. Hoffinger has been involved in the water industry for over 55 years. Under the joint venture arrangement, the Company and Hoffinger were to jointly develop, manufacture and market water filtration products, with the Company furnishing the technology and engineering expertise and Hoffinger handling most of the manufacturing, marketing and distribution. However, Hoffinger has filed for bankruptcy protection under Chapter 11 of the Federal Bankruptcy Code, and the joint venture is inactive. The Company plans to conduct its manufacturing through contract manufacturers. MARKETING AND CUSTOMERS. The potable water market includes residential, commercial, and food service customers throughout the world. According to industry data, it is estimated that one billion people in the world do not have safe drinking water. Demand is driven both by consumers' desire to improve the taste and quality of their drinking water and by the expanded concern of regulatory agencies. There is significant market potential in Asian, Pacific and Latin American countries, where the quality of drinking water has been found to be severely deficient in several regions. Outbreaks of cryptosporidium and giardia cyst in the United States and Australia have also raised health concerns in major developed countries. Water safety concerns have driven the growth of the consumer bottled water market to over $2 billion in the United States, as well as the growth in the water filtration market. The food service industry has an increasing need for consistent global product quality. Food service includes water used for fountain beverages, steam ovens, coffee and tea. Specifically, restaurants have become increasingly aware of the need for water filtration to control the taste and quality of the water used in their businesses. In the United States, the Company plans to initially target the established base of small to medium water providers, as well as industrial users (such as the dairy industry, meat and poultry producers, food and beverage processors, pharmaceuticals, cooling tower manufacturers and oil and gas producers) with a need for a clean, consistent water supply. Outside the United States, the Company plans to market to local water systems. The Company's marketing efforts emphasize that its products are easily expandable and upgradable; for example, adding ozone and microfiltration equipment to a DAF unit is similar to adding a new hard drive to a personal computer. Each piece of equipment comes with state-of-the-art telemetry and wet-chemistry monitoring that expands as the system does. The Company plans to provide lease financing for all of its products, not only making it easy for a customer to acquire the equipment, but also guaranteeing that the customer will always have access to any refinements and improvements made to the Company's products. The Company plans to market its products through its marketing and sales department, their contacts and inquiries, direct mail, participation in industry groups, trade shows, and through selected advertising in specialized publications. PATENTS. The Company holds seven U.S. patents on technology incorporated into the Sionix Particle Separator Treatment System and related components. One patent covers an automatic backflushing system using air pressure to activate the valves and another concerns the ozone mixing system. The Company also holds several patents on the inline wet-chemistry water quality monitoring system, and regularly processes new patent applications. The extent to which patents provide a commercial advantage or inhibit the development of competing products varies. To some extent, however, the Company is required to rely upon common law concepts of confidentiality and trade secrets, as well as economic barriers created by the required investments in tooling and technical personnel and the development of customer relationships, to protect its proprietary products. COMPETITION. The Company's products will compete with other producers of water filtration and purification equipment, such as U.S. Filter and Cuno, Inc., many of which are more established and have significantly greater resources. In addition to conventional methods such as chlorination and ozonation, the Company's products may also compete with other new technologies for water filtration. Competitive factors include system effectiveness, operational cost, practicality of application, pilot study requirements and potential adverse environmental effects. In competing in this marketplace, the Company will have to address the conservative nature of public water agencies and fiscal constraints on the installation of new systems and technologies. REGULATORY MATTERS. Process water treatment plants and wastewater plants must comply with clean water standards set by the Environmental Protection Agency under the authority of the Clean Water Act and standards set by states and local communities. In many jurisdictions, including the United States, because process water treatment facilities and wastewater treatment systems require permits from environmental regulatory agencies, delays in permitting could cause delays in construction or usage of the systems by prospective customers. RESEARCH AND DEVELOPMENT. The Company invests significantly in the development of products for new applications. Only direct costs associated with tooling for new products are capitalized. All other costs, including salaries and wages of employees included in research and development, are expensed as incurred. Most of the Company's research and development efforts are in connection with development and refinement of the DAF Particle Separator and related components. RAW MATERIALS. Materials and components to be used by the Company for manufacturing will be carefully selected based on stringent specifications for usage and operating conditions. At the outset, the specification of parts and raw materials will be jointly managed by Sionix and Hoffinger Industries through the joint venture arrangement, utilizing many of Hoffinger's existing procurement resources. Every effort will be made to specify parts from multiple sources for independence from manufacturers and distributors. In developing its products, the Company has avoided using hard-to-get special parts to further minimize dependency from vendors. Simplicity in design and the use of common, widely used and readily available components is emphasized. EMPLOYEES. At September 30, 2001, the Company had four full-time employees, none of whom are covered by any collective bargaining agreement. The Company considers its relationship with its employees to be good. ITEM 2. DESCRIPTION OF PROPERTY. The Company's office/manufacturing facility is located in Irvine, California and is leased pursuant to a lease expiring in July of 2004. The facility consists of approximately 3,400 square feet, including office area and adjoining manufacturing/ warehouse area. Management believes the Company's facility will provide adequate space for its office, product assembly and warehouse activities, although it may lease additional space for component assembly and warehouse uses, depending on demand. The Company believes that suitable additional space will be available to accommodate planned expansion. ITEM 3. LEGAL PROCEEDINGS. The Company filed an action for professional negligence, malpractice, breach of fiduciary duty and breach of contract against Gilliam, Duncan & Harms, its previous patent counsel (San Diego County Superior Court, Case No. GIC 754391). The action alleged that the patent attorneys represented the Company and Jack Moorehead, former President of the Company, contemporaneously and failed to advise the corporation of the inherent conflict of interest in representing both parties. The action further alleged the patent attorneys aided Moorehead