Document/Exhibit Description Pages Size
1: 10-KT Composite Technology Corporation 54 224K
2: EX-2.1 Articles of Merger 2 7K
3: EX-3.1 Articles of Incorporation 3 13K
4: EX-3.2 Bylaws of the Company 20 81K
5: EX-4.2 Warrant to Purchase 120,000 Shares of Common Stock 5 23K
6: EX-10.1 2001 Incenctive Stock Option Plan 10 40K
7: EX-21 Subsidiaries of the Company 1 4K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from January 1, 2001 to September 30, 2001.
Commission File Number 0-10999
COMPOSITE TECHNOLOGY CORPORATION
--------------------------------
(Name of Small Business Issuer in Its Charter)
NEVADA 59-2025386
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
18881 VON KARMAN AVENUE, SUITE 1630, IRVINE, CALIFORNIA 92612
------------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(949) 756-1091
--------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.001 par value
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period 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 contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
The issuer's revenues for the nine months ended September 30, 2001. $0.
As of February 8, 2002, the aggregate market value of the registrant's Common
Stock held by non-affiliates (assuming for these purposes but without conceding
that all officers, directors and greater than 10% stockholders are "affiliates"
of the registrant), was $18,340,866.54, based upon the closing price of $2.07
per share of Common Stock on the OTC Bulletin Board.
As of January 31, 2002, there were 66,463,098 shares of Common Stock issued and
outstanding.
The following documents are incorporated by reference: None.
Transitional Small Business Disclosure Format: Yes No X
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TABLE OF CONTENTS
[Enlarge/Download Table]
PAGE NUMBER
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PART I........................................................................................................... 4
ITEM 1. DESCRIPTION OF BUSINESS...................................................................... 4
ITEM 2. DESCRIPTION OF PROPERTY...................................................................... 17
ITEM 3. LEGAL PROCEEDINGS............................................................................ 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................... 19
PART II.......................................................................................................... 19
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS............................ 19
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.................................... 22
ITEM 7. INDEX TO FINANCIAL STATEMENTS................................................................ 23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES........ 24
PART III......................................................................................................... 24
ITEM 9. OFFICERS AND DIRECTORS....................................................................... 24
ITEM 10. EXECUTIVE COMPENSATION....................................................................... 25
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................... 27
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................... 28
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K............................................................. 29
3
CAUTION REGARDING FORWARD-LOOKING INFORMATION
All statements contained in this Form 10-KSB, other than statements of
historical facts, that address future activities, events or developments are
forward-looking statements, including, but not limited to, statements containing
the words "believe," "anticipate," "expect" and words of similar import. These
statements are based on certain assumptions and analyses made by us in light of
our experience and our assessment of historical trends, current conditions and
expected future developments as well as other factors we believe are appropriate
under the circumstances. However, whether actual results will conform to the
expectations and predictions of management is subject to a number of risks and
uncertainties that may cause actual results to differ materially.
Such risks include, among others, the following: international, national
and local general economic and market conditions: our ability to sustain, manage
or forecast our growth; raw material costs and availability; new product
development and introduction; existing government regulations and changes in, or
the failure to comply with, government regulations; adverse publicity;
competition; the loss of significant customers or suppliers; fluctuations and
difficulty in forecasting operating results; changes in business strategy or
development plans; business disruptions; the ability to attract and retain
qualified personnel; the ability to protect technology; and other factors
referenced in this and previous filings.
Consequently, all of the forward-looking statements made in this Form
10-KSB are qualified by these cautionary statements and there can be no
assurance that the actual results anticipated by management will be realized or,
even if substantially realized, that they will have the expected consequences to
or effects on our business operations.
As used in this Form 10-KSB, unless the context requires otherwise, "we"
or "us" or the "Company" means Composite Technology Corporation and its
subsidiaries.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION:
The Company is engaged in the development of high-strength composite
materials, high-speed neural-networked pultrusion manufacturing systems for
composites, and novel designed composite products commercialization. These
composite technologies will initially include applications in the areas of
electricity delivery, structural strength members for civil engineering
applications, tower structures, and related materials inspection systems.
Through our subsidiary, Transmission Technology Corporation, a Nevada
corporation ("TTC"), we are engaged in the development, production, and
commercialization of composite reinforced cable and support systems for use in
electrical power transmission and distribution systems.
We were incorporated in Nevada as ElDorado Financial Group, Inc, on
June 25, 2001. We are a successor by merger to ElDorado Financial Group, Inc., a
Florida corporation
4
incorporated in February 1980. On November 13, 2001, we changed our name to
Composite Technology Corporation.
On November 3, 2001, we entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement"), with TTC and certain
stockholders of TTC, whereby such stockholders of TTC exchanged all of their
shares of common stock ("TTC Common Stock") in TTC for an aggregate of
57,546,000 shares of our common stock, par value $.001 per share ("Common
Stock"). As a result, TTC became our majority-owned subsidiary and such
stockholders of TTC became the holders of 89.9% of the issued and outstanding
shares of Common Stock. Since then, the remaining holders of TTC Common Stock
have also exchanged their shares of TTC Common Stock for an additional 2,374,598
shares of Common Stock, so that we now own all the outstanding shares of TTC
Common Stock. The former stockholders of TTC now own an aggregate of 59,920,598
shares of Common Stock, representing 90.2% of the issued and outstanding Common
Stock. Prior to entering into the Reorganization Agreement, we had no operating
history, revenues from operations, or assets since December 31, 1989. In
addition, we have not had any revenues from operations subsequent to acquiring
TTC.
Prior to entering into the Reorganization Agreement, TTC entered into
certain financing and other transactions with Red Guard Industries, Inc. ("Red
Guard"). See Item 5 -- Market for Company's Common Stock and Related Stockholder
Matters -- Sale of Unregistered Securities" and "Item 12 -- Certain
Relationships and Related Transactions."
On December 16, 2001, we entered into a non-binding letter of agreement
to establish a joint venture in China with Jiangsu Far East Group Company, Ltd.
for the manufacture and sale of composite reinforced aluminum conductors for
electrical transmission and distribution systems in China. The parties are
negotiating the terms of a definitive joint venture agreement, although there
are no assurances that a definitive agreement will be executed.
On December 28, 2001, we changed our fiscal year-end from December 31
to September 30.
PRINCIPAL PRODUCT:
Our principal product is our proprietary Composite Reinforced Aluminum
Conductor ("CRAC") cable. We have obtained an exclusive license for patent
pending CRAC technologies, which are new electrical transmission and
distribution cable designs that are able to deliver more power (ampacity) than
conventional ACSR (aluminum conductor steel reinforced) cables in use today.
CRAC cables are lighter than conventional steel reinforced cables and have a
higher ampacity rating, thus allowing them to replace existing overhead lines
without structural modification of the supporting tower systems while allowing
more power to be transmitted. We believe that the use of this technology to
replace existing lines can improve the reliability and reduce the stress on the
overloaded electrical infrastructure at a fraction of the cost and in a much
shorter time period than is required to create expensive new rights-of-way and
build new tower systems. However, if new system construction is required to
support new generation sources, we believe the size and cost of the new towers
can be significantly reduced due to the lower weight and higher ampacity of the
CRAC conductors. See "-- Intellectual Property" and "Item 3 - Legal
Proceedings."
5
We believe that there is an immediate need for a reasonably priced
higher performance cable, such as our CRAC cable. Recently, industry research
has focused primarily on superconductors, which are very expensive and require
constant cooling with liquid nitrogen. While superconductors perform with low
transmission losses, their higher price, larger size, and increased maintenance
constraints make them suitable only for short underground lines in highly
congested power centers.
Since the late 1880's, overhead transmission lines have used cables
that are made from straight steel wires that are helically wrapped by aluminum
wires, generally known as ACSR (aluminum conductor steel reinforced) cable. CRAC
cable is over 20% lighter than ACSR cable, has higher tensile strength and has
half of the thermal expansion. Therefore, CRAC cable is able to carry additional
electrical current (ampacity) on existing structures with little modification
for supporting connections. Furthermore, since the composite core of CRAC cable
is non-conductive, unlike ACSR steel-core cable, there is no inductive field
effect due to the conductor being wound around a steel core, which appears to
lower the electromagnetic field. Since the composite core of the CRAC cable is
stronger than ACSR cable, and since the same cross-sectional area used by the
steel wires can be packed with greater density using composite-core shapes, the
CRAC cable core has areas that can be designed to hold a fiber optic cable
bundle. With the addition of devices capable of intelligent sensing of
temperature, sag, and line problems, CRAC cable can also be used for the
transmission of all types of optical communications and control data.
The first CRAC cables planned for production are designed to replace
the ACSR "Drake" model commonly used in transmission lines and the smaller ACSR
"Linnet" model commonly used in distribution lines. There are many other similar
versions of ACSR cables with different specifications that can also be produced
using the same arrangement as the proposed CRAC cable versions of the Drake and
Linnet models. CRAC's unique core simply replaces the steel wires in the center
of the ACSR with pultruded composite profiles that leave an area which may hold
a fiber optic cable bundle; however, the current carrying aluminum wire layers
that are helically stranded around the CRAC cable core in the CRAC design are
the same as in the ACSR design. Therefore, the handling and splicing of the CRAC
cable is similar to ACSR, except for the joining of the composite core and the
fiber.
The primary benefits of replacing ACSR cable with our CRAC cable are as
follows:
- Greater ampacity (electrical current carrying capacity), principally
because the cable has the ability to handle more elevated temperatures
with less sag in the line and because of lower resistance with less
inductive field resulting from a core that is now non-conductive.
- Glass composites have 50% less thermal expansion than steel, which
results in less sag and reduced movement in wind. This means that our
CRAC cable can be rated with a higher ampacity, without sag causing the
cable to encroach on safe operating clearances.
- The fiber optic cable can be used with sensors in the line to detect
the temperature of the cable and other conditions, which allows the
operator to maximize the amount of power sent down the line, without
having to estimate the line's actual condition.
- The cable can be produced with minor modifications to existing cable
production plants.
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- Replacement composite core weight reduction results in overall cable
weight reduction.
Another key advantage of CRAC cable is that the outside conductive wire
portion of the cable is the same diameter and configuration as the conventional
ACSR cable, which means that it can be handled and spliced with minimal
re-training of utility linemen. The only difference is the splicing of the
inside composite core and the splicing of the fiber optic bundle. The splicing
techniques have been developed and demonstrated by technicians retained by us.
Although the price of CRAC cable may initially be slightly greater than the
proportionate increased ampacity it provides, we believe that the replacement of
ACSR cable with CRAC cable will be less expensive than the installation costs of
new additional lines and support structures. Moreover, the optical fibers could
provide additional revenue streams for the transmission and distribution system.
Electricity now accounts for nearly 40% of total energy consumption in
the United States and in other countries with similar levels of economic
development. The electricity system has emerged as the world's most critical
infrastructure, in the sense that it enables all other infrastructures to
function. To ensure the capability and reliability of electricity systems in the
twenty-first century, new advanced materials, polymers, composites and special
structures will be required. High-performance polymeric cables, such as our CRAC
cables, are expected to meet the needs of the electrical industry because they
are lighter, have a higher current carrying capacity and are better able to
tolerate high stresses during emergency overload conditions.
SALES AND DISTRIBUTION:
We intend to seek companies with established, successful distribution
networks to distribute our products. We may also seek to distribute our products
through joint ventures.
We have not to date made any sales of our product. Our initial CRAC
conductor sales efforts are being targeted at potential customers that have the
greatest need for a solution to congested line circuits or aging transmission
systems. This is a niche market with great potential for immediate sales to
solve significant reliability and power delivery problems, such as seen in the
California marketplace over the past two years. We have initiated discussions
with potential customers for our CRAC conductor including generation companies
and transmission grid owners located throughout the United States and the world,
as well as various local, state and federal government agencies in the United
States.
Because we will introduce our products in a conservative industry, we
intend to provide our prospective customers with demonstrations of the product
under controlled conditions. We are in the process of arranging to produce CRAC
cable for demonstrations during 2002 in the North American, Chinese, and South
American markets.
Following a parallel sales path strategy, we are contacting selected
companies or agencies that are in early stages of project development of
generation facilities requiring new transmission or distribution systems. We
believe that one or more of these may elect to integrate CRAC cable into their
systems.
7
Until and unless we secure multiple customer relationships, it is
likely that we will experience periods during which we will be highly dependent
on one or a limited number of customers.
