Non-cash transactions: An executive officer and shareholder
forgave $200, 000 in deferred compensation payable owed to him
during the first quarter. The resulting effect was a $200,000
decrease in Deferred Compensation Payable and an increase in
Additional Paid in Capital of $200,000
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents.
Holdings of highly liquid investments with maturities of three months or less,
when purchased, are considered to be cash equivalents. The carrying amount
reported in the balance sheet for cash and cash equivalents approximates its
fair values. The amount of federally insured cash deposits was $64,800 as of
September 30, 2004 and $13,300 on December 31, 2003
Fair Values of Financial Instruments.
The carrying amount of trade accounts receivable, accounts payable, prepaid and
accrued expenses, bonds and notes payable, and amounts due to shareholders, as
presented in the balance sheet, approximates fair value.
Accounts Receivable
Accounts for which no payments have been received for three consecutive months
are considered delinquent and a reserve is setup for them. Customary collection
efforts are initiated and an allowance for uncollectible accounts is set up and
the related expense is charged to operations.
Inventories
Inventories are stated at the lower of cost (which represents cost of materials
and manufacturing costs on a first-in, first-out basis) or market. Cost is
determined principally on the average actual cost method. Finished goods and
work-in-process inventories include material, labor, and overhead costs. Factory
overhead costs are allocated to inventory manufactured in-house based upon cost
of materials. Dionics monitors usage reports to determine if the carrying value
of any items should be adjusted down due to lack of demand for the item. Dionics
adjusts down the inventory for estimated obsolescence or unmarketable inventory
equal to difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual
market conditions are less favorable than those projected by management,
additional inventory write-down may be required.
Inventories are comprised of the following:
September 30, December 31,
2004 2003
---- ----
(Audited)
---------
Raw materials (net of reserves) $ 31,000 $ 76,700
Work in process 180,500 216,000
Manufacturing Supplies 24,000 42,700
Finished goods 39,500 33,100
-------- --------
Total $275,000 $368,500
======== ========
|
7
DIONICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Notes Payable
The Company accounts for all note liabilities that are due and payable in one
year as short-term notes.
Long-Lived Assets- Property, Plant And Equipment
These assets are recorded at cost less depreciation and amortization.
Depreciation and amortization are accounted for on the straight-line method
based on estimated useful lives. The amortization of leasehold improvements is
based on the shorter of the lease term or the life of the improvement.
Betterments and large renewals, which extend the life of the asset, are
capitalized whereas maintenance and repairs and small renewals are expenses, as
incurred. The estimated useful lives are: machinery and equipment, 7-15 years;
buildings, 30 years; and leasehold improvements, 10-20 years.
Deferred Compensation Plan
Future payments required under a plan of deferred compensation adopted in 1987,
and revised in 2000, as well as interest accrued thereon have been charged to
operations over the period of expected service.
Bad Debt
The Company maintained an allowance for doubtful accounts of $7,300 at September
30, 2004 and December 31, 2003.
Deferred Mortgage Costs
Costs related to the new First Union Business Capital Mortgage and prior costs
related to the paid off mortgage with D.A.N. Joint Venture are being amortized
over ten years as follows:
September 30, December 31,
2004 2003
---- ----
(Audited)
---------
Cost $ 52,000 $ 52,000
Accumulated Amortization (18,900) (16,400)
-------- --------
$ 33,100 $ 35,600
======== ========
|
Amortization for the nine months ended September 30, 2004 was $2,500 and $3,300
for the year ended December 31, 2003.
Major Customers
For the nine months ended September 30, 2004, approximately $220,000 or 27% of
total sales were to our largest customer, Agilent Technologies.
8
DIONICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Gain/Loss Per Common share
Basic earnings per share ("EPS") are computed based on the weighted average
number of common shares outstanding for the period. Diluted EPS gives effect to
all dilutive potential shares outstanding (i.e., options, warrants and
convertible notes) during the period. The assumed exercise of outstanding stock
options have been excluded from the calculations of loss per share as their
effect is anti-dilutive, in 2003.