and others in misappropriating the Company's intellectual property and trade secrets. The action went to trial, and in December 2001 a minute order was issued announcing a judgment in favor of Sionix against the defendants in the amount of $525,962. The judgment is still subject to appeal. The Company also filed a separate action against two law firms that had previously represented the Company, Wenthur & Chachas and Mitchell & Huston (San Diego County Superior Court Case No. GIC 747267). On January 15, 2002, Sionix entered into a settlement agreement with Wenthur & Chachas, Cris John Wenthur and George G. Chachas, prior corporate counsel to the Company, providing for the reduced payment in full satisfaction of the judgment against the Company obtained by Wenthur & Chachas, Cris John Wenthur and George G. Chachas, in the matter entitled Sionix Corporation v. Wenthur & Chachas, et. al. On August 3, 2001, the court in the above entitled case granted the Summary Judgement Motion of Wenthur & Chachas, Cris John Wenthur and George G. Chachas, against the Company and on September 5, 2001, entered judgment against the Company and order that Wenthur & Chachas, Cris John Wenthur and George G. Chachas shall recover from the Company costs of the suit in the amount of $2,407.00 and attorneys fees in the amount of $69,074.10. The Company was precluded from proceeding to trial where Sionix intended to present evidence to support the allegations against Wenthur & Chachas. The Court granted a motion by Wenthur & Chachas which enforced a prior settlement and release agreement entered into by prior Company management and Wenthur & Chachas in January 1998. The Company believes that the Court of Appeal would reverse the court's decision and would allow the case to proceed to trial on its merits. Wenthur & Chachas believe that the Court of Appeal would uphold the lower court's decision which prevented a trial. However, both parties recognizing the additional expense and time of a lengthy appellate process have agreed to settle this matter. Pursuant to the terms of the settlement agreement the judgment against the Company has been satisfied for an undisclosed amount, the Company has dismissed its appeal and the parties have released and waived any and all respective claims against each other. The action against Mitchell and Huston alleges legal malpractice in advising the Company on the settlement agreement with Wenthur & Chachas. The case against Mitchell & Huston is expected to go to trial in early 2002. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is listed and traded on the OTC Bulletin Board under the symbol "SINX". There has been relatively limited trading activity in the Company's stock since inception. The following table represents the high and low bid prices for the Company's common stock for each quarter of the fiscal year ended September 30, 2001. Fiscal 2001 High Low ----------- ---- --- First Quarter $ .88 .23 Second Quarter .47 .19 Third Quarter .45 .12 Fourth Quarter .34 .19 Fiscal 2000 High Low ----------- ---- --- First Quarter $ .375 .065 Second Quarter 3.875 .203 Third Quarter 1.781 .937 Fourth Quarter 1.01 .66 There were approximately 759 holders of record of the Company's common stock as of September 30, 2001. The Company has never declared or paid any cash dividend on its shares of common stock. During the fiscal year ended September 30, 2001, the Company sold 6,105,000 shares of Common Stock to approximately 70 purchasers, with gross proceeds of $610,500. The Company believes all such sales were exempt from registration under the Securities Act of 1933 by reason of Section 4(2) thereof and Regulation D thereunder. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. GENERAL. As of September 30, 2001, the Company had an accumulated deficit of $9,522,180. It can be expected that the future operating results will continue to be subject to many of the problems, expenses, delays and risks inherent in the establishment of a new business enterprise, many of which the Company cannot control. The Company has formulated its business plans and strategies based on certain assumptions of the Company's management regarding the size of the market for the products the Company will be able to offer, the Company's anticipated share of the market, and the estimated prices for and acceptance of the Company's products. Although these plans and assumptions are based on the best estimates of management, there can be no assurance that these assessments will prove to be correct. No independent marketing studies have been conducted on behalf of or otherwise obtained by the Company, nor are any such studies planned. Any future success that the Company might enjoy will depend upon many factors, including factors which may be beyond the control of the Company or which cannot be predicted at this time. These factors may include product obsolescence, increased levels of competition, including the entry of additional competitors and increased success by existing competitors, changes in general economic conditions, increases in operating costs including cost of supplies, personnel and equipment, reduced margins caused by competitive pressures and other factors, and changes in governmental regulation imposed under federal, state or local laws. RESULTS OF OPERATIONS (YEAR ENDED SEPTEMBER 30, 2001 COMPARED TO YEAR ENDED SEPTEMBER 30, 2000). During the 2001 fiscal year the focus of the Company's efforts have been on preparation for commencement of manufacturing and distribution of its products, including the DAF (Dissolved Air Flotation), Automatic Back-Flush Filtration System, O-Zone Mixing Chamber and other related products. The Company is continuing its engineering focus on hardware and water filtration equipment. The Company has completed testing, and has previewed its products with experienced treatment plant managers and certified operators to gauge their level of acceptance. The Company has also been working with Hoffinger Industries, its joint venture partner, to prepare for manufacturing of the products. Also, the Company has arranged for lease and maintenance financing for its product lines. For the year ended September 30, 2001, the Company reported a loss of $1,353,429 or $.02 per share. This compares with a loss of $2,414,188, or $.07 per share for the year ending September 30, 2000. The decrease in the net loss is principally due to non-cash expenses for the prior period relating to stock compensation to officers and employees; no stock compensation was paid to officers or employees during the current period, as they became subject to a stock option plan. This was offset by increased legal fees due to increased levels of activity in the pending litigation during the current period, as compared with the prior year. Research and development costs for the year were $176,847, a slight decrease from the prior year. LIQUIDITY AND CAPITAL RESOURCES. On September 30, 2001, the Company had cash and cash equivalents of approximately $21,827, along with restricted cash of $140,000. The principal source of liquidity has been sales of securities. Management anticipates that additional capital will be required to finance the Company's operations. The Company believes that anticipated proceeds from sales of securities, plus expected cash flow from operations towards the end of the fiscal year, will be sufficient to finance the Company's operations at currently anticipated levels for a period of at least twelve months. However, there can be no assurance that the Company will not encounter unforeseen difficulties that may deplete its capital resources more rapidly than anticipated. Also, the Company may not be able to generate revenues from operations during the fiscal year. ITEM 7. FINANCIAL STATEMENTS SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) FINANCIAL STATEMENTS SEPTEMBER 30, 2001 C O N T E N T S Independent Auditors' Report.............................................F-1 Report of Independent Certified Public Accountants.......................F-2 Balance Sheet............................................................F-3 Statements of Operations.................................................F-4 Statements of Stockholders' Deficit......................................F-5 Statements of Cash Flows.................................................F-7 Notes to the Financial Statements........................................F-8 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors Sionix Corporation (A development stage company): We have audited the accompanying balance sheet of Sionix Corporation, a Utah Corporation (the "Company") as of September 30, 2001 and the related statements of operations, stockholders' deficit and cash flows for the year then ended and for the period from commencement of development stage on October 3, 1994 to September 30, 2001. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sionix Corporation as of September 30, 2001 and the results of its operations and its cash flows for the period from inception (October 3, 1994) to September 30, 2001 in conformity with accounting principles generally accepted in the United States of America. The Company's financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has accumulated deficit of $9,522,180 and negative working capital of $377,146 on September 30, 2001. These factors as discussed in Note 13 to the financial statements, raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 13. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KABANI & COMPANY, INC. CERTIFIED PUBLIC ACCOUNTANTS Fountain Valley, California December 6, 2001 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------- Board of Directors and Stockholders Sionix Corporation (A Development Stage Company) We have audited the accompanying statements of operations, stockholders' equity (deficit) and cash flows of Sionix Corporation (a development stage company) for the year ended September 30, 2000. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements of operations, stockholders' equity (deficit) and cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements of operations, stockholders' equity (deficit) and cash flows. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of statements of operations, stockholders' equity (deficit) and cash flows. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the statements of operations, stockholders' equity and cash flows referred to above present fairly, in all material respects, the results of operations and cash flows of Sionix Corporation (a development stage company) for the year ended September 30, 2000 in conformity with accounting principles generally accepted 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 13 to the financial statements, the Company has incurred significant losses since its inception and lacks the capital necessary to pursue its operating plan. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note 13. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ CACCIAMATTA ACCOUNTANCY CORPORATION Irvine, California April 5, 2001 F-2 SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET SEPTEMBER 30, 2001 ASSETS ------ CURRENT ASSETS: Cash & cash equivalents $ 21,827 Restricted cash 140,000 Prepaid expense 30,000 Other receivable 118 ------------ Total current assets 191,945 PROPERTY AND EQUIPMENT, net 26,275 INTANGIBLE ASSETS, net 85,738 DEPOSITS 6,831 ------------ $ 310,789 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- CURRENT LIABILITIES: Accounts payable $ 213,555 Accrued expenses 110,819 Accrued interest-related parties 20,454 Notes payable-related parties 224,263 ------------ Total current liabilities 569,091 COMMITMENTS & CONTINGENCIES STOCKHOLDERS' DEFICIT Common stock, $0.001 par value; 100,000,000 shares authorized; 62,688,698 shares issued and outstanding 62,688 Additional paid-in capital 9,229,213 Shares to be issued 113,295 Unamortized consulting fees (141,318) Deficit accumulated from inception (9,522,180) ------------ Total stockholders' deficit (258,302) ------------ $ 310,789 ============ The accompanying notes are an integral part of these financial statements. F-3 SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
CUMULATIVE FROM INCEPTION YEAR ENDED SEPTEMBER 30, (OCTOBER 3, 1994) TO 2001 2000 SEPTEMBER 30, 2001 ------------- ------------- ------------- REVENUES $ - $ - $ - EXPENSES: General and administrative 1,242,497 2,168,462 6,837,434 Research and development 176,847 182,308 1,216,593 Write-off of obsolete intangibles - - 1,040,865 Depreciation and amortization 28,336 51,847 354,038 ------------- ------------- ------------- 1,447,680 2,402,617 9,448,930 ------------- ------------- ------------- OPERATING LOSS (1,447,680) (2,402,617) (9,448,930) OTHER INCOME(EXPENSE) Interest income 9,596 24,440 42,319 Interest expense - (4,000) (110,923) Interest expense-related parties (7,950) (31,111) (91,851) Other expense (16,981) - (16,981) Legal settlement 110,486 - 110,486 ------------- ------------- ------------- 95,151 (10,671) (66,950) ------------- ------------- ------------- LOSS BEFORE INCOME TAXES (1,352,529) (2,413,288) (9,515,880) Income taxes 900 900 6,300 ------------- ------------- ------------- NET LOSS $ (1,353,429) $ (2,414,188) $ (9,522,180) ============= ============= ============= BASIC WEIGHTED AVERAGE NUMBER OF COMMON STOCK OUTSTANDING 55,603,611 49,861,728 ============= ============= BASIC NET LOSS PER SHARE $ (0.02) $ (0.05) ============= ============= DILUTED WEIGHTED AVERAGE NUMBER OF COMMON STOCK OUTSTANDING 55,603,611 49,861,728 ============= ============= DILUTED NET LOSS PER SHARE $ (0.02) $ (0.05) ============ ============ The accompanying notes are an integral part of these financial statements.
F-4 SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' DEFICIT FROM INCEPTION (OCTOBER 3, 1994) TO SEPTEMBER 30, 2001
Common Stock Deficit Total ---------------------- Additional Stock Stock Unamortized accumulated Stockholders' Number of Paid-In to be subscription consulting from Equity Shares Amount Capital issued receivable fees inception (Deficit) ------------ --------- ------------ -------- ------------ ------------ ------------ ------------ Shares issued for cash-Oct 1994 10,000 $ 10 $ 90 - $ - $ - $ - $ 100 Net loss for period Oct 3, 1994 to Dec 31, 1994 - - - - - - (1,521) (1,521) ------------ --------- ------------ -------- ------------ ------------ ------------ ------------ Balance December 31, 1994 10,000 10 90 - - - (1,521) (1,421) Shares issued for assignment right 1,990,000 1,990 (1,990) - - - - - Issuance of shares for service 572,473 572 135,046 - - - - 135,618 Issuance of shares for debt 1,038,640 1,038 1,164,915 - - - - 1,165,953 Issuance of shares for cash 232,557 233 1,119,027 - - - - 1,119,260 Issuance of shares for subscription note receivable 414,200 414 1,652,658 - (1,656,800) - - (3,728) Issuance of shares for future production cost 112,500 113 674,887 - (675,000) - - - Net loss for the year ended December 31, 1995 - - - - - - (914,279) (914,279) ------------ --------- ------------ -------- ------------ ------------ ------------ ------------ Balance December 31, 1995 4,370,370 4,370 4,744,633 - (2,331,800) - (915,800) 1,501,403 Issuance of shares for reorganization 18,632,612 18,633 (58,033) - - - - (39,400) Issuance of shares for cash 572,407 573 571,834 - - - - 572,407 Issuance of shares for service 24,307 24 24,283 - - - - 24,307 Net loss for the nine month ended September 30, 1996 - - - - - - (922,717) (922,717) ------------ --------- ------------ -------- ------------ ------------ ------------ ------------ Balance September 30, 1996 23,599,696 23,600 5,282,717 - (2,331,800) - (1,838,517) 