U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
----------------
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 0-22273
SONIC JET PERFORMANCE, INC.
(Name of small business issuer in its charter)
----------------
Colorado 84-1383888
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15662 Commerce Lane, Huntington Beach, CA. 92649
(Address of principal executive offices) (Zip Code)
(714) 895-0944
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.0001 per share
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 there is no 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. [ ]
State issuer's revenues for its most recent fiscal year. $1.20 million
The aggregate market value of the voting Common Stock held by
non-affiliates of the issuer was approximately $4,291,437 computed using the
closing price of $0.16 per share of Common Stock on March 4, 2002 as reported by
the Over the Counter Bulletin Board).
As of March 11, 2002, the issuer had 28,042,061 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Proxy Statement prepared in connection with
the Annual Meeting of Stockholders to be held in 2002 are incorporated by
reference in Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
SONIC JET PERFORMANCE, INC.
FORM 10-KSB
TABLE OF CONTENTS
Part I
Page
Item 1. Description of Business ..........................................3
Item 2. Description of 7
Property..........................................................
Item 3. Legal Proceedings.................................................7
Item 4. Submission of Matters to a Vote of Security Holders...............8
Part II
Item 5. Market for Common Equity and Related Stockholder Matters...........9
Item 6. Management's Discussion and Analysis or Plan of Operation........10
Item 7. Financial Statements..............................................10
Item 8. Changes In and Disagreements With Accountants on 20
Accounting and Financial Disclosure.............................
Part III
Item 9. Directors, Executive Officers, Promoters and Control 21
Persons; Compliance With Section 16(a) of the Exchange Act......
Item 10. Executive Compensation............................................21
Item 11. Security Ownership of Certain Beneficial Owners and Management....21
Item 12. Certain Relationships and Related Transactions....................21
Item 13. Exhibits and Reports on Form 8-K..................................21
24
Signatures.................................................................
DESCRIPTION OF BUSINESS
Our Company
We design, manufacture and distribute high performance commercial and
recreational boats. Our boats combine sleek and innovative designs with power,
safety, handling and stability. We believe our patented "V" hull design, and our
other proprietary designs, make our boat safer and more stable in rough water
and at high speeds. We have three commercial models and one recreational model.
We market and sell our commercial boats directly to municipalities and other
government entities such as fire departments, police departments, and the
military, and we sell our recreational boats directly to consumers through our
sales force and select distributors and dealers in both the United States and
abroad.
We are a Colorado corporation incorporated in November 1996, as Boulder
Capital Opportunities III, Inc.
We had no significant operations in 1996 or 1997. Effective June 30
1998, we acquired all of the assets and assumed all of the liabilities of Sonic
Jet Performance, LLC, a California limited liability company that was in the
business of producing and marketing recreational boats, jet boats, trailers, and
related accessories. On November 4, 1998, we changed our name to Sonic Jet
Performance, Inc. The results of operations of Sonic Jet Performance, LLC, were
consolidated into our results of operations from January 1, 1998 through June
30, 1998.
The address of our principal executive office is 15662 Commerce Lane,
Huntington Beach, CA. 92649. Our telephone number is (714) 895-0944. Our website
address is www.sonicjet.com. Information contained on our website does not
constitute part of this report and our address should not be used as a hyperlink
to our website.
Our Market Opportunity
We offer high performance and quality boats that are durable, highly
reliable and safe, at affordable prices.
The target market for our commercial boats include municipalities and
counties, fire and police departments and military units. Commercial boats,
particularly those used for search and recovery, patrol and fire fighting
operations, offer us a niche market. With approximately 181,518 miles of
waterways in the United States alone, opportunities for fire, search and
recovery and patrol boats abound. County purchases alone constitute an enormous
market for our commercial boats. Of the 3,536 counties in the United States, 88
are located in coastal regions. Because of the high cost of many commercial
boats, few municipalities have adequate search and recovery, patrol or fire
fighting boats. Our commercial boats offer a cost effective solution for
municipalities with limited funds and an unanswered need.
Demand for recreational boats is seasonal with sales generally highest
in the second quarter. Adverse weather in key geographic areas, including, but
not limited to, excessive rain, prolonged below-average temperatures and severe
heat or drought, can significantly influence demand for our boats. Demand for
pleasure boats is also influenced by a number of other factors, including
consumer education about boating, economic conditions, particularly in the
United States, and, to some extent, fuel costs, prevailing interest rates and
consumer confidence. Demand is also affected by the competitiveness of our
product offerings.
We believe our boats offer the following competitive advantages over
other boats on the market:
Durability - We construct our hulls using hand laid "S" glass/kevlar
and carbon fiber. This produces a fiberglass hull that is stronger yet lighter
than conventional fiberglass hulls.
High Performance and Stability - Most boats capable of exceeding 55
miles per hour are inherently unstable and virtually uncontrollable at those
speeds. We believe our patented "V" shape hull design eliminates this problem,
by making our boats safer and more stable, at high speeds.
o Unique Designs - We believe our boats epitomize style. Our
designs are modern and sleek, and resemble high performance
racing boats.
o Cost - The prices for our recreational boats are generally
competitive to our competitors, and our prices for commercial
boats are considerably competitive to our competitors.
Our Products
We design, manufacture and sell both commercial and recreational boats,
which we believe epitomize safety, style and performance.
All of our boats are designed by Albert Mardikian, our director of
design and chairman and chief executive officer of our international operations.
Our hulls incorporate Mr. Mardikian's patented "V" shaped hull design, and we
build them using hand laid "S" glass/kevlar and carbon fiber. This produces a
fiberglass hull that is stronger yet lighter than conventional fiberglass hulls
and provides extraordinary stability and handling in rough waters and at high
speeds.
Commercial Boats
Our commercial boats are quick response vehicles that provide high
maneuverability in confined areas and shallow water. They are small and
therefore can be easily transported to emergency areas. Our commercial boats
include the following:
o Fire Rescue Jet. The Fire Rescue Jet is designed to fight fires on
the water and in near shore areas. The Fire Rescue Jet comes
equipped with our patented water pump that can supply up to 750
gallons of water per minute. The Fire Rescue Jet is uniquely
designed so one person can control the boat and the fire apparatus
from a single station.
o Patrol Rescue Jet. The Patrol Rescue Jet is designed to provide
security in inland waterways and in harbors.
o Dive Rescue Jet. The Dive Rescue Jet is tailored for search and
recovery operations. It includes ample storage for dive gear and
other equipment necessary for search and recovery operations.
We offer a 12-foot and a 15-foot version of each of our commercial models.
Except for boats we sell for use in California, our commercial boats come
equipped with Mercury Marine Sport Jet 175 XR2 two stroke engines that generate
175 horse power, and Mercury Marine single stage axial flow jet pumps. Our
15-foot boats come with dual engines, while our 12-foot boats have a single
engine. We equip boats we sell for use in California with a Mercury Marine
Optimax 200 horsepower direct injection engine, which meets the strict emissions
standards in California and the year 2006 emissions requirements mandated by the
United States Environmental Protection Agency.
We offer options and accessories for our commercial boats such as engine
upgrades up to 240 horse power, helicopter lifting rings, stretchers, floatation
canisters that increase the buoyancy of our boats, and dive platforms.
The following table sets forth the basic characteristics of our 12 and 15
foot models of each of our commercial boats:
------------------- ---------- --------- ------------- ------------
Model Load Fuel Towing Passenger
Capacity Capacity Capacity Capacity
------------------- ---------- --------- ------------- ------------
------------------- ---------- --------- ------------- ------------
12 foot models 2,200 32 gal. 7,000 lbs. 5
lbs.
------------------- ---------- --------- ------------- ------------
------------------- ---------- --------- ------------- ------------
15 foot models 5,500 58 gal. 10,000 lbs. 6
lbs.
------------------- ---------- --------- ------------- ------------
Our commercial boats come with a two-year warranty on the engine, the
fuel system and the electrical system, and a five-year warranty on the hull.
Recreational Boats
The Vortex, our recreational model, is tailored for recreational
boating. It is 22 feet long and can carry up to seven passengers. It comes
equipped with, among other things, a single Mercury Marine/Mercruiser V-8
engine, two 33-gallon fuel tanks, marine grade stainless steel hardware, a ski
tow, navigation lights, state-of-the art instrumentation, and a small cabin that
sleeps two.
Options and accessories available for the Vortex include upgraded
engines, boat covers, radios, fishing rod holders, floatation canisters that
increase buoyancy, and dive platforms.
The Vortex comes with a one-year warranty on the engine, the fuel
system and the electrical system, and a five-year warranty on the hull.
Sales, Marketing and Distribution
We sell our recreational boats through our direct sales staff and our
network of distributors and dealers, which include three dealers in the United
States. We give our dealers, distributors and sales personnel what they need to
be profitable: Safe, performing products, sleekly designed and priced right. Our
design, marketing and promotion strategy emphasize our high performance image.
Our marketing strategy consists of displaying and demonstrating our
boats at regional, national and international boat shows, and at local waterways
throughout the United States, and advertising our boats in magazines and on the
Internet.
Competition
The commercial and recreational boat markets are highly competitive. The
principal competitive factors in this market include price, quality,
reliability, durability, styling and performance.
Our current competitors in the commercial market include, among others,
Boston Whaler, Mon Ark, Safe Boat and Zodiac. Our current competitors in the
recreational boats market include, among others, Yamaha, SeaDoo and Polaris.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we do.
As a result, these companies may be able to develop and expand their market
share more rapidly, adapt to changes in customer requirements more quickly, take
advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their products than we can.
Intellectual Property
Our intellectual property is important to our business. We rely on a
combination of license rights, trade secret laws, confidentiality procedures and
contractual provisions to protect our intellectual property.
The unique designs and other components of our boats are protected by
United States patents issued to Albert Mardikian, the beneficial owner of over
20% of our outstanding shares of common stock, our design director, chief
executive officer and chairman of our international operations. Mr. Mardikian
has assigned these patent rights to Mardikian Marine Design, LLC, which has
granted us an exclusive license to use the patents. Mr. Mardikian and a
principal of Ashford Capital, LLC, which holds preferred stock convertible into
20% of our common stock, are the sole owners of Mardikian Marine Design, LLC.
Our competitors may independently develop similar designs or duplicate
our products or designs. Unauthorized parties may infringe upon or
misappropriate our products or proprietary information. In the future,
litigation may be necessary to enforce our intellectual property rights or to
determine the validity and scope of the proprietary rights of others. Any such
litigation could be time consuming and costly.
There can be no assurance that any patent relating to our products will
not be challenged, in-validated, or circumvented or that the rights granted
thereunder will give us a competitive advantage. In addition, we cannot assure
you that any of the patents sublicensed to us by Mardikian Marine Design will be
held valid if subsequently challenged.