For the nine months ended September 30, 2004, basic loss per share of Dionics,
Inc. was $(.02) per share. For the nine months ended September 30, 2003, basic
loss per share of Dionics, Inc. was $(.03) per share
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Recently Issued Accounting Standards
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB Opinion No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in
ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). Among other provisions, the new rule requires that items
such as idle facility expense, excessive spoilage, double freight, and
rehandling costs be recognized as current period charges regardless of whether
they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally,
SFAS 151 requires that the allocation of fixed production overheads to the costs
of conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for fiscal years beginning after June 15, 2005. We have
considered SFAS 151 and have determined that this pronouncement will not
materially impact our consolidated results of operations.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees. "SFAS 123R requires that all share-based payments to
employees, including grants of employee stock options, be recognized in the
financial statements based on their fair values, beginning with the first
interim or annual period after June 15, 2005, with early adoption encouraged.
The pro forma disclosures previously permitted under SFAS 123, no longer will be
an alternative to financial statement recognition. We are required to adopt SFAS
123R in the third quarter of 2005. Under SFAS 123R, we must determine the
appropriate fair value model to be used in valuing share-based payments, the
amortization method for compensation cost and the transition method to be used
at the date of adoption. Upon adoption, we may choose from two transition
methods: the modified-prospective transition approach or the
modified-retroactive transition approach. Under the modified-prospective
transition approach we would be required to recognize compensation cost for
awards that were granted prior to, but not vested as of the date of adoption.
Prior periods remain unchanged and pro forma disclosures previously required by
SFAS No. 123 continue to be required.
9
DIONICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Standards (Continued)
Under the modified-retrospective transition method, we would be required to
restate prior periods by recognizing compensation cost in the amounts previously
reported in the pro forma disclosure under SFAS No. 123. Under this method, we
would be permitted to apply this presentation to all periods presented or to the
start of the fiscal year in which SFAS No. 123R is adopted. We would also be
required to follow the same guidelines as in the modified-prospective transition
method for awards granted subsequent to adoption and those that were granted and
not yet vested. We are currently evaluating the requirements of SFAS 123R and
its impact on our consolidated results of operations and earnings per share. We
have not yet determined the method of adoption or the effect of adopting SFAS
123R, and it has not been determined whether the adoption will result in amounts
similar to the current pro forma disclosures under SFAS 123.
NOTE 2. DESCRIPTION OF BUSINESS
Background
Dionics, Inc., a Delaware corporation, is located at 65 Rushmore Street,
Westbury, NY. Dionics, Inc., designs, manufactures and sells silicon
semi-conductor electronic products, individual discrete components,
multi-component integrated circuits and multi-component hybrid circuits.
NOTE 3. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable were as follows:
September 30, December 31,
2004 2003
---- ----
(Audited)
---------
Trade accounts receivable $ 65,200 $ 61,700
Less: allowance for doubtful accounts (7,300) (7,300)
-------- --------
Trade accounts receivable, net $ 57,900 $ 54,400
======== ========
|
At September 30, 2004 and December 31, 2003 trade accounts receivable were
pledged as collateral in connection with bank loans.
There was no bad debt expense for the periods ended September 30, 2004 and
September 30, 2003.
10
DIONICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
September 30, December 31,
2004 2003
---- ----
(Audited)
---------
Equipment $ 1,199,700 $ 1,199,700
Building 122,000 122,000
Furniture and Fixtures 233,300 233,300
Leasehold Improvements 169,400 169,400
Land 40,000 40,000
----------- -----------
1,764,400 1,764,400
Less: accumulated depreciation (1,699,000) (1,693,600)
----------- -----------
Net property, plant, and equipment $ 65,400 $ 70,800
=========== ===========
|
Depreciation expenses for the nine months ended September 30, 2004 and for the
year ended December 31, 2003 were $5,400 and $6,700, respectively.
NOTE 5. DEFERRED COMPENSATION PAYABLE
In 1987 we entered into an agreement, amended in 1997 and 1999, which provides
for a 72-month schedule of payments to our chief executive officer.
In connection with the refinancing of the Wachovia Small Business Capital
(formerly First Union Small Business Capital), a modified deferred compensation
payment schedule commencing January 1, 1999 was agreed to by us and our chief
executive officer.
We have executed a mortgage subordinate to the existing first and second
mortgage secured by land and building at 65 Rushmore Street, Westbury, NY in
favor of the chief executive officer to insure amounts due him on the deferred
compensation agreement.