1,136,000 Share issued for cash 722,733 723 365,857 - - - - 366,580 Share issued for service 274,299 274 54,586 - - - - 54,860 Cancellation of shares (542,138) (542) (674,458) - 675,000 - - - Net loss for the year ended September 30, 1997 - - - - - - (858,915) (858,915) ------------ --------- ------------ -------- ------------ ------------ ------------ ------------ Balance September 30, 1997 24,054,590 $ 24,055 $ 5,028,702 $ - $(1,656,800) $ - $(2,697,432) $ 698,525 The accompanying notes are an integral part of these financial statements. F-5 SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' DEFICIT FROM INCEPTION (OCTOBER 3, 1994) TO SEPTEMBER 30, 2001 Common Stock Deficit Total ---------------------- Additional Stock Stock Unamortized accumulated Stockholders' Number of Paid-In to be subscription consulting from Equity Shares Amount Capital issued receivable fees inception (Deficit) ------------ --------- ------------ -------- ------------ ------------ ------------ ------------ Balance September 30, 1997 24,054,590 $ 24,055 $ 5,028,702 $ - $(1,656,800) $ - $(2,697,432) $ 698,525 Share issued for cash 2,810,000 2,810 278,190 - - - - 281,000 Share issued for service 895,455 895 88,651 - - - - 89,546 Shares issued for compensation 2,200,000 2,200 217,800 - - - - 220,000 Cancellation of shares (2,538,170) (2,538) (1,534,262) - 1,656,800 - - 120,000 Net loss for the year ended September 30, 1998 - - - - - - (1,898,376) (1,898,376) ------------ --------- ------------ -------- ------------ ------------ ------------ ------------ Balance September 30, 1998 27,421,875 27,422 4,079,081 - - - (4,595,808) (489,305) Shares issued for compensation 3,847,742 3,847 389,078 - - - - 392,925 Share issued for service 705,746 706 215,329 - - - - 216,035 Share issued for cash 9,383,000 9,383 928,917 - - - - 938,300 Net loss for the year ended September 30, 1999-Restated - - - - - - (1,158,755) (1,158,755) ------------ --------- ------------ -------- ------------ ------------ ------------ ------------ Balance September 30, 1999 41,358,363 41,358 5,612,405 - - - (5,754,563) (100,800) Share issued for cash 10,303,500 10,304 1,020,046 - - - - 1,030,350 Shares issued for compensation 1,517,615 1,518 1,218,598 - - - - 1,220,116 Shares issued for service 986,844 986 253,301 - - - - 254,287 Net loss for the year ended September 30, 2000 - - - - - - (2,414,188) (2,414,188) ------------ --------- ------------ -------- ------------ ------------ ------------ ------------ Balance September 30, 2000 54,166,322 54,166 8,104,350 - - - (8,168,751) (10,235) Shares issued for service and prepaid expenses 2,517,376 2,517 530,368 - - (141,318) - 391,567 Share issued for cash 6,005,000 6,005 594,495 - - - - 600,500 100,000 share to be issued for cash - - 10,000 - - - 10,000 639,509 Shares to be issued for debt settlement in 2001 - - 103,295 - - - 103,295 Net loss for the period ended September 30, 2001 - - - - - - (1,353,429) $(1,353,429) ------------ --------- ------------ -------- ------------ ------------ ------------ ------------ Balance September 30, 2001 62,688,698 $ 62,688 $ 9,229,213 $113,295 $ - $ (141,318) $(9,522,180) $ (258,302) ============ ========= ============ ======== ============ ============ ============ ============ The accompanying notes are an integral part of these financial statements. F-6
SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
Cumulative from inception Year Ended September 30, (October 3, 1994) to 2001 2000 September 30, 2001 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(1,353,429) $(2,414,188) $(9,522,180) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 28,336 51,847 354,038 Issuance of common stock for compensation - 1,220,116 1,833,041 Issuance of common stock for services 391,567 254,287 1,166,220 Write-down of obsolete assets - 38,862 38,862 Write-down of intangible assets - - 1,040,865 Other - - 57,351 (Increase) decrease of other assets (30,118) 1,164 (30,118) (Increase) decrease of deposits - 30,400 (6,831) Increase (decrease) in accounts payable 205,683 (11,023) 213,555 Increase (decrease) in accrued interest-related party (63,447) 31,110 20,454 Increase (decrease) in accrued interest (15,331) 4,000 16,982 Increase (decrease) in accrued expense 85,887 (28,752) 110,820 ------------ ------------ ------------ Total adjustments 602,577 1,592,011 4,815,239 ------------ ------------ ------------ Net cash used in operating activities (750,852) (822,177) (4,706,941) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of certificate of deposit (40,000) (100,000) (140,000) Purchase of patents - - (135,033) Purchase of equipment (11,045) (3,635) (225,272) ------------ ------------ ------------ Net cash used in investing activities (51,045) (103,635) (500,305) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes to related party - - 345,773 Proceeds from (repayment of) notes (50,000) - - Proceeds from (repayments of) notes to related party (16,775) (9,000) (35,197) Issuance of common stock for cash 600,500 1,030,350 4,908,497 Receipt of cash for stock to be issued 10,000 - 10,000 ------------ ------------ ------------ Net cash provided by financing activities 543,725 1,021,350 5,229,073 ------------ ------------ ------------ Net inrease (decrease) in cash & cash equivalents (258,172) 95,538 21,827 CASH & CASH EQUIVALENTS, BEGINNING 279,999 184,461 - ------------ ------------ ------------ CASH & CASH EQUIVALENTS, ENDING $ 21,827 $ 279,999 $ 21,827 ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Stock issued for consulting services & prepaid $ 530,368 $ - $ 530,368 ============ ============ ============ Acquisition of intangible for debt $ - $ - $ 1,185,475 ============ ============ ============ Settlement of debt with equity $ 103,294 $ - $ 1,269,247 ============ ============ ============ CASH PAID FOR: Interest $ - $ - $ 2,134 ============ ============ ============ Income taxes $ 900 $ 900 $ 6,300 ============ ============ ============ The accompanying notes are an integral part of these financial statements. F-7
SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS 1. ORGANIZATIONS AND DESCRIPTION OF BUSINESS Sionix Corporation (the "Company") was incorporated in Utah in 1985. The Company was formed to design, develop, and market an automatic water filtration system primarily for small water districts. The Company is in the development stage and its efforts have been principally devoted to research and development, organizational activities, and raising capital. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS Cash and cash equivalents represent cash and short-term highly liquid investments with original maturities of three months or less. RESTRICTED CASH Restricted cash represents two certificates of deposit which mature one year for one and 180 days for the other from the purchase dates. The certificates of deposit are recorded at cost which approximates market. At September 30, 2001, the certificates of deposit were pledged as collateral under a compensating balance arrangement associated with a line of credit and surety bond required by court for nonresident corporation. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. The cost of additions and improvements are capitalized while maintenance and repairs are expensed as incurred. Depreciation of property and equipment is provided on a straight-line basis over the estimated five year useful lives of the assets. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. PATENTS Patents are stated at cost and are being amortized using the straight-line method over their estimated useful lives of 15 years. PROVISION FOR INCOME TAXES Deferred taxes are provided for on a liability method for temporary differences between the financial reporting and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized. F-8 SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS ADVERTISING The cost of advertising is expensed as incurred. Total advertising costs were $12,663 and $72,726 for the years ended September 30, 2001 and 2000, respectively. STOCK BASED COMPENSATION The Company has adopted the disclosure provisions only of SFAS 123 and continues to account for stock based compensation using the intrinsic value method prescribed in accordance with the provisions of APB No. 25, Accounting for Stock Issued to Employees, and related interpretations. Common stock issued to employees for compensation is accounted for based on the market price of the underlying stock, generally the average low bid price. The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services". Common stock issued to non-employees in exchange for services is accounted for based on the fair value of the services received. BASIC AND DILUTED NET LOSS PER SHARE Net loss per share is calculated in accordance with Statement of Financial Accounting Standards 128, Earnings Per Share ("SFAS 128"). Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of financial accounting standard No. 107, Disclosures about fair value of financial instruments, requires that the company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value. USE OF ESTIMATES 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-9 RECLASSIFICATIONS Certain items in the prior year financial statements have been reclassified for comparative purposes to conform with the presentation in the current period's presentation. These reclassifications have no effect on the previously reported income (loss). REPORTING SEGMENTS Statement of financial accounting standards No. 131, Disclosures about segments of am enterprise and related information (SFAS No. 131), which superceded statement of financial accounting standards No. 14, Financial reporting for segments of a business enterprise, establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performances. The company adopted this standard in 1998 and the implementation of this standard did not have a material impact on its financial statements. REVENUE RECOGNITION The Company recognizes revenues in accordance with SEC Staff Accounting Bulletin No. 101, or other specific authoritative literature, as applicable. Accordingly, revenues from products sales are recorded when all four of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the Company's price to the buyer is fixed or determinable; and (iv) collectibility is reasonably assured. The Company policy is to report its sales levels on a net revenue basis, with net revenues being computed by deducting from gross revenues the amount of actual sales returns and the amount of reserves established for anticipated sales returns. The Company's policy for shipping and handling costs, billed to customers, is to include it in revenue in accordance with Emerging Issues Task Force ("EITF") issue No. 00-10, "Accounting for Shipping and Handling Revenues and Costs." The purpose of this issue was to clarify the classification of shipping and handling revenues and costs. The consensus reached was that all shipping and handling billed to customers should be recorded as revenue. Accordingly, the Company records its shipping and handling amounts within net sales and operating expenses. The Company has not earned any revenue since its inception. ACCOUNTING DEVELOPMENTS In September 2000, the FASB issued FINANCIAL ACCOUNTING STANDARDS SFAS NO. 140, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, AND A REPLACEMENT OF FASB STATEMENT NO. 125." This statement is not applicable to the Company. F-10 SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS On July 20, 2001, the FASB issued SFAS NO. 141, "BUSINESS COMBINATIONS," and SFAS NO. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS." These statements make significant changes to the accounting for business combinations, goodwill, and intangible assets. SFAS NO. 141 establishes new standards for accounting and reporting requirements for business combinations and will require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. This statement is effective for business combinations completed after June 30, 2001. SFAS NO. 142 establishes new standards for goodwill acquired in a business combination and eliminates amortization of goodwill and instead sets forth methods to periodically evaluate goodwill for impairment. Intangible assets with a determinable useful life will continue to be amortized over that period. This statement becomes effective January 1, 2002. Management is in the process of evaluating the requirements of SFAS No. 141 and 142, but does not expect these pronouncements will materially impact the Company's financial position or results of operations. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of FINANCIAL ACCOUNTING STANDARDS ("SFAS") NO. 143, "ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS". SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The impact of the adoption of SFAS 143 on the Company's reported operating results, financial position and existing financial statement disclosure is not expected to be material. In August 2001, Statement of FINANCIAL ACCOUNTING STANDARDS NO. 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS" ("SFAS 144"), was issued. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The impact of the adoption of SFAS 144 on the Company's reported operating results, financial position and existing financial statement disclosure is not expected to be material. In January 2001, the FINANCIAL ACCOUNTING STANDARDS BOARD EMERGING ISSUES TASK FORCE issued EITF 00-27 effective for convertible debt instruments issued after November 16, 2000. This pronouncement requires the use of the intrinsic value method for recognition of the detachable and imbedded equity features included with indebtedness, and requires amortization of the amount associated with the convertibility feature over the life of the debt instrument rather than the period for which the instrument first becomes convertible. Management is in the process of evaluating the requirements of EITF 00-27, but does not expect this pronouncement will materially impact the Company's financial position or results of operations. F-11 SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS 3. INTANGIBLES During fiscal 1998 The Company wrote-off obsolete intangibles of $1,040,865 resulting from new managements decision not to pursue a product line relating to these intangibles. At September 30, 2001, patents were as follows: Patents issued and pending $ 135,033 Less accumulated amortization (49,295) ------------ $ 85,738 ============ Annual amortization expense for fiscal 2001 and 2000 was $9,002. 4. PROPERTY AND EQUIPMENT Equipment $ 175,700 Furniture and fixtures 10,710 ------------ 186,410 Less accumulated depreciation (160,135) ------------ $ 26,275 ============ Depreciation expense for fiscal year ended September 30, 2001 and 2000 was $19,334 and $42,846, respectively. 5. NOTES PAYABLE - RELATED PARTIES The Company has received advances in the form of unsecured promissory notes from stockholders and other related parties in order to pay ongoing operating expenses. These notes are at interest rates up to 13% and are due on demand. As of September 30, 2001, amounts due to related parties included $224,263 of principal and $20,454 of unpaid interest. 