Employees
As of March 11, 2002, we employ nine full time employees in the United
States, including, five factory workers, one sales person, and three
administration and management personnel. We also employ 17 full time employees
in China, all of whom are factory workers. We have never experienced work
stoppages, and we are not a party to any collective bargaining agreement. We
believe our employee relationships to be generally good.
Environmental Matters
We are subject to federal, state, local and foreign laws and
regulations regarding protection of the environment, including air, water, and
soil. Our manufacturing business involves the use, handling, storage, and
contracting for recycling or disposal of, hazardous or toxic substances or
wastes, including environmentally sensitive materials, such as batteries,
solvents, lubricants, degreasing agents, gasoline and resin. We must comply with
certain requirements for the use, management, handling, and disposal of these
materials. We, however, do not maintain insurance for pollutant cleanup and
removal. If we are found responsible for any hazardous contamination, any fines
or penalties we may be required to pay, or any clean up we are required to
perform, could be very costly. Even if we are charged, and later found not
responsible, for such contamination or clean up, the cost of defending the
charges could be high. If either of the foregoing occurs, our business, results
from operations and financial condition could be materially adversely affected.
We do not believe we have any material environmental liabilities or that
compliance with environmental laws, ordinances, and regulations will,
individually or in the aggregate, have a material adverse effect on our
business, financial condition, or results of operations.
Other Regulatory Matters
Our operations and products are subject to extensive government
regulation, supervision, and licensing under various federal, state, local and
foreign statutes, ordinances and regulations. Certain governmental agencies such
as the EPA and the Occupational Safety and Health Administration, or OSHA,
monitor our compliance with their regulations, require us to file periodic
reports, inspect our facilities and products, and may impose substantial
penalties for violations of the regulations. For example, we are subject to
federal regulation under the Boat Safety Act of 1971 that requires boat
manufacturers to recall products for replacement of parts or components that
have demonstrated defects affecting safety. Although manufacturers of certain
equipment we use in our boats have instituted recalls, there has never been a
recall resulting from our design or manufacturing process.
While we believe that we maintain all requisite licenses and permits
and are in compliance with all applicable federal, state, local and foreign
regulations, there can be no assurance that we will be able to maintain all
requisite licenses and permits. The failure to satisfy those and other
regulatory requirements could have a material adverse effect on our business,
financial condition, and results of operations.
DESCRIPTION OF PROPERTY
We conduct our operations within approximately 5,075 square feet of
office space and 63,700 square feet of factory space. We lease an approximately
19,800 square foot facility in Huntington Beach, California, which includes
approximately 5,100 square feet that serves as our corporate office, and a
13,700 square foot manufacturing area where we assemble our boats and construct
prototypes for new designs. Our lease expired on February 28, 2002, and we are
currently searching for a new facility. Our landlord has agreed to allow us to
continue to lease the current facility on a month-to-month basis; however,
either of us can terminate the lease on thirty days prior written notice. Our
landlord is MGS Grand Sports, Inc. Our design director, chairman and chief
executive officer of our international operations, and beneficial owner of over
20% of our outstanding common stock, is also an officer, director and majority
owner of MGS Grand Sports, Inc.
Our wholly owned subsidiary, Nanning Sonic Jet Co., Ltd., a company
organized under the laws of the People's Republic of China, leases a 50,000
square foot manufacturing facility in Nanning, China, on a month-to-month basis.
We manufacture the hulls for our boats at the facility.
We also own 45% of Dalian Sonic Jet Co., Ltd., a joint venture company
organized under the laws of the People's Republic of China. Until January 2000,
the joint venture company manufactured some of the shells for our boats at a
50,000 square foot facility in Dalian China. Because of a dispute between us and
one of our partners, the joint venture discontinued operations. We do not
believe those operations will resume. See Factors That May Affect Future
Results.
We believe our facilities are adequate for our current operations and
that we can obtain additional leased space if needed.
LEGAL PROCEEDING
In February 2002, we settled a lawsuit filed against us by our former
chief executive officer and chairman, and our former vice president of
operations, in which they alleged, among other things, that we breached their
employment agreements. We settled both claims in exchange for issuing the former
employees an aggregate of 70,000 shares of our common stock.
In December 2001, we settled a wrongful death action filed against us
and one of our employees, by the survivors of the victim of a boating accident
that involved one of our boats. In exchange for conditionally dismissing the
lawsuit and releasing us of all claims related thereto, we agreed to issue to
the plaintiffs and their counsel an aggregate of 750,000 shares of our common
stock. We also agreed to pay the plaintiffs $85,000 in cash. That obligation is
secured by two of our boats. We made an initial payment of $25,000, and agreed
to pay the remaining $60,000 in ten monthly installments of $6,000. If, however,
we sell one or both of the boats securing the settlement before all ten payments
are made, upon receipt of the proceeds of such sale, we shall pay the plaintiffs
all remaining amounts due and owing, up to the amount of the sale price of the
boat. If we default on any payment due and fail to cure such default within 30
days after the plaintiffs provide us with written notice of such default, the
plaintiffs may file a stipulated judgment we executed, which authorizes the
court to award the plaintiffs $250,000, less any cash amounts we pay before such
default.
On June 26, 2001, we settled a lawsuit that Michel Attias filed against
us for, among other things, breach of contract, fraud and negligent
misrepresentation, in which he sought approximately $1.4 million in damages, the
value of common stock he alleged we promised to issue to him. In exchange for
dismissing the lawsuit with prejudice, we issued Mr. Attias 600,000 shares of
our common stock, which we agreed to register, and transferred him one of our
Vortex recreational boats. We also agreed to satisfy a $250,000 debt Mr. Attias
owed to Sheikh Mohammed Al Rashid, who is a former director and beneficially
owns approximately 18% of our outstanding common stock.
On January 22, 2002, we settled a breach of contract action filed
against us by Whalen Engineering Company, Inc., in which the plaintiff sought to
recover approximately $11,300. We agreed to pay the plaintiff $9,000 in three
equal monthly installment payments, in exchange for a dismissal of the lawsuit
with prejudice.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2001, to a
vote of security holders, through the solicitation of proxies or otherwise.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock is traded on the OTC Bulletin Board under the symbol
"SJET.OB." Our common stock began trading on the OTC Bulletin Board on December
29, 1998. Before our listing on the OTC Bulletin Board none of our securities
were traded in the public market. The following table shows, for the periods
indicated, the high and low closing sales prices per share of our common stock
as adjusted to reflect the two-for-one stock split affected on March 26, 1999:
High Low
2000
First Quarter $3.56 $0.75
Second Quarter $1.75 $0.59
Third Quarter $0.63 $0.31
Fourth Quarter $0.41 $0.03
2001
First Quarter $0.22 $0.05
Second Quarter $0.17 $0.05
Third Quarter $0.20 $0.04
Fourth Quarter $0.12 $0.02
As of March 4, 2002, the last sale price of the Common Stock was $0.17.
Holders
As of March 4, 2002, there were approximately 600 holders of record of
the Company's common stock.
Dividends
We have never declared or paid a cash dividend on our common stock. We
currently intend to retain all of our future earnings, if any, for use in our
business and therefore we do not anticipate paying any cash dividends on our
common stock in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of our board of directors and will depend
upon our financial condition, operating results, capital requirements,
restrictions contained in our agreements and other factors which our board of
directors deems relevant.
Recent Sales of Unregistered Securities
On December 21, 2001, as part of the settlement of the wrongful death
action filed against us in February 2001, we issued an aggregate of 750,000
shares of our common stock to the plaintiffs and their attorneys. We issued
these securities under an exemption provided by Section 4(2) under the
Securities Act.
On December 27, 2001, we issued ten shares of our Series B Convertible
Preferred Stock to a private equity investor in exchange for an aggregate
purchase price of $25,000. Each share is convertible into two percent of the
shares of our common stock outstanding at the date of conversion. The shares
shall convert at the earlier of the election of the holder, or December 27,
2002. We issued these securities under an exemption provided by Rule 506 of
Regulation D under the Securities Act Rules. The equity investor certified that
it was an "accredited investor" as defined in Rule 501 of Regulation D, was
acquiring the securities as an investment and not with a view to distribution,
and would not resell the securities unless they became registered or another
exemption from registration was available. The securities issued by us included
a legend reflecting these restrictions. No underwriters were engaged in the
sales of the securities described above.
On December 27, 2001, we issued five shares of our Series C Convertible
Preferred Stock to a private equity investor for an aggregate purchase price of
$50,000. Each share is convertible into a number of shares of our common stock
that equals the sum of (i) the quotient obtained by dividing $10,000 by
eighty-five percent (85%) of the average of the lowest three (3) intra-day bids
on our common stock on the primary exchange, quotation system or market on which
it is listed, over the ten trading days immediately preceding the date of the
conversion, and (ii) twenty percent (20%) of such quotient. We issued these
securities under an exemption provided by Rule 506 of Regulation D under the
Securities Act Rules. The investor certified that it was an "accredited
investor" as defined in Rule 501 of Regulation D, was acquiring the securities
as an investment and not with a view to distribution, and would not resell the
securities unless they became registered or another exemption from registration
was available. The securities issued by us included a legend reflecting these
restrictions. No underwriters were engaged in the sales of the securities
described above.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
We design and manufacture high performance commercial and recreational
boats. Our boats combine power, safety, handling and stability in rough water
along with high-speed performance. We believe our patented "V" hull design makes
our boats safer and more stable that other boats, at speeds in excess of 55 mph.
We operate both in the United States and internationally.
Results of Operations
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Revenue
Revenue for the twelve months ended December 31, 2001 was of $1.20
million.
Revenue for the twelve months ended December 31, 2000 was of $1.03
million.
Cost of Goods Sold
Cost of goods sold for the twelve months ended December 31, 2001 was
$0.90 million.
Our cost of goods sold for the twelve months ended December 31, 2000
was $0.87 million.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses include payroll,
advertising, and marketing expenses, as well as facilities, insurance, legal and
travel costs incurred in the normal course of conducting business. Selling,
general and administrative expenses for the twelve months ended December 31,
2001, decreased $1.55 million to $1.55 million, from $3.10 million in the
comparable period in 2000. The selling, general and administrative expenses
decreased primarily because of a decrease in administrative wages that resulted
from a reduction in force, a decrease in insurance expense that resulted from
the cancellation of our director's and officer's liability insurance policy, and
a reduction in advertising expenses.
Our selling, general and administrative expenses for the year ended
December 31, 2000, were $3.10 million.
Interest Expense
For the twelve months ended December 31, 2001, our interest expense was
$24,938. This includes $4,937 in interest we paid on a $110,936 loan we received
from an entity owned by the nephew of Albert Mardikian, the beneficial owner of
over 20% of our common stock. It also includes $20,001 in interest related to
our equipment leases, our financing arrangement with Bombardier Capital, and the
outstanding balance we owe to our accountants.