A new 72-month schedule consists of a 24-month period of reduced consecutive
monthly payments, to be followed by an 18-month period of no payments except for
monthly interest. At the end of the 42nd month, the total of the delayed
payments becomes due followed by 30 months of principal and interest payments.
Notwithstanding the above schedule for payments, other than a life insurance
policy to cover death benefits, we have not specifically designated funds with
which to meet these payment requirements. In view of its continuing total
indebtedness as well as our need for operating capital, there can be no
assurance that we will be able to satisfy the terms of this new agreement in
full or in part. Should such unfavorable circumstances occur, the terms of the
agreement may have to again be renegotiated to better match our then -current
financial circumstances.
Under the standby agreement of the SBA Loan the chief executive will take no
action on the deferred compensation unless authorized by the lender.
The previously mentioned life insurance policy had a cash surrender value of
$122,700 at June 30, 2004 and is shown net of loans in the amount of $121,300
under other assets.
11
DIONICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6. LONG-TERM DEBT
As of September 30, 2004 and December 31, 2003, our long-term debt includes a
mortgage and notes payable as follows:
September 30, December 31,
2004 2003
---- ----
(Audited)
---------
Mortgage payable (a) $ 362,000 $ 368,000
Term loans -- 35,000
Lease 6,800 8,400
SBA - Loan (a) 305,800 305,800
--------- ---------
674,600 717,200
Less: current maturities (11,300) (42,400)
--------- ---------
$ 663,300 $ 674,800
========= =========
|
(a) - these mortgage amounts were paid off in April 2005 with the sale and
leaseback of the building
As of December 31, 2003, principal payments over the next five years and in
total are:
Year Payments
---- --------
2004 $ 42,400
2005 63,600
2006 66,300
2007 69,500
2008 70,100
After 2008 405,300
--------
$717,200
========
|
Mortgage Payable
In 1998, a loan agreement was entered into between us and Wachovia Small
Business Capital (formerly the First Union Business Capital). The loan amount
was $384,700 which requires 360 monthly self-liquidating payments in the amount
of $2,900. Interest is calculated on the unpaid principal balance at an initial
rate of 8.23% per annum. The interest rate on the loan is variable depending on
an independent index related to the yield of United States Treasury Notes. This
rate change will occur once every 60 months.
Term loans agreements with D.A.N. Joint Venture, dated 1999, were restructured
and replaced by a new term loan in the principal amount of $283,900, ("Term Loan
A") structured over two five-year periods. During the first five-year period
ended March 31, 1999 the Company paid interest only. During the second five-year
period commencing April 1, 1999, the balance due was to be repaid over 60 equal
monthly installments, plus interest at prime plus two percent on the unpaid
balance. The monthly payments are $6,400. The principal balance as of December
31, 2003 was $22,000.
12
DIONICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6. LONG-TERM DEBT (Continued)
Term Loans
D.A.N. Joint Venture and the Company also re-financed and amount of $167,500
stemming from the original mortgage amount, (Term Loan - C). Term Loan - C, is
structured over two five-year periods, subject to the same terms noted above in
Term Loan - A. The principal balance as of December 31, 2003 was $13,002.
Monthly payments for this loan are $3,800.
Small Business Administration Loan
On October 20, 2002, the Company was approved with the Small Business
Administration for a loan in the amount of $305,800. Interest will accrue at the
rate of 4% per annum. Monthly payments of $5,600 will begin 25 months from the
date of the promissory note. Each payment will be applied first to interest
accrued to the date of receipt of each payment, and the balance, if any, will be
applied to the principal. Interest will accrue only on funds actually advanced
from the date of each advance, but in no case sooner than 24 months from the
date of the promissory note. Dionics, Inc. will provide the deed of
trust/mortgage on real estate located at 65 Rushmore Street, Westbury, NY 11590,
as collateral. In April 2005 the building was sold and the mortgage was then
paid off.
NOTE 7. COLLATERIALIZED ASSETS
The Wachovia Small Business Capital and the SBA Loans are secured by a First
Mortgage and a Second Mortgage, respectively on the Company's Westbury Property,
which was sold in April 2005 and the loan was paid off. All of the Company's
assets other than the Westbury Property, are pledged to the remaining loans due
to D.A.N. Joint Venture.