MANUFACTURING:
We do not currently manufacture any products. In order to reduce market
entry costs, we are considering establishing subcontractor relationships and/or
joint ventures to manufacture our CRAC cable product line, although no such
relationships or joint ventures are currently in place. Both methods will allow
us to produce CRAC cables with much lower initial capital expenditures. To
establish a composite core manufacturing facility would require a significant
capital expenditure, the funds for which are not currently available.
We plan to produce our proprietary high speed neural-networked
manufacturing systems for our own use and for sale to our joint venture
partners, as appropriate. We will, in some instances, produce cable through
relationships with existing cable makers, by having them add helically stranded
combinations of individual aluminum wires around the composite core that we will
supply.
Our principal raw materials will be e-glass fibers and various polymer
resins. The prices for these raw materials are subject to market forces largely
beyond our control, including energy costs, organic chemical feedstocks, market
demand, and freight costs. The prices for these raw materials has varied
significantly and may vary significantly in the future.
Our objective is to build an efficient, high speed, thermoset
pultrusion system for use in manufacturing the composite core. Additionally, we
intend to build and test a high-speed "high-strength thermoplastic pultrusion"
equipment line while proceeding to market a "pultruded thermoset" core. We
believe that there are additional potential improvements to the CRAC design that
should be pursued and could be implemented with minimal retraining on the part
of the utility companies. Future market developments include marine cables,
underground cables, large fiber optic cables, and various other wire
applications, such as "last mile" cables.
The pultrusion process is a composite manufacturing method that
resembles extrusion, except that the fiber and polymer materials are pulled
through a heated die having the shape of the part to be made. Organic compounds
from resin baths and the enclosed die are contained in this process equipment
package. Production is a highly automated continuous process, and conductor core
lengths of many miles are possible, but are limited by reel sizes, handling, and
transportation constraints.
The composite cores that have been produced and tested have been made
by pultruding high strength glass fibers and a high strength epoxy under high
tension to achieve very high tensile strength in a process known as "thermoset."
The initial cores will be made in this manner, although at a higher cost than
the use of an engineered plastic in a "thermoplastic" pultrusion process. The
principal advantage of perfecting the "thermoplastic pultrusion" process to
achieve similar tensile strengths as the "thermoset pultrusion" is that the
production line should be able to run at higher speeds resulting in lower
manufacturing costs per foot of product in addition to the
8
fact that thermoplastic, sometimes known as "engineered plastics," is less
expensive per pound. Both polymers have proven resistance to high electrical
energy fields, higher temperatures, and weathering.
INTELLECTUAL PROPERTY:
TTC entered into a technology license agreement with W.B.G., Inc., a
California corporation ("WBG"), on May 7, 2001 (the "License Agreement"). The
License Agreement related to patent pending composite reinforced aluminum
conductor technologies and gave TTC an exclusive license to the technologies
covered by the License Agreement. The License Agreement currently is the basis
for our rights to the composite reinforced aluminum conductor technologies. We
also intend to file patent applications for several cable designs resulting from
our development and testing work. We believe that patents and other proprietary
rights are important to our success and our competitive position. Accordingly,
we intend to devote substantial resources to the establishment and protection of
patents and other proprietary rights. There can be no assurance that the actions
taken by us to establish and protect any patents or other proprietary rights
will be adequate to prevent imitation of our products by others or to prevent
others from prohibiting sales of any products we may develop in violation of the
patents and proprietary rights of others. Moreover, no assurance can be given
that others will not assert rights in, or ownership of, the patents and other
proprietary rights that we may establish or acquire, or that we will be able to
successfully resolve such conflicts. See "Item 3 -- Legal Proceedings."
MARKET:
The U.S. Department of Energy has reported that much of the nation's
electrical transmission and distribution infrastructure is rapidly becoming
incapable of meeting the demands of our modern economy. Traditionally, utilities
would be adding new transmission capacity to handle the expected load increase,
but because of difficulty in obtaining permits and the uncertainty over
receiving an adequate rate of return on investment, the total of transmission
circuit miles added annually have been declining. Obtaining approval to site and
build new electricity transmission is becoming more difficult due to
environmental concerns, the perceived health effects of electric and magnetic
fields, interest groups' concerns, and the concern that property values would
decline along transmission line routes. In the period from 1985 to 1990, 10,000
new circuit miles were added in the United States, while only 4,000 circuit
miles were added in the period from 1990 to 1995. Therefore, we believe that
there is an increased need for new conductors that deliver more power at a
reasonable cost on the existing tower system. We believe that we will be able to
attain a reasonable market share of the anticipated demand for both new and
replacement conductors.
COMPETITION:
There are three principal manufacturers of traditional bare overhead
ACSR conductors which supply the United States market: Southwire Company, with
approximately 42-45% of the market, and General Cable Corporation and Alcan
Inc., which supply most of the balance of the
9
market. Outside of the United States market, key manufacturers for ACSR cable
include Pirelli Cable, Jaingsu Far East Group Company, Ltd., and others.
The following developmental-stage efforts also have potential to
compete with CRAC cable:
- Minnesota Mining and Manufacturing Co., also known as 3M, in
partnership with Electricite de France, has developed a new
lightweight, high performance conductor which is expected to have at
least double the ampacity of ACSR; however its price is expected to be
seven to eight times higher than ACSR. The cable is not yet available
and a preliminary demonstration is expected to be conducted in the
third quarter of 2002.
- Korea Electric Power Corporation completed 24 overhead transmission
line upgrade projects between 1994 and 1997, where they replaced
existing conductors with high-ampacity conductors using existing towers
and rights-of-way. They used the "Super Thermal Resistant Aluminum
Alloy Conductor with Invar Reinforcement" ("STACIR"), first introduced
in 1994. The cable can operate to 210 degrees Celsius with its ampacity
approximately doubled. The cost of STACIR is four to seven times higher
than ACSR with slightly increased line losses.
- Several companies are in the preliminary stages of developing
superconducting technology in the form of liquid nitrogen-cooled
superconductor power cables, which are capable of conducting with very
low losses. The disadvantage is that the cost of such cables is
expected to be up to fifty (50) times the current price of ACSR cable,
so that it would only be practical in specific short underground
installations in downtown metropolitan areas.
GOVERNMENTAL REGULATION:
There are no specific government regulations governing the design and
specifications of bare overhead conductors in the United States. The manufacture
of CRAC cable is not subject to any specific government regulations other than
those regulations that traditionally apply to manufacturing activities such as
the Occupational Safety and Health Act of 1970.
Our intended operations are subject to various federal, state, and
local laws and regulations relating to the protection of the environment. These
environmental laws and regulations, which have become increasingly stringent,
are implemented principally by the Environmental Protection Agency and
comparable state agencies, and govern the management of hazardous wastes, the
discharge of pollutants into the air and into surface and underground waters,
and the manufacture and disposal of certain substances.
RESEARCH AND DEVELOPMENT:
We have not spent significant funds on research and development because
development of the CRAC technology has been funded with various state and
federal government grants
10
obtained by the licensor of such technology. See "-- Intellectual Property" and
"Item 3 - Legal Proceedings." We anticipate the need to spend significant funds
to protect the CRAC technology. We intend to seek patents with respect to
certain new hardware components, new related structures, and advanced production
equipment lines, although we have not filed any patent applications or obtained
any patents to date. The costs associated with development work on new equipment
lines is expected to be recovered through the purchase of such equipment by our
manufacturing partners, joint ventures, or licensees.
EMPLOYEES:
We currently have three full time employees; Benton H Wilcoxon, C.
William Arrington, and Robert Nikoley. Numerous technical skills will be
required to bring our products to market. Recruiting efforts have begun and will
continue in the near future.
RISK FACTORS:
WE ARE A DEVELOPMENT STAGE COMPANY AND HAVE A LIMITED OPERATING HISTORY.
We are a development stage company and have a limited operating
history. We are subject to business risks that are typical of development stage
companies, and "start-up" and "lead-time" factors are expected to affect the
timing of our receipt of revenues. There can be no assurance that we will be
able to generate any revenues. Until we generate significant revenues, we will
experience negative cash flows and financial losses. Our ability to generate
revenues may be affected by numerous factors. No assurance can be given that a
demand for our product will develop or, if it does develop, that it will be
sufficient to justify our investment in developing our intended business.
WE EXPECT FUTURE LOSSES AND WE MAY NOT BECOME PROFITABLE.
Prior to acquiring TTC, we were a shell corporation having no operating
history, revenues from operations, or assets since December 31, 1989. We have
not had any revenues from operations subsequent to acquiring TTC. We anticipate
that we will experience significant quarterly and annual losses at least through
the next 18 months. We may not ever become profitable. If we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis. We expect the need to significantly increase our
general administrative and product prototype and equipment prototype production
expenses. As a result, we will need to generate significant revenues to achieve
and maintain profitability.
11
OUR ACCOUNTANTS HAVE ISSUED A QUALIFIED REPORT WITH RESPECT TO OUR ABILITY TO
CONTINUE AS A GOING CONCERN.
Our accountants have issued a report relating to our audited financial
statements which contains a qualification with respect to our ability to
continue as a going concern because, among other things, we have no viable
operations or significant assets. For the fiscal period ended September 30,
2001, we had a comprehensive loss of $493,450, and for the same period, our net
cash used in operating activities was $263,345. As of September 30, 2001, our
accumulated deficit was $501,672, after taking into account the TTC
reorganization.
OUR PRODUCT MAY NOT BE ACCEPTED BY OUR POTENTIAL CUSTOMERS.
There can be no assurance that we will be able to profit from the
development or manufacture of our products as planned, or that we will be
successful in marketing our products to our potential customers. Our ability to
successfully commercialize our products will depend in part on the acceptance of
our products by our potential customers, primarily the major utility companies.
The failure of utility companies to purchase our products would have a material
adverse effect on our business, results of operations and financial condition.
Unfavorable publicity concerning us or any of our products could have an adverse
effect on our ability to achieve acceptance of our products by utility companies
and to commercialize our products, which could have a material adverse effect on
our business, results of operations and financial condition.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH EFFECTIVELY.
Our recent growth, primarily as a result of our acquisition of TTC, has
placed and will continue to place a significant strain on our managerial,
operational, and financial resources. Failure to manage our growth effectively
could have a material adverse effect on our business, results of operations and
financial condition. Significant additional growth will be necessary for the
Company to achieve its plan of operation.
OUR FAILURE TO RAISE NECESSARY CAPITAL COULD RESTRICT OUR GROWTH, LIMIT OUR
ABILITY TO DEVELOP AND MARKET OUR PRODUCT AND HINDER OUR ABILITY TO COMPETE.
We need to raise significant additional funds in order to achieve our
business objectives. Failure to raise these additional funds would: (i) restrict
our growth; (ii) limit our ability to market our product; (iii) limit the
development of our product; (iv) hinder our ability to compete; and (v) hinder
our ability to continue our business operations. Any of these consequences would
have a material adverse effect on our business, results of operations and
financial condition.
TO SATISFY OUR CAPITAL REQUIREMENTS, WE MAY SEEK TO RAISE FUNDS IN THE PUBLIC OR
PRIVATE CAPITAL MARKETS.
Our ability to raise additional funds in the public or private markets
will be adversely affected if the results of our business operations are not
favorable, or if any products developed are not well-received. We may seek
additional funding through corporate collaborations and other financing vehicles
or from loans or investments from new or existing stockholders. There can be no
assurance that any such funding will be available to us, or if available, that
it will be
12
available on acceptable terms. If adequate funds are not available, we will not
be able to complete the commercialization of any products that we may have
developed. As a result, we may be required to discontinue our operations without
obtaining any value for our products under development, thereby eliminating
stockholder equity, or we could be forced to relinquish rights to some or all of
our products under development in return for an amount substantially less than
we expended to develop such products. If we are successful in obtaining
additional financing, the terms of the financing may have the effect of diluting
the holdings or adversely affecting the rights of the holders of Common Stock.
WE MAY NOT BE ABLE TO DIVERSIFY OUR OPERATIONS INTO OTHER INDUSTRIES.
Because of the limited financial resources that we have, we may not be
able to diversify our activities into other areas outside the development,
production, and commercialization of cable and support systems for use in
electrical power transmission and distribution systems. Our inability to
diversify our products into other areas will subject us to economic fluctuations
within this industry and therefore increase the risks associated with our
operations.
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS AND MAY INFRINGE ON THE
PROPRIETARY RIGHTS OF OTHERS.