For the twelve months ended December 31, 2000, our interest expense was
$2.19 million. This included $0.22 we paid to JNC Opportunity Fund, Ltd., $0.06
we paid to Sheikh Mohammed Al Rashid, and $1.89 million charged for the
difference between the market value and the discounted rate on warrants we
issued to JNC Opportunity Fund, Ltd., in connection with funds they advanced us
during 2000. The sharp decrease in interest expense during 2001 resulted from
the satisfaction of our outstanding loans to JNC Opportunity Fund, Ltd. and
Sheikh Rashid.
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Revenue
Revenue for the twelve months ended December 31, 2000 was of $1.03
million.
Revenue for the twelve months ended December 31, 1999 was of $0.97
million.
Cost of Goods Sold
Cost of goods sold for the twelve months ended December 31, 2000 was
$0.87 million.
Our cost of goods sold for the twelve months ended December 31, 1999
was $0.58 million.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses include payroll,
advertising, and marketing expenses, as well as facilities, insurance, legal and
travel costs incurred in the normal course of conducting business.
Selling, general and administrative expenses for the twelve months
ended December 31, 2000 increased $3.6 million to $5.45 million, from $1.85
million in the comparable period in 1999. This increase resulted primarily from
an increase in administrative wage expenses, insurance expenses and advertising
expenses.
Our selling, general and administrative expenses for the twelve months
ended December 31, 1999 were $1.85 million.
Interest Expense
Interest expense of $2.19 million for the twelve months ended December
31, 2000, included, $0.22 million we paid to JNC Opportunity Fund, Ltd., $0.06
we paid to Sheikh Mohammed Al Rashid, and $1.89 million charged for the
difference between the market value and the discounted rate on warrants we
issued to JNC Opportunity Fund, Ltd., in connection with funds they advanced us
during 2000. The sharp increase in interest expense during 2000 resulted from
accruing interest on our debt obligations to JNC Opportunity Fund, Ltd., and
Sheikh Rashid.
Interest expense of $0.83 million for the twelve months ended December
31, 1999 included $0.44 million related to our loan from JNC Opportunity Fund,
Ltd., and $0.30 million related to our loan from Sheikh Rashid.
Liquidity And Capital Resources
As of December 31, 2001, cash and cash equivalents were $0.42 million,
compared to $0.40 million as of December 31, 2000. Our principal use of cash
during the year ended December 31, 2001, was for operations. Our principal
sources of liquidity to fund ongoing operations for the year ended December 31,
2001, were sales proceeds, and a $0.11 million loan we received from an entity
owned by the nephew of Albert Mardikian, the beneficial owner of over 20% of our
common stock. The loan accrued interest at the rate of 4% per month, or 48% per
annum.
Operating Activities.
The cash used by operating activities for the year ended December 31,
2001 was to be $0.12, attributable primarily to funding ongoing operations.
Investing Activities.
We did not use any cash in investing activities for the year ended
December 31, 2001.
Our capital expenditures for the year ended December 31, 2001 were
$2,645 related to investments in office and manufacturing equipment. We
anticipate that our capital expenditures during 2002 will increase because we
intend to improve operating efficiencies, and may relocate our principle
facility.
Financing Activities.
In December 2001, we sold ten shares of our Series B Convertible
Preferred Stock to a private equity investor in exchange for $25,000. Each share
of preferred stock is convertible into two percent of our common stock
outstanding as of the date of conversion. The preferred stock shall convert at
the earlier to occur of the election of the holder, or December 27, 2002.
In December 2001, we also completed a private placement of five shares
of our Series C Convertible Preferred Stock with a private equity investor in
exchange for $50,000. Each share of Series C Stock is convertible into a number
of shares of common stock that equals the sum of (i) the quotient obtained by
dividing $10,000 by eighty-five percent (85%) of the average of the lowest three
(3) intra-day bids on our common stock, over the ten trading days immediately
preceding the date of the conversion, and (ii) twenty percent (20%) of such
quotient.
During 2001, we eliminated an aggregate $3,952,150 in related-party
debt from our balance sheet by issuing an aggregate of 3,211,720 shares of
common stock.
o JNC Opportunity Fund, Ltd. cancelled $3,069,699 due under
promissory notes, in exchange for 2,455,759 shares of common
stock. Encore Capital Management, LLC, which controls JNC
Opportunity Fund, Ltd., also controls JNC Strategic Fund, Ltd.,
which, at the time of the issuance, owned all outstanding shares
of our Series A Preferred Stock. Just prior to the transaction,
Neil Chau (Deceased), a principle at Encore Capital Management,
Inc., served on our board of directors.
o Sheikh Mohammed Al Rashid cancelled $808,871 due under a
promissory note in exchange for 697,097 shares of common stock.
At that time, Sheikh Rashid was a director, and beneficially
owned over 20% of our outstanding common stock.
o Albert Mardikian cancelled $53,205, which included royalties due
under his license agreements with us, and business-related
expenses, in exchange for 42,564 shares of common stock. At the
time of the transaction, Mr. Mardikian beneficially owned over
20% of our common stock through his ownership of Sonic Jet
Performance, LLC. He also served on our board of directors, and
was our interim chief executive officer, our director of design,
and chairman and chief executive officer of our international
operations.
o MGS Grand Sports, Inc., the landlord of our Huntington Beach
facility, cancelled $20,375 due for past due rent, insurance and
for legal fees we agreed to pay in connection with a wrongful
termination lawsuit filed against it and us, in exchange for
16,300 shares of common stock. Mr. Mardikian is the majority
shareholder, a director and an officer of MGS Grand Sport, Inc.
In addition, his brother, wife and brother-in-law are minority
shareholders and directors of, and his brother and wife are
officers of, MGS Grand Sport, Inc.
During 2001, we also eliminated $1.6 million from the balance sheet by
converting 1,600 shares of Series A Preferred Stock held by JNC Strategic Fund,
Ltd., into 1,731,449 shares of common stock.
Each of the issuances described above occurred on June 29, 2001, and
had an effective issue price of $1.25 per share. The market price of our common
stock on that day was $0.17.
We neither used any credit lines nor had any bank loans during fiscal
2001. We have a financing arrangement with Bombardier Capital, collateralized by
a certificate of deposit in the amount of $201,000, under which Bombardier
finances purchases of our products from some of our dealers. In certain
instances, we agree to pay Bombardier financing charges on behalf of the
dealers.
The table below sets forth our obligations and commitments to make
future payments under contracts:
---------------------------- --------------------------------------------------------------------------
Contractual Obligations Payments Due by Period
---------------------------- --------------------------------------------------------------------------
Total Less than 1 1-3 years 4-5 years After 5 years
year
---------------------------- ----------- ------------- --------------- ---------------- ---------------
Capital Lease Obligations $12,236 $12,236 0 0 0
---------------------------- ----------- ------------- --------------- ---------------- ---------------
Operating Leases $8,190 $2,340 $2,340 $2,340 $1,170
---------------------------- ----------- ------------- --------------- ---------------- ---------------
Settlement Payments 0 0 0
Legal Settlement $74,000 $60,000
---------------------------- ----------- ------------- --------------- ---------------- ---------------
Total Contractual Cash $80,426 $74,576 $2,340 $2,340 $1,170
Obligations
---------------------------- ----------- ------------- --------------- ---------------- ---------------
Material Changes in Financial Condition, Liquidity and Capital Resources
At the present time, we are not generating sufficient revenue to cover
our expenses. Accordingly, our future liquidity will depend on our ability to
successfully restructure our operations to reduce our operating losses and our
ability to obtain necessary financing from outside sources.
In July 2001, we ceased operations at our manufacturing facility in
Nanning, China because we did not have sufficient cash to pay rent, and to
otherwise fund operations. In January 2002, we used a portion of the proceeds
from our December 2001 private placements to resume operations in Nanning,
China. Although we have brought our rent payments current, our landlord has
converted the lease term, originally set to expire in July 2003, to a
month-to-month term.
We have received a going concern opinion from our independent auditors,
which states that we may be unable to continue as a going concern. As a result
our current financial condition and ability to continue as a going concern
depends on our reducing our expenses and obtaining necessary financing from
outside sources.
Between December 2001 and February 2002, however, the Company raised
$535,000 in connection with the issuance of shares of our Series B & C
Convertible Preferred Stock. We are using the proceeds to fund ongoing
operations.
On February 5, 2002, we signed an engagement letter with Regents
Capital West, a finanacial consultants, pursuant to which it agreed to assist us
in a private placement of unregistered common stock in accordance with an
applicable exemption from registration under the Securities Act. We agreed to
pay Regents Capital West, 8% of the gross proceeds of such offering, including
capital raised from the issuance of our securities and from the exercise of
warrants we issue in connection with the offering. We also agreed to issue
Regents Capital West shares of common stock equal to 5% credit for all capital
raised (including warrants) convertible to 144 common stock at $0.18 per share
for the first $500,000 of credit, and $0.15 per share for all credit over
$500,000.
The engagement has a 12 month term which we may extend. If we terminate
such offering, or perform any act that causes the offering to terminate, before
the end of the term of the engagement, in addition, to compensation already paid
to Regents Capital West, we must pay a monetary amount between $125,000 and
$750,000 depending on the month during which the offering is so terminated. In
addition, we agree that if we terminate the offering because we have secured
funds from another source, we will issue Regents Capital West shares of common
stock equal to 5% credit for all capital raised (including warrants) convertible
to 144 common stock at $0.18 per share for the first $500,000 of credit, and
$0.15 per share for all credit over $500,000.
We have not yet determined the amount of the offering. In addition, we
cannot assure that the proposed financing will be consummated or that other debt
or equity financing will be available to us on commercially reasonable terms.
In August 2001, we defaulted on the lease for our Huntington Beach
property. The default was corrected in January 2002.
As of March 4, 2002, cash and cash equivalents were $0.12, and our
available borrowings under our credit lines were $784,000. Although we believe
that we are taking steps to rectify our liquidity position, we cannot assure you
that our actions will be successful and that we will be able to continue as a
going concern.
Foreign Currency Translation and Hedging
We are exposed to foreign currency fluctuations through our operations
in China. At December 31, 2001 approximately 1.60% of our revenue are in Chinese
Yen. We do not enter into forward exchange contracts or any derivative financial
investments for trading purposes. Thus, we do not currently hedge our foreign
currency exposure.
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Form 10-KSB
are forward-looking in nature. The discussion of such matters and subject areas
is qualified by the inherent risks and uncertainties surrounding future
expectations generally, and also may differ materially from our actual future
experience involving any one or more of such matters and subject areas. We wish
to caution readers that all statements other than statements of historical facts
included in this Annual Report on Form 10-KSB regarding our financial position
and business strategy, may constitute forward-looking statements. All of these
forward-looking statements are based on estimates and assumptions made by our
management, which although believed to be reasonable, are inherently uncertain.