6. LINE OF CREDIT On March 1, 2000, the Company obtained a $100,000 line of credit with a bank which was renewed with the maturity date of March 1, 2002. The line of credit bears interest at 11.5% and is secured by a $100,000 certificate of deposit. At September 30, 2001, no amounts were outstanding under this line. 7. INCOME TAXES Since the Company has not generated taxable income since inception, no provision for income taxes has been provided (other than minimum franchise taxes paid to the States). Differences between income tax benefits computed at the federal statutory rate and reported income taxes for 2000 and 1999 are primarily attributable to the valuation allowance for net operating losses (NOL) and other permanent differences. F-12 PAGE> SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS At September 30, 2001, the Company has a net operating loss carryforward for federal tax purposes of $6,170,000, which, if unused to offset future taxable income, will expire beginning in 2007 through 2016. The Company has deferred tax assets of $ 2,470,000 at September 30, 2001 relating to its net operating losses. The Company provided a 100% valuation allowance for these deferred tax assets. The Company recorded no benefit for income taxes during the periods presented. During the periods ended September 30, 2001 and 2000, the Company's total valuation allowance increased approximately $54,000 and $218,000, respectively. 8. STOCKHOLDERS' EQUITY COMMON STOCK During fiscal year 2000, the Company issued shares of its common stock in exchange for compensation under the terms of certain employment contracts. The employment contracts expire between November 30, 2000 and September 30, 2003 and call for quarterly issuances of common stock to four employees. The contract was subsequently amended to terminate bonus clause and include an option plan for the employees. On August 14, 2000, the Company entered into an agreement with a firm (the "Firm") to obtain investment capital. Under the terms of the agreement, the company employed the services of the Firm to obtain investment capital of no less than $1,000,000 for the acquisition, restructuring, marketing and procurement of new management relating to a water bottling and distribution venture. During fiscal 2000, the Firm received cash of $2,500 and 100,000 shares of the Company's restricted common stock upon execution of the agreement. The shares of common stock issued were recorded at fair value (low bid price). The Company issued 6,005,000 shares of its common stock for cash in connection with a private placement during fiscal years 2001 at $.10 per share amounting $600,500. The Company issued 617,376 shares of its common stock for various services at prices from $0.16 to $0.28 per share for total amount of $158,711. In connection with the Company's registration statements on Form S-8, 1,900,000 shares of common stock were issued to consultants at $.19 to $.22 per share for a total amount of $374,174 for the services to be provided through June 2002. The Company has amortized $232,856 of consulting fees through September 30, 2001. SHARES TO BE ISSUED The Company received cash of $10,000 for 100,000 shares of common stock to be issued subsequent to the period ended September 30, 2001. In addition, the Company settled the outstanding notes and the accrued interest for 639,509 shares of common stock valued at $103,294, to be issued subsequent to the period ended September 30, 2001. The valuation of shares was based upon market value of the shares at the time of the consummation of the transaction F-13 SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS COMMON STOCK OPTIONS In April 2001, the Company granted options to an employee to purchase 244,892 shares at an exercise price of $0.15. The market price of the shares at the grant date was $0.15 per share. The options vested as follows: 29,434 immediately, and on each of May 31, August 31 and November 30, 2001; 31,789 on each of Feb 28; May 31, Aug 31 and November 30, 2002, 31,789 each respectively. The options expire in April 2010. 2001 EXECUTIVE OFFICERS STOCK OPTION PLAN ----------------------------------------- On October of 2000, the company entered into amendments to the employment agreement with each of the executive officers eliminating the provisions of stock bonuses. In lieu of the bonus provision, the Company adopted the 2001 Executive Officers Stock option Plan. The Company reserved 7,576,680 shares for issuance under the plan. In April 2001, the Company granted options to purchase 7,034,140 shares to three of the officers vesting at various dates through March 31, 2006. The exercise price of the options is $0.25 15 per share and the market value at the date of the grant was $.0.15 A summary of the Company's option activity is listed below:
Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Stock Stock Remaining Price of Price of Exercise Options Options Contractual Options Options Price Outstanding Exercisable Life Outstanding Exercisable -------------- ----------- ----------- ----------- ----------- ----------- $ 0.15 7,279,032 762,282 4.44 years $ 0.15 $ 0.15
The fair value of the warrants was calculated using the Black-Scholes option valuation model with the following weighted-average assumptions for the year ended September 30, 2001: dividend yields of 0%; risk free interest rates of 6%; expected volatility of 100% and expected lives of 4.9 years. The weighted-average fair value of the options issued during the years ended September 30, 2000 was $ 0.11. F-14 SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS The Company has adopted the disclosure-only provisions of SFAS No. 123. Because the exercise price of the options granted was greater than the fair value of the common stock at the grant date, no compensation cost has been recognized. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company's net loss and loss per share for the years ended September 30, 2001 would have been as follows: 2001 ------------- Net loss as reported $ (1,283,429) Net loss, pro forma $ (1,364,337) Basic loss per share as reported $ (0.02) Basic loss per share, pro forma $ (0.02) 9. EARNING (LOSS) PER SHARE Earnings (loss) per share were determined by dividing net income for the periods by the weighted average number of both basic and diluted shares of common stock and common stock equivalents outstanding. Stocks to be issued are regarded as common stock equivalents and are considered in diluted earnings per share calculations. Weighted average number of shares used to compute basic and diluted loss per share is the same since the effect of dilutive securities is antidilutive. 10. LEASES On August 6, 1998, the Company entered into a three-year noncancelable operating lease relating to its office facility expiring on August 30, 2001. On November 16, 2001, the Company extended the lease to October 31, 2004. Rent expense totaled $46,300 and $41,098 during fiscal year 2001 and 2000, respectively. Future minimum rental payments are as follows for the fiscal year ended September 30: 2002 $ 41,293 2003 42,813 2004 44,854 ---------- Total $ 128,960 ========== 11. LITIGATION In February 1999 the Company filed an action against its former President, Dascore, LLC, an entity controlled by the former President and in a business related to that of the Company; and a former officer and director of the Company (the "Defendants"). The Company alleges, that the Defendants have (1) infringed on certain patents owned by the Company, through knowledge gained in their former positions; (2) sold or attempted to sell technology owned by the Company and covered by patents; (3) conspired to convert technology, money and equipment owned by the Company to pay personal expenses, and (4) defrauded the Company and breached their fiduciary duties in connection with their departure by retention of property owned by the Company. F-15 SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS In June 1999, the United States District Court issued a preliminary injunction enjoining the Defendants from selling or transferring shares of the Company's stock in excess of 10,000,000 shares. The Defendants twice sought to have that injunction dissolved and both attempts were unsuccessful. The Defendants filed a cross-complaint against the Company based on