Establishment of patents and other proprietary rights is important to
our success and our competitive position. Accordingly, we intend to devote
substantial resources to the establishment and protection of patents and other
proprietary rights. There can be no assurance that the actions taken by us to
establish and protect any patents or other proprietary rights will be adequate
to prevent imitation of our products by others or to prevent others from
prohibiting sales of any products we may develop in violation of the patents and
proprietary rights of others. Moreover, no assurance can be given that others
will not assert rights in, or ownership of, patents and other proprietary rights
we may establish or acquire or that we will be able to successfully resolve such
conflicts.
There can be no assurance that any patents related to the technology
licensed under the License Agreement will be issued. Additionally, as further
explained in Item 3 of this Form 10-KSB, the enforceability of the License
Agreement is currently subject to litigation. In the event a court or an
arbitration panel determines that the License Agreement is unenforceable, it
would have a material adverse effect on us, our businesses and our prospects.
"See Item 3 -- Legal Proceedings."
WE DEPEND ON KEY PERSONNEL AND WE MAY NOT BE ABLE TO ATTRACT AND RETAIN
QUALIFIED EMPLOYEES.
Our success will be largely dependent, in particular, upon the
continuing services of Benton H Wilcoxon, our Chief Executive Officer, and C.
William Arrington, our President. If Mr. Wilcoxon or Mr. Arrington were unable
to provide services to us for whatever reason, our business would be adversely
affected. Neither Mr. Wilcoxon nor Mr. Arrington have entered into employment
agreements with the Company.
13
In addition, our ability to develop and market our products and to
achieve profitability will depend on our ability to attract and retain highly
talented personnel. We face intense competition for personnel from other
companies. There can be no assurance that we will be successful in attracting
and retaining key personnel. The loss of key personnel, or the inability to
attract and retain the additional, highly-talented employees required for the
development and commercialization of our products, could adversely affect our
results of operations and our business.
A FAILURE TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH STRATEGIC PARTNERS MAY
HARM OUR BUSINESS.
We will depend on establishing and maintaining relationships with
strategic partners. Our ability to develop, produce, and market our products is
dependent on our ability to establish and maintain relationships with other
companies and individuals. We may not be able to enter into relationships with
these companies on commercially reasonable terms or at all. Even if we enter
into these relationships, not all such relationships may result in benefits for
our company.
WE CANNOT CONTROL THE COST OF OUR RAW MATERIALS.
Our principal raw materials will be e-glass fibers and various polymer
resins. The prices for these raw materials are subject to market forces largely
beyond our control, including energy costs, organic chemical feedstocks, market
demand, and freight costs. The prices for these raw materials have varied
significantly and may vary significantly in the future. We may not be able to
adjust our product prices, especially in the short-term, to recover the costs of
increases in these raw materials. Our future profitability may be adversely
affected to the extent we are unable to pass on higher raw material and energy
costs to our customers.
WE ARE CONTROLLED BY A SMALL NUMBER OF STOCKHOLDERS.
Currently, three stockholders in the aggregate beneficially own
approximately 86.7% of the outstanding Common Stock. As a result, these persons
will have the ability to control substantially all matters submitted to our
stockholders for approval and to control our management and affairs. "See Item
11 -- Security Ownership of Certain Beneficial Owners and Management."
WE WILL LIKELY EXPERIENCE CUSTOMER CONCENTRATION.
Until and unless we secure multiple customer relationships, it is
likely that we will experience periods during which we will be highly dependent
on one or a limited number of customers. Dependence on a single or a few
customers will make it difficult to satisfactorily negotiate attractive prices
for our products and will expose us to the risk of substantial losses if a
single dominant customer stops conducting business with us.
OUR BUSINESS MAY BE SUBJECT TO INTERNATIONAL RISKS.
We are pursuing international business opportunities, including in
China. Risks inherent in international operations include unexpected changes in
regulatory requirements, export restrictions, tariffs and other trade barriers;
challenges in staffing and managing foreign
14
operations; differences in technology standards, employment laws and business
practices; longer payment cycles and problems in collecting accounts receivable;
political instability; changes in currency exchange rates; currency exchange
controls; and potentially adverse tax consequences.
WE MUST COMPLY WITH ENVIRONMENTAL REGULATIONS.
Our intended operations are subject to various federal, state, and
local laws and regulations relating to the protection of the environment. These
environmental laws and regulations, which have become increasingly stringent,
are implemented principally by the Environmental Protection Agency and
comparable state agencies, and govern the management of hazardous wastes, the
discharge of pollutants into the air and into surface and underground waters,
and the manufacture and disposal of certain substances. There are no material
environmental claims currently pending or, to our knowledge, threatened against
us. In addition, we believe our planned operations will be implemented in
compliance with the current laws and regulations. We estimate that any expenses
incurred in maintaining compliance with current laws and regulations will not
have a material effect on our earnings or capital expenditures. However, there
can be no assurance that current regulatory requirements will not change, that
currently unforeseen environmental incidents will not occur, or that past
non-compliance with environmental laws will not be discovered.
WE WILL EXPERIENCE COMPETITION FROM OTHER COMPANIES IN THE INDUSTRY.
Our competitors include makers of traditional bare overhead wire and
other companies with developmental-stage products that have the potential to
compete with CRAC cable. Competing manufacturers are seeking to increase the
performance of the current electrical power transmission and distribution
cables. Such competitors could develop a more efficient product or undertake
more aggressive and costly marketing campaigns than us which may adversely
affect our marketing strategies which could have a material adverse effect on
our business, results of operations or financial condition. In addition, as we
introduce new products, we will compete directly with a greater number of
companies. There can be no assurance that we can compete successfully against
current or future competitors nor can there be any assurance that competitive
pressures faced by us will not result in increased marketing costs, loss of
market share or otherwise will not materially adversely affect our business,
results of operations and financial condition. See "Item 1 -- Description of
Business--Competition."
THERE IS CURRENTLY A LIMITED TRADING MARKET FOR OUR COMMON STOCK.
The Common Stock is traded in the over-the-counter market through the
OTC Bulletin Board. There is currently an active trading market for the Common
Stock; however there can be no assurance that an active trading market will be
maintained. Trading of securities on the OTC Bulletin Board is generally limited
and is effected on a less regular basis than that effected on other exchanges or
quotation systems (such as the Nasdaq Stock Market), and accordingly investors
who own or purchase Common Stock will find that the liquidity or transferability
of the Common Stock is limited. Additionally, a stockholder may find it more
difficult to dispose of, or obtain accurate quotations as to the market value,
of Common Stock. There can be no assurance that the Common Stock will ever be
included for trading on any stock exchange or through any other quotation system
(including, without limitation, the Nasdaq Stock Market).
15
THE APPLICATION OF THE "PENNY STOCK RULES" COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK.
So long as the trading price of Common Stock is below $5.00 per share,
trading of Common Stock will be subject to the "penny stock" rules. The "penny
stock rules" impose additional sales practice requirements on broker-dealers who
sell securities to persons other than established customers and accredited
investors (generally those with assets in excess of $1,000,000 or annual income
exceeding $200,000 or $300,000 together with their spouse). For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchase of securities and have received the purchaser's
written consent to the transaction before the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the broker-dealer must
deliver, before the transaction, a disclosure schedule prescribed by the
Securities and Exchange Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability of broker-dealers to sell the
Common Stock and may affect your ability to resell the Common Stock.
Stockholders should be aware that, according to Securities and Exchange
Commission Release No. 34-29093, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. Such patterns include (i) control
of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through
prearranged matching of purchases and sales and false and misleading press
releases; (iii) boiler room practices involving high-pressure sales tactics and
unrealistic price projections by inexperienced sales persons; (iv) excessive and
undisclosed bid-ask differential and markups by selling broker-dealers; and (v)
the wholesale dumping of the same securities by promoters and broker-dealers
after prices have been manipulated to a desired level, along with the resulting
inevitable collapse of those prices and with consequent investor losses. Our
management is aware of the abuses that have occurred historically in the penny
stock market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our securities.
OUR STOCK PRICE IS VOLATILE.
The market price of the Common Stock may be subject to significant
fluctuations in response to our operating results, announcements of new products
or market expansions by us or our competitors, changes in general conditions in
the economy, the financial markets, the electrical power transmission and
distribution industry, or other developments and activities affecting us, our
customers, or our competitors, some of which may be unrelated to our
performance. The sale or attempted sale of a large amount of Common Stock into
the market may also have a significant impact on the trading price of Common
Stock. The sales prices for the Common Stock have fluctuated from a high of
$10.75 to a low of $0.40 during the first quarter of the 2002 fiscal year.
16
WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE.
We have not paid dividends on the Common Stock and do not anticipate
paying such dividends in the foreseeable future.
WE ARE RESPONSIBLE FOR THE INDEMNIFICATION OF OUR OFFICERS AND DIRECTORS.
Our By-laws provide for the indemnification of our directors, officers,
employees, and agents, under certain circumstances, against attorney's fees and
other expenses incurred by them in any litigation to which they become a party
arising from their association with or activities on behalf of our company. This
indemnification policy could result in substantial expenditures, which we may be
unable to recoup.
ITEM 2. DESCRIPTION OF PROPERTY
We do not own any real estate. We rent office space in Irvine,
California on a month to month basis at a rate of $3,120.00 per month. If we
decide to manufacture the CRAC cable ourselves, we will seek appropriate
manufacturing facilities available for lease.
We do not anticipate investing in real estate or interests in real
estate, real estate mortgages, or securities of or interests in persons
primarily engaged in real estate activities. We currently have no formal
investment policy, and we do not intend to undertake investments in real estate
as a part of our normal operations.
ITEM 3. LEGAL PROCEEDINGS
TTC entered into the License Agreement with WBG on May 7, 2001. The
License Agreement related to patent pending composite reinforced aluminum
conductor technologies and gave TTC an exclusive license to the technologies
covered by the License Agreement. TTC became a majority-owned subsidiary of the
Company, on November 3, 2001 pursuant to the Reorganization Agreement.
In the License Agreement, WBG represented and warranted to TTC that WBG
had the right to enter into the License Agreement, including without limitation
the right to grant TTC the exclusive rights to the technologies covered by the
License Agreement. TTC agreed to pay royalties to WBG, initially at a rate of 5%
of Gross Revenues (as defined in the License Agreement). WBG also agreed to
provide TTC full disclosure of all current and future technologies covered by
the License Agreement as well as disclosure of any interested parties in such
technologies. TTC agreed to pay WBG to design, build, install and provide
specifications, manuals and training to complete commercial product equipment
lines for the technologies, with the price to be mutually agreed upon. TTC would
advance funds to WBG for each phase as required under a mutually agreed upon
budget and schedule.
17
In the event of any controversy or claim relating to the License
Agreement, or a breach thereof, the parties agreed the dispute would initially
be subject to mediation proceedings. If the controversy, claim or breach was not
resolved by mediation, the parties agreed to arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association.
All information herein with respect to the License Agreement is
qualified in its entirety by reference to the License Agreement, a copy of which
is attached as Exhibit 10.3 to our Form 8-K filed on January 11, 2002, and is
incorporated herein by reference.
TTC sought information from WBG relating to the technologies pursuant
to the License Agreement but did not receive a response. As a result, TTC sought
to invoke the mediation provision of the License Agreement. WBG declined to
engage in mediation. In August 2001, TTC commenced an arbitration proceeding
with the American Arbitration Association against WBG and W. Brandt Goldsworthy
& Associates, Inc., a California corporation related to WBG ("WBG&A").
On August 15, 2001, TTC also filed suit against WBG and WBG&A in the
United States District Court for the Central District of California (Case No.
01-CV-7118). The suit sought (i) specific performance of the License Agreement,
including supplying the requested information and subjecting to arbitration,
(ii) an injunction against WBG and WBG&A licensing the technologies to any other
parties, and (iii) damages and costs.
In their answers, WBG and WBG&A argued a number of defenses and also
asserted certain counterclaims. One defense raised was that TTC did not have
standing or capacity to sue. WBG and WBG&A contended that Tom Sawyer, the lawyer
who incorporated TTC, is the sole stockholder and director of TTC and that he
had not authorized the filing of the suit. Mr. Sawyer claimed that he purchased
all of the authorized common stock for $24.00. Subsequently and separately, on
October 4, 2001, Mr. Sawyer made a demand to TTC's counsel to dismiss the suit
with prejudice based on his claim that he was the sole stockholder and director
of TTC. In addition, on October 5, 2001, Mr. Sawyer, allegedly on behalf of TTC,
and WBG executed a Mutual Rescission of the License Agreement.