Therefore, undue reliance should not be placed on such estimates and statements.
No assurance can be given that any of such estimates or statements will be
realized and it is likely that actual results will differ materially from those
contemplated by such forward-looking statements. We have attempted to identify,
in context, certain of the factors that we currently believe may cause actual
future experience and results to differ from our current expectations regarding
the relevant matter or subject area. In addition to the items specifically
discussed in the foregoing, our business and results of operations are subject
to the rules and uncertainties described under the heading "Factors That May
Affect Future Results" contained herein, however, the operations and results of
our business also may be subject to the effect of other risks and uncertainties.
Such risks and uncertainties include, but are not limited to, items described
from time to time in our reports filed with the Securities and Exchange
Commission.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We have a history of losses and negative cash flows. We expect these losses and
negative cash flows to continue in the future. If we are unable to generate
sufficient revenue from our operations or raise additional operating capital, we
may not be able to continue to operate our business, and you may lose your
investment.
We have experienced net losses and negative cash flows and our net
losses and our negative cash flows will continue for the foreseeable future.
Unless we increase our revenues or are able to obtain additional operating
capital, we may not be able to operate profitably in the future or generate
positive cash flows. If we cannot operate profitably or generate positive cash
flows we may be unable to continue to operate our business, and you may lose
your investment.
If we are unable to raise additional capital, we will not be able to achieve our
business plan and you could lose your investment.
We need to raise additional funds through public or private debt or
equity financing to be able to fully execute our business plan. Any additional
capital raised through the sale of equity may dilute your ownership interest. We
may not be able to raise additional funds on favorable terms, or at all. If we
are unable to obtain additional funds, we will be unable to execute our business
plan and you could lose your investment.
If all or a substantial portion of the shares of our common stock offered for
sale by the prospectus related to the registration statement we are obligated to
file, are sold in a short period of time, our stock price may be adversely
affected. Our stock price may also be adversely affected by the perception that
such sales could occur.
We have agreed to register shares of our common stock held by certain
common stock holders as well as shares of common stock underlying our Series B
Convertible Preferred Stock and our Series C Convertible Preferred Stock. We
intend to file a registration statement during the second quarter of 2002.
Depending on the market price of our common stock at the time the preferred
shareholders convert their stock, the number of shares registered could be
substantial. We cannot control when the selling stockholders will sell their
shares. If all or a substantial portion of the shares of common stock offered
for sale by that prospectus are sold in a short period of time, the common stock
available for sale may exceed the demand and the stock price may be adversely
affected. In addition, the mere perception that such sales could occur may
depress the price of our common stock.
If we are unable to retain our key employees we may be unable to execute on our
business plan.
Our success depends in significant part on the continued services of
our key employees, including Albert Mardikian, our director of design, and
chairman and chief executive officer of our international operations. Mr.
Mardikian holds the patents on the designs we use to build our boats and is
integral to designing and supervising the construction of the boats. Losing Mr.
Mardikian or one or more of our other key personnel may seriously impair our
ability or could cause us to fail to successfully implement our business plan.
This may have a material adverse effect on our business, results of operations
and financial condition and you could lose your investment.
We face competition.
The boat industry is very competitive and competition is increasing in
the United States and abroad. We may not be able to compete successfully against
either current or future competitors. Increased competition could result in
significant price erosion, reduced revenue, lower margins or loss of market
share, any of which would significantly harm our business. If we are unable to
successfully compete, we will be unable to achieve our business plan and you
could lose your investment. See "Competition."
To date, we have sold only small quantities of our boats and accessories. There
can be no assurance that our products will be widely accepted.
To date, we have sold only small quantities of our boats and
accessories. We intend to generate sales through our dealer network and our
direct sales force, both of which we are seeking to expand throughout the United
States and abroad. We cannot assure you that we will be able to successfully
maintain or expand our dealer network or sales force to distribute our products
or that we will generate enough sales. Our failure to do so could have a
material adverse effect on our business, results of operations and financial
condition and you could lose your investment.
We do not own our designs.
We do not own our designs. We license them from Mardikian Marine
Design, LLC, an entity controlled by Albert Mardikian, the beneficial owner of
over 20% of our outstanding common stock, our design director, and chairman and
chief executive officer of our international operations, and a principal of
Ashford Capital, LLC, which holds all of the outstanding shares of our Series B
Convertible Preferred Stock, which is convertible into 20% of our outstanding
common stock, on a fully diluted basis.
In the future, litigation may be necessary to enforce our license
rights or to determine the validity and scope of the proprietary rights of
others. Any such litigation could be time-consuming and costly. There can be no
assurance that any patent relating to our products or our license rights, will
not be challenged, in-validated, or circumvented or that the rights granted to
us will give us a competitive advantage.
We have potential liability for personal injury and property damage claims.
We may be exposed to liability for personal injury or property damage
claims relating to the use of our products. A wrongful death action was filed
against us in September 2000. Although we settled that lawsuit and it did not
materially affect our business, any future claim against us for personal injury
or property damage could materially adversely affect our business, financial
condition, and results of operations and result in negative publicity. We
maintain product liability and other liability insurance which we believe is
adequate. However, there can be no assurance that we will not experience legal
claims in excess of our insurance coverage or that our insurance will not cover.
We are susceptible to fluctuations in the economy. If fewer boats are purchased
in response to general slowdowns in the economy, our business could be adversely
affected.
Sales of recreational boats generally fluctuate with the economy. In
the United States, for example, the sale of recreational boats has been steadily
declining since 1995. Sales have gone from approximately 200,000 units in 1995
to approximately 83,000 units in 2001. Fluctuations in the growth of the market
for recreational boats could cause fluctuations in our operating results and a
stagnation or decline in the growth of the recreational boats market could have
a material adverse effect on our business, financial condition, and results of
operations.
If we are unable to obtain certain components or raw materials that we use to
manufacture our boats, we may be unable to build new boats.
We depend on certain vendors to provide us with key components and raw
materials we use to build our boats. While we believe our current vendor
relationships are sufficient to provide the materials necessary to meet present
production demands, we cannot assure that these relationships will continue or
that the quantity or quality of materials available from these vendors will be
sufficient to meet our future needs. Disruptions in current vendor relationships
or our inability to continue to purchase construction materials or components in
sufficient quantities and of sufficient quality could lower our sales or
increase our cost of goods. Additionally, current or future price increases in
construction materials or components could cause a reduction in our profit
margins or reduce the number of boats we can manufacture and sell. If this
occurs, our business, financial condition, and results of operations would be
materially adversely affected, and you could lose your investment.
The hulls on our boats are molded to fit engines and pumps manufactured
by Mercury Marine. Although there are other engines and pumps available on the
market, if we are unable to obtain Mercury Marine engines and pumps in a timely
manner, at an acceptable cost, or at all, we may need to redesign and
reconstruct the molds we use to build the hulls for our boats, which we believe
would take a minimum of one month. If we do not have a sufficient inventory of
Mercury Marine engines or pumps, or we are unable to find a suitable
replacement, we may not be able to manufacture any boats for a period of time,
which could materially adversely affect our business, results from operations
and financial condition, and you could lose your investment.
If we are unable to comply with environmental and other regulatory laws, our
business may be exposed to liabilities and fines.
Our operations and our products are subject to extensive regulation,
supervision, and licensing under various federal, state, local and foreign
statutes, ordinances, and regulations, including, but not limited to,
environmental regulations, health and safety regulations and labor regulations.
While we believe we maintain all requisite licenses and permits and are in
compliance with all applicable regulations, there can be no assurance that we
will be able to maintain all requisite licenses and permits, and maintain
compliance with applicable regulations. Our failure to satisfy those and other
regulatory requirements, or the adoption of additional laws, rules, and
regulations could have a material adverse effect on our business, financial
condition, and results of operations.
Our manufacturing business involves the use, handling, storage, and
contracting for recycling or disposal of, hazardous or toxic substances or
wastes, including environmentally sensitive materials, such as batteries,
solvents, lubricants, degreasing agents, gasoline, and resin. We must comply
with certain requirements for the use, management, handling, and disposal of
these materials. We use small amounts of these materials at our Huntington Beach
facility and large amounts at our factory in Nanning, China. We, however, do not
maintain insurance for pollutant cleanup and removal. If we are found
responsible for any hazardous contamination, any fines or penalties we may be
required to pay, or any clean up we are required to perform, could be very
costly. Even if we are charged, and later found not responsible, for such
contamination or clean up, the cost of defending the charges could be high. If
either of the foregoing occurs, our business, results from operations and
financial condition could be materially adversely affected, and you could lose
your investment.
In addition, the EPA has passed various air emissions regulations for
outboard marine engines that impose stricter emissions standards for two-cycle,
gasoline outboard marine engines. Emissions from such engines must be reduced by
approximately 75% over a nine-year period that began in 1998. The California
legislature has enacted similar regulations that are already effective, and with
which the engines we install in most of our commercial boats do not comply. We,
therefore, equip boats we sell for use in California with a different engine. We
expect other states will pass similar laws. If future emissions standards or
other regulations materially increase the cost of engines, or if manufacturers
are unable to comply with such standards or regulations, our business, results
from operations and financial condition could be materially adversely affected,
and you could lose your investment.
We have a dispute with one of the partners of our joint venture in Dalian,
China.
We own 45% of Dalian Sonic Jet Co., Ltd., a joint venture company
organized under the laws of the People's Republic of China, which was formed for
the purpose of manufacturing the shells of our boats in Dalian, China. In June
2000, we stopped purchasing shells from the joint venture because we believed
there were quality control problems with the manufacturing process. Soon
thereafter, Dalian Sonic Jet Co., Ltd. ceased all operations. The joint venture
claims we owe it $60,000 on account of boat shells which we allegedly ordered
but for which we did not pay. We do not intend to purchase any more products
from the joint venture. We are currently negotiating a settlement with the joint
venture, which would include its dissolution. Although we do not believe we have
any substantial liability associated with the joint venture, if any litigation
is commenced against us, it would likely be commenced in China, and we would
need to spend significant money and management time in our defense. If a court
determined that we have breached our obligation to the joint venture by
discontinuing our performance under the joint venture, we could be liable for
damages. This could materially and adversely affect our business, results from
operations and financial condition, and you could lose your investment.
If China's favorable trade status with the United States ceases, or import
tariffs or taxes otherwise increase, our cost of goods could substantially
increase.
The hulls for our boats are manufactured in Nanning, China. The United
States has designated China as a most favored nation, which has resulted in low
tariffs on imports into the United States from China. Each year, the United
States reconsiders the renewal of China's status as a most favored nation. If
import tariffs or taxes increase because the United States does not renew or
revokes China's most favored nations status, or for any other reason, our cost
of goods would substantially increase, and our business, financial condition,
and results of operations would likely be materially adversely effected, and you
could lose your investment.