a breach of contract cause of action and to collect loans allegedly made by them to the Company. On December 7, 2001, the court dismissed the Company's claim against its former President, Dascore, LLC, an entity controlled by the former President and in a business related to that of the Company; and a former officer and director of the Company. The security posted by the Company was released. The Company has filed an action for professional negligence, malpractice, breach of fiduciary duty and breach of contract against its previous patent counsel and a separate action against its previous corporate counsel. The action against the patent attorneys alleges that the patent attorneys represented the Company and its former President contemporaneously and failed to advise the corporation of the inherent conflict of interest in representing both parties. The action further alleges the patent attorneys aided the former President and others in misappropriating the Company's intellectual property and trade secrets. The action seeks monetary damages, attorneys' fees and interest. The action against the former corporate counsel seeks damages arising out of the alleged creation of false documents to defraud the Company with respect to certain intellectual property rights and securities transactions. Both actions are in the discovery stage. The case of Barnett v. Sionix Corporation was settled in Orange County Superior Court on July 20, 2001. The complaint sought repayment of approximately $150,000 in alleged loans. The plaintiff is the mother-in-law of the former Chief Executive Officer of the Company. As a result of the settlement, the Company reversed accruals of $180,486 which the Company had recorded in the prior years. A malpractice case was brought by the Company against its former counsels, Wenthur and Chachas and also, Huston and Mitchell. The defendants motion for summary judgment was granted by the court. The court granted the attorneys fees and costs in the amount of apx. $70,000 to the defendants. The Company is appealing the summary judgment. The Company has accrued a liability of $70,000 in the financial statement to cover any possible final judgment. Subsequent to the year end, the Company's counsel was served with a motion in the Federal case by the attorneys of Mr. Wade Cowart. The motion seek to have the Company pay damages of up to $100,000 in connection with a restraining order that the Federal court previously issued against Mr. Cowart. The Company's counsel and the management believe that the case is without merit and will be denied by the court. F-16 SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO THE FINANCIAL STATEMENTS 12. OTHER COMMITMENT In October 2000, the Company and the Environmental Products Division of Hoffinger Industries, Inc. ("EPD") entered into a Joint Venture Agreement to form Sionix/EDP (the "Joint Venture"), a limited liability corporation, to develop, market, sell and manufacture water filtration technology products. Pursuant to the terms of the Joint Venture Agreement, the Company's initial contribution was to be consisted of cash of $12,500 and licensing of its intellectual property in exchange for 51% of all shares of the Joint Venture. EDP's initial contribution included cash of $12,500 and services consisting of manufacturing, assembly, advertising and marketing in exchange for 49% of all shares of the Joint Venture. Any capital contributions beyond the initial contributions were to be borne equally by the Company and EDP. Net profits and losses of the Joint Venture are to be allocated based on the ownership interests. The Board of Directors consists of five directors comprising two members appointed by the Company and two members appointed by EDP. The Company's President had been appointed, as the Chairman of the Board of Directors. The Joint Venture will automatically dissolve two years from the date of incorporation, unless otherwise directed by resolution of the Board of Directors and a concurring vote of the stockholders. Upon dissolution of the Joint Venture, all assets, property and intellectual rights shall become the sole and exclusive property of the Company. EDP will retain the right to obtain a non-exclusive written license to distribute and sell Joint Venture products at a 10% discount. As of September 30, 2001, the Company has not contributed any amount for its share of initial contribution. There was no activity by the joint venture through September 30, 2001. 13. GOING CONCERN The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company's assets and the satisfaction of its liabilities in the normal course of business. Through September 30, 2001, the Company had incurred cumulative losses of $9,522,180 and negative working capital of $377,146. The Company's successful transition from a development stage company to attaining profitable operations is dependent upon obtaining financing adequate to fulfill its research and development activities, production of its equipment and achieving a level of revenues adequate to support the Company's cost structure. Management's plan of operations anticipates that the cash requirements for the next twelve months will be met by obtaining capital contributions through the sale of common stock and cash flow from operations. However, there is no assurance that the Company will be able to implement its plan. F-17 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. See Item 11 for information on beneficial ownership of the Company's securities. The directors and executive officers of the Company are as follows: Name Age Position ---- --- -------- James J. Houtz 62 President, Chief Operating Officer and a Director Robert E. McCray 65 Chief Financial Officer and a Director Joan C. Horowitz 59 Secretary/Treasurer and a Director Mr. Houtz has been President and Chief Operating Officer of the Company since March 1998. For more than five years prior to that time he was a self-employed consultant in the areas of engineering and new product development. Mr. Houtz is married to Joan C. Horowitz, Secretary/Treasure of the Company. Mr. McCray has been Chief Financial Officer of the Company since July 1998. Prior to that time he was employed by San Clemente Hospital and Medical Center, as Supervisor-Accounts Payable and Supervisor-Data Processing. Ms. Horowitz has been Secretary/Treasurer and Office Manager of the Company since April 1998. Prior to that time she was employed by Coldwell Banker in office management. Ms. Horowitz is married to James J. Houtz, President of the Company. The term of office of each director is one year or until his successor is elected at the Company's annual meeting. Each officer is appointed by the Board of Directors and serves at the pleasure of the Board. In 1988 the Company entered into a five-year employment agreement with James J. Houtz, which was amended and restated in October 2000.The amended agreement calls for salary to Mr. Houtz of $85,000 per year, which amount is increased by 10% each year. In 1998 the Company entered into an employment agreement with Robert E. McCray, which was amended and restated in October 2000, and which expires in September 2001. The amended agreement calls for salary to Mr. McCray of $50,000 per year, which amount is increased by 8% each year. In 1998 the Company entered into an employment agreement with Joan C. Horowitz, which was amended and restated in October 2000, and which expires in September 2001. The amended agreement calls for salary to Ms. Horowitz of $32,000 per year, which amount is increased by 8% each year. ITEM 10. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth certain compensation awarded or paid by the Company to its three highest paid persons who are executive officers or directors during the fiscal years ended September 30, 2001, 2000, and 1999, respectively.