The counterclaims raised by WBG and WBG&A included alleged untrue and
misleading advertising and unfair competition (against TTC and C. William
Arrington, an officer of the Company and TTC) for claiming rights in the
technologies and a claim for declaratory relief (against TTC, Mr. Arrington, Mr.
Sawyer and Composite Power Corporation, a Nevada corporation ("CPC")). On
September 24, 1999, a Nevada state court had issued an injunction against Mr.
Arrington, a former officer and director of CPC, in his individual capacity from
"contacting, soliciting business from or otherwise doing business with any
individuals, entities or financiers connected or related in any way to any of
CPC's projects." WBG&A was mentioned as an entity that had a business
relationship with CPC but the technologies licensed by the License Agreement are
completely unrelated to CPC or any of its projects. Mr. Arrington had signed the
License Agreement on behalf of TTC and WBG and WBG&A contended that Mr.
Arrington's signature violated the injunction and made the License Agreement
void and illegal. WBG and WBG&A also sought a declaratory judgment that Mr.
Sawyer is the sole director and stockholder of TTC and that the License
Agreement is void and illegal. The injunction was
18
dissolved by the Nevada state court on August 31, 2001 and Mr. Arrington was
limited only against doing business with anyone involved in specific CPC
projects, none of which related to TTC, the Company or the License Agreement.
Furthermore, that limitation as well is no longer in effect as the Nevada state
court dismissed all claims against Mr. Arrington with prejudice on January 10,
2002. CPC has never initiated any proceedings with the Nevada state court
claiming any violation of the injunction and the court has issued no order and
has never found that Mr. Arrington was ever not fully in compliance with the
injunction.
On December 10, 2001, the United States District Court held a hearing
on TTC's request for an injunction. No decision has yet been rendered. With
regard to TTC's arbitration demand, arbitrators have been appointed. A hearing
on TTC's petition to enforce the arbitration provisions of the License Agreement
is currently awaiting scheduling. WBG and WBG&A are seeking to have the court
halt the arbitration and instead have all issues settled by the court.
The License Agreement currently is the basis for TTC's rights to the
CRAC technologies. In the event a court or an arbitration panel determines that
the License Agreement is unenforceable in any way, it would have a material
adverse effect on the Company, its business and its prospects. The claims as to
Mr. Sawyer's alleged ownership of, and position with, TTC, in the event they are
supported, would raise serious questions as to the status and authority of the
current management and Board of Directors of TTC and the Company and the effect
and consequences of the Reorganization Agreement.
We believe that TTC has raised valid claims in its suit and claim for
arbitration and that WBG's and WBG&A's defenses and counterclaims are without
merit. TTC will defend itself and Mr. Arrington, as an officer of TTC,
vigorously against the alleged counterclaims of WBG and WBG&A.
Other than the matter discussed above, we are not a party to any
material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no stockholder meetings and no matters were submitted to the
security holders for a vote during the period from January 1, 2001 to September
30, 2001.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock is not listed on any stock exchange. The Common Stock
is traded over-the-counter on the OTC Bulletin Board under the symbol "CPTC."
The following table sets forth the high and low sale information for
the Common Stock for the period from April 20, 2001 through December 31, 2001,
as reported by the OTC Bulletin
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Board. The Common Stock did not trade on any exchange or over-the-counter for
the period from January 1, 2000 through April 19, 2001.
[Download Table]
Fiscal Year 2001 High Low
----------------------------------------------------------------------------------
April 20, 2001 through June 30, 2001 1.00 .13
July 1, 2001 through September 30, 2001 1.00 .13
[Download Table]
Fiscal Year 2002 High Low
----------------------------------------------------------------------------------
October 1, 2001 through December 31, 2001 10.75 .40
January 1, 2002 through February 8, 2002 7.00 1.30
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. As of January
31, 2002, there were 66,463,098 shares of Common Stock outstanding and owned by
approximately 350 stockholders of record.
We have never paid any dividends on the Common Stock. We currently
anticipate that any future earnings will be retained for the development of our
business and do not anticipate paying any dividends on the Common Stock in the
foreseeable future.
SALES OF UNREGISTERED SECURITIES
On April 12, 2001, TTC issued 950,000 shares of TTC Common Stock to Red
Guard in reliance upon the exemption from registration set forth in Section 4(2)
of the Securities Act in consideration for marketable and restricted securities
in various unrelated entities. The initial exchange transaction was valued at
approximately $137,750. Pursuant to the Reorganization Agreement, each share of
TTC Common Stock was exchanged for 15.88 shares of Common Stock.
On April 12, 2001, TTC issued 165 shares of 10% Series A Cumulative
Convertible Preferred Stock (the "TTC Series A Preferred") to Red Guard in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), in consideration for
the rights to the CRAC technology. Each share of TTC Series A Preferred was
convertible into one share of TTC Common Stock at an original conversion price
of $0.20 per share.
On July 12, 2001, TTC granted Red Guard an option to purchase up to
$500,000 of 10% Series B Cumulative Convertible Preferred Stock of TTC (the "TTC
Series B Preferred") at $100 per share (the "Red Guard Option") and a warrant to
purchase up to 120,000 shares of TTC Common Stock at $20.00 per share (the "Red
Guard Warrant") in reliance upon the exemption from registration set forth in
Section 4(2) of the Securities Act in consideration for revising the conversion
terms of the TTC Series A Preferred, including an increase in the conversion
from $0.20 to $7.50 per share. The Red Guard Option was exercisable at any time
and expired on January 12, 2002. The Red Guard Warrant is exercisable at any
time and expires on June 12, 2006.
20
Mr. Benton H. Wilcoxon, our Chief Executive Officer and Director, is a
shareholder and officer of Red Guard. "See Item 12 -- Certain Relationships and
Related Transactions."
During August 2001, TTC issued 10,000 shares of TTC Common Stock to AMJ
Logistics, Inc., a privately owned software company ("AMJ"), in reliance upon
the exemption from registration set forth in Section 4(2) of the Securities Act
and paid $10,000 in consideration for 72,665 shares of the common stock of AMJ.
Pursuant to the Reorganization Agreement, each share of TTC Common Stock was
exchanged for 15.88 shares of Common Stock.
During August 2001, Red Guard exercised a portion of the Red Guard
Option and purchased 1,000 shares of TTC Series B Preferred in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act for
$100,000. Each share of TTC Series B Preferred is convertible into five shares
of TTC Common Stock at a conversion price of $20.00.
On October 11, 2001, TTC issued 320 shares of TTC Series B Preferred to
an individual in reliance upon the exemption from registration set forth in
Section 4(2) of the Securities Act for approximately $32,000. Each share of TTC
Series B Preferred is convertible into five shares of TTC Common Stock at a
conversion price of $20.00.
On October 18, 2001, Red Guard exercised a portion of the Red Guard
Warrant and purchased 500 shares of TTC Common Stock in reliance upon the
exemption from registration set forth in Section 4(2) of the Securities Act for
$10,000. Pursuant to the Reorganization Agreement, each share of TTC Common
Stock was exchanged for 15.88 shares of Common Stock.
On October 24, 2001, TTC issued 1,000 shares of TTC Common Stock to an
unrelated entity in reliance upon the exemption from registration set forth in
Section 4(2) of the Securities Act for approximately $61,500. Pursuant to the
Reorganization Agreement, each share of TTC Common Stock was exchanged for 15.88
shares of Common Stock.
On October 26, 2001, TTC issued 1,740 of TTC Common Stock to an
individual in reliance upon the exemption from registration set forth in Section
4(2) of the Securities Act for approximately $107,010. Pursuant to the
Reorganization Agreement, each share of TTC Common Stock was exchanged for 15.88
shares of Common Stock.
On October 30, 2001, TTC issued 5,000 shares of TTC Common Stock to a
corporate law firm in reliance upon the exemption from registration set forth in
Section 4(2) of the Securities Act as a retainer for future legal services to be
provided during the one-year period commencing on October 30, 2001. Pursuant to
the Reorganization Agreement, each share of TTC Common Stock was exchanged for
15.88 shares of Common Stock.
Pursuant to the Reorganization Agreement, on November 3, 2001, we
issued 57,546,000 shares of Common Stock to certain stockholders of TTC in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act, in exchange for 95.91% of the TTC Common Stock. In addition,
since November 3, 2001, we have issued 2,374,598 shares of
21
Common Stock to certain stockholders of TTC in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act, in exchange for
the remaining shares of TTC Common Stock.
On November 3, 2001, certain consultants were issued an aggregate of
450,000 shares of Common Stock in reliance upon the exemption from registration
set forth in Section 4(2) of the Securities Act as compensation for the services
they provided in connection with the acquisition of TTC.
During December 2001, we issued 42,500 shares of Common Stock to AMJ in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act in exchange for 37,335 shares of the common stock of AMJ.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
We have not had revenues from operations in the fiscal years ended
December 31, 2000 and September 30, 2001.
Summary
We plan to subcontract a limited production of composite core and the
helical winding of aluminum conductors so that a significant demonstration test
in an operating transmission line can be commenced by June 30, 2002. We expect
that the planned test will be conducted by a major American utility company
along with a consortium of approximately 15 other utility companies and the
Electric Power Research Institute. The test will be closely monitored for three
months after which time we anticipate receiving orders from utility companies,
although the demonstration will continue for at least two years. By June 30,
2002, we plan to finalize the design and produce a working prototype of the
specialized production line capable of economically manufacturing high strength
composite core. We are presently negotiating various possible strategic
relationships, including joint ventures with conventional ACSR cable
manufacturers, in which we will either sell our composite core, license or sell
our production equipment, or enter into an agreement with respect to the
production of cable using our composite core. The equipment can be used for
other types of high strength composite production with various modifications in
the event that there is any delay in the acceptance of the composite reinforced
cable. We intend to establish an equipment and product prototype development
facility in Orange County, California. We plan to continue negotiating joint
ventures for the production of our products in other countries, including in
China and Brazil.
Liquidity and Capital Resources
At the present time we have no liquidity. We plan to obtain capital
through loans or equity offerings in order to have the funds required to
complete the implementation of our plan of operation. We currently have no
material commitments for capital expenditures.
22
We anticipate receiving orders for our products beginning in
approximately September 2002. Prior to that, we will be dependent on the receipt
of additional financing from third parties. If such financing is not available,
we may be required to discontinue operations.
We expect to recover some equipment development costs through the sale
of equipment to production joint ventures, although there can be no assurance
that we will sell any such equipment or enter into any such joint ventures.
Product Research and Development
We believe research and development activities are important to our
success. Over the next 12 calendar months, we anticipate completing various
other composite reinforced cable designs and the development of the hardware
required to splice, terminate, and extend the cable. Additionally, we plan to
design, seek patents for, and produce prototypes of novel composite structures.
We plan to complete a unique prototype production equipment line that will allow
for the production of several types of products, which will allow us to expand
to different products.
Acquisition of Plant and Equipment
We do not own any real estate or significant equipment. We do anticipate
the need for prototype equipment and product manufacturing capability in the
near future and are actively searching for facilities. The precise space
requirements are being finalized since we anticipate the requirement for
prototype equipment development to occur by June 30, 2002.
Personnel
We currently have three full time employees; Benton H Wilcoxon, C.
William Arrington, and Robert Nikoley. Since we are in the development stage we
have not been able to pay salaries to date. However, salaries are being accrued
at a monthly rate of $5,000 since April 1, 2001 for each of Mr. Wilcoxon and Mr.
Arrington.
Numerous technical skills will be required to bring our products to
market. Recruiting efforts have begun and will continue in the near future.
Independent consultants, accountants and attorneys have been retained in the
past and will continue to be used extensively in the future.
ITEM 7. INDEX TO FINANCIAL STATEMENTS
Our financial statements appear at the end of this report beginning
with the Index to Financial Statements on page F-1 of this report.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 9. OFFICERS AND DIRECTORS
The following table sets forth the names, ages, and positions of our
directors and officers.