Changes in China's political, social and economic environment may affect our
financial performance.
Our financial performance may be affected by changes in China's
political, social and economic environment. We have been able to
cost-effectively produce our boats, in part, by manufacturing the hulls for our
boats in China. The role of the Chinese central and local governments in the
Chinese economy is significant. Chinese policies toward economic liberalization,
and laws and policies affecting foreign companies, foreign investment, currency
exchange rates and other matters could change, resulting in greater restrictions
on our ability to do business and operate our manufacturing facilities in China.
The Chinese government could impose surcharges, increase our tax rates, or
revoke, terminate or suspend our operating licenses without compensating us.
Also, China has from time to time experienced instances of civil unrest and
hostilities. Confrontations have occurred between the military and civilians. If
for these or any other reason, we lose our ability to manufacture our products
in China, or our cost of doing business in China increases, our business,
financial condition, and results of operations would be materially and adversely
affected, and you could lose your investment.
FINANCIAL STATEMENTS
The information required by this item is included in pages F-1 through
F-20 attached hereto and incorporated herein by reference. The index to the
consolidated financial statements can be found at F-1.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On September 17, 2001, we dismissed Singer Lewak Greenbaum & Goldstein
LLP, as our principal independent accountant. Singer Lewak's audit report for
our financial statements for the periods ended December 31, 1999 and December
31, 2000, included a going concern uncertainty paragraph indicating that there
is uncertainty about our ability to continue as a going concern. To replace that
firm, we hired Michael Johnson & Co., LLC, as our principal independent
accountant.
Our board of directors approved the change of our accountant. We had no
disagreements with Singer Lewak Greenbaum & Goldstein LLP, on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to their satisfaction, would have
caused it to make reference to the subject matter of the disagreement in
connection with its report.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTES AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
The information set forth under the captions "ELECTION OF DIRECTORS"
and "TRANSACTIONS WITH MANAGEMENT AND OTHERS -- Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive proxy statement (the
"Proxy Statement") for the Annual Meeting of Stockholders we intend to hold in
May 2002, is incorporated herein by reference. The Proxy Statement will be filed
with the U.S. Securities and Exchange Commission (the "Commission") not later
than 120 days after the close of Fiscal 2001.
EXECUTIVE COMPENSATION
Except as specifically provided, the information set forth under the
captions "COMPENSATION OF EXECUTIVE OFFICERS" and "INFORMATION ABOUT THE BOARD
OF DIRECTORS AND COMMITTEES OF THE BOARD -- Compensation of Directors" in the
Proxy Statement is incorporated herein by reference. The Proxy Statement will be
filed with the Commission not later than 120 days after the close of Fiscal
2001.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement is incorporated
herein by reference. The Proxy Statement will be filed with the Commission not
later than 120 days after the close of Fiscal 2001.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "TRANSACTIONS WITH
MANAGEMENT AND OTHERS" in the Proxy Statement is incorporated herein by
reference. The Proxy Statement will be filed with the Commission not later than
120 days after the close of Fiscal 2001.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The exhibits listed below are hereby filed with the Commission as part
of this Annual Report on Form 10-KSB. Certain of the following exhibits have
been previously filed with the Commission pursuant to the requirements of the
Securities Act or the Exchange Act. Such exhibits are identified by the
parenthetical references following the listing of each such exhibit and are
incorporated herein by reference. We will furnish a copy of any exhibit upon
request, but a reasonable fee will be charged to cover our expense in furnishing
such exhibit.
Exhibit Description
Number
3.1 Articles of Incorporation for Boulder Capital Opportunities III, Inc.
(Previously filed with the Commission on March 24, 1997, as Exhibit
3.(i) to the Company's General Form for Registration of Securities of
Small Business Issuer on Form 10-SB.)
3.2 Articles of Amendment to the Articles of Incorporation of Boulder
Capital Opportunities III, Inc., filed January 15, 1997 (Filed
herewith.)
3.3 Articles of Amendment to the Articles of Incorporation for Boulder
Capital Opportunities III, Inc., filed November 5, 1998 (Previously
filed with the Commission on April 15, 1998, as Exhibit 3.(iv) to the
Company's Current Report on Form 8-K.)
3.4 Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of Boulder Capital Opportunities III, Inc.
(Previously filed with the Commission on July 6, 1998, as Exhibit 7.4
to the Company's Current Report on Form 8-K.)
3.5 Bylaws for Boulder Capital Opportunities III, Inc. (Previously filed
with the Commission on March 24, 1997, as Exhibit 3.(ii) to the
Company's General Form for Registration of Securities of Small
Business Issuer on Form 10-SB.)
3.6 Certificate of Designation for Series B Convertible
Preferred Stock (Previously filed with the Commission on
January 7, 2002, as Exhibit 3.1 to the Company's Current
Report on Form 8-K.)
3.7 Certificate of Designation for Series C Convertible
Preferred Stock (Previously filed with the Commission on
January 7, 2002, as Exhibit 3.2 to the Company's Current
Report on Form 8-K.)
10.1 2000 Stock Plan of Sonic Jet Performance, Inc. (Previously
filed with the Commission on June 30, 2000 as Appendix A to
the Company's Information Statement pursuant to Section
14(c) of the Securities Exchange Act of 1934.)
10.2 Contract for Sino-Foreign Contractual Joint Venture of Dalian Sonic
Jet Co., Ltd. (Previously filed with the Commission on April 30, 1999,
as Exhibit 10.4 to the Company's Current Report on Form 10-KSB.)
10.3 Contract for Sino-Foreign Contractual Joint Venture of Nanning Sonic
Jet Co., Ltd. (Previously filed with the Commission on April 30, 1999,
as Exhibit 10.5 to the Company's Current Report on Form 10-KSB.)
10.4 Series B Convertible Preferred Stock Purchase Agreement
between Ashford Capital, LLC and Sonic Jet Performance,
Inc. (Previously filed with the Commission on January 7,
2002, as Exhibit 10.1 to the Company's Current Report on
Form 8-K.)
10.5 Series C Convertible Preferred Stock Purchase Agreement between e-Fund
Capital Partners, LLC, and Sonic Jet Performance, Inc. (Previously
filed with the Commission on January 7, 2002, as Exhibit 10.2 to the
Company's Current Report on Form 8-K.)
10.6 Agreement dated August 23, 2001, between Sonic Jet Performance, Inc.,
JNC Opportunity Fund, Ltd. and JNC Strategic Fund Ltd. (Filed
herewith.)
10.7 Letter Agreement between Sonic Jet Performance, Inc., and Encore
Capital Management, LLC, JNC Opportunity Fund, Ltd. and JNC Strategic
Fund, Ltd. (Previously filed with the Commission on January 7, 2002,
as Exhibit 10.3 to the Company's Current Report on Form 8-K.)
10.8 Letter Agreement dated June 15, 2001, between Sonic Jet Performance,
Inc. and Sheikh Mohammed Al Rashid (Filed herewith.)
10.9 Letter Agreement between Sonic Jet Performance, Inc. and Sheikh
Mohammed Al Rashid (Previously filed with the Commission on January 7,
2002, as Exhibit 10.4 to the Company's Current Report on Form 8-K.)
10.10 Letter dated February 5, 2002, between Regents Capital West and Sonic
Jet Performance, Inc. (Filed herewith.)
10.11 Employment Offer Letter dated January 2, 2002, between Madhava Rao
Mankal and Sonic Jet Performance, Inc. (Filed herewith.)
21.0 List of Subsidiaries.(Filed herewith)
24.1 Power of Attorney (included in signature page).
(b) Reports on Form 8-K.
On October 8, 2001, we filed a Current Report on Form 8-K reporting
that we terminated Singer, Lewak, Greenbaum & Goldstein, LLP, as our certifying
accountant, and engaged Michael Johnson & Co., LLC, as our new certifying
accountant.
On October 16, 2001, we filed an amendment to the Current Report on
Form 8-K we filed on October 8, 2001. The amendment included as an Exhibit, a
letter from Michael Johnson & Co., LLC, acknowledging its engagement as our
certifying accountant.
On November 6, 2001, we filed a Current Report on Form 8-K reporting
the resignation of Scott R. Ervin as a director, and the resignation of Albert
Mardikian as Interim Chief Executive Officer, and as a director.
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.
SONIC JET PERFORMANCE, INC.
Date: March 14, 2002 By: /s/ Madhava Rao Mankal
---------------------------------
Madhava Rao Mankal
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that such person whose signature
appears below constitutes and appoints Madhava Rao Mankal, his true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Form 10-KSB and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the U.S. Securities
and Exchange Commission, granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Name Capacity Date
/s/ MADHAVA RAO MANKAL President, Chief Financial Officer, March 12, 2002
-------------------------- Secretary, and Director (Principal
Madhava Rao Mankal Executive Officer & Principal
Financial & Accounting Officer)
/s/ GEORGE MOSEMAN Director March 13, 2002
--------------------------
George Moseman
/s/ SCOTT ERVIN Director March 14, 2002
--------------------------
Scott R. Ervin
Exhibit List
Exhibit Description
Number
3.1 Articles of Incorporation for Boulder Capital Opportunities III, Inc.
(Previously filed with the Commission on March 24, 1997, as Exhibit
3.(i) to the Company's General Form for Registration of Securities of
Small Business Issuer on Form 10-SB.)
3.2 Articles of Amendment to the Articles of Incorporation of Boulder
Capital Opportunities III, Inc., filed January 15, 1997 (Filed
herewith.)
3.3 Articles of Amendment to the Articles of Incorporation for Boulder
Capital Opportunities III, Inc., filed November 5, 1998 (Previously
filed with the Commission on April 15, 1998, as Exhibit 3.(iv) to the
Company's Current Report on Form 8-K.)
3.4 Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of Boulder Capital Opportunities III, Inc.
(Previously filed with the Commission on July 6, 1998, as Exhibit 7.4
to the Company's Current Report on Form 8-K.)
3.5 Bylaws for Boulder Capital Opportunities III, Inc. (Previously filed
with the Commission on March 24, 1997, as Exhibit 3.(ii) to the
Company's General Form for Registration of Securities of Small
Business Issuer on Form 10-SB.)
3.6 Certificate of Designation for Series B Convertible Preferred Stock
(Previously filed with the Commission on January 7, 2002, as Exhibit
3.1 to the Company's Current Report on Form 8-K.)
3.7 Certificate of Designation for Series C Convertible Preferred Stock
(Previously filed with the Commission on January 7, 2002, as Exhibit
3.2 to the Company's Current Report on Form 8-K.)
10.1 2000 Stock Plan of Sonic Jet Performance, Inc. (Previously filed with
the Commission on June 30, 2000 as Appendix A to the Company's
Information Statement pursuant to Section 14(c) of the Securities
Exchange Act of 1934.)
