SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File Number 0-28375
SILVERADO FINANCIAL, INC.
(Formerly as Rhombic Corporation)
(Exact name of registrant as specified in its charter)
Nevada 86-0824125
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1475 South Bascom Avenue, Suite 210, Campbell, CA 95008
(Address of principal executive offices) (Zip Code)
Telephone Number: (408) 371-2301
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and
will not 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-K or any amendment to this Form 10-K. [ ]
At December 31, 2002, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $1,250,000
At April 7, 2003, the number of shares outstanding of registrant's Common Stock
was 54,173,936.
PART I
ITEM 1 - BUSINESS
GENERAL
SILVERADO FINANCIAL, INC. ("Silverado" or the "Company"), is a development-stage
company incorporated under the laws of the State of Nevada. The corporation was
initially formed on February 26, 1987 as Toledo Medical Corporation. The name
was changed to Almaz Space Corporation on February 9, 1991 and to Ready When You
Are Funwear, Inc. on April 14, 1992. On December 30, 1994 a group of individuals
acquired control of the corporation. On February 17, 1995, they changed the name
to Rhombic Corporation. On March 19, 2003, the company changed its name to
Silverado Financial, Inc. The Company is currently headquartered in Campbell,
California.
The Company is in the development stage and its efforts, since inception, until
October of 2002, has been primarily focused on the acquisition of the rights to
intellectual property that could lead to the development of innovative
technologies. During the years of 1999 and 2000 it began to focus on the
research and development of its portfolio of acquired intellectual property.
During 2001, the Company's main objective was to identify and develop specific
applications from its intellectual property in order to make them commercially
marketable. In November 2002, Silverado acquired Financial Software, Inc. as the
first part of its strategy to enter the lucrative financial services sector.
The company has five wholly owned subsidiaries. They are:
* Rockford Technology Associates, Inc. ("Rockford")
* Nanophase Diamond Technologies, Inc. ("Nanophase")
* AEP Technologies, Inc. ("AEPT")
* Rhombic Detection Technologies, Inc. ("RDT")
* Financial Software, Inc. ("FSI").
By assignment from the University of Illinois on September 5, 1995, filed with
the Patent and Trademark Office, Rockford owns a patent for the Inertial
Electrostatic Confinement and Neutron Monitor technology. On June 27, 1996,
Rockford entered a licensing agreement with Daimler Benz Aerospace and the
University of Illinois by which it is entitled to receive a long-term royalty on
all IEC sales throughout the world including North America and may engage in
direct marketing of the technology in North America without restriction. In
return, Rockford assigned to Daimler Benz Aerospace, "Daimler", its right, title
and interest to the Inertial Electrostatic Confinement technology for its
development and commercialization by Daimler Benz Aerospace. In late August
2000, Astrium, which is a subsidiary of Daimler-Chrysler Aerospace, informed
Silverado that they would not continue to self-fund the Neutron Generator
project beyond December 31, 2000. As a result, Silverado attempted to form of a
joint venture between itself, Astrium and other partners that would provide
capital and technological expertise to commercialize the technology within
certain applications. The joint venture company was planned to originate in the
wholly owned subsidiary of Silverado named AEP Technologies, Inc. ("AEPT").
Agreements were obtained from all of the participating joint venture partners to
perform their respective roles; however, Silverado was unable to raise the
necessary capital to begin the project.
Nanophase owns the Diamond Film Forced Diffusion technology. No activity
occurred during 2001 or 2002 in the subsidiary.
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Rhombic Detection Technologies, Inc. was formed during 2000 in anticipation of
Rhombic's being awarded a contract from the Department of Energy ("DOE") to
develop a Beryllium detection device. Rhombic was not awarded the contract by
the DOE; therefore, the subsidiary was not used.
As a technology transfer and development stage company, Silverado has limited
finances. On March 8, 2001 it signed a $2.5 million convertible debenture to be
funded with installment payments starting May 1, 2001 in order to accomplish its
growth objectives and development of products and marketing of its technologies.
The Holder funded $200,000 on the debenture and converted the advances into
1,166,142 shares of the Company under the terms of the debenture. On July 20,
2001, the Company withdrew its registration statement for the shares issued and
to be issued under the debenture because it was no longer applicable to the
Company.
There is no assurance that the Company will be able to secure any additional
funding necessary for such growth and expansion. There is also no assurance that
even if the Company obtains adequate funding to complete any contemplated
acquisition, such acquisition will succeed in enhancing the Company's business
and will not ultimately have an adverse effect on the Company's business and
operations.
ACQUISITION OR DISPOSITION OF ASSETS
On January 3, 2000, the Company acquired the right, title and interest in an
invention named "Micro Wave Driven Ultra Violet Lamp" or "Excimer Lamp". The
seller agreed to provide technical support for the research and development of
the Excimer Lamp when the development takes place. The Company issued 100,000
restricted shares at a deemed value of $281,250 and issued the inventor and
option to purchase 50,000 shares of its common stock at $1.00 per share until
December 31, 2000. The option was not exercised on December 31, 2000 and
expired.
On April 12, 2000, the Company issued 100,000 shares of its common stock at a
deemed value of $194,250 for the patent rights, title and interest to an
invention called long-lived nuclear waste by low energy nuclear reactions in
host metals and Disperse Composite Material "LENR/DCM". The invention is a
defined process to convert the long-lived nuclear wastes by low energy nuclear
reactions using hydrogen in host metals. The inventor and seller, Dr. Heinrich
Hora, agreed to provide reasonable technical support under a compensation
agreement to be decided upon for the research and development of the technology.
The Company is seeking joint venture partners or others to effect
commercialization of its other impaired technologies. There is no assurance that
Company will be able to locate a joint venture partner to develop any or all of
these technologies. In addition, there is no assurance that even if a joint
venture partner is found that any of these technologies will ever result in
marketable or viable products.
On November 19th, 2002, Silverado acquired all of the issued and outstanding
shares of Financial Software, Inc., (FSI) a New Jersey corporation engaged in
the development of Internet and Intranet financial software in addition to
operating several financial industry publishing web-sites. This acquisition was
completed on a share for share exchange basis for 22,000,000 shares of Silverado
Common Stock at a deemed value of $1,100,000 and a note for $275,000. Silverado
acquired FSI in order to gain access to certain proprietary software products
owned by FSI which Silverado intends to further develop and extend into a
comprehensive back office platform necessary to accomplish its business
objectives.
The Company is currently in negotiations to acquire Realty Capital Corporation,
a California based mortgage and insurance brokerage company owned partly by a
director of the Company, his wife, and others. Silverado intends to acquire
Realty Capital on a share for share exchange. The exact number of shares is
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subject to an independent, fair market valuation of the net assets of Realty
Capital with no shares to be issued in exchange for goodwill or other
intangibles as this is not an arms length transaction. Realty Capital is
currently operating and does generate revenue.
Silverado intends to apply for a license as a lender in the states of
California, Alaska, Arizona, Idaho, Nevada, New Mexico, Oregon, Washington, and
Utah.
Silverado intends to make future acquisitions of revenue generating operations
in the Mortgage Brokerage and Mortgage Banking sectors. However, currently, the
Company does not have a definitive source of capital to finance such
acquisitions. In this respect, the Company intends to accomplish its acquisition
plans by exchange of the Company stock. There is no assurance that the Company
will be able to arrange for such acquisitions or as to the trading price or
liquidity of the Company's common stock. Low trading price or poor liquidity of
the Company's common stock may adversely affect the Company's ability to engage
in future acquisitions and to accomplish its growth objectives.
INTELLECTUAL PROPERTY
In early July 2001, the Company hired a scientific consultant to evaluate all of
the patents and patent applications of the Company for relevance to potential
commercial applications. The consultant first stated that all patents and
provisional patents involving Field Enhanced Diffusion by Optical Activation
(FEDOA) which covered diamond based fuel cells, diamond doping and the removal
of impurities, listed inventors that are or were faculty members of the
University of Missouri at Columbia. The University administration asserts that
all inventions created at the University by its faculty members are its
intellectual property and not Silverado's. The following opinions on Silverado's
provisional patents invented by faculty members at the University of Missouri
are summarized as follows:
1. Provisional patents for the System and Method for Diamond Based Fuel
Cells give substantial evidence that the described process using FEDOA
is too slow to be economically feasible.
2. Provisional patent applications covering the doping of natural and
chemically vacuum deposited (CVD) diamond using FEDOA is too slow of a
process to be economically feasible. Additional research into
electrical applications of these provisional patents could be used
with other doping processes to explore potential commercial
applications.
3. Provisional patent applications for a System and Method for Removal of
Impurities from materials such as semiconductors using FEDOA would
require significantly more research to determine commercial value.