[Download Table]
Name Age Position Held Officer/Director Since(1)
---- --- ------------- -------------------------
Benton H Wilcoxon 52 Chief Executive Officer, 2001
Director, and Secretary
C. William Arrington 60 President and Director 2001
Robert Nikoley 62 Chief Financial Officer 2001
(1) As of November 3, 2001, Glenn Little resigned as the President and
Chief Financial Officer and as a member of the Board of Directors,
Matthew Blair resigned as Secretary and Treasurer, Benton H Wilcoxon
became Chief Executive Officer and Secretary, and C. William Arrington
became President. On December 28, 2001, Robert Nikoley became Chief
Financial Officer. On February 10, 2002, Mr. Wilcoxon and Mr. Arrington
were appointed to the Board of Directors and Mr. Blair resigned as a
Director.
The directors named above will serve until the next annual meeting of
our stockholders or until their successors are duly elected and have qualified.
Directors will be elected for one-year terms at the annual stockholders meeting.
Officers will hold their positions at the pleasure of the board of directors,
absent any employment agreement, of which none currently exists. Other than as
set forth in the Reorganization Agreement, there is no arrangement or
understanding between any of our directors or officers and any other person
pursuant to which any director or officer was or is to be selected as a director
or officer, and there is no arrangement, plan or understanding as to whether
non-management stockholders will exercise their voting rights to continue to
elect the current board of directors. There are also no arrangements, agreements
or understandings between non-management stockholders that may directly or
indirectly participate in or influence the management of our affairs.
There is no family relationship among any of our directors and
executive officers.
BIOGRAPHICAL INFORMATION
Benton H Wilcoxon, 52, has been our Chief Executive Officer and
Secretary since November 3, 2001. He also is Chairman and Chief Executive
Officer of TTC. From 1998 to
24
2001, he was a consultant for Magnesium Alloy Corporation, a Canadian company
involved in the development of magnesium salt deposits. Between 1998 and 2000,
he also served as a consultant to Macallan & Callanish Ltd. regarding business
in Russia and the Ukraine. Mr. Wilcoxon held senior positions with Ashurst
Technology Ltd., a Bermuda corporation, from 1991 to 1997, culminating as
Chairman, Chief Executive Officer and President. Ashurst Technology Ltd.
commercialized advanced materials technologies, primarily from the Ukraine. Mr.
Wilcoxon currently is a Director of Magnesium Alloy Corporation, which is traded
on the Canadian Venture Exchange.
C. William Arrington, 60, has been our President since November 3,
2001. He also is President and Chief Operating Officer of TTC. Mr. Arrington has
headed his own consulting firm for more than the past five years. He has over 30
years experience in the electrical energy industry, both generation and
transmission. Mr. Arrington is also a Director of Eaglecrest Exploration, Ltd.,
a precious metals exploration company traded on the Canadian Venture Exchange.
Robert Nikoley, 62, has been our Chief Financial Officer since December
28, 2001. From November 3 until December 28, 2001, he performed the duties of
that position as a consultant. From June 2001 until joining us, Mr. Nikoley was
Chief Financial Officer of WebQuest International, Inc. ("WebQuest"), a company
traded on the OTC Bulletin Board. Between March 2000 and June 2001, he was
Controller of WebQuest. WebQuest helps develop business opportunities for
emerging growth companies. He served as Chief Financial Officer of International
Fuel Technology, Inc., a company engaged in the development of diesel fuel
additives, from 1996 through 1999. Mr. Nikoley is a Director of WebQuest.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires our directors and executive officers, and persons who
beneficially own more than ten percent of a registered class of our equity
securities, to file with the Securities and Exchange Commission (the
"Commission") initial reports of beneficial ownership and reports of changes in
beneficial ownership of our Common Stock. The rules promulgated by the
Commission under Section 16(a) of the Exchange Act require those persons to
furnish us with copies of all reports filed with the Commission pursuant to
Section 16(a). The information in this section is based solely upon a review of
Forms 3, Forms 4, and Forms 5 received by us.
Neither Mr. Little nor Mr. Blair has made any filings under Section
16(a). Each of Mr. Wilcoxon, Mr. Arrington, Mr. Nikoley, Red Guard, and G.
William Harrison has filed a Form 3 but such Forms were not filed on a timely
basis.
ITEM 10. EXECUTIVE COMPENSATION
None of our executive officers received compensation in excess of
$100,000 for the fiscal years ended December 31, 1999, December 31, 2000, or
September 30, 2001. The following table summarizes all compensation received by
our Chief Executive Officer in fiscal years 1999, 2000, and 2001.
25
[Enlarge/Download Table]
Long-Term Compensation
----------------------------------------
Annual Compensation Awards Payouts
----------------------------------- -------------------------- -------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Fiscal Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
---- --- --- --- --- --- --- ---
Benton H Wilcoxon 2001 0(1) -- -- -- 40,000(2) -- --
Chief Executive
Officer
Glenn A. Little (3) 2001 0 -- -- -- -- -- --
President 2000 0 -- -- -- -- -- --
1999 0 -- -- -- -- -- --
(1) Mr. Wilcoxon began accruing, but has not received, a monthly salary of
$5,000 as of April 1, 2001.
(2) Represents options to purchase 40,000 shares of TTC Common Stock at an
exercise price of $5.50 per share. The options expire on June 7, 2011.
(3) Although Mr. Little did not have the title of Chief Executive Officer,
as President, he served in a similar capacity until his resignation on
November 3, 2001.
The following table shows all grants during the fiscal year ended
September 30, 2001 of stock options under our stock option plans to the named
executive officers.
OPTIONS/SAR GRANTS IN FISCAL YEAR ENDED SEPTEMBER 30, 2001
(Individual Grants)
[Download Table]
Number of Percent of Exercise or Expiration
Securities Total Options Base Price Date
Underlying Granted to ($/Sh)
Option Employees
Granted (#) during Fiscal
Name Year (%)
---- ---------- -------- ---------- ----------
Benton H Wilcoxon 40,000(1) 46.8% 5.50 6/7/11
----------
(1) Represents options to purchase 40,000 shares of TTC Common Stock.
The following table provides information as to the number and value of
unexercised options to purchase TTC Common Stock held by the named executive
officers at September 30, 2001. None of the named executive officers exercised
any options during the fiscal year ended September 30, 2001.
[Enlarge/Download Table]
Number of Securities Underlying
Unexercised Options at Fiscal Value of Unexercised In-the-Money
Year-End (#) Options at Fiscal Year-End ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
Benton H Wilcoxon 40,000 /0 (1) (2)
----------
(1) Represents options to purchase 40,000 shares of TTC Common Stock.
26
(2) There was no public market for TTC Common Stock as of September 30,
2001 and, therefore, the Board of Directors has no basis to make any
determination with respect to the value of the options to purchase
shares of TTC Common Stock.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
We currently have no employment agreements with any of our executive
officers, nor any compensatory plans or arrangements resulting from the
resignation, retirement or any other termination of any of our executive
officers, from a change-in-control, or from a change in any executive officer's
responsibilities following a change-in-control.
COMPENSATION OF DIRECTORS
Directors do not receive compensation for their services as directors
and are not reimbursed for expenses incurred in attending board meetings.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 10, 2002, the number of
shares of our Common Stock owned of record and beneficially by executive
officers, directors and persons who hold 5% or more of our outstanding Common
Stock. Also included are the shares held by all executive officers and directors
as a group.
[Download Table]
Percent of Class
Name and Address Number of Shares (1) Beneficially Owned (2)
---------------- -------------------- ----------------------
Benton H Wilcoxon 3,4 20,250,514 30.5%
C. William Arrington 3 20,250,514 30.5%
Robert Nikoley 3 0 0%
Red Guard Industries, Inc. 5,6 14,932,699 22.5%
G. William Harrison 5,6 17,101,748 25.7%
All Directors and Executive Officers 40,501,028 61.0%
as a Group
(3 persons)
(1) Unless otherwise indicated, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them.
(2) Based on 66,463,098 shares of Common Stock issued and outstanding.
(3) The address of each such person is c/o Composite Technology
Corporation, 18881 Von Karman Avenue, Suite 1630, Irvine, California
92612
27
(4) Mr. Wilcoxon owns 34.0% of the common stock of Red Guard and he also is
Vice President and Treasurer of Red Guard. Mr. Wilcoxon disclaims
beneficial ownership of the Common Stock and the securities of TTC
owned by Red Guard.
(5) The address for Red Guard is 393 Lange, Troy, Michigan 48093. Red Guard
also owns (i) 165 shares of the TTC Series A Preferred and 1,000 shares
of the TTC Series B Preferred, and (ii) a warrant to purchase 119,500
shares of TTC Common Stock.
(6) The address for Mr. Harrison is 20 Oxford Boulevard, Pleasant Ridge,
Michigan 48069. Mr. Harrison's living trust owns 1,058,471 shares of
Common Stock and an additional 772,684 shares of Common Stock are owned
by a living trust for the benefit of Mr. Harrison's wife. Bridgestone
Capital Group, LLC ("Bridgestone") owns 337,894 shares of Common Stock.
Mr. Harrison is the President and Chief Executive Officer of
Bridgestone and he and the trust for the benefit of his wife own a
majority of the membership interests in Bridgestone. In addition, Mr.
Harrison is the Chairman and Chief Executive Officer of Red Guard and
he and the trust for the benefit of his wife own a majority of the
common stock of Red Guard. As a result, he beneficially owns the Common
Stock and the securities of TTC owned by Bridgestone and Red Guard and
such Common Stock owned by them and the trust for the benefit of Mr.
Harrison's wife are included in the 17,101,748 shares of Common Stock
stated as being beneficially owned by Mr. Harrison above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 26, 2000, we cancelled an aggregate total of 833,485 shares
of issued and outstanding Common Stock. Management at that time, upon extensive
research into transactions approved by former officers and or controlling
stockholders, determined that all of such shares had been issued improperly,
inasmuch as no corporate authorization of the issuances existed and no
consideration was received for such shares.
Specifically, the cancellations were as follows:
400,000 shares were purchased by Glenn Little, a former
officer and director of the Company, from another former
officer of the Company for $15,000 and returned to our
treasury with no consideration received by Glenn Little.
403,485 shares issued to former officers, directors and
individuals were issued improperly as (A) at the time of such
issuance, our corporate charter had been revoked by the
Secretary of State of Florida for failure to make required
filings and to pay associated fees and (B) we received no
consideration for such shares. Many of the certificates
representing these shares were never delivered and were in the
possession of the transfer agent.
30,000 shares issued to a company in anticipation of fees due
for investment banking activities were issued improperly as
(A) there was no action by our Board of Directors authorizing
the issuance of any of such shares, and (B) at the time of
such issuance, our corporate charter had been revoked by the
Secretary of State of Florida for failure to make required
filings and to pay associated fees.
28
Red Guard acquired 165 shares of TTC Series A Preferred in April 2001.
In July 2001, Red Guard and TTC agreed to increase the conversion price from
$.20 per share of TTC Common Stock to $7.50 and to extend the date the shares
became initially convertible into TTC Common Stock from July 12, 2001 to
November 14, 2001. In exchange Red Guard received the Red Guard Option and the
Red Guard Warrant. During August 2001, Red Guard exercised a portion of the Red
Guard Option and purchased 1,000 shares of TTC Series B Preferred for $100,000.
On October 18, 2001, Red Guard exercised a portion of the Red Guard Warrant and
purchased 500 shares of TTC Common Stock for $10,000.
Red Guard also made four loans to the Company totaling $57,000. Each
loan is for six months (maturing from July 3, 2002 to July 28, 2002) and bears
interest at 10-1/2% per annum.
Mr. Wilcoxon, our Chief Executive Officer and Director, is a
shareholder and officer of Red Guard.
Prior to the consummation of the transactions contemplated by the
Reorganization Agreement, Glenn Little was the controlling stockholder of the
Company, owning 8,548,899 shares of Common Stock. On November 3, 2001, as part
of the transactions contemplated by the Reorganization Agreement, he
contributed, without consideration, 3,116,515 shares of Common Stock to the
Company for cancellation. In addition, for his services in connection with the
transaction, he was issued 185,000 shares of Common Stock.