10.2 Contract for Sino-Foreign Contractual Joint Venture of Dalian Sonic
Jet Co., Ltd. (Previously filed with the Commission on April 30, 1999,
as Exhibit 10.4 to the Company's Current Report on Form 10-KSB.)
10.3 Contract for Sino-Foreign Contractual Joint Venture of Nanning Sonic
Jet Co., Ltd. (Previously filed with the Commission on April 30, 1999,
as Exhibit 10.5 to the Company's Current Report on Form 10-KSB.)
10.4 Series B Convertible Preferred Stock Purchase Agreement between
Ashford Capital, LLC and Sonic Jet Performance, Inc. (Previously filed
with the Commission on January 7, 2002, as Exhibit 10.1 to the
Company's Current Report on Form 8-K.)
10.5 Series C Convertible Preferred Stock Purchase Agreement between e-Fund
Capital Partners, LLC, and Sonic Jet Performance, Inc. (Previously
filed with the Commission on January 7, 2002, as Exhibit 10.2 to the
Company's Current Report on Form 8-K.)
10.6 Agreement dated August 23, 2001, between Sonic Jet Performance, Inc.,
JNC Opportunity Fund, Ltd. and JNC Strategic Fund Ltd. (Filed
herewith.)
10.7 Letter Agreement between Sonic Jet Performance, Inc., and Encore
Capital Management, LLC, JNC Opportunity Fund, Ltd. and JNC Strategic
Fund, Ltd. (Previously filed with the Commission on January 7, 2002,
as Exhibit 10.3 to the Company's Current Report on Form 8-K.)
10.8 Letter Agreement dated June 15, 2001, between Sonic Jet Performance,
Inc. and Sheikh Mohammed Al Rashid (Filed herewith.)
10.9 Letter Agreement between Sonic Jet Performance, Inc. and Sheikh
Mohammad Al Rashid (Previously filed with the Commission on January 7,
2002, as Exhibit 10.4 to the Company's Current Report on Form 8-K.)
10.10 Letter dated February 5, 2002, between Regents Capital West and Sonic
Jet Performance, Inc. (Filed herewith.)
10.11 Employment Offer Letter dated January 2, 2002, between Madhava Rao
Mankal and Sonic Jet Performance, Inc. (Filed herewith.)
21.0 List of Subsidiaries (Filed herewith).
23.1 Consent of Michael Johnson & Co., LLC, Independent Auditors,
_______________, __state______.
24.1 Power of Attorney (included in signature page).
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SONIC JET PERFORMANCE, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2001 AND 2000
SONIC JET PERFORMANCE, INC. AND SUBSIDIARY
CONTENTS
December 31, 2001
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6 - F-8
Notes to Consolidated Financial Statements F-9 - F-19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Sonic Jet Performance, Inc. and subsidiary
We have audited the accompanying consolidated balance sheet of Sonic Jet
Performance, Inc. and subsidiary as of December 31, 2001, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sonic
Jet Performance, Inc. and subsidiary as of December 31, 2001, and the
consolidated results of their operations and their consolidated cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.
The financial statements for the year ended December 31, 2000,were audited by
other accountants, whose report dated May 14, 2001, expressed an unqualified
opinion on those statements. They have not performed any auditing procedures
since that date.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. During the years ended December 31,
2001 and 2000, the Company incurred net losses of $1,437,818 and $7,458,046,
respectively. In addition, the Company's accumulated deficit was $11,009,005 as
of December 31, 2001. As discussed in Note 2, conditions exist which raise
substantial doubt about the Company's ability to continue unless it is able to
generate sufficient cash flows to meet its obligations and sustain its
operations. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustment that might result
from the outcome of this uncertainty.
/s/ Michael Johnson & Co., LLC.
Michael Johnson & Co, LLC
Denver, Colorado
February 28, 2002
F-1
SONIC JET PERFORMANCE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31,
ASSETS
2001 2000
Current assets
Cash $42,760 $ 40,129
Restricted cash 201,004 203,120
Accounts receivable 9,500 45,760
Inventories 363,971 574,903
Due from related party - 393,291
Other current assets 7,731 3,450
--------- ---------
Total current assets 624,966 1,260,653
--------- ---------
Property and equipment, net 1,221,313 1,359,910
--------- ---------
Other assets
Licensing rights 267,500 267,500
--------- ---------
Total assets $2,113,779 $2,888,063
========== ==========
The accompanying notes are an integral part of these financial statements.
F-2
SONIC JET PERFORMANCE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31,
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $458,416 $192,206
Accrued payroll taxes 70,936 68,486
Accrued interest - 300,834
Other accrued liabilities 397,276 386,215
Current portion of capitalized lease oblig. 12,236 1,432
Convertible debts - related party - 2,801,301
-------- ---------
Total current liabilities 938,864 3,750,474
------- ---------
Capitalized lease obligations, net of current portion - 12,236
Subordinated note payable - related party - 600,000
-------- -------
Total liabilities 938,864 4,362,710
-------- ---------
Commitments and contingencies
Stockholders' deficit
Preferred stock, no par value
10,000,000 shares authorized
Series A Convertible Preferred Stock
1600 shares issued and outstanding - 1,500,000
Series B Convertible preferred stock
1 shares issued and outstanding 25,000 -
Series C Convertible preferred stock
5 shares issued and outstanding 50,000 -
Common stock, no par value
100,000,000 shares authorized
19,333,936 shares issued and outstanding 12,015,715 4,328,777
Additional paid-in capital stock warrants - 1,024,627
Additional paid-in capital - 1,098,000
Shares committed to be issued 93,205 143,872
Accumulated Comprehensive income - 20,330
Accumulated deficit (11,009,005)(9,590,253)
---------- ----------
Total stockholders' deficit 1,174,915 (1,474,647)
--------- ---------
Total liabilities and stockholders' deficit $2,113,779 $2,888,063
The accompanying notes are an integral part of these financial statements.
F-3
SONIC JET PERFORMANCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
2001 2000
---- ----
Sales $1,199,047 $1,032,355
Cost of sales 896,084 870,676
----------- -----------
Gross profit 302,963 161,679
---------- -----------
Operating expenses
General and administrative expenses 1,501,864 3,101,037
Impairment loss - 2,350,045
------------ ---------
Total operating expenses (1,501,864) (5,451,082)
---------- ----------
Loss from operations (1,198,901) (5,289,403)
----------- ----------
Other income (expense)
Other income 172,258 15,694
Interest income 7,056 3,463
Interest expense (24,938) (2,187,800)
Extraordinary Loss (393,293) -
------------ -----------
Total other income (expense) (238,917) (2,168,643)
------------ ----------
Net loss $(1,437,818) $ (7,458,046)
=========== ============
Basic and diluted loss per share $(0.09) $(0.58)
---------- ----------
Weighted-average shares used to compute basic and
fully diluted loss per share 15,847,263 12,896,202
========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
SONIC JET PERFORMANCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31,
Additional
Paid-In Accumulated
Capital - Shares Compre-
Stock Additional Committed hensive
Preferred Stock Common Stock Warrant Paid-In to be Income Accumulated
------------------------------------------
Shares Amount Shares Amount Outstanding Capital Issued (Loss) Deficit Total
------------------------------------------ -------------------------------------------------------------------
Balance, December
31, 1999 1,600 1,500,000 12,676,000 3,618,194 316,026 272,000 799,455 (4,943) (2,132,207) 4,368,525
Issuance of common
stock 348,767 710,583 (655,583) 55,000
Capital changes due
to debt financing 708,601 826,000 1,534,601
Cumulative translation
adjustment 25,273 25,273
Net loss (7,458,046) (7,458,046)
------- ---------- ----------- --------- -------- --------- ---------- ------- ----------- ----------
Balance, December
31, 2000 1,600 1,500,000 13,024,767 4,328,777 1,024,627 1,098,000 143,872 20,330 (9,590,253) (1,474,647)
Issuance of common
stock (1,594) (1,425,000) 6,309,169 7,686,938 (1,024,627)(1,098,000) (50,667) (20,330) 20,332 4,088,646
Capital changes due
to debt financing
Prior Year transaction (1,266) (1,266)
Cumulative translation
adjustment
Net loss (1,437,818) (1,437,818)
------- ---------- ----------- --------- -------- --------- ---------- ------- ----------- ----------
Balance, December
31, 2001 6 75,000 19,333,936 12,015,715 ----- ------- 93,205 --- (11,009,005) 1,174,915
The accompanying notes are an integral part of these financial statements.
F-5
SONIC JET PERFORMANCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2001 2000
Cash flows from operating activities
Net loss $ (1,437,818) $(7,458,046)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 141,314 49,735
Write off of molds and tools on discontinued product - 2,350,045
Write off of licensing rights - 267,500
Write off of inventories - 533,181
Loss from sale of property and equipment - 43,491
Income due to settlement of debt (164,335) -
Bad debts 152,970 293,835
Provision for warrants 100,000 -
Write off Investments in Dalian Sonic Jet co, ltd 393,292 -
Write off Dalian Sonic Jet Co, Ltd Inventory 5,863 -
Interest relating to beneficial conversion of debt and below
market warrants - 1,959,302
Common stock committed for services 93,205 -
Common stock issued for services 96,080 55,000
(Increase) decrease in
Account receivable 36,261 (327,751)
Other receivables (4,281) 699
Inventories 205,069 23,815
Due from related party (32,084) 36,977
Prepaid inventories - 20,000
Other current assets - -
Increase (decrease) in
Account payable 430,546 255,491)
Accrued payroll taxes 2,450 83
Accrued interest - 289,055
Other accrued liabilities (138,940) 107,801
Due to related parties - -
--------- ---------
Net cash provided by (used in) operating 120,408) (2,010,769)
------- ----------
F-6
Cash flows from investing activities
Restricted cash 2,116 (203,120)
Purchase of property and equipment (2,645) (56,522)
Proceeds from sale of property and equipment - 1,000
Proceeds from sale of other assets - 22,575
Tooling - -
------- -----------
Net cash used in investing activities (529) (236,067)
--------- --------
Cash flows from financing activities
Proceeds from convertible debt - related party 125,000 2,171,151
Proceeds from (payments on) capitalized lease obligation (1,432) (1,303)
------- ---------
Net cash provided by financing activities 123,568 2,169,848
------- ---------
Effect of exchange rate on cash and cash equivalents - 36,560
------- ----------
Net decrease in cash 2,631 (40,428)
Cash, beginning of year 40,129 80,557
------- -------
Cash, end of year $42,760 $40,129
======= =======
Supplemental disclosures of cash flow information
Interest paid $24,937 $ 537
======= =====
Income taxes paid $ 800 $ 800
======= =====
The accompanying notes are an integral part of these financial statements.