Although the process appears to offer an increase yield of chips
obtainable from wafers, the commercial viability is questionable
because the FEDOA is very slow for commercial applications.
4. Provisional patent applications for Carbon Crystal Growth Using
Electric Emission Enhanced Showerhead Hot Filament Chemical Vapor
Deposition offers an improved process for the CVD process, but the
applications and inventors do not have enough data to determine
commercial viability.
The conclusion of the consultant and the company was not to continue the patent
process of the above listed provisional patent applications because of (1) the
limited economic viability due primarily to the process speed of FEDOA; (2) the
high costs of patent counsel and the direct costs to obtain domestic and foreign
patents; and (3) the potential exposure to royalty payments to the University of
Missouri with corresponding costs of defending ownership of the patents.
3
The consultant also evaluated Silverado's intellectual property that was
unaffected by potential claims from the University of Missouri. His opinions are
as follows:
1. Provisional patent for the Method and System for Manufacturing
Disperse Composite Materials is of great economic value if the process
is fully developed for the numerous applications that are being
proposed now by industry or that will emerge shortly.
2. Provisional patent for a Method of Contact Diffusion into Diamond and
Other Crystalline Structures and Products using its thermal diffusion
method is commercially viable.
The consultant recommended proceeding with a development plan for commercial
applications involving the Manufacturing of Disperse Composite Materials. He
also recommended that the Company proceed with Contact Diffusion into Diamond if
reasonable arrangements could be made to secure a license to receive the
processed diamond material necessary to complete the process.
Upon the recommendations of the consultant, the company met with its patent
attorneys and determined that the application deadlines to extend the patents
pending on the Manufacturing of Disperse Composite Materials had expired. As a
result, the President, Roger Duffield, met with the inventors of the patents and
determined a commitment of $500,000 to $1,000,000 in capital would be needed to
begin a development program for any commercial applications that would provide
specific patent coverage for any process developed. Due to existing financing
problems that the Company was facing, Silverado's President recommended a merger
with a private research and development company that had capital and scientists.
Unfortunately, Silverado never received enough information from the company to
evaluate a merger and Silverado's President subsequently resigned.
Silverado recognized an impairment in the value of FEDOA and its corresponding
intellectual properties as a result of the consultants report and its inability
to raise money during 2001 for the development of any of its applications.
Silverado recognized an impairment in the value of the Excimer Lamp and its
corresponding intellectual properties as a result of its inability to raise
money during 2002 for the development of any of its applications.
On November 19, 2002, in connection with the acquisition of Financial Software,
Inc., Silverado acquired certain software, web sites and intellectual property
which can aggregate financial information from a large number of data sources on
an individual basis, amalgamate the data and provide accurate and detailed
insight into an individuals personal financial picture on a real time basis.
This software can manage a host of disparate objectives as they relate to a
persons financial goals, be they investment or debt related or any combination.
This software suite, together with mortgage generation capabilities can create a
wealth of new and different mortgage, investment or insurance products.
POTENTIAL COMMERCIAL APPLICATIONS
Silverado intends to initially utilize the software acquired in connection with
the acquisition of Financial Software Inc. to develop new mortgage products
aimed at sub-prime borrowers whereby Silverado will generate mortgage products
at high interest rates relative to prime borrowers and through the use of the
software, determine whether or not an individual borrower is acting in a manner
which would enable a rebate of certain portions of said higher interest rate. If
a borrower should in fact act in this manner, within a relatively short period,
the borrower's credit rating should improve and Silverado will be able to
refinance the loan at a lower rate. Should the borrower not act accordingly, the
higher rate will be collected. Eventually, we intend to modify the software to
create aggregated pictures of individual financial positions in order to market
a range of products and services to customers including but not limited to
insurance and securities related products and services.
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IMPAIRED INTELLECTUAL PROPERTY
All of Silverado's intellectual properties are in the development phase.
Silverado's current portfolio of impaired intellectual property includes (1)
Inertial Electrostatic Confinement and the Neutron Monitoring Detector, (2)
Diamond-reinforced Flywheel Battery and Radio Nuclide Battery, (3) Active Engine
("Rhombic Explorer") (4) Disperse Composite Material (5) LENR/DCM technology and
(6) Diamond Film and Forced Diffusion. All of these have been acquired by
Silverado in exchange for shares of its common stock from different parties
including research companies and individual inventors throughout the world. In
certain cases, as part of the acquisition of the technology, the Company has
agreed to pay royalty fees based on sales, when and if any such sales occur.
1. Inertial Electrostatic Confinement "IEC"
The IEC device is a large, negatively charged grid ionizing the gas inside a
spherical vacuum chamber. The positive ions produced by this plasma are
attracted toward the central cathode (negative electrode). Since the grid is
mostly transparent, most of the ions will pass through the grid toward the
center of the device, rather than collide with the grid. At the center, many of
the ions will collide with each other. If the constituent particles of the gas
are of fusionable fuels, (tritium, deuterium, helium-3) some of the collisions
will result in fusion and the concurrent release of energy. Increasing the
number of fusion reactions would increase the energy output of a fusion reactor,
or would increase the number of valuable fusion products produced (neutrons,
helium-3). Potentially the IEC device may become a source of energy. Currently,
however, the IEC device does not produce as much energy as is used to operate
it.
Research on the technology began during 1993 under a licensing agreement between
Daimler-Benz Aerospace (DASA), the University of Illinois and Rockford
Technology Associates (a wholly owned subsidiary of Silverado). The development
program objective was to develop a neutron generator for multiple applications.
As of December 2000, the development program with Astrium successfully proved
the demonstrator model of the neutron generator in continuous operation for over
5,000 hours. This achievement was significant because there are not any known
competitors that have been able to match the longevity of Astrium's
demonstrator. Competitors have been able to generate a higher output of neutrons
per second than the demonstrator. Current applications suitable for the Astrium
demonstrator are:
a. medical cancer treatments
b. bulk foodstuffs quality control
c. On-line measurement of coal quality at the power station for
combustion emission control.
d. On-line measurement of mineral quality in the mining industry.
e. Land mine detection
Silverado acquired a related device during September 1999 utilizing the
principle described above. The device is named the Neutron Monitoring Detector
and monitors the speed and frequency of passing neutrons to assess the quality
of alloy. Some practical applications of this technology may include detection
of impurities in high quality alloys, mineral quality analysis in coal, cement
and similar industries, detection contraband at airports, bus stops, train
stations, and detection of nonmetallic antipersonnel land mines.
5
During the second quarter of that year, the Company paid $22,000 in cash and
issued 50,000 restricted common shares to Roger Duffield to prepare a business
plan to develop and commercialize the Inertial Electrostatic Confinement
technology. On September 1, 2000 Mr. Duffield became the President of the
Company and completed the business plan. While completing the business plan in
late August, Astrium, which is a subsidiary of Daimler-Chrysler Aerospace,
informed Silverado that they would not continue to self-fund the Neutron
Generator project beyond December 31, 2000. As a result, the business plan
provided for the formation of a joint venture between Astrium, Silverado, and
other partners that would provide capital and technological expertise to
commercialize the technology within certain applications. Agreements were
obtained from all of the participating joint venture partners to perform their
respective roles. The joint venture was not funded by the participating partner
who committed to capitalizing the joint venture. As a result, Astrium informed
the Company and the University of Illinois that it had no intention to continue
research on the neutron generator project or on paying any future royalties
beyond December 31, 2000.
As a result of the written statements from Astrium declining to continue further
research on the IEC, the Company is in discussions with the University of
Illinois to determine how to obtain the patent rights and the best way to move
forward with the technology. It also believes that its rights to the Neutron
Monitoring Detector will be relevant to continued research on the IEC
technology.
The Company will need to determine specific applications and potential customers
before pursuing development work because it has already identified competitors
that are able to generate confined neutron streams in at higher outputs than
what was developed by Astrium.
2. Diamond-reinforced Flywheel Battery and Radio Nuclide Battery.
The battery operates on a principle using diamond layers instead of carbon
filters to increase the power density of electro-mechanical energy storage for
batteries used in automobiles or other storage systems. This concept is based on
a rupture stress measure for present polycrystalline diamond. An increase in
storage capacity may result in the development of a satisfactory method for
storing large amounts of electrical energy for portable applications, such as
automobiles and satellites, as well as fixed appliances, such as electric power
load leveling from the individual house to the utility level. Throughout the
world, much work is being performed on improving electrochemical cells with
limited success. The hydrogen fuel cell, long used in space, is just now
receiving its first tests in motor vehicles, but offers no great improvement on
electrochemical batteries and requires a large, expensive infrastructure. Of
greatest current interest for electric automobiles is electromechanical storage
(a flywheel coupled to a motor-generator), which, with new technology promises
all the advantages of an all-electric automobile but with the performances of a
gasoline-powered automobile.