We have made interest-free advances in the amounts of approximately
$13,628 and $55,114 to Mr. Wilcoxon and Mr. Arrington, respectively, to be
applied against accrued salary.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
EXHIBIT
NUMBER DESCRIPTION
--------------------------------------
2.1 Articles of Merger of ElDorado Financial Group, Inc.,
a Florida corporation, into ElDorado Financial Group,
Inc., a Nevada corporation
2.2* Agreement and Plan of Reorganization By and Among
Transmission Technology Corporation, Certain of its
Stockholders, and ElDorado Financial Group, Inc.
dated November 3, 2001
3.1 Articles of Incorporation of the Company
3.2 By-Laws of the Company
29
4.1 See Exhibits 3.1 and 3.2 for provisions of the
Articles of Incorporation and By-laws of the Company
defining the rights of holders of Common Stock of the
Company
4.2 Warrant to Purchase 120,000 Shares of Common Stock of
Transmission Technology Corporation dated July 12,
2001
10.1 2001 TTC Incentive Compensation Stock Option Plan
10.2** Technology License Agreement by and between W.B.G.,
Inc and Transmission Technology Corporation dated May
7, 2001.
21 Subsidiaries of the Registrant
* Incorporated herein by reference to Form 8-K filed with the Securities and
Exchange Commission on November 20, 2001.
** Incorporated herein by reference to Form 8-K filed with the Securities and
Exchange Commission on January 11, 2002.
(b) Reports on Form 8-K filed during the quarter ended September 30, 2001.
None
30
SIGNATURES
In accord with Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Composite Technology Corporation
Dated: February 12, 2002 By: /s/ Benton H Wilcoxon
-------------------------
Benton H Wilcoxon
Chief Executive Officer,
Director, and Secretary
In accordance with the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: February 12, 2002 By: /s/ Benton H Wilcoxon
-------------------------
Benton H Wilcoxon
Chief Executive Officer,
Director, and Secretary
Dated: February 12, 2002 By: /s/ C. William Arrington
-------------------------
C. William Arrington
President and Director
Dated: February 12, 2002 By: /s/ Robert Nikoley
-------------------------
Robert Nikoley
Chief Financial Officer
31
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
CONTENTS
[Download Table]
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
as of September 30, 2001 (post-acquisition),
September 30, 2001 (pre-acquisition) and December 31, 2000 F-3
Consolidated Statements of Operations and Comprehensive Loss for the nine
months ended September 30, 2001 (post-acquisition) for the nine months
ended September 30, 2001 (pre-acquisition) and
for the year ended December 31, 2000 F-4
Consolidated Statements of Changes in Shareholders' Equity for the nine
months ended September 30, 2001 (post-acquisition) for the nine months
ended September 30, 2001 (pre-acquisition) and
for the year ended December 31, 2000 F-5
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2001 (post-acquisition) for the
nine months ended September 30, 2001 (pre-acquisition) and
for the year ended December 31, 2000 F-7
Notes to Consolidated Financial Statements F-8
F-1
S. W. HATFIELD, CPA
certified public accountants
Member: Texas Society of Certified Public Accountants
Press Club of Dallas
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Composite Technology Corporation
(formerly Eldorado Financial Group, Inc.)
We have audited the accompanying consolidated balance sheets of Composite
Technology Corporation (formerly Eldorado Financial Group, Inc.) (a Nevada
corporation) and Subsidiary as of September 30, 2001 (post-acquisition),
September 30, 2001 (pre-acquisition) and December 31, 2000 (pre-acquisition),
respectively, and the related consolidated statements of operations and
comprehensive loss, changes in shareholders' equity and cash flows for the nine
months ended September 30, 2001 (post-acquisition), nine months ended September
30, 2001 (pre-acquisition) and the year ended December 31, 2000
(pre-acquisition), respectively. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Composite Technology Corporation (formerly Eldorado Financial Group, Inc.) as of
September 30, 2001 (post-acquisition), September 30, 2001 (pre-acquisition) and
December 31, 2000 (pre-acquisition) and the results of its operations and its
cash flows for the nine months ended September 30, 2001 (post-acquisition), nine
months ended September 30, 2001 (pre-acquisition) and the year ended December
31, 2000 (pre-acquisition), respectively, in conformity with generally accepted
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has no viable operations or significant assets
and is dependent upon significant shareholders to provide sufficient working
capital to maintain the integrity of the corporate entity. These circumstances
create substantial doubt about the Company's ability to continue as a going
concern and are discussed in Note B. The financial statements do not contain any
adjustments that might result from the outcome of these uncertainties.
S. W. HATFIELD, CPA
Dallas, Texas
January 4, 2002
Use our past to assist your future (sm)
(secure mailing address) (overnight delivery/shipping address)
P. O. Box 820395 9002 Green Oaks Circle, 2nd Floor
Dallas, Texas 75382-0395 Dallas, Texas 75243-7212
214-342-9635 (voice) (fax) 214-342-9601
800-244-0639 SWHCPA@aol.com
F-2
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
CONSOLIDATED BALANCE SHEETS
September 30, 2001 and December 31, 2000
[Enlarge/Download Table]
(post-acquisition) (pre-acquisition) (pre-acquisition)
September 30, September 30, December 31,
2001 2001 2000
------------------ ------------------- ------------------
ASSETS
CURRENT ASSETS
Cash on hand and in bank $ 33,013 $ -- $ --
Advances to officers 8,742 -- --
Prepaid expenses 33,359 -- --
--------- ----------- -----------
TOTAL CURRENT ASSETS 75,114 -- --
--------- ----------- -----------
PROPERTY AND EQUIPMENT - AT COST
Office furniture and equipment 7,400 -- --
Accumulated depreciation (1,234) -- --
--------- ----------- -----------
NET PROPERTY AND EQUIPMENT 6,166 -- --
--------- ----------- -----------
OTHER ASSETS
Investment in acquisition candidate -- 60,000 --
Contract rights 165,000 -- --
Investments in other companies 45,020 -- --
--------- ----------- -----------
TOTAL OTHER ASSETS 210,020 60,000 --
--------- ----------- -----------
TOTAL ASSETS $ 291,300 $ 60,000 $ --
========= =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 9,625 $ -- $ --
Accrued dividends payable 8,222 -- --
--------- ----------- -----------
TOTAL CURRENT LIABILITIES 17,847 -- --
--------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock - $0.001 par value
5,000,000 shares authorized
1,165, -0- and -0- issued and outstanding, respectively 1 -- --
Common stock - $0.001 par value
200,000,000 shares authorized
66,500,000, 66,500,000 and 9,166,515
The accompanying notes are an integral part of these financial statements.
F-3
[Enlarge/Download Table]
shares issued and outstanding, respectively 66,500 66,500 9,167
Additional paid-in capital 708,624 2,094,714 2,001,570
Accumulated deficit (501,672) (2,101,214) (2,010,737)
--------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) 273,453 60,000 --
--------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 291,300 $ 60,000 $ --
========= =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Nine months ended September 30, 2001 (post-acquisition),
Nine months ended September 30, 2001 (pre-acquisition) and
Year ended December 31, 2000
[Enlarge/Download Table]
(post-acquisition) (pre-acquisition) (pre-acquisition)
Nine months Nine months Year
ended ended ended
September 30, September 30, December 31,
2001 2001 2000
------------------ ---------------- ----------------
REVENUES $ -- $ -- $ --
------------ ------------ -----------
EXPENSES
General and administrative expenses 131,136 477 636
Legal, professional and consulting fees 117,700 -- --
Reorganization expenses 30,000 90,000 --
Interest expense 150 -- --
Depreciation 1,234 -- --
Compensation expense related to common
stock issuances at less than "fair value" 76,000 -- --
------------ ------------ -----------
Total operating expenses 356,220 90,477 636
------------ ------------ -----------
LOSS FROM OPERATIONS (356,220) (90,477) (636)
OTHER INCOME (EXPENSE)
Carrying value impairment adjustment
on investments in other companies (137,230) -- --
------------ ------------ -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (493,450) (90,477) (636)
PROVISION FOR INCOME TAXES -- -- --
------------ ------------ -----------
NET LOSS (493,450) (90,477) (636)
OTHER COMPREHENSIVE INCOME -- -- --
------------ ------------ -----------
COMPREHENSIVE LOSS $ (493,450) $ (90,477) $ (636)
============ ============ ===========
Earnings per share of common stock
outstanding computed on net income
- basic and fully diluted $ (0.01) $ (0.01) nil
============ ============ ===========
Weighted-average number of shares
outstanding - basic and fully diluted 69,156,748 69,156,748 9,986,336
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-5
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine months ended September 30, 2001 (post-acquisition),
Nine months ended September 30, 2001 (pre-acquisition) and
Year ended December 31, 2000
[Enlarge/Download Table]
Convertible Additional
Preferred Stock Common Stock paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
------ ------ ------ ------ ------- ------- -----
BALANCES AT JANUARY 1, 2000,
PRE-ACQUISITION - $ -- 10,000,000 $ 10,000 $2,000,101 $(2,010,101) $ --
Stock cancelled on December 26, 2000 - -- (833,485) (833) 833 -- --
Capital contributed to support operations - -- -- -- 636 -- 636
Net loss for the year (pre-acquisition) - -- -- -- -- (636) (636)
- -------- ----------- -------- ---------- ----------- --------
BALANCES AT DECEMBER 31, 2000,
PRE-ACQUISITION - -- 9,166,515 9,167 2,001,570 (2,010,737) --
Cancellation of stock by controlling
shareholder for no compensation - -- (3,116,515) (3,117) 3,117 -- --
Issuance of common stock for
reorganization and consulting expenses - -- 450,000 450 89,550 -- 90,000
Capital contributed to support operations - -- -- -- 477 -- 477
Stock issued for acquisition candidate - -- 60,000,000 60,000 -- -- 60,000
Net loss for the period (pre-acquisition) - -- -- -- -- (90,477) (90,477)
- -------- ----------- -------- ---------- ----------- --------
- CONTINUED -
The accompanying notes are an integral part of these financial statements.
F-6
[Enlarge/Download Table]
BALANCES AT SEPTEMBER 30, 2001,
PRE-ACQUISITION - -- 66,500,000 $ 66,500 $2,094,714 $(2,101,214) $ 60,000
= ======== =========== ======== ========== =========== ========
F-7
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - CONTINUED
Nine months ended September 30, 2001 (post-acquisition),
Nine months ended September 30, 2001 (pre-acquisition) and
Year ended December 31, 2000
[Enlarge/Download Table]
Convertible Additional
Preferred Stock Common Stock paid-in Accumulated
Shares Amount Shares Amount capital deficit Total
------ ------ ------ ------ ------- ------- -----
BALANCES AT SEPTEMBER 30, 2001,
PRE-ACQUISITION -- $- 66,500,000 $ 66,500 $ 2,094,714 $(2,101,214) $ 60,000
Initial capitalization of
Transmission Technology Corporation -- - 2,500,000 2,500 -- -- 2,500
Recapitalization due to
reverse acquisition
transaction with
Transmission Technology
Corporation 1,165 1 (2,500,000) (2,500) (1,386,090) 2,101,214 712,625
Dividends on preferred stock -- - -- -- -- (8,222) (8,222)
Net loss for the period
(post-acquisition) -- - -- -- -- (493,450) (493,450)
----- -- ---------- -------- ----------- ----------- ---------
BALANCES AT SEPTEMBER 30, 2001,
POST-ACQUISITION 1,165 $1 66,500,000 $ 66,500 $ 708,624 $ (501,672) $ 273,453
===== == ========== ======== =========== =========== =========
The accompanying notes are an integral part of these financial statements.
F-8
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2001 (post-acquisition),
Nine months ended September 30, 2001 (pre-acquisition) and
Year ended December 31, 2000
[Enlarge/Download Table]
(post-acquisition) (pre-acquisition) (pre-acquisition)
Nine months Nine months Year
ended ended ended
September 30, September 30, December 31,
2001 2001 2000
------------------ ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $(493,450) $(90,477) $(636)
Adjustments to reconcile net loss
to net cash provided by operating activities
Depreciation 1,234 -- --
Amortization of prepaid expenses paid
with common stock 6,016 -- --
Compensation expense related to common
stock issuances at less than "fair value" 76,000 -- --
Carrying value impairment adjustment
on investments in other companies 137,230 -- --
Consulting and reorganization expenses
paid with common stock 90,000 --
Increase (Decrease) in
Accounts payable - trade 9,625 -- --
--------- -------- -----
NET CASH USED IN OPERATING ACTIVITIES (263,345) (477) (636)
--------- -------- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Cash advanced to officers (8,742) -- --
Purchase of property and equipment (7,400) -- --
Cash paid for investments in other companies (40,000) -- --
--------- -------- -----
NET CASH USED IN INVESTING ACTIVITIES (56,142) -- --
--------- -------- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Cash contributed to support operations -- 477 636
Proceeds from sale of preferred stock 100,000 -- --
Proceeds from sale of common stock 252,500 -- --
--------- -------- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES 352,500 477 636
--------- -------- -----
INCREASE (DECREASE) IN CASH 33,013 -- --
Cash at beginning of period -- -- --
--------- -------- -----
CASH AT END OF PERIOD $ 33,013 $ -- $ --
========= ======== =====
SUPPLEMENTAL DISCLOSURE OF INTEREST
AND INCOME TAXES PAID
Interest paid for the period $ 150 $ -- $ --
========= ======== =====
Income taxes paid for the period $ -- $ -- $ --
========= ======== =====
The accompanying notes are an integral part of these financial statements.