F-7
Supplemental schedule of non-cash investing and financing activities
During the year ended December 31, 2001, the Company recorded a reduction of
$164,335 in accounts payable that was treated as other income. Also a provision
of $100,000 for Warranty on boats was recorded.
During the year ended December 31, 2001, the Company issued 6,309,169 restricted
shares of common stock valued at $6,044,961 in connection with the settlement
agreement of all outstanding debts owed by the Company under loan agreements,
agreement between the Company and Plaintiffs in Wrongful death case and
outstanding amounts owed to employee and other expenses.
During the year ended December 31, 2001, the Company recorded $93,205 for
settlement with employees and consultants by committing to issue shares, which
represents the Company's commitment to issue 1,656,695 shares of common stock.
Cash from investing and financing activities exclude the effect of the
acquisition of real property through the assumption of debt.
F-9
SONIC JET PERFORMANCE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
NOTE 1 - NATURE OF BUSINESS
Sonic Jet Performance, Inc. ("SJPI"), a Colorado corporation, and
subsidiary (collectively, the "Company") designs and manufactures
commercial and recreational boats. The principal executive office is
located in Huntington Beach, California.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of SJPI and
its wholly owned subsidiary, Nanning Sonic Jet, LLC. During the year
ended December 31, 2001. All inter-company balances and transactions
are eliminated in consolidation.
Going Concern
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
As shown in the financial statements, during the years ended December
31, 2001 and 2000, the Company incurred losses of $1,437,818 and
$7,458,046 respectively, and the Company's accumulated deficit was
$11,009,005 as of December 31, 2001. Realization of a major portion of
the assets in the accompanying balance sheet is dependent upon
continued operations of the Company, obtaining additional financing,
and the success of its future operations.
Since December 31, 2001, the Company has received $460,000 from the
various subscribers. On February 5, 2002, the Company signed an
engagement letter with Regents Capital West, an investment banker,
pursuant to which it agreed to assist the Company in a private
placement of unregistered common stock in accordance with an applicable
exemption from registration under the Securities Act. The Company
agreed to pay Regents Capital West, 8% of the gross proceeds of such
offering, including capital raised from the issuance of the Company's
securities and from the exercise of warrants issued in connection with
the offering. The Company also agreed to issue Regents Capital West
shares of common stock equal to 5% of any proceeds raised in such
offering. Such shares shall be issued at $0.18 per share for any amount
raised up to $500,000, and at $0.15 per share for any amounts raised in
addition to $500,000. The engagement has a 12 month term which may be
extended. If the Company terminates such offering, or performs any act
that causes the offering to terminate, before the end of the term of
the engagement, in addition to compensation already paid to Regents
Capital West, the Company must pay a monetary amount between $125,000
and $750,000 depending on the month during which the offering is so
terminated. In addition, if the Company terminates the offering because
it has secured funds from another source, the Company will issue
Regents Capital West shares of common stock equal to 5% of any proceeds
received from such alternative funding source. Such shares shall be
issued at $0.18 per share for any amount raised up to $500,000, and at
$0.15 per share for any amounts raised over $500,000.The Company has
entered into agreement with Bombardier Capital for financing dealers
under a dealer's floor plan. Management expects such a
receivable-financing program will provide sufficient cash to continue
the Company's present operations.
F-10
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income (Loss)
The Company utilizes Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting comprehensive income (loss) and its
components in a financial statement. Comprehensive income (loss) as
defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in
comprehensive income (loss), which are excluded from net loss, include
foreign currency translation adjustments and unrealized gains and
losses on available-for-sale securities. Comprehensive income (loss)
consists of foreign currency translation adjustments and is presented
in the consolidated statements of stockholders' equity (deficit).
Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with maturity of three months or less
to be cash equivalents. Cash equivalents consist primarily of United
States government securities.
Restricted Cash
Restricted cash consists of money deposited in a money market account
to secure a letter of credit for approximately the same amount. The
letter of credit was issued under a Floor Plan Repurchase Agreement
with a financing company, which finances certain customers of the
Company who are dealers and distributors.
Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market. Work in process and finished goods include
materials.
Property and Equipment
Property and equipment are stated at cost or at the value of the
operating agreement. Depreciation and amortization are computed using
the straight-line method over the following estimated useful lives:
Building and improvements 20 years
Furniture and fixtures 7 years
Machinery and equipment 7 years
Tooling and molds 7 years
Vehicles 7 years
The Company capitalizes costs incurred on tooling and molds once the
design of the product is completed and independent marketing channels
establish marketability of the product.
Impairment of Long-Lived Assets
The Company reviews long-lived assets to be held and used for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. If the sum of
the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, the Company
would recognize an impairment loss based on the estimated fair value of
the asset.
F-11
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign Currency Transaction
Assets and liabilities in foreign currencies are translated at the
exchange rate prevailing at the balance sheet date. Revenues and
expenses are translated at the exchange rate prevailing at the
transaction date, and the resulting gains and losses are reflected in
the statements of operations. Gains and losses arising from translation
of a subsidiary's foreign currency financial statements are shown as a
component of stockholders' equity (deficit) as accumulated
comprehensive income (loss).
Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. The asset and liability method accounts for deferred
income taxes by applying enacted statutory rates in effect for periods
in which the difference between the book value and the tax bases of
assets and liabilities are scheduled to reverse. The resulting deferred
tax asset or liability is adjusted to reflect changes in tax laws or
rates. Because the Company has incurred losses from operations, no
benefit is realized for the tax effect of the net operating loss
carry-forward due to the uncertainty of its realization.
Loss per Share
The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per
share is computed by dividing loss available to common stockholders by
the weighted-average number of common shares outstanding. Diluted loss
per share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive.
Because the Company has incurred net losses, basic and diluted loss per
share are the same.
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, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue Recognition
Revenues from products and services are recognized at the time goods
are shipped or services are provided to the customer, with an
appropriate provision for returns and allowances.
Recently Issued Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation," (an Interpretation of Accounting
Principles Bulletin Opinion No. 25 ("APB 25")) ("FIN 44"). FIN 44
provides guidance on the application of APB 25, particularly as it
relates to options. The effective date of FIN 44 is July 1, 2000, and
the Company has adopted FIN 44 as of that date.
NOTE 3 - CONCENTRATION OF CREDIT RISK
The Company maintains bank accounts at several banks. Deposits at the
banks are insured by the Federal Deposit Insurance Corporation (FDIC)
up to $100,000. At times, the Company holds cash with these banks in
F-12
excess of amounts insured by federal agencies. As of December 31, 2001,
the amount in excess of the FDIC limit totaled $101,004. Management
believes the financial risk associated with these financial instruments
is minimal.
NOTE 4 - INVENTORIES
Inventories at December 31, 2001 consisted of the following:
Raw materials and supplies $ 37,704
Work in process 255,101
Finished goods 71,166
--------
Total $363,971
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2001 consisted of the following:
Building and improvements $ 32,933
Furniture and fixtures 13,613
Machinery and equipment 309,043
Tooling and molds 6,000
Tooling - new products 1,210,290
Vehicles 20,899
-------
1,592,778
Less accumulated depreciation and amortization (371,465)
--------
Total $1,221,313
Depreciation expense for the year ended was $141,314.
NOTE 6 - CONVERTIBLE DEBT - RELATED PARTY
Convertible debt and accrued interest owed to JNC Opportunity fund,
Ltd. in the amount of $3,069,699 was converted to 2,455,759 shares of
144D common stock on June 29, 2001. Also 1,600 Convertible Preferred
stock and negotiated dividend on preferred stock in the name of JNC
Strategic Fund, Ltd. were converted to 1,731,449 shares of 144D common
stock on June 29, 2001.
NOTE 7 - SUBORDINATED NOTE PAYABLE - RELATED PARTY
$600,000 Promissory Note and accrued interest payable to Sheikh
Mohammed Al Rashid was converted to 647,097 shares of 144D common stock
on June 29, 2001.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Lease
The Company leases its principal executive offices and facility from
its majority stockholder under an operating lease agreement. This lease
F-13
agreement expired on February 28, 2002. The Company currently leases
these premises on a month-to-month basis at a monthly rental charge of
$7,400.
The Company's wholly owned subsidiary leases a 50,000 square foot
facility in Nanning, China on a month-to-month basis.
Rent expense was $81,750 and $80,000 for the years ended December 31,
2001 and 2000, respectively.
Future minimum lease payments under a non-cancelable capital lease at
December 31, 2001 were as follows:
Year Ending
December 31,
2001 12,236
-------
Current portion $12,236
=======
Capitalized leased assets included in property and equipment at
December 31, 2001 consisted of the following:
Vehicles $ $ 20,899
Less accumulated amortization 2,986
----------------
Total $ 17,913
================
F-14
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Agreement
On January 2, 2002, the Company entered into an at-will employment
agreement with Mr. Mankal. The agreement provides for an annual base
salary of $64,800, and an annual bonus of up to 25% of Mr. Mankal's
annual base salary based on the Company's achievement of certain
earnings and positive cash flow targets, to be established by the
board. The Company also granted him options to purchase 250,000 shares
of common stock that vest in three equal yearly installments.
Royalty/Licensing Agreements
In September 1999, the Company entered into two license agreements with
the Company's Design Director and Chairman/Chief Executive Officer of
International operations, pursuant to which, the Company acquired
exclusive design and other rights related to the boats design and
manufacture. On December 27, 2001, the Company terminated those
agreements and entered into a new license agreement covering the design
and other rights, with Mardikian Marine Design, LLC, an entity owned by
other Company's largest shareholder, and by a principal of the holder
of the Company's series B preferred Stock. Under the new licensing
agreement, the Company is obligated to pay the licensor, as royalties
(1) 4% of the first $3 Million Dollars in gross revenues resulting from
the sale of products using the designs, (2) 3% of gross revenue between
$3 Million Dollars and $5 Million Dollars (3) 2% of gross revenue
between $5 Million Dollars and $10 Million Dollars (4) 1% of gross
revenue in excess of $10 Million Dollars.
Investment in Joint Venture - Dalian
The Company owns a portion of a joint venture company in Dalian, China
that was created to manufacture boats. Because of a dispute with one of
the joint venture partners, the joint venture discontinued operations.
Series B Convertible Preferred Stock
1 During fiscal 2001, One share of Series B Convertible Preferred stock
has been issued to Ashford Capital, LLC in exchange for $25,000.
2.During fiscal 2001, five shares of Series C Convertible Preferred
Stock were issued to Efund Capital Partners, LLC. for $50,000.
Stock Compensation Plan
The Company's 1998 Employee Consultant Stock Compensation Plan provides
for the granting of stock options to employees and certain consultants
of the Company and was amended in July 2000. A total of 2,000,000
shares of common stock have been reserved for issuance upon exercise of
options granted under the plan, as amended. During the year ended
December 31, 2001, the Company did not issue any option shares.
NOTE 10 - INCOME TAXES
There has been no provision for U.S. federal, state, or foreign income
taxes for any period because the Company has incurred losses in all
periods and for all jurisdictions.
F-15
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of deferred tax assets are as follows:
Deferred tax assets:
Net operating loss carry forwards $ 10,073,818
Less valuation allowance 10,073,818
---------------
Net deferred tax assets $ -
===============
Realization of deferred tax assets is dependent upon future earnings,
if any, the timing and amount of which are uncertain. Accordingly, the
net deferred tax assets have been fully offset by a valuation
allowance. As of December 31, 2001, the Company had net operating loss
carry forwards of approximately $10,073,818 for federal and state
income tax purposes. These carry forwards, if not utilized to offset
taxable income begin to expire in 2007. Utilization of the net
operating loss may be subject to substantial annual limitation due to
the ownership change limitations provided by the Internal Revenue Code
and similar stat provisions. The annual limitation could result in the
expiration of the net loss before utilization.
NOTE 11 - OTHER RELATED PARTY TRANSACTIONS
Transactions Related to Albert Mardikian
Huntington Beach Lease
On February 1, 1999, The Company entered into a three-year lease
agreement with MGS Grand Sport, Inc.,(MGS) for office and manufacturing
space in Huntington Beach, California. The lease expired in February
2002, and converted to a month-to-month term. During this period,
Albert Mardikian, the majority shareholder, a director and officer of
MGS Grand Sport, Inc., beneficially owned over 20% of the Company's
common stock through his ownership of Sonic Jet Performance, LLC.
Throughout the lease term, Mr. Mardikian has served as the Company's
director of design, and chairman and chief executive officer of our
international operations. In addition, between January and November
2001, Mr. Mardikian was our interim chief executive officer, and
between March and October 2001, he was a director.
During fiscal 2000, the Company paid $97,500 in cash for rent expense
to MGS Grand Sport, Inc. During fiscal 2001, the Company paid $51,375
in cash and the remaining balance of $30,325 was settled by issuance of
38,125 share of S-8 common stock and exchange of a Red Vortex with a
value of $16,000. The Company also issued MGS Grand Sport, Inc., 14,310
shares of S-8 common stock to compensate it for fiscal 2001 property
tax coverage it paid on the Company's behalf.
License Agreements
Patents awarded to Mr. Mardikian protect the designs and certain
components of the Company's boats. On November 24, 1999, Mr. Mardikian
granted the Company exclusive licenses, until November 18, 2003, to use
those patents and related rights. The Company owed Mr. Mardikian
$24,000 in royalties for 2000. The Company paid this debt by issuing
Mr. Mardikian 10,765 shares of the Company's common stock. The Company
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owed him $46,138 in royalties for 2001. The Company issued him 46,138
shares of the Company's common stock for payment of $34,138 of this
debt.
In December 2001, to induce Ashford Capital, LLC to purchase the
Company's Series B Convertible Preferred Stock, Mr. Mardikian offered
to assign his watercraft related patents to Mardikian Marine Design,
LLC, an entity owned by Mr. Mardikian and a principal of Ashford
Capital, LLC. To facilitate the assignment, on December 27, 2001, The
Company terminated its license agreements with Mr. Mardikian and
entered into an exclusive license with Mardikian Marine Design, LLC, to
use the patent rights through December 30, 2011. Each year of the term
of the license, the Company must pay Mardikian Marine Design as
royalties, a percentage of its gross revenue that results from the sale
of its products that incorporate or include any of Mr. Mardikian's
designs. The Company is obligated to pay (1) four percent of the first
$3 million is gross revenues, (2) three percent of gross revenues over
$3 million but below $5 million, (3) two percent of gross revenue over
$5 million and under $10 million, and (4) one percent of any gross
revenue in excess of $10 million. The Company can pay the royalties to
Mardikian Marine Design in cash or stock, at its discretion.
Other Transactions
As a condition to the issuance to Mr. Mardikian of 42,564 shares of
common stock on June 29, 2001, in exchange for his cancellation of the
Company obligation to pay him $46,138 for past due royalties and $7,067
for business expenses, the Company agreed that if it was unable to
obtain $500,000 in capital infusions by August 22, 2002, Mr. Mardikian
could convert those shares back into debt. On December 20, 2001, in
exchange for a general release of claims from Mr. Mardikian, including
his right to covert those shares into debt, the Company agreed that
when it receives a total of $500,000 in capital infusions, the Company
would issue Mr. Mardikian a number of shares of common stock which when
added to his holdings as of December 20, 2001, would equal 20% of the
Company's outstanding common stock. As of February 15, 2002, the time
the Company met that condition, Mr. Mardikian still owned more than 20%
of the Company's common stock and therefore the Company will not issue
him any additional shares.
On June 29, 2001, the Company issued Mr. Mardikian 5,654 shares of the
Company's common stock in exchange for $7,067 in business-related
expenses owed him.
In 2001, the plaintiffs in a wrongful termination lawsuit filed against
the Company, and also named MGS Grand Sport, Inc., as a codefendant.
The Company agreed to reimburse MGS Grand Sport, Inc., for $2,950 in
legal fees MGS paid for its defense. In lieu of paying cash, the
Company issued MGS 2,360 shares of the Company's common stock.
Between September and November 2001, MBZ West, Inc., an entity owned by
Mr. Mardikian's nephew, loaned the Company approximately $110,926 at an
interest rate of 4% per month, or 48% per annum. Between September and
November 2001, the Company paid an aggregate of $115,863 for the
principal and interest that had accrued on the loan.
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The Company owns 45% of Dalian Sonic Jet Co., Ltd., a joint venture
company that Sonic Jet Performance, LLC, our predecessor in interest,
and two partners, formed in May 1998, under the laws of the People's
Republic of China. The Company formed the joint venture to manufacture
boat shells in China. The joint venture agreement provided for the
payment to Mr. Mardikian of 2% of the profit resulting from the joint
venture's sales. Because of disagreements between the partners, Dalian
Sonic Jet Co., Ltd., discontinued operations in June 2000, and Mr.
Mardikian has not received any royalty payments since 1999.
Transactions with JNC Opportunity Fund, Ltd. and JNC Strategic Fund, Ltd.
In November 1999, the Company issued a promissory note in the principle
amount of $1.25 million to JNC Opportunity Fund, Ltd., in exchange for
a $1.25 million loan. During each of March, May, September, October and
November of 2000, the Company issued an additional promissory note to
JNC Opportunity Fund, Ltd., in exchange for five additional advances of
an aggregate of $1.45 million. At the time the Company made each
additional advance, Neil Chau, a principle of Encore Capital
Management, LLC, which controls JNC Opportunity Fund, Ltd., served on
the Company's board of directors. Encore Capital Management, LLC also
controls JNC Strategic Fund, Ltd., which owned all outstanding shares
of the Company's Series A Preferred Stock.
On June 29, 2001, the Company converted $3,069,699 in principal and
interest due under the promissory notes into 2,455,759 shares of the
Company's common stock. The Company also issued the fund 16,000 shares
to compensate it for certain legal expenses related to the transaction
that the Company had agreed to pay. On the same day, the Company
converted 1,600 shares of Series A Preferred Stock held by JNC
Strategic Fund, Ltd., plus $330,311 in accrued dividends, into
1,731,449 shares of common stock. Encore Capital Management, LLC, also
controls that fund. The Company issued all of these shares at an
effective issue price of $1.25 per share. The issuances resulted in the
JNC funds collectively holding approximately 22% of the Company's
outstanding common stock. The conversions were effected on the
condition that if the Company was unable to raise $500,000 in capital
infusions by August 22, 2002, JNC Opportunity Fund, LLC and JNC
Strategic Fund, LLC, could reconvert the shares back into debt and
Series A Preferred Stock, respectively.
On December 20, 2001, in exchange for a general release of claims from
Encore Capital Management, LLC and the JNC funds, the Company agreed
that when it receives a total of $500,000 in capital infusions, the
Company would issue the JNC funds a number of shares of common stock
which when added to their holdings as of December 20, 2001, would equal
18% of the Company's outstanding common stock. As of February 15, 2002,
the Company had raised the $500,000. To satisfy the Company's
obligation, the Company intends to issue the JNC funds 1,776,633 shares
of the Company's common stock.
Transactions with Sheikh Mohammed Al Rashid
On June 29, 2001, the Company issued 697,097 shares of its common stock
to Sheikh Mohamed Al Rashid, in lieu of paying $808,871 in principle
and interest due under a promissory note the Company issued to him in
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May 1999. On June 29, 2001, the Company also issued Sheikh Rashid
50,000 shares in satisfaction of a $250,000 debt a third party owed
him. The Company agreed to pay the debt as part of the Company's
settlement of a lawsuit filed against the Company by the third party,
and issued the shares at an effective issue price of $1.25 per share.
At the time of these transactions, Sheikh Rashid was a director, and
beneficially owned over 20% of the Company's outstanding common stock.
On December 21, 2001, in exchange for a general release of claims, the
Company agreed that when it receives a total of $500,000 in capital
infusions, the Company would issue Sheikh Rashid a number of shares of
common stock which when added to his holdings as of December 20, 2001,
would equal 13% of the Company's outstanding common stock. As of
February 15, 2002, the Company had raised the $500,000. To satisfy the
Company's obligation, it intends to issue Sheikh Rashid 1,021,677
shares.
Sheikh Rashid served as a director between April 1999 and February
2002.
Other Transactions
In January 2002, Ashford Capital, KK purchased 7 shares of our Series C
Convertible Preferred Stock for an aggregate purchase price of $70,000.
It converted two of the preferred shares into 564,706 shares of our
common stock. Ashford Capital, LLC, the holder of our Series B
Preferred Stock, owns a minority interest in Ashford Capital, KK.
In 1998, Sonic Jet Performance, LLC, our predecessor-in-interest,loaned
$75,683 to Sonic Marketing International, LLC. On June 30, 2000, the
company wrote off the debt as uncollectable. Alex Mardikian, the son of
Albert Mardikian, and Majid Al Rashid, the son of Sheikh Mohammed, were
the sole shareholders, directors and officers of Sonic Marketing
International, LLC.
On January 30, 2000, the joint venture agreement with China Guangxi
Shipyard of Nanning, Guangxi, China was dissolved, and Nanning Sonic
Jet, LLC became a wholly owned subsidiary of SJPI.
NOTE 12 - FOURTH QUARTER ADJUSTMENTS
Provision amounting to $150,000 has been made on the product sold to
dealers under financing agreement.
Also a provision amounting to $100,000 is made for warranty repairs
Investment in Dalian Sonic Jet Co, Ltd. amounting to $393,292 and
$5,863 inventory was written off during the fourth quarter.
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