LONG-TERM COMPENSATION ---------------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS --------------------------- ----------------------- -------------------- OTHER SECURITIES ALL ANNUAL RESTRICTED UNDERLYING OTHER NAME AND FISCAL COMPEN- STOCK OPTIONS/ LTIP COMPEN- PRINCIPAL POSITION YEAR SALARY BONUS SATION AWARDS SARs PAYOUTS SATION James J. Houtz, President... 1999 $107,667 -0- -0- $ 344,272 -0- -0- -0- 2000 $115,679 -0- -0- $ 989,352 -0- -0- -0- 2001 $101,136 -0- -0- -0- 6,171,000 shares -0- -0- Robert McCray, Chief........ 1999 $ 44,713 -0- -0- $ 16,191 -0- -0- -0- Financial Officer 2000 $ 55,080 -0- -0- $ 88,895 -0- -0- -0- 2001 $ 54,238 -0- -0- -0- 583,200 shares -0- -0- Joan Horowitz, Secretary.... 1999 $ 25,000 -0- -0- $ 18,406 -0- -0- -0- 2000 $ 21,565 -0- -0- $ 54,739 -0- -0- -0- 2001 $ 21,275 -0- -0- -0- 279,940 shares -0- -0-
OPTION GRANTS DURING THE YEAR ENDED SEPTEMBER 30, 2001. The following table sets forth certain information regarding stock options granted to the Named Executive Officers during the twelve months ended September 30, 2001:
% OF TOTAL NUMBER OF OPTIONS SECURITIES GRANTED TO UNDERLYING EMPLOYEES OPTIONS IN FISCAL EXERCISE NAME YEAR GRANTED YEAR PRICE EXPIRATION DATE ---- ---- ------- ---- ----- --------------- James J. Houtz..... 2001 6,171,000 87.7% $.15 April 19, 2010 Robert McCray...... 2001 583,200 28% .15 April 19, 2010 Joan Horowitz...... 2001 279,940 0% .15 April 19, 2010
The following table sets forth certain information as of September 30, 2001 with respect to options held by the Named Executive Officers. The Company has no outstanding stock appreciation rights, either freestanding or in tandem with options.
OPTION VALUES AS OF SEPTEMBER 30, 2001 ------------------------------------------------------- SHARES NUMBER OF UNEXERCISED VALUE OF UNEXERCISED ACQUIRED ON VALUE OPTIONS AT IN-THE-MONEY OPTIONS AT EXERCISE REALIZED SEPTEMBER 30, 2001 SEPTEMBER 30, 2001(1) NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ------------------- --- --- -------------------------- ------------------------- James J. Houtz..... N/A -0- 617,100/5,553,900 $24,684 /$222,156 Robert McCray...... N/A -0- 58,320 /524,880 $23,333 /$20,995 Joan Horowitz...... N/A -0- 27,994/251,946 $1,120 /$10,078
(1) Assumes that a share of Common Stock was valued at $.19 per share on September 30, 2001. Amounts reflected are based on this assumed price minus the exercise price and do not indicate that shares were sold. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth ownership information as of September 30, 2001 with respect to all officers and directors and promoters, and each shareholder who beneficially owns more than 5% of the outstanding shares: Name and Address No. of Shares Percentage ---------------- ------------- ---------- S. Donna Friedman Trust 7,618,000 12% 4120 Porte De Merano #80 San Diego, CA. 92122 James J. Houtz 7,613,917 (1) 12% 9272 Jeronimo Road, Suite 108 Irvine, CA 92618 Robert E. McCray 315,193 (2) * 9272 Jeronimo Road, Suite 108 Irvine, CA 92618 Joan C. Horowitz 289,055 (3) * 9272 Jeronimo Road, Suite 108 Irvine, CA 92618 All Directors and Officers 8,218,165 13% as a Group (3 Persons) * Less than 1% (1) Includes 617,100 shares issuable upon exercise of options that become exercisable within 60 days. (2) Includes 58,320 shares issuable upon exercise of options that become exercisable within 60 days. (3) Includes 27,994 shares issuable upon exercise of options that become exercisable within 60 days. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Inapplicable ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) The following exhibits are filed herewith or incorporated by reference: Exhibit 3.1 Amended and Restated Articles of Incorporation of the Company (1) Exhibit 3.2 Amended and Restated Bylaws of the Company (1) Exhibit 10.1 Amended and Restated Employment Agreement with James J. Houtz, dated October 1, 2000 (2). Exhibit 10.2 Amended and Restated Employment Agreement with Robert E. McCray, dated October 1, 2000 (2) Exhibit 10.3 Amended and Restated Employment Agreement with Joan C. Horowitz, dated October 1, 2000 (2) Exhibit 10.4 Industrial Lease between the Company and The Irvine Company, dated August 6, 1998 (3). - ------------- (1) Incorporated by reference from Registrant's Registration Statement on Form S-8, filed with the Commission on July 26, 1996, and incorporated herein by reference. (2) Incorporated by reference from the Company's Annual Report on Form 10-KSB for the fiscal year ending September 30, 2000, filed on January 14, 2001. (3)Incorporated by reference from the Company's Annual Report on Form 10-KSB for the fiscal year ending September 30, 1999, filed on January 14, 2000. (b) Reports on Form 8-K None. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Sionix Corporation Date: January 14, 2001 By: /s/ James J. Houtz ------------------------------------ James J. Houtz, President Pursuant to the requirements of 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. SIGNATURE TITLE DATE - --------- ----- ---- (1) Principal Executive Officer /S/ JAMES J. HOUTZ President and a Director January 14, 2002 - --------------------- James J. Houtz (2) Principal Financial and Accounting Officer /S/ ROBERT MCCRAY Chief Financial Officer January 14, 2002 - --------------------- and a Director Robert McCray (3) Directors /S/ JOAN HOROWITZ Director January 14, 2002 - --------------------- Joan Horowitz EXHIBIT INDEX Exhibit 3.1 Amended and Restated Articles of Incorporation of the Company (1) Exhibit 3.2 Amended and Restated Bylaws of the Company (1) Exhibit 10.1 Amended and Restated Employment Agreement with James J. Houtz, dated October 1, 2000 (2) Exhibit 10.2 Amended and Restated Employment Agreement with Robert E. McCray, dated October 1, 2000(2) Exhibit 10.3 Amended and Restated Employment Agreement with Joan C. Horowitz, dated October 1, 2000 (2). Exhibit 10.4 Industrial Lease between the Company and The Irvine Company, dated August 6, 1998 (3). - ------------- (1) Incorporated by reference from Registrant's Registration Statement on Form S-8, filed with the Commission on July 26, 1996, and incorporated herein by reference. (2) Incorporated by reference from the Company's Annual Report on Form 10-KSB for the fiscal year ending September 30, 2000, filed on January 14, 2001. (3)Incorporated by reference from the Company's Annual Report on Form 10-KSB for the fiscal year ending September 30, 1999, filed on January 14, 2000. -----END PRIVACY-ENHANCED MESSAGE-----