F-9
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Composite Technology Corporation (Company) was incorporated under the laws of
the State of Florida on February 26, 1980 as Eldorado Gold & Exploration, Inc.
On January 13, 1987, the Company amended its Articles of Incorporation to change
the corporate name to Eldorado Financial Group, Inc. and modified the Company's
capital structure to allow for the issuance of up to 100,000,000 shares of
common stock at $0.001 par value per share.
On June 27, 2001, the Company changed its state of Incorporation from Florida to
Nevada by means of a merger with and into Eldorado Financial Group, Inc., a
Nevada corporation formed on June 25, 2001 solely for the purpose of effecting
the reincorporation. The Articles of Incorporation and Bylaws of the Nevada
corporation are the Articles of Incorporation and Bylaws of the surviving
corporation. Such Articles of Incorporation did not make any changes to the
capital structure of the Company.
On November 3, 2001, the Company exchanged 60,000,000 shares of restricted,
unregistered common stock for 100.0% of the issued and outstanding common stock
of Transmission Technology Corporation, a privately-owned Nevada corporation
incorporated on March 28, 2001. Transmission Technology Corporation was formed
to own a license agreement related to patent-pending composite reinforced
electrical transmission lines utilizing composite core materials. Transmission
Technology Corporation became a wholly-owned subsidiary of the Company.
In conjunction with the November 3, 2001 transaction, the Company, in November
2001, changed its corporate name to Composite Technology Corporation and amended
its Articles of Incorporation to allow for the issuance of up to 5,000,000
shares of $0.001 par value Preferred Stock from none previously authorized and
for the issuance of up to 200,000,000 shares of $0.001 par value Common Stock
from the 100,000,000 shares previously authorized.
On December 28, 2001, the Company's Board of Directors elected to change the
fiscal year-end of the Company from December 31 to September 30.
Additionally, the Board of Directors established the initial year-end of
September 30 for the Registrant's wholly-owned subsidiary, Transmission
Technology Corporation.
This action was taken after an evaluation and review of the November 3, 2001
acquisition transaction, the operations of both the Company and Transmission
Technology Corporation during the period since the last annual filing on Form
10-KSB and consideration of future economic events and opportunities.
The acquisition of Transmission Technology Corporation, on November 3, 2001, by
the Company effected a change in control and was accounted for as a "reverse
acquisition" whereby Transmission Technology Corporation is the accounting
acquiror for financial statement purposes. Accordingly, for all periods
subsequent to the September 30, 2001 year-end date, the financial statements of
the Company reflect the historical financial statements of Transmission
Technology Corporation from its inception on March 28, 2001 and the operations
of the Company subsequent to September 30, 2001.
The accompanying consolidated financial statements contain the accounts of
Composite Technology Corporation (formerly Eldorado Financial Group, Inc.) and
its wholly-owned subsidiary, Transmission Technology Corporation. All
significant intercompany transactions have been eliminated. The consolidated
entities are collectively referred to as "the Company".
F-10
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS - CONTINUED
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
For segment reporting purposes, the Company operates in only one industry
segment and makes all operating decisions and allocates resources based on the
best benefit to the Company as a whole.
NOTE B - RELATED PARTY TRANSACTIONS
Prior to the November 3, 2001 acquisition of Transmission Technology Corporation
(TTC) by the Company, TTC engaged in significant transactions involving both
Preferred Stock and Common Stock of TTC with an entity in which an shareholder,
officer, and director of TTC, and subsequently, the Company, is a shareholder
and officer. Key transactions involving this relationship include the issuance
of the Series A and Series B Preferred Stock, the issuance of Common Stock to
acquire various marketable and restricted securities in various unrelated
entities and to acquire the rights to patent-pending Composite Reinforced
Aluminum Conductor technology.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and cash equivalents
For Statement of Cash Flows purposes, the Company considers all cash on
hand and in banks, including accounts in book overdraft positions,
certificates of deposit and other highly-liquid investments with
maturities of three months or less, when purchased, to be cash and cash
equivalents.
2. Property and Equipment
Property and equipment are recorded at historical cost. These costs are
depreciated over the estimated useful lives of the individual assets,
generally 4 to 10 years, using the straight-line method.
Gains and losses from disposition of property and equipment are
recognized as incurred and are included in operations.
3. Research and development expenses
Research and development expenses are charged to operations as
incurred.
4. Advertising expenses
Advertising and marketing expenses are charged to operations as
incurred.
F-11
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
5. Income taxes
The Company utilizes the asset and liability method of accounting for
income taxes. At September 30, 2001 and December 31, 2000,
respectively, the deferred tax asset and deferred tax liability
accounts, as recorded when material, consist of temporary differences.
Temporary differences represent differences in the recognition of
assets and liabilities for tax and financial reporting purposes,
primarily allowance for doubtful accounts and accumulated depreciation.
As of September 30, 2001 and December 31, 2000, the deferred tax asset
related to the Company's net operating loss carryforward is fully
reserved. Due to the provisions of Internal Revenue Code Section 338,
the Company may have no net operating loss carryforwards available to
offset financial statement or tax return taxable income in future
periods as a result of a change in control involving 50 percentage
points or more of the issued and outstanding securities of the Company.
6. Income (Loss) per share
Basic earnings (loss) per share is computed by dividing the net income
(loss) by the weighted-average number of shares of common stock and
common stock equivalents (primarily outstanding options and warrants).
Common stock equivalents represent the dilutive effect of the assumed
exercise of the outstanding stock options and warrants, using the
treasury stock method. The calculation of fully diluted earnings (loss)
per share assumes the dilutive effect of the exercise of outstanding
options and warrants at either the beginning of the respective period
presented or the date of issuance, whichever is later. As of September
30, 2001, the Company's outstanding stock options are considered
anti-dilutive due to the Company's net operating loss position. As of
December 31, 2000, the Company had no warrants and/or options issued
and outstanding.
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
(Remainder of this page left blank intentionally)
F-12
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE E - YEAR-END CHANGE AND COMPARABILITY (UNAUDITED)
On December 28, 2001, the Company's Board of Directors elected to change the
fiscal year-end of the Company from December 31 to September 30. Additionally,
the Board of Directors established the initial year-end of September 30 for the
Registrant's wholly-owned subsidiary, Transmission Technology Corporation. The
following unaudited information presents selected annualized financial data as
if the fiscal year had been reset as of September 30, 2001 and 2000,
respectively.
[Download Table]
(pre-acquisition) (pre-acquisition)
October 1, 2000 October 1, 1999
through through
September 30, 2001 September 30, 2000
------------------ ------------------
Revenues $ -- $ --
Gross profit -- --
Income taxes -- --
Loss from continuing operations (90,636) (1,620)
Earnings per share nil nil
Proforma weighted-average number
of shares issued and outstanding 66,500,000 66,500,000
NOTE F - CONTRACT RIGHTS
On April 12, 2001, the Company issued 165 shares of restricted, unregistered
Series A Cumulative and Convertible Preferred Stock to an entity in which an
shareholder, officer, and director of TTC, and subsequently, the Company, is a
shareholder and officer to acquire the rights to patent-pending Composite
Reinforced Aluminum Conductor technology. This transaction was valued at an
agreed-upon amount of approximately $165,000.
As of September 30, 2001 and subsequent thereto, the Company and the licensor
are involved in litigation questioning the validity of the original license
agreement (See Note M - Contingencies). Management is of the opinion that the
license agreement will be upheld and no valuation impairment of the original
agreed-upon acquisition cost has been provided in the accompanying financial
statements.
NOTE G - INVESTMENTS IN OTHER COMPANIES
Investments in other companies consists of the following at September 30, 2001:
[Download Table]
Initial Carrying value at
Investee company Valuation September 30, 2001
-----------------------------------
Integrated Performance Systems, Inc. $ 10,500 $ 1,000
STL Group, Inc. 73,200 1,000
TMA Ventures, LLC/ MEMX, Inc. 44,050 1,000
AMJ Logistics, Inc.
F-13
[Download Table]
Equity investment 24,500 12,020
Convertible advances 30,000 30,000
-------- -------
Totals $182,250 $45,020
======== =======
F-14
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE G - INVESTMENTS IN OTHER COMPANIES - CONTINUED
On April 12, 2001, the Company exchanged 15,086,000 equivalent post-acquisition
shares of restricted, unregistered common stock with an entity in which an
shareholder, officer, and director of TTC, and subsequently, the Company, is a
shareholder and officer for various marketable and restricted securities in
various unrelated entities. The initial exchange transaction was valued using an
agreed-upon valuation of approximately $137,750.
On September 30, 2001, upon evaluation, management recognized a valuation
impairment of approximately $137,230 against these holdings.
Integrated Performance Systems, Inc. (IPS) is a publicly-traded electronics
manufacturing corporation located in Frisco, Texas. IPS is a manufacturer and
supplier of performance-driven circuit boards for high-speed digital computer
and telecommunications applications. The Company acquired an aggregate 3,000
shares of IPS in the April 12, 2001 transaction.
STL Group, Inc. (STL) is a privately-owned company based in Cleveland, Ohio
involved in manufacturing and distributing patented and FDA approved solid
surgical implants and other surgical products. The Company acquired an aggregate
15,000 post-STL forward split shares of STL in the April 12, 2001 transaction.
TMA Ventures, LLC/MEMX, Inc. is a privately-owned company which was formed in
2000 to commercialize micro electro-mechanical systems "MEMS" technologies
licensed by Sandia National Laboratories, specifically to make an all optical
cross-connect microchip for optical switches. The Company acquired an aggregate
3,389 units in TMA Ventures, Inc., which convert on a one-for-one basis into
shares in MEMX, Inc., in the April 12, 2001 transaction.
AMJ Logistics, Inc. (AMJ) is a privately-owned software company based in Tucson,
Arizona. AMJ's primary product is an open-architecture, event-driven,
object-oriented integrated Electronic Data Interchange (EDI) system providing
transaction accountability for a complete audit trail for history and accurate
tracing of costs.
The Company, on August 11, 2001, executed a 30-day purchase option to acquire up
to an additional 110,000 unregistered, restricted shares of AMJ at prices
ranging between $12.40 and $16.00 per share. During August 2001, the Company
paid $10,000 in cash and issued 158,800 equivalent post-acquisition shares of
restricted, unregistered common stock, valued at $4,500.00, to acquire
approximately 72,665 shares of AMJ common stock under this option.
On September 29, 2001, the Company made an advance of $30,000 cash to AMJ. On
October 13, 2001, AMJ and the Company agreed to convert this $30,000 advance and
an additional advance of $20,000, made on October 3, 2001, into 3,125 shares of
AMJ restricted, unregistered common stock.
In December 2001, the Company and AMJ settled the outstanding balances on the
purchase option agreement with the issuance of 42,500 shares of the Company's
restricted, unregistered common stock to AMJ in exchange for 37,335 shares of
restricted, unregistered AMJ common stock.
F-15
As a result of all AMJ transactions, through December 31, 2001, the Company owns
an aggregate 114,125 shares of AMJ, including the initial 1,000 shares acquired
in the April 12, 2001 transaction.
F-16
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE H - PREFERRED STOCK
Preferred stock consists of the following as of September 30, 2001 and December
31, 2000:
[Enlarge/Download Table]
September 30, 2001 December 31, 2000
------------------ -----------------
# shares
par value # shares par value
--------- -------- ---------
Series A Cumulative Convertible Stock 165 $- - $ --
Series B Cumulative Convertible Stock 1,000 1 - --
----- -- - ------
Totals 1,165 $1 - --
===== == = ======
On April 12, 2001, the Company authorized and allocated 165 shares of Series A
10.0% Cumulative Convertible Preferred Stock. The Series A Preferred Stock
(Series A Stock) was issued at $1,000.00 per share. The Series A Shares shall be
entitled to receive cumulative cash dividends at a rate of 10.0% per annum of
the issue price ($1,000.00 per share) from the date of issuance of the shares
until such shares are converted into common stock or redeemed by the Company.