NOTE 8. STOCK OPTION PLAN
The Company has an employee incentive compensation plan (the "Plan") pursuant to
which the Company's board of directors may grant stock options to officers and
key employees. In September 1997, the Board of Directors of the Company adopted
the 1997 Incentive Stock Option Plan (The "1997 Plan") for employees of the
Company to purchase up to 250,000 shares of common stock of the Company. Options
granted under the 1997 plan are "incentive stock options" as defined in Section
422 of the Internal Revenue Code. Any stock options granted under the 1997 Plan
shall be granted at no less than 100% of the fair market value of the Common
Stock of the Company at the time of the grant. As of December 31, 2003, options
to acquire 192,500 shares of Common Stock have been granted under the 1997 Plan
which includes (i) 120,000 options originally granted on September 11, 1997 and
repriced on February 21, 2002 in order to reduce the exercise price from $.38 to
$.10 per share and (ii) 68,500 additional options granted on February 21, 2002
with an exercise price of $.10 per share and (iii) 4,000 additional options
granted on April 8, 2002 with an exercise price of $.20 per share. As of
December 31, 2003, 57,500 options were available for future grant. Since the
average market price of the Company's Common Stock was below the exercise option
for the six months ended June 30, 2004, the options were anti-dilutive.
Weighted Average
Number of options Remaining Estimated Exercise
Currently Exercisable Life Price
--------------------- ---- -----
188,500 5.31 $ 0.10
4,000 8.27 0.20
------- ---- ----
192,500 5.37 0.10
======= ==== ====
|
13
DIONICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company has an agreement with its chief executive officer to pay to his
widow or estate for a period of five (5) years following his death an amount per
year equal to the annual salary being earned by him at the time of his death,
provided that he was an employee of the Company at the time of his death. Such
arrangements had previously been funded by life insurance policies owned by
Dionics' on his life; however, currently the policy remains unfunded.
In May 2004, the Company entered into the following investment agreements:
1. Stock Purchase Agreement - 2,200,000 shares of Common Stock would be
issued in consideration for an investment of $110,000. In addition
to the execution of the agreement, Kenneth Levy will become a
director of the Company, whereby he will be entitled to acquire
200,000 shares of Common Stock for $10,000.
2. The Kravitz Note - 1,000,000 shares of Common Stock and a three-year
warrant to acquire an additional 1,000,000 shares exercisable at
$.05 per share has been issued to the president of the Company,
Bernard Kravitz, for an investment of $50,000.
In May 2004, the Company issued, under the 2002 Stock Compensation Plan, 172,500
restricted shares of Common Stock to 15 employees equal to the number of options
held by such employees which shares were issued in place of and in cancellation
for all of the Outstanding Options. During the quarter ended June 30, 2004, the
Company agreed to issue a five-year option to a newly retained employee to
acquire up to 105,000 shares of Common Stock at $.15 per share. The Company also
agreed to issue three-year warrants to two persons to acquire up to 5,000 shares
each at $.15 per share.
In August 2004, the Company amended its Certificate of Incorporation filed in
the State of Delaware and effected the "Capitalization Agreement." The
Capitalization Agreement amends the following: (i) increased the number of
authorized shares of Common Stock of the Company from 5,000,000 shares of Common
Stock, $.01 par value, to 50,000,000 shares, and (ii) created a new class
consisting of 1,000,000 shares of Preferred Stock, $.01 par value.
NOTE 10. SUBSEQUENT EVENTS
In April 2005, the Company sold the property located at 65 Rushmore Street,
Westbury, New York for the sum of $990,000. At closing the mortgage held by
Wachovia Small Business Capital in the amount of $361,900 and the mortgage held
by The Small Business Administration in the amount of $307,200 were both paid
off. A mortgage held by Bernard Kravitz in the amount of $25,000 was also paid
off at closing. After all mortgages and commissions were paid at closing the
balance of $168,200 was paid to Dionics, Inc. The Company will continue to
occupy the Premises in accordance with the terms of the Lease between the Seller
and Purchaser dated July 25, 2005. The lease is for a period of seven years with
an annual base rent of $83,200, to be paid with monthly installments as of the
first of each month. A security deposit in the amount of $20,800, representing
an amount equal to three months of the lease term, was required at the signing
of the lease agreement.
14