Carbon fiber technology, developed for high rotational velocity uranium
enrichment centrifuges, has been used to produce automobile prototypes. Cars
equipped with this "rotation battery" are projected to demonstrate performance
(speed and range) equal to that of a standard mid-engine automobile and quite
superior to ones with electrochemical batteries, which last only about 40,000km.
On May 30, 2000, the Company received an extensive five-volume Technical and
Business Panning and Development report on its Radionuclide Batteries for space
applications. The conclusion was that the
Noble Gas battery was neither economically feasible nor commercially viable
because of the scarcity of the required gases and the cost to produce those
gases such as Kr-85 and Ar-39.
6
The dust plasma battery was evaluated as not feasible because the Technetium-99
isotope is not a practical radioisotope because extremely large amounts would be
required for the battery. Strontium-90 would not be appropriate for commercial
use because it represents a major biological hazard.
3. Active Engine ("Rhombic Explorer"):
The Active Engine or Magnesite is a software program designed to economize on
Internet search and data download costs. It creates site directories and
translates hypertext references, making the information fully useable offline.
The development of the Magnesite is interrelated with the Company's efforts to
develop and launch the Rhombic Explorer, a personal Internet search engine.
During September, the Company and its strategic marketing partner, Vision
Magnetics, conducted quality assurance testing on the Magnesite code to ensure
product reliability and to allow for expansion of Magnesite into Magnesite Pro.
The results of the testing indicated that the program was not suitable for
marketing because of its inability to download graphics and certain web sites in
their entirety. As a result of the testing, the Company is evaluating the cost
and benefits involved in debugging the program and bringing it to the
marketplace. In conjunction with the planned marketing of Magnesite during the
third quarter, Vision Magnetics engaged programmers to create a new website for
Silverado to sell, deliver and maintain user registration and update information
as well as hard delivery of diskettes containing Magnesite code to end users.
Vision informed Silverado that it needed to obtain a marketing study in order to
determine the specifications needed for the Magnesite Pro. During the fourth
quarter of 2000, the Company engaged a programmer to debug the program in order
to prepare it for quality assurance testing.
During the first quarter of 2001, it became apparent to Silverado that there was
no cost benefit to continue developing Magnesite because of the necessary costs
to continue developing a working program, conducting marketing studies,
incurring marketing costs and incurring administrative and legal costs for
licensing and customer service. On March 14, 2001, Silverado and Vision agreed
to cancel all of their agreements with each other under a Mutual Release, Hold
Harmless and Cross Indemnification Agreement.
4. Disperse Composite Material
During the fourth quarter of 2000, the Company impaired its Disperse Composite
Material technology. The Company determined that it was not cost beneficial to
incur patent and research costs to advance the theory of the technology. Its
decision was mainly due to having identified numerous competitors with more
capital resources intending to develop comparable technologies.
5. LENR/DCM
During the fourth quarter of 2000, the Company impaired its LENR/DCM technology.
The Company determined that it was not cost beneficial to incur patent and
research costs to advance the theory of the technology. Its decision was mainly
due to having identified numerous competitors with more capital resources
intending to develop comparable technologies.
6. Diamond Film Forced Diffusion.
Silverado's negative type diamond technology, referred to as "Forced Diffusion,"
has been successfully created in a former Soviet Republic laboratory to create
functional integrated circuits. This technology consists of diffusing different
elements into diamonds. Silverado believes that Forced Diffusion has many
spin-off applications. Certain elements in diamond can change the mechanical,
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optical, and electrical properties of the material. For example, boron doping
causes diamonds to turn blue and enhances the wear resistance of the diamond and
makes a p-type conductor.
Methods of growing diamonds on a film have been accomplished by chemical vapor
deposition. Generally methane gas is used as the source of carbon and hydrogen
is used as the flux and carrier gas. Substrate temperatures are generally in the
700 - 800 Centigrade range. Several different substrates have been used for
single crystal growth. In general, diamond has very good adhesion to most
carbide forming materials. Diamond will nucleate and grow on most non-carbide
forming materials but it tends to delaminate except on nickel, molybdenum and
tungsten. Diamonds conductivity can be varied from very low values to very high
values. It has tensile strength better than that of graphite and is the most
chemically resistive material known to engineering.
Producing diamond with electronic properties is greatly superior to those of
silicon which is the material currently used for computer chips. This technology
allows for the exponential decrease of the space required for a computer
microchip. Such diamond film is considerably more heat and radiation resistant
extending the life of the electronic circuitry. Harder cutting tools and
abrasives, diamond television and computer monitor screens, sensor bearing and
radar screens are among a number of potential commercial applications of this
technology.
The research plan for this technology has four aspects. 1) attention on
understanding the forced diffusion process and how it produces n-type diamond
material with Lithium, Oxygen and Chlorine will be done; 2) an examination on
the forced diffusion of a variety of elements will be conducted; 3) a study on
how the addition of these impurities changes the mechanical, optical, chemical,
and electrical properties of the diamond; and 4) an evaluation of the electrical
characteristics of various elements put into diamond by the forced diffusion
process will be conducted.
During the year 2000, the Company targeted the development of the following four
applications of its Diamond Film Forced Diffusion technology:
1. A Silicon-Carbide purification technology for the high-tech
manufacturing industry,
2. An integrated Diamond Circuit for the computer and electronics
industry,
3. A Heavy Doped Diamond Fuel-Cell Electrode for the fuel cell industry,
4. Quality colored diamonds for the high-end jewelry accessory market.
Silverado believes that controlling impurities in Gallium Nitride "GaN" and
Silicon Carbide "SiC" is important because impurities are used to make n-type
and p-type materials. The n-type and p-type material is used to form transistors
and other structures in integrated circuits. Impurities represent an
imperfection in the crystal structure and a center for further propagation of
imperfections during the growth phase. A high quality crystal structure is
necessary in order to shrink the size of the transistors and other electrical
elements. Crystal quality is also a means of increasing the lifetime of the
integrated circuit. A second benefit of a relatively impurity free crystal
structure is in the limitation of unwanted leakage currents.
During the first quarter 2000 approximately $85,000 was spent to build three
second generation forced diffusion reactors. One reactor will be used for the
n-type diamond material, one reactor for p-type materials and the third reactor
for purification of crystals. Also, a high voltage Silicon Carbide purification
reactor was built. This reactor will enhance the impurities removal rate from
Silicon Carbide materials. Results from research during the year reduced
impurity levels for oxygen and nitrogen from 10 parts per million to .5 parts
per million. GaN is at the point where impurity levels are about one part per
million and SiC is at about the 20ppm. It is imperative that the GaN and SiC
industries continue along the path of high quality crystal production. We know
8
from the silicon industry that when the impurity levels in silicon were
decreased by one or two orders of magnitude that silicon achieved a factor of
ten improvements in chip power consumption and lifetime. We can therefore
anticipate improvements in GaN and SiC.
A specific program of work has been defined at the University of Missouri to
demonstrate the process for treating 2-inch wafers using the existing reactor
and to have designed and tested a prototype FEDOA for 6-inch GaN wafer
treatment. Development budgets for this work program are estimated at $0.5
million.
6A. Diamond Fuel Cell
Previous research over many years by the team of scientists at the University of
Missouri have developed innovations in diamond materials that have shown the
capability to replace the current polymer electrolyte membrane with diamond.
This new development in proton diamond electrode membrane (PDEM) technology may
allow high proton transport through the membrane by the process of a non-porous
structure supported by an improved anode and cathode and to which hydrogen ions
are not affected. Furthermore, a major advantage of using diamond is that it can
withstand temperatures four times greater than current membrane material.
Silverado believes that its planned PDEM could operate at higher temperatures
than current standard proton polymer electrolyte membrane (PPEM) fuel cells,
subsequently; reaction rates would be increased considerably with the platinum
content decreased by a similar factor, while manufacturing costs would be
drastically reduced. The new diamond membrane does not require moisture; whereas
current PPEM must be kept moist, thus restricting operating temperatures
In conclusion, the Diamond PDEM fuel cell may allow for higher operating
temperatures, an increased reaction rate and longevity and a much smaller fuel
cell stacked system. Reduced platinum and manufacturing costs that can provide
an opportunity to produce a fuel cell stacked system at an affordable price. The
research budget would require a minimum of $500,000 to create a working model
and approximately $1,500,000 to create prototypes with marketing plans.
6B. Coloring Gemstones
Forced diffusion technology has been demonstrated on mined diamond, diamond
films, and gahnite. Impurities were added to diamond and the results were
verified. In these studies it was found that changes occurred to the mechanical,
chemical, optical and electrical properties of diamond. The diamond became more
wear resistant, the crystal color changed to blue, and the diamond became a
p-type semiconductor. Each of these property changes has a commercial value.
Another example is that the addition of lithium to mined diamond and
polycrystalline diamond film made the diamonds an n-type conductor.
The forced diffusion process has demonstrated that the optical properties of
diamond can be changed with the addition of impurities. Mined blue diamonds are
rare; 1 in 1,000,000 diamonds is blue. Other impurities added to a diamond
crystal change its color from red to green. Modification of the optical
properties of diamond can impact the gem market. The diamond gem market is about
$4.8 billion. The colored diamond market is about $500 million. It is well known
that the rare blue diamond is more than double the cost of a white diamond. In
addition, red diamonds are the rarest gemstones known. Recently a 1/2 carat red
diamond was auctioned for the price of $1.5 million dollars.
Forced diffusion is being applied to gemstone quality Type II diamond. The goal
of this work is to demonstrate that the technology can be used to induce a color
change in the crystal. The forced diffusion process used for coloring is used
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commercially and there are numerous patents by competitors covering the area.
Silverado does not believe that it is sufficiently capitalized to pursue
commercializing its doping technology as it applies to coloring diamonds.
7. Excimer Lamp
This lamp uses a highly efficient photon emission reaction (7-50%) from excimers
to produce wavelengths of vacuum ultra violet (VUV) to visible light. An excimer
is an excited state in a molecule that dissociates into an unbound state. This
feature means that self-absorption in the lamp is small, and because of this,
the lamp can be scaled to large volumes without severe degradation of the
emission wavelength. The pioneering excimer lamp technology developed by
Columbia Research Instruments is now owned by Silverado. It efficiently
transfers the energy of electricity to microwaves and microwaves to excimers
(transfer efficiency between 50 and 90%). This technology produces light of a
pure wavelength more efficiently than any other light source. This is
significant because light is used to induce chemical reactions that are
wavelength specific. The excimer lamp is orders of magnitude more cost effective
(dollar/photon bandwidth) than anything that current technology is capable of
producing.
COMPETITION
The Company operates in the competitive environment of financial services and
financial technologies where other companies may be developing similar
technologies with substantially larger financial resources, operations, staffs,
engineers and facilities. The company's competitors include other financial
software companies, financial portals and websites as well as national mortgage
brokers, mortgage banks and banks. Failure to develop scale through internal
growth and acquisition could have material adverse effect on the Company's
future financial condition and could result in a write-off of a significant
portion of its investment in the technologies.
The Company operates in the competitive environment of developing technologies
where other companies may be developing similar technologies with substantially
larger financial resources, operations, staffs, scientists and facilities. The
Company is working toward developing prototype demonstrative models for certain
applications of its technologies. There can be no assurance that the prospects
will yield substantial economic returns or that a competitor may develop a
similar prototype and enter the marketplace ahead of Silverado. Failure to
develop applications from the technologies with an estimated economic return
could have a material adverse impact on the Company's future financial condition
and could result in a write-off of a significant portion of its investment in
the technologies.
The Company's competitors include major integrated international companies in
various industries with research and development programs. The international
companies are large, well established companies with substantially larger
operating staffs and greater capital resources than the Company's and which, in
many instances, have been engaged in the technology development arena for a much
longer time.
MARKETING
The Company's primary business focus is placed upon the acquisition and
consolidation of the highly fragmented mortgage brokerage and mortgage banking
markets. Management has extensive experience in its chosen markets and intends
to integrate the fractured market through the use of technology and gain cost
savings through economies of scale. Secondarily, Silverado will review the
commercialization of its advanced technologies and commercial products resulting
there from. The Company has limited experience in marketing of products and
services in these fields of applications for its intellectual property and
intends to rely on licensing and joint venture opportunities with companies for
the marketing and sale of its technologies. The Company also has little
experience marketing products of a consumer nature. There is no assurance that
10
the Company will be successful in developing a market for any of its products or
that it will gain any market recognition and acceptance.
PATENTS
Current patents
* Field-Enhanced Diffusion Using Optical Activation, U.S. Patent No.
5,597,762
* Microwave-Driven UV Light Source and Solid-State Laser, US Patent No.
5,659,567
* Microwave-Driven UV Light Source and Solid-State Laser, U.S. Patent
No. 5,659,567
Patent applications
* System and Method for Network Based Information Retrieval (Magnesite),
U.S. Patent App. No. 60/240,770
* Compact Power Technology Using Photon-Intermediate Direct Conversion
of Radioisotope Energy to Electricity, U.S. Patent App. No. 60/223,869
* System and Method for Diamond Based Fuel Cells, U.S. Patent App. No.
60/241,097
* System and Method for Diamond Based Fuel Cells, Docket No.
790072.408P2
* System and Method for Conductive Diamond and Ohmic Contacts 60/251,823
* System and Method for Conductive Diamond and Ohmic Contacts 60/255,686
* System and Method for Removal of Impurities From Materials Such as
Semi-conductors, Docket No. 790072.411P1
* System and Method for Removal of Impurities from Materials Such as
Semi-conductors, Docket No. 790072.411P1
Patent applications terminated
* Super Compact Radio Nuclide Battery Docket No. 790072.401
* Low-cost Elimination of Long-lived Nuclear Waste, U.S. App. 09/013,179
* Method and System for Manufacturing Disperse Composite Materials,
International Patent Application No. PCT/US99/16552.
EMPLOYEES
The Company currently has two employees.
RISK FACTORS
NO REVENUES, OPERATING LOSS. The Company has no Revenues and is Currently
Operating at a Loss. The Company will need to raise additional capital through
the placement of its securities or from debt or equity financing. If the Company
is not able to raise such financing or obtain alternative sources of funding,
management will be required to curtail operations. There is no assurance that
the Company will be able to continue to operate if additional sales of its
securities cannot be generated or other sources of financing located.
LIMITED HISTORY OF OPERATIONS. The Company has only a limited history of
operations. The Company operations are subject to the risks and competition
inherent in the establishment of a relatively new business enterprise in a
highly competitive field of technology transfer. There can be no assurance that
future operations will be profitable. Revenues and profits, if any, will depend
11
upon various factors, including market acceptance of its products and
technologies, market awareness, its ability to promptly and accurately recognize
a marketable technology or invention, dependability of an advertising and
recruiting network, and general economic conditions. There is no assurance that
the Company will achieve its expansion goals and the failure to achieve such
goals would have an adverse impact on it.
NEED FOR ADDITIONAL FUNDING. The Company May Need Additional Financing. Future
events, including the problems, delays, expenses and difficulties frequently
encountered by startup companies may lead to cost increases that could make the
Company's source of funds insufficient to fund the Company's proposed
operations. The Company may seek additional sources of capital, including an
additional offering of its equity securities, an offering of debt securities or
obtaining financing through a bank or other entity. The Company has not
established a limit as to the amount of debt it may incur nor has it adopted a
ratio of its equity to a debt allowance. If the Company needs to obtain
additional financing, there is no assurance that financing will be available,
from any source, or that it will be available on terms acceptable to the
Company, or that any future offering of securities will be successful. The
Company could suffer adverse consequences if it is unable to obtain additional
capital when needed.
TRADEMARK PROTECTION AND PROPRIETARY MARKS. The Company may continue pursuing
patents and several pending patents as a result for its intellectual property.
There is no assurance that the Company will be able to prevent competitors from
using the same or similar names, marks, concepts or appearances or that it will
have the financial resources necessary to protect its marks against infringing
use.
OBSOLESCENCE OF INTELLECTUAL PROPERTY. The Company's Intellectual Property and
Inventions May Become Obsolete. Patent review is usually a lengthy, tedious and
expensive process that may take months or, perhaps, several years to complete.
With the current rate of technology development and its proliferation throughout
the world, those inventions may become commercially obsolete during or after the
patent review. There is no assurance that the Company's intellectual property,
acquired or developed, may not become obsolete and remain commercially viable.
FAILURE TO OBTAIN PATENTS. The Company May Fail to Obtain Patent Protection in
Various Jurisdictions. The Company has filed patent applications in several
jurisdictions, including Japan, Korea, and the United States. The filing process
is usually a costly and time-consuming undertaking requiring proper legal
counsel under the laws of the jurisdiction where patent protection is sought.
There is no assurance that those patent protection filings were properly and
timely made. There is also no assurance that upon review, those applications may
not be rejected for lack of novelty or any other bases sufficient to reject a
pending patent application in any of those jurisdictions.
COMMERCIAL VIABILITY OF THE COMPANY'S CURRENT TECHNOLOGIES. The Company was
organized to identify, assess, acquire and capitalize on technologies introduced
and developed by scientists throughout the world. These technologies are new and
in their research and development stage. Generally, it requires substantial time
and resources to be able to both recognize a commercially successful technology
or invention at an early stage and conduct a successful marketing campaign to
sell this technology or invention. There is no assurance that all or any of the
Company's research and development efforts will result in commercially viable
final products.
LACK OF INTEREST IN ACQUIRED TECHNOLOGIES. The Company may fail to generate
sufficient interest in acquired technologies. The Company must undertake
substantial effort to educate the buying public, consumers and businesses, in
the U.S. and worldwide, as to the Company's products and technologies. There is
no assurance that the Company will be able to generate interest in and to create
and maintain steady demand for its products over time.
12
RELIANCE ON FUTURE ACQUISITIONS STRATEGY. The Company expects to continue to
rely on acquisitions as a primary component of its growth strategy. It regularly
engages in evaluations of potential target candidates, including evaluations
relating to acquisitions that may be material in size and/or scope. There is no
assurance that the Company will continue to be able to identify potentially
successful companies that provide suitable acquisition opportunities or that the
Company will be able to acquire any such companies on favorable terms. Also,
acquisitions involve a number of special risks including the diversion of
management's attention, assimilation of the personnel and operations of the
acquired companies, and possible loss of key employees. There is no assurance
that the acquired companies will be able to successfully integrate into the
Company's existing infrastructure or to operate profitably. There is also no
assurance given as to the Company's ability to obtain adequate funding to
complete any contemplated acquisition or that any such acquisition will succeed
in enhancing the Company's business and will not ultimately have an adverse
effect on the Company's business and operations.
POSSIBLE INABILITY TO FINANCE ACQUISITIONS. In transactions in which the Company
agrees to make an acquisition for cash, it will have to locate financing from
third-party sources such as banks or other lending sources or it will have to
raise cash through the sale of its securities. There is no assurance that such
funding will be available to the Company when required to close a transaction or
if available on terms acceptable to the Company.
LOSS OF KEY PERSONNEL. The loss of the company's key directors may adversely
affect growth objectives. The Company's success in achieving its growth
objectives depends upon the efforts of its directors. Their experience and
industry-wide contacts significantly benefit the Company. The loss of the
services of any of these individuals may have a material adverse effect on the
Company business, financial condition and results of operations. There is no
assurance that the Company will be able to maintain and achieve its growth
objectives should it lose any or all of these individuals' services.
FAILURE TO ATTRACT QUALIFIED PERSONNEL. A change in labor market conditions that
either further reduces the availability of employees or increases significantly
the cost of labor could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's business
growth is dependent upon its ability to attract and retain qualified research
personnel, administrators and corporate management. There is no assurance that
the Company will be able to employ a sufficient number of qualified training
personnel in order to achieve its growth objectives.
DILUTION. Issuance of Future Shares May Dilute Investors Share Value. The
Certificate of Incorporation of the Company authorizes the issuance of
70,000,000 shares of common stock and 5,000,000 shares of preferred stock. The
future issuance of all or part of the remaining authorized common or preferred
stock may result in substantial dilution in the percentage of the Company's
common stock held by the its then existing shareholders. Moreover, any common
stock issued in the future may be valued on an arbitrary basis by the Company.
The issuance of the Company's shares for future services or acquisitions or
other corporate actions may have the effect of diluting the value of the shares
held by investors, and might have an adverse effect on any trading market for
the Company's common stock.
PENNY STOCK REGULATION. The Company's common stock is deemed to be a penny
stock. Penny stocks generally are equity securities with a price of less than
$5.00 per share other than securities registered on certain national securities
exchanges or quoted on the NASDAQ Stock Market, provided that current price and
volume information with respect to transactions in such securities is provided
by the exchange or system. The Company's securities may be subject to "penny
stock rules" that impose additional sales practice requirements on
broker-dealers who sell such 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 such securities and have
13
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the "penny stock rules" require the delivery, prior to the transaction,
of a disclosure schedule prescribed by the 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. Consequently, the
"penny stock rules" may restrict the ability of broker-dealers to sell the
Company's securities. The foregoing required penny stock restrictions will not
apply to the Company's securities if such securities maintain a market price of
$5.00 or greater. There can be no assurance that the price of the Company's
securities will reach or maintain such a level.
ITEM 2. PROPERTIES
PROPERTY
The Company has a two-year lease commitment for its corporate and sales office
located at 1475 S. Bascom Avenue, Suite 210, Campbell, CA 95008
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
GENERAL
The Company has an authorized capitalization of 100,000,000 shares of common
stock and 5,000,000 shares of preferred stock, $0.001 par value per share of
which 54,173,936 were issued and outstanding at April 7, 2003. On April 3, 2003
the Company increased the common shares authorized to 100,000,000 shares and the
preferred stock to 5,000,000 shares.
MARKET INFORMATION
The Company's common stock is traded in the over-the-counter market on the OTC
Bulletin Board under the symbol "NUKE". The following table sets forth the range
of high and low bid quotes of the Company's Common Stock per calendar quarter
which reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
2002
-------------
Low High
--- ----
Fourth quarter $0.04 $0.17
Third quarter $0.02 $0.17
Second quarter $0.02 $0.05
First quarter $0.02 $0.06
14
2001
-------------
Low High
--- ----
Fourth quarter $0.05 $0.16
Third quarter $0.09 $0.21
Second quarter $0.15 $0.28
First quarter $0.16 $0.48
On March 10, 2000 the Company's common shares began trading on the Hamburg Stock
Exchange in Hamburg, Germany under the symbol "919335".
HOLDERS
As of February 10, 2003, the Company had 53,073,936 shares of common stock
outstanding. A total of approximately 289 shareholders of record held a total of
approximately 31,659,907 common shares. The Company estimates the remaining
21,414,029 common shares in street name to be held by over 400 additional
individual shareholders.
DIVIDENDS
The Company has never declared or paid cash dividends on its common stock and
anticipates that future earnings, if any, will be retained for development of
its business. Payment of cash dividends in the future will be wholly dependent
upon the Company's earnings, financial condition, capital requirements and other
factors deemed relevant by them. It is not likely that cash dividends will be
paid in the foreseeable future. In the event of the acquisition of or merger
with a business by the Company, control of the Company and its Board of
Directors may pass to others. In that event, the payment of dividends would be
wholly dependent upon such persons.
ITEM 6. MANAGEMENT'S PLAN OF OPERATION
In the following discussion we are providing an analysis of our financial
condition and Plan of Operation during the next quarter and the balance of the
fiscal year. This discussion should be read in conjunction with our financial
statements and the notes thereto. Certain matters discussed below are based on
potential future circumstances and developments, which the Company anticipates,
but which cannot be assured. Such forward-looking statements include, but are
not limited to, seeking a revenue generating business to acquire and conducting
research and development on the Excimer Lamp within the Company and in
conjunction with joint venture partners.
The competition in the technology proliferation and transfer market is highly
intense and is based on product and technology recognition and acceptance,
novelty and marketability of an invention, price, and sales expertise. The
Company has refocused its primary emphasis on developing a cash-flow business in
the mortgage brokerage and mortgage banking markets. Silverado intends to pursue
a consolidation strategy in the highly fragmented mortgage industry to take
advantage of certain changes to the real estate procedures and settlement act
(RESPA), which the company's management believes will fundamentally change the
industry as it currently exits. These changes will eventually force an industry
consolidation and the economies of scale, which will result. These changes will
also make it more important then ever that the brokerage community has immediate
access to pertinent information from its lending sources.
Silverado Financial is a multifaceted finance and technology company focusing on
mortgage lending, consumer lending and software technology related to the
finance and lending industry. Silverado has developed the backbone of its
15
proprietary, Internet based, software product targeted at interlinking
independent real estate and mortgage professionals with Silverado's mortgage
bank and consumer lending group. Silverado calls its platform Financenter.
Financenter organizes, tracks, and helps to proactively manage the lending
process with leading-edge technology and financial tools and provides a
transaction platform that becomes a robust e-commerce site, designed to serve
the needs of mortgage brokers, real estate agents, consumers, lenders and
property owners.
Financenter makes it possible for mortgage and real estate professionals to
manage more clients, reduce overhead, and increase the level of service they
provide. Financenter networks Silverado's operating subsidiaries and strategic
partnership alliances, allowing multiple broker/advisor and client collaboration
in a securely networked real time environment. Loan brokerage organizations
receive unlimited service from Silverado in exchange for the ability to provide
loans to their clients, or the organization can opt for a fee-for-service
contract where their clients receive access through a model interlinked with
their lending advisor.
Silverado's vision is to build the premier loan distribution network, providing
a broad range of financial products and services to its clientele.
Silverado's purpose is to consolidate those consumer lending, mortgage brokerage
and mortgage banking entrepreneurs who (a) believe that the size and scale of an
operation are important to the future of their business, (b) desire to retain
the independent operation of their business and continue to grow it, and (c)
wish to capitalize some portion of the value of their business. Silverado will
use its Financenter platform to create a community with its acquired companies
and to foster cross selling and integration.
Silverado will provide three basic benefits to its companies - the ability to
compete, capitalize and control. The result is the marriage of entrepreneurial
energy and public capital resulting in the creation of the premier loan
distribution system providing a broad range of financial products and services
to its clientele.
Silverado capitalizes itself through the sale of its public stock to purchase a
portion of the economics of each business for a combination of stock and cash.
Although 100% of the stock in the acquired business will be purchased, only a
portion of the economics will be purchased. A management agreement provides the
management of the acquired company the entrepreneurial freedom, economic
ownership and upside in the future of the firm. Only established businesses in
the mortgage brokerage and mortgage banking markets are purchased. Each
continues to operate in a highly independent and entrepreneurial style.
Based upon the assumption of earnings acquired and internal growth rate, the
goals for Silverado in pre-tax cash flow are:
Year 1 $1,500,000
Year 2 $4,500,000
Year 3 $9,000,000
Silverado's strategy results in the widespread ownership of the Company by the
"best and brightest" in the lending industry and a responsive, well capitalized
company with significant growth, both internally and externally.
16
In order to achieve its growth objectives, Silverado is focused on adding value
to its acquired firms by providing access to capital, leading edge technology
and internal loan and mortgage products. In addition, Silverado's Financenter
platform will create a community for firms to build relationships, share ideas
and develop synergies that lead to new business opportunities and increased
revenue.
As a public company Silverado makes employee ownership through incentive stock
options an important aspect of its hiring and retention policy as well as an
incentive for increased and above average revenue production. Each acquired
company must take at least 25% of the purchase price in restricted stock as part
of the transaction.
The retention of quality people at the acquired firms is a key to success in the
high growth consolidation environment. Today, there are well over 85 public
companies in 25 separate industries, which are viewed as "consolidators".
To date, the Company has not generated any revenues from any of its acquired
intellectual property except minimal royalties from Daimler Benz from the IEC
Technology. Silverado is currently a development stage company and is operating
at a loss. None of the technologies have been developed to commercialization.
The Company is not able to determine an approximate date for commercialization
of any of its intellectual property at this time. No assurances can be given
that any of the Company's intellectual property will ever be developed to a
point of usefulness or, if developed, that any will be commercially feasible.
Development of its intellectual property may be possible through joint ventures
where Silverado contributes its intellectual property for an ownership
percentage in a joint venture and the other joint venture partner's pay all
costs.
With the acquisition of Financial Software, Inc. (FSI) Silverado obtained three
subscription based web-sites and a proprietary software platform all targeted at
the financial services industry. Silverado hired Michael Grabelsky to manage the
e-publishing and website content for FSI and to further develop the websites as
institutional subscription services.
The first site has been reworked as Silverado Financial News (the Reporter) and
provides up to date information to institutions on up and coming Micro-Cap
companies. FSI is currently signing up subscribers for the Reporter and has
begun work on a new site targeted at real estate and mortgage professionals. We
anticipate a positive income stream by second quarter of 2003.
The acquired software will be developed into a portal and internal employees
will have access to all the work modules as well as the subscription based
website services. The software will be used to interlink Silverado's mortgage
brokers, mortgage banking operations, suppliers and customers via the internet
and an internal intranet.
The acquisition of FSI creates both a cash flow operation from the website
operations as well as moves the company ahead with cutting edge internal support
technology.
Silverado's plan during the next twelve months is to acquire revenue producing
mortgage brokerage operations and further develop the technology and websites
acquired through the FSI acquisition.
The Company currently has no options outstanding from which it could obtain
cash; however, it is not possible that the Silverado could obtain cash from
outstanding warrants. If all outstanding warrants were exercised, the Company
would receive $29,250 in cash from the issuance of 325,000 shares.
17
During 2002 it impaired the carrying value of the Excimer Lamp by $276,250
because the carrying value exceeded the projected future discounted cash flows.
At December 31, 2002 the Company had $561 in cash and $167,100 in current
liabilities of which $55,000 was owed to affiliates. At December 31, 2001 the
Company had $ 9,100 in cash and $ 49,092 in current payables. Silverado may be
able to settle the majority of the debt with its common shares; however, it
currently has no source of income.
ITEM 7. FINANCIAL STATEMENTS
The following financial information is filed as part of this report:
REPORT OF INDEPENDENT AUDITORS F-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2002 AND 2001 F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE
YEARS ENDED DECEMBER 31, 2002 AND 2001 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2001 AND 2001 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 - F-17
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
The Company had no disagreements on accounting and financial disclosures with
its independent auditors during the reporting period.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth the names and ages of the current directors and
executive officers of the Company, the principal offices and positions with the
Company held by each person and the date such person became a director or
executive officer of the Company. Each serves until the next annual meeting of
the stockholders.
Name of Executive
Officers & Directors Age Title Since
-------------------- --- ----- -----
R.G. Krushnisky 41 Director 01/01/1995
Albert Golusin 48 C.F.O & Chairman of the Board 02/05/1999
John Hartman 37 President, CEO & Director 09/26/2002
Ilija (Sean) Radetich 34 Director 01/10/2003
R.G. Krushnisky, Director of the Company. Mr. Krushnisky served as past
President of Rockford Technology Corporation which is a Canadian company
involved in Hydrogeneration plants. Since 1984, Mr. Krushnisky has been the
owner and operator of International Laser Games, Ltd., a British Columbia,
Canada, and coin-operated arcade machinery business. Mr. Krushnisky is a
graduate of the United States International University at San Diego with a
Bachelor Science degree in Business and International Commerce
18
Albert Golusin, Chief Financial Officer, Chairman of the Board and Director, is
a Certified Public Accountant in Phoenix, Arizona. Since 1992, Mr. Golusin has
been in private practice as an accounting consultant to public companies. He has
also served as a controller for Glenayre Electronics, a NASDAQ company, from
1984 - 1991. From 1983 to 1984, Mr. Golusin worked for Kenneth Leventhal &
Company. From 1979 to 1981, Mr. Golusin worked for the international accounting
firm of Grant Thornton & Company. Mr. Golusin graduated from Brigham Young
University in 1978. Mr. Golusin worked full-time for Silverado during part of
2000 and has continued working on a part-time basis.
John Hartman is President, Chief Executive Officer and a member of the Board of
Directors of Rhombic Corporation. Prior to joining Rhombic, Mr. Hartman was
Chief Executive Officer and Chairman of the Board for NEXT Advisors, Inc. in San
Jose California. While CEO of NEXT Advisors he was responsible for raising over
$4.5M in funding for the development of its proprietary technology, the creation
of a residential and commercial lending division, and a futures brokerage. Mr.
Hartman also completed three acquisitions on behalf of NEXT including an on-line
securities brokerage, ATradeUSA.com, an insurance brokerage and a traditional
securities brokerage. Before joining NEXT Advisors, Inc., Mr. Hartman was
Managing Partner of Hartman and Kauffman, which was subsequently merged into
NEXT Advisors. As the Managing Partner of Hartman & Kauffman he increased the
gross sales of the San Jose office 400% and grew the sales force from 2 to 30.
From 1995 to January 1999, Mr. Hartman was a Financial Advisor with Morgan
Stanley. Prior to beginning his career at Morgan Stanley, he was a Partner of
Realty Capital Partners of Scotts Valley, California. Prior to Realty Capital
Partners, he held several positions with Grubb & Ellis and Company, a commercial
real estate firm headquartered in San Francisco, California. He received his
Masters in Business Administration (MBA) from California Coast University in
Santa Ana, California and Bachelor of Science Degree in Business Administration
from San Jose State University in San Jose, California.
Ilja (Sean) Radetich has over 12 years of hands-on experience in investment
banking and corporate finance, and has spent his professional career identifying
and working with emerging growth companies. In that time, his main focus has
been on PIPE (Private Investment in Public Equities) financings. His PIPE
experience includes straight equity, convertible preferred equity, convertible
debenture and subordinated debentures of NASDAQ/AMEX, OTCBB, and foreign
securities. Since 1991 Sean has structured and negotiated the risk capital
investments for some of Europe's largest banks and asset management
institutions. Sean is the founder and managing director of Odyssey Advisors LLC,
an investment firm specializing in PIPE financing. Sean also has worked for LBI
Group and SBC Warburg in the Private Placement Divisions. Over the past 10 years
Sean has identified and developed key financial advisory relationships with
public and private firms including Wall Street Web, eLiberation, Clearworks
Technologies, CyberMerchants Exchange and Cekatel, and has managed transactions
for them including PIPE's, private company investments, and secondary offerings.
In addition to investment banking, Sean served as Chief Financial Officer for
WebCash Corporation, a B2B infrastructure company backed by Berg McAfee and
Silicon Valley Angel Fund, and presently in acquisition negotiations. Sean is
currently active on several boards, including Navigate Network, GoNet2k board of
directors, and Wall Street Web board of advisors. Sean received his B.S. in
International Economics from the University of Oldenburg, Germany, and attended
the Haas School of Business, University of California at Berkeley.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the compensation
paid by the Company for services rendered in all capacities to the Company for
the three fiscal years ended December 31, 2002, 2001 and 2000 of the chief
executive officer at December 31, 2002 and all officers and directors, as a
group.
19
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards
Restricted Securities
Other Annual Stock Underlying All Other
Name and Principle Position Year Salary($) Bonus($) Compensation($) Award(s)($) Options/SARs(#) Compensation($)
--------------------------- ---- --------- -------- --------------- ----------- --------------- ---------------
John E. Hartman, CEO (4) 2002 -0- -0- None $15,000 None None
2001 -0- -0- None None None None
2000 -0- -0- None None None None
Albert Golusin, CEO (3) 2002 -0- -0- None $48,153 None None
2001 -0- -0- None None None None
2000 -0- -0- None None None None
Roger Duffield, CEO (2) 2002 -0- -0- None None None None
2001 $70,000 -0- $10,000 None None None
2000 $50,000 $50,000 (2) $12,500 None None None
William L Owen CEO (1) 2002 -0- -0- None None None None
2001 -0- -0- None None None None
2000 -0- -0- $60,000 None None None
All Officers & Directors,
as a group (five persons)
(3) (4) (5) (6) (7) 2002 -0- -0- None $85,675 None None
2001 $145,000 -0- $46,000 None (4) None
2000 $40,000 $50,000 $60,450 None None None
----------
(1) William Larry Owen, was compensated by Owen & Associates through an
agreement with the Company to provide office and administrative support for
$7,500 a month. He served as the President of the Company from inception until
April 2000 in which he then became the Chairman until his retirement on July 26,
2000.
(2) During the year 2000, Roger Duffield provided services as a consultant and
received $12,500 in cash for such services. On August 1, 2000 Mr. Duffield
became the President and Chief Executive Officer and received 50,000 shares of
restricted stock at a deemed value of $50,000 as a signing bonus. During the
remaining part of 2000 he received $50,000 in cash. During the year 2001, the
Company issued 125,000 restricted common shares at a deemed value of $10,000 to
reimburse him for moving expenses.
(3) Albert Golusin, Chief Financial Officer and Director of the Company,
provided his services on a part-time basis during 2000 until September 1, 2000.
During the year 2000, he received $20,000 in cash for services and 25,000 shares
at a deemed value of $30,563 for office expenses. During 2001, Mr. Golusin
received $60,000 in cash for his services. During 2002 he served as the Chief
Financial Officer and the Chief Executive Officer from January 1, 2002 to
September 25, 2002. During 2002 he received 1,189,156 restricted common shares
at a deemed value of $48,153.
(4) John Hartman became the Chief Executive Officer on September 26, 2002.
During 2002 he received 238,610 restricted common shares at a deemed value of
$15,000.
(5) R.G. Krushnisky, Vice President and Director of the Company, provides his
consulting services on a part-time basis. During 2000, he received $20,000.
During 2000 he exercised an option and purchased 100,000 shares for $100,000.
During 2001, Mr. Krushnisky received $15,000 for services as a Vice President.
He also earned $18,000 for director fees during 2001. During 2002 he received
304,532 restricted common shares at a deemed value of $15,261.
(6) Stanley Porayko, Secretary and Director of the Company, provides his
consulting services on a part-time basis. He did not receive any shares during
2000 for services. He received $450 for his participation in board meetings
during the year 2000. During 2001, he earned $18,000 in director fees. During
2002, he received 181,532 restricted common shares at a deemed value of $7,261.
20
(7) All of the current directors collectively had an option to purchase
1,000,000 shares at $0.50 per share until June 30, 2002 and did not exercise
their option. The options expired and the directors and officers did not have
any options outstanding at December 31, 2002.
There are no current plans to pay cash or stock dividends on the Company's
stock.
VALUE OF OPTIONS AT DECEMBER 31, 2002
The Company had no options outstanding from which it could obtain cash as of
December 31, 2002.
During 2002 the Company had a total of 2,000,000 options expire at an average
exercise price of $ 0.86 per share. The exercise prices range from $0.50 to
$4.50. No options were exercised ; therefore, the Company did not receive any
cash.
OPTION GRANTS IN THE LAST FISCAL YEAR
The Company granted no options during 2002:
STOCK OPTION PLAN
The Board of Directors of the Company has approved its year 2000 Incentive Stock
Option Plan ("Plan") that authorizes the Company to grant incentive stock
options. The Plan relates to a total of 2,500,000 shares of common stock
including all unexercised options from prior plans. All options which may be
outstanding at any point in time must be exercised no later than three months
after termination of employment or service as a director, except that any
optionee who is unable to continue employment or service as a director due to
total and permanent disability may exercise such options within one year of
termination and the options of an optionee who is employed or disabled and who
dies must be exercised within one year after the date of death.
The Plan is to be administered by the Company's Board of Directors or a
committee thereof which determines the terms of options granted, including the
exercise price, the number of shares of common stock subject to the option, and
the terms and conditions of exercise. Options granted under the plan are
transferable by the optionee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information, as of March 31, 2003, regarding the
shareholdings of (1) The Company's current directors and executive officers, (2)
those persons or entities who beneficially own more than 5% of its common stock
and (3) all of the directors and executive officers as a group (giving effect to
the exercise of the warrants held by each such person or entity). Unless
otherwise indicated, the person or entity listed in the table is the beneficial
owner of the shares and has sole voting and investment power with respect to the
share indicated:
21
Number of shares Percent of
Common Stock Common Stock
Name Beneficially Owned Beneficially Owned(1)
---- ------------------ ---------------------
John Hartman
Chief Executive Officer, Director
1475 South Bascom Ave. # 210
Campbell, CA. 95008-0629 238,610 0.44%
Albert Golusin (1)
Chief Financial Officer, Director
10641 North 44th Street
Phoenix, Arizona 85028 1,489,156 2.75%
R.G. Krushnisky
Director
93 English Bluff Road
Tsawwassen, British Columbia
Canada V4M 2M4 1,154,532 2.13%
Ilya (Sean) Radetich
Director
1475 South Bascom Ave. # 210
Campbell, CA. 95008-0629 143,000 0.26%
Total shares owned by Directors and
Officers of the Company (4 persons) 3,025,298 5.58%
----------
(1) Based upon 54,173,936 outstanding shares of common stock. There were no
options outstanding at March 31, 2003.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On April 8, 2003 the company entered into a binding Letter of Intent with Realty
Capital Corporation whereby the Company will acquire Realty Capital Corporation
for a purchase to be determined by the net asset value of Realty Capital as
determined by an independent, third party valuation. The transaction is subject
to receipt by the Company of said valuation as well as financial statements and
the affirmative vote of the majority of the shareholders. Realty Capital
Corporation is majority controlled by the President of Silverado Financial,
Inc., John E. Hartman and his spouse.
On December 18, 2002, the Company entered into a memorandum of understanding
with Realty Capital Corporation whereby Realty Capital Corporation would utilize
office space and telephone services at the company's offices in Campbell,
California in exchange for payment of $15,000 per month. Realty Capital
Corporation is majority controlled by the President of Silverado Financial,
Inc., John E. Hartman and his spouse.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The following exhibits required by Item 601 to be filed herewith
are incorporated by reference to previously filed documents:
22
Exhibit No. Description and Method of Filing
----------- --------------------------------
2.1 The Agreement and Plan of Reorganization between Rhombic
Corporation and Emerald Acquisition Corporation filed in an 8-K on
January 21, 2000.
3.1 Certificate of Incorporation of Emerald Acquisition Corporation
filed on December 3, 1999 in the Form 10SB
3.2 The corporate by-laws filed on December 3, 1999 in the Form 10SB
10.1 Stock Option Plan filed in the 10-QSB on May 17, 2000.
10.2 Letter Agreement to purchase Financial Software Inc., dated
November 15, 2002, incorporated by reference to Exhibit 10.1 to
Form 8-K dated November 26, 2002.
10.3 Audited financial statements of Financial Software Inc. through
April 30, 2002 and 2001, respectively, and unaudited statements
through October 31, 2002, incorporated by reference to Form 8-K/A
dated February 6, 2003.
21.1 Subsidiary of the Registrant on Exhibit 21.1 on Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 2002.
23.1 Consent of Auditor
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) REPORTS ON FORM 8-K
1 Form 8-K dated October 11, 2002 relating to change of control of
registrant.
2 Form 8-K dated November 26, 2002 relating to purchase of Financial
Software, Inc.
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures (as defined in Rule
13a-14 of the Exchange Act) that are designed to ensure that information
required to be disclosed in the Company's Exchange Act report is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and that such information is accumulated and communicated
to the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and management necessarily was required
to apply its judgment in the evaluating the cost-benefit relationship of
possible controls and procedures.
Within 90 days prior to the filing date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation if the Company
disclosure controls and procedures. Based on the foregoing, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
the factors that could significantly affect the internal controls subsequent to
the date the company completed its evaluation.
23
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SILVERADO FINANCIAL, INC. (formerly Rhombic Corporation)
Date: April 14, 2003 By /s/ John E. Hartman
----------------------------------------
John E. Hartman, Chief Executive Officer
Date: April 14, 2003 By /s/ Albert Golusin
----------------------------------------
Albert Golusin, Principal Accounting Officer
In accordance with the Exchange Act, the report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.
Date: April 14, 2003 By /s/ John E. Hartman
----------------------------------------
John E. Hartman, Director
Date: April 14, 2003 By /s/ Albert Golusin
----------------------------------------
Albert Golusin, Director
Date: April 14, 2003 By /s/ Ilja (Sean) Radetich
----------------------------------------
Ilja (Sean) Radetich, Director
Date: April 14, 2003 By /s/ R.G. Krushnisky
----------------------------------------
R.G. Krushnisky, Director
24
CERTIFICATION
I, John E. Hartman, Chief Executive Officer of Silverado Financial, Inc.,
formerly Rhombic Corporation, certify that:
1) I have reviewed this annual report on Form 10-KSB of Silverado Financial,
Inc., formerly Rhombic Corporation;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 14, 2003 By /s/ John E. Hartman
----------------------------------------
John E. Hartman, Chief Executive Officer
25
CERTIFICATION
I, Albert A. Golusin, Chief Financial Officer of Silverado Financial, Inc.,
formerly Rhombic Corporation , certify that:
1) I have reviewed this annual report on Form 10-KSB of Silverado Financial,
Inc., formerly Rhombic Corporation,;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 14, 2003 By /s/ Albert Golusin
----------------------------------------
Albert Golusin, Chief Financial Officer
26
SILVERADO FINANCIAL, INC.
(formerly Rhombic Corporation)
(A DEVELOPMENT STAGE COMPANY)
December 31, 2002
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT AUDITORS F-2
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2002 F-3
CONSOLIDATED STATEMENTS OF OPERATION FOR THE YEARS ENDED
DECEMBER 31, 2002 AND 2001 F-4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 F-5
CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE YEARS ENDED
DECEMBER 31, 2001 AND 2001 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 - F-17
F-1
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors of
SILVERADO FINANCIAL, INC.
(formerly Rhombic Corporation):
We have audited the accompanying consolidated balance sheets of Silverado
Financial, Inc., formerly Rhombic Corporation, (a Development Stage Company) and
subsidiaries as of December 31, 2002, and the related consolidated statements of
operations, stockholders' equity and cash flows for the two years then ended and
the period from inception to December 31, 2002. These 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 audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Silverado Financial, Inc.,
formerly Rhombic Corporation, and its consolidated subsidiaries as of December
31, 2002, and the results of their operations and cash flows for the two years
then ended and the period from inception to December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
As disclosed in Note 1, the accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced material operating losses and has yet to commence significant
revenue producing operations. Ultimate realization of material investments in
intellectual properties is uncertain. These and other conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern.
/s/ James C. Marshall, CPA, P.C
Scottsdale, Arizona
April 14, 2003
F-2
SILVERADO FINANCIAL, INC.
(formerly Rhombic Corporation)
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31,
2002
-----------
ASSETS
CURRENT ASSETS
Cash $ 561
Receivables 12,627
Total Current Assets 13,188
-----------
OTHER ASSETS
Investments 53,692
Intellectual property 1,403,028
Patents 734
Other 8,803
-----------
Total assets $ 1,479,445
===========
LIABILITIES
CURRENT LIABILITIES
Accounts Payable $ 109,008
Accrued interest 3,092
Due to affiliates 55,000
-----------
Total Current Liabilities $ 167,100
OTHER LIABILITIES
Convertible notes payable 26,000
Note payable 275,000
-----------
Total liabilities 468,100
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value,
1,000,000 shares authorized, none issued --
Common stock, $0.001 par value, 70,000,000 shares
authorized, 52,000,000 and 28,697,042 issued and
outstanding at December 31, 2002 and 2001 52,000
Additional paid-in capital 9,574,427
(Deficit) accumulated during the development stage (8,622,481)
Net unrealized holding gain on available for sale securities 7,399
-----------
Total stockholders' equity 1,011,345
-----------
Total liabilities and stockholders' equity $ 1,479,445
===========
See accompanying notes to these consolidated financial statements.
F-3
SILVERADO FINANCIAL, INC.
(formerly Rhombic Corporation)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATION
For the 12 months ended Cumulative from
December 31, November 21, 1994
--------------------------------- (Inception) to
2002 2001 December 31, 2002
------------ ------------ -----------------
REVENUES
Revenue $ 7,500 $ -- $ 13,229
Interest income 80 6,954
------------ ------------ ------------
7,500 80 20,183
EXPENSES
Research and development expense (9,184) 12,159 688,563
Write down on intellectual property 276,250 404,158 2,168,038
Legal and accounting 54,420 164,055 795,738
Consulting, related party -- 1,294 368,294
Consulting -- 37,375 2,876,830
Interest expense 6,820 6,820
Other general and administrative 82,167 291,329 1,665,917
------------ ------------ ------------
Total Expenses 410,473 910,370 8,570,200
Net (loss) from operations (402,973) (910,290) (8,550,017)
OTHER REVENUES & EXPENSES
(Loss) on sale of investments -- (72,464) (72,464)
------------ ------------ ------------
NET (LOSS) $ (402,973) $ (982,754) $ (8,622,481)
============ ============ ============
NET (LOSS) PER SHARE:
Basic $ (0.01) $ (0.04)
============ ============
Diluted $ (0.01) $ (0.04)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 31,949,226 27,097,894
============ ============
Diluted 31,949,226 27,097,894
============ ============
See accompanying notes to these consolidated financial statements.
F-4
SILVERADO FINANCIAL, INC.
(formerly Rhombic Corporation)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Net
(Deficit) Unrealized
Accumulated Holding loss
Common Stock Additional During on available
------------------------ Paid-In Development for sale
Shares Amount Capital Stage securities Total
------ ------ ------- ----- ---------- -----
Balance at December 31, 1999 24,741,100 $ 24,741 $ 4,589,750 $(2,078,855) $ 0 $2,535,636
Acquisition of Excimer lamp technology 100,000 100 281,150 281,250
Acquisition of LENR/DCM intellectual property 100,000 100 194,150 194,250
Shares issued to acquire Emerald Investments 200,000 200 (200) 0
Shares issued for services 775,000 775 2,671,810 2,672,585
Exercise of stock options 370,000 370 306,880 307,250
Net (loss) (5,157,899) (5,157,899)
----------- ----------- ----------- ----------- ------- ----------
Balance at December 31, 2000 26,286,100 $ 26,286 $ 8,043,540 $(7,236,754) $ 0 $ 833,072
Shares issued for services 1,244,800 1,245 210,255 211,500
Shares issued under convertible debenture 1,166,142 1,166 198,834 200,000
Net unrealized holding loss on (7,476) (7,476)
available for sale securities 0
Net (loss) (982,754) (982,754)
----------- ----------- ----------- ----------- ------- ----------
Balance at December 31, 2001 28,697,042 $ 28,697 $ 8,452,629 $(8,219,508) $(7,476) $ 254,342
Shares issued for services 1,302,958 1,303 53,895 55,198
Shares issued for Financial Software Inc. 22,000,000 22,000 1,067,903 1,089,903
Net unrealized holding gain on
available for sale securities 14,875 14,875
Net (loss) (402,973) (402,973)
----------- ----------- ----------- ----------- ------- ----------
Balance at December 31, 2002 52,000,000 $ 52,000 $ 9,574,427 $(8,622,481) $ 7,399 $1,011,345
=========== =========== =========== =========== ======= ==========
See accompanying notes to these consolidated financial statements.
F-5
SILVERADO FINANCIAL, INC.
(formerly Rhombic Corporation)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOW
For the 12 months ended Cumulative from
December 31, November 21, 1994
--------------------------------- (Inception) to
2002 2001 December 31, 2002
------------ ------------ -----------------
OPERATING ACTIVITIES
Net (loss) income for the period $ (402,973) $ (982,754) $(8,622,481)
Adjustments to reconcile net
cash used by operations:
Write down on intellectual property and patents 276,250 404,158 2,086,837
Loss on sale of marketable securities -- 72,464 72,464
Rockford shares issued for