The dividends shall be payable quarterly on the last day of March, June,
September and December in each year, commencing on September 30, 2001. The
Series A Shares are convertible into common stock at an negotiated conversion
rate of $0.47 per effective post-acquisition share at the election of the holder
beginning 90 days after the date of issuance. The Series A Shares are callable
at any time by the Company at a price of 102.0% of issue value upon a 10-day
advance written notice. These shares were issued on April 12, 2001 to an entity
in which an shareholder, officer, and director of TTC, and subsequently, the
Company, is a shareholder and officer to acquire the rights to patent-pending
Composite Reinforced Aluminum Conductor technology. This transaction was valued
at an agreed-upon amount of approximately $165,000.
On June 27, 2001, the Company authorized and allocated 2,000 shares of Series B
10% Cumulative Convertible Preferred Stock. The Series B Preferred Stock (Series
B Stock) was issued at $100.00 per share. The Series B Stock shall be entitled
to receive cumulative cash dividends at a rate of 10.0% per annum of the issue
price ($100.00 per share) from the date of issuance of the shares until such
shares are converted into common stock or redeemed by the Company. The dividends
shall be payable quarterly on the last day of March, June, September and
December in each year, commencing on September 30, 2001. Any dividends on the
Series B Stock that are not paid within 30 days after the date upon which
payment thereof is due shall bear interest at 10.0% per annum from such date
until ultimately paid. The shares are convertible into common stock at a rate of
$1.25 per effective post-acquisition share at the election of the holder
beginning 90 days after the date of issuance. The The Series B Stock is callable
at a price of 109.0% at any time by the Company upon 10-day advance written
notice. The Company sold 1,000 Series B Shares to an entity in which an
shareholder, officer, and director of TTC, and subsequently, the Company, is a
shareholder and officer for cash proceeds of approximately $100,000 on August
28, 2001.
NOTE I - COMMON STOCK TRANSACTIONS
On December 26, 2000, the Company cancelled an aggregate total of 833,485 shares
of its issued and
F-17
outstanding common stock. Management, upon extensive research into transactions
approved by former officers and or controlling shareholders, determined that all
of such shares may have been issued improperly, inasmuch as no corporate
authorization of the issuances existed and no consideration was received by the
Company for such shares.
F-18
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE I - COMMON STOCK TRANSACTIONS - CONTINUED
Specifically, the cancellations were as follows:
400,000 shares were purchased by the then majority stockholder from a
former officer of the Company for a cash consideration of $15,000 and
returned to the Company's treasury for no consideration.
403,485 shares issued to former officers, directors and individuals.
These shares were issued improperly as (a) at the time of such
issuance, the corporate charter of the Company had been revoked by the
Secretary of State of Florida for failure to make required filings and
to pay associated fees and (b) no consideration was received by the
Company for such shares. Many of the certificates representing these
shares were never delivered and remained in the possession of the
Company's transfer agent since their initial issuance.
30,000 shares issued to a company in anticipation of fees due for
investment banking activities. These shares were issued improperly as
(a) there was no action by the Company's Board of Directors authorizing
the issuance of any of such shares, and (b) at the time of such
issuance, the corporate charter of the Company had been revoked by the
Secretary of State of Florida for failure to make required filings and
to pay associated fees.
As a result of the cancellation of these 833,485 shares of Company common stock,
the Company then had 9,166,515 shares outstanding. The effect in the
accompanying financial statements was to restate the par value of the issued and
outstanding shares with a corresponding offset to the additional paid-in capital
account. There was no impact on the earnings of the Company as a result of this
event.
On November 3, 2001, in connection with a business combination transaction, the
Company's then controlling shareholder surrendered and cancelled an aggregate
3,116,515 shares of common stock to the Company for no consideration. The effect
of this transaction was to reduce the common stock account by the par value
(approximately $3,117) and increase the additional paid-in capital account.
On November 3, 2001, the Company executed an Agreement and Plan of
Reorganization whereby the Company issued an aggregate 60,000,000 shares of
restricted, unregistered common stock to the shareholders of Transmission
Technology Corporation (TTC) in exchange for 100.0% of the issued and
outstanding stock of TTC. TTC was incorporated as a Nevada corporation on March
28, 2001 to own a license agreement related to patent-pending composite
reinforced electrical transmission lines utilizing composite core materials.
Transmission Technology Corporation became a wholly-owned subsidiary of the
Company.
On November 3, 2001, the Company issued an aggregate 450,000 shares of
restricted, unregistered common stock to four (4) unrelated entities and/or
individuals as compensation for various financial consulting services provided
in the above discussed Agreement and Plan of Reorganization. This transaction
was valued at approximately $90,000, which approximates the "fair value" of the
Company's stock on the date of the transaction using the discounted closing
price of the Company's common stock as quoted on the NASDAQ Electronic Bulletin
Board.
F-19
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE J - STOCK OPTIONS
On May 15, 2001, TTC established the 2001 Incentive Compensation Stock Option
Plan (Plan). The purpose of the Plan is to grant options to purchase the
Company's common stock to employees of the Company and any subsidiaries to
attract and retain persons of ability and provide incentives for them to exert
their best efforts on behalf of the Company. The Plan is administered by either
the Company's Board of Directors or a committee established and appointed by the
Board of Directors. Under the Plan, the Board has reserved 4,764,000 shares of
common stock to support the underlying options which may be granted. The
exercise price of the underlying shares will be determined by the Board of
Directors; however, the exercise price may not be lower than 100.0% of the mean
of the last reported bid and asked price of the Company's common stock as quoted
on the NASDAQ Bulletin Board or any other exchange or organization. The term of
each option will be established by the Board of Directors at the date of issue
and may not exceed 10 years. The Plan shall automatically terminate on May 15,
2021 and no options under the Plan may be granted after May 15, 2011.
In June 2001, the Board of Directors granted an aggregate 1,357,740 options to
various officers and employees to purchase an equivalent number of shares of
restricted, unregistered common stock. The options were issued at per share
exercisable prices of $0.31 to $0.35 and expire in either June 2006 or June
2011.
There were no exercise of any options during the periods ended September 30,
2001 and December 31, 2000, respectively. The following table summarizes all
options granted from the Plan's inception through September 30, 2001.
[Enlarge/Download Table]
Options Options Options Options Exercise price
granted exercised terminated outstanding per share
------- --------- ---------- ----------- ---------
2001 options 1,357,740 - - 1,357,740 $0.31 - $0.35
--------- ------ ------ ---------
Totals 1,357,740 - - 1,357,740
========= ====== ====== =========
The weighted average exercise price of all issued and outstanding options at
September 30, 2001 is approximately $0.33.
Had compensation cost for options granted been determined based on the fair
values at the grant dates, as prescribed by SFAS 123, the Company's net loss and
net loss per share would not have changed significantly as the exercise price of
the options was relatively equivalent to the market price at the grant date.
The calculations to estimate the fair value of the options were made using the
Black-Scholes pricing model which required making significant assumptions. These
assumptions include the expected life of the options, which was determined to be
the initial life of the corresponding option, either five (5) or ten (10) years,
the expected volatility, which was based on fluctuations of the stock price over
a 12 month period, the expected dividends, determined to be zero based on past
performance, and the risk free interest rate, which was estimated using the bond
equivalent yield of 6.0% at September 30, 2001 and December 31, 2000,
respectively.
F-20
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE K - STOCK WARRANT
The Company, on July 12, 2001, as compensation for changing the conversion terms
of the Series A Preferred Stock, granted the holder of the Series A Preferred
Stock a stock warrant to purchase 1,905,600 shares of the Company's restricted,
unregistered common stock at a price of $1.26 per share. This warrant is
exercisable at any time after its issuance and expires on June 12, 2006.
[Enlarge/Download Table]
Warrants Warrants
originally outstanding at
issued September 30, 2001 Exercise price
------------- ------------------ --------------
Series A Preferred Stock Warrants 1,905,600 1,905,600 $1.26 per share
--------- ---------
Totals at September 30, 2001 1,905,600 1,905,600
========= =========
NOTE L - COMMITMENTS
The Company operates in leased offices, located in Irvine, California, on a
month-to-month agreement at a rate of approximately $3,120 per month.
NOTE M - CONTINGENCIES
On or about August 15, 2001, TTC commenced an arbitration with the American
Arbitration Association in Los Angeles, California against W. Brandt Goldsworthy
& Associates (WBG&A) and W. B. G., Inc. (WBG), an entity affiliated with WBG&A,
seeking to enforce a License Agreement between TTC and WBG dated May 7, 2001.
Concurrent with the above action, TTC entered an action in the United States
District Court for the Central District of California against WBG&A and WBG
(Case No. CV 01-07118 GHK (AJWx)) seeking preliminary injunctive relief and to
compel the parties to arbitrate.
WBG&A and WBG counterclaimed seeking to rescind the License Agreement on
numerous grounds, including but not limited to, alleged fraud and unfair
business practices. Additionally WBG&A and WBG included C. William Arrington,
President and COO of the Company, Tom Sawyer and Composite Power Corporation, an
unrelated entity, as third party defendants. The third party complaints were in
the nature of declaratory relief actions claiming that Mr. Sawyer was the sole
shareholder, officer and director of TTC at that time and that Mr. Arrington,
pursuant to a non-competition injunction issued against him in the State of
Nevada in an action commenced by Composite Power Corporation, was enjoined from
entering into the License Agreement and therefore it was illegal.
The motion for a preliminary injunction is sub judice. The petition to compel
arbitration has been completely briefed and there is a hearing set for January
28, 2002. Management and legal counsel are of the opinion that the Company and
TTC have meritorious claims.
F-21
Due to the early nature of the arbitration procedure, the Company anticipates no
material impact to either the results of operations, its financial condition or
liquidity based on the uncertainty of outcome, if any, of existing litigation,
either collectively and/or individually, at this time.
F-22
COMPOSITE TECHNOLOGY CORPORATION AND SUBSIDIARY
(formerly Eldorado Financial Group, Inc.)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE N - SUBSEQUENT EVENTS
On October 11, 2001, the Company sold 320 shares of Series B Preferred Stock to
an individual for approximately $32,000 cash.
On October 18, 2001, the holder of the Warrant to purchase shares of the
Company's common stock exercised 7,940 warrants and purchased 7,940 shares of
restricted, unregistered common stock for $10,000 cash.
On October 24, 2001, the Company sold an aggregate 15,880 equivalent
post-acquisition shares of restricted, unregistered common stock to an unrelated
entity for approximately $61,500 cash.
On October 26, 2001, the Company sold an aggregate 27,632 equivalent
post-acquisition shares of restricted, unregistered common stock to an
individual for approximately $107,010.
On October 30, 2001, the Company issued an aggregate 79,400 equivalent
post-acquisition shares of restricted, unregistered common stock to its
corporate law firm at an agreed-upon value of approximately $300,000 as a
retainer for future legal services to be provided during a one-year period from
October 30, 2001. The retainer shares shall vest against normal monthly billings
from the law firm to the Company using the agreed-upon valuation of $3.78 per
share, regardless of the open market price of the Company's common stock during
the billing month. If the aggregate market value of the 79,400 shares are worth
less than $450,000 in the open market at the average mean of the bid and ask
price for the shares during the one-month period just preceding the first
anniversary of the retainer agreement (October 30, 2002) then the law firm will
have 15 days to make a written election to either a) exercise a downward
adjustment in the agreed-upon price of $3.78 to an amount of not less than $1.89
per share, which would cause the Company to issue up to an additional 79,400
equivalent post-acquisition shares to the law firm or b) put all 79,400 shares
back to the Company and require payment in cash for the legal services provided
during the initial term of the agreement. During January 2002, the Company and
the law firm agreed to rescind this transaction and the 79,400 shares were
returned to the Company. All future transactions between the Company and the law
firm will be conducted on a cash transaction basis.
On December 4, 2001, the Company issued 42,500 shares of the Company's
restricted, unregistered common stock in exchange for 37,335 shares of
restricted, unregistered AMJ common stock. This transaction was valued at
approximately $191,450, which approximates the "fair value" of the Company's
stock on the date of the transaction using the discounted closing price of the
Company's common stock as quoted on the NASDAQ Electronic Bulletin Board.
F-23
Dates Referenced Herein and Documents Incorporated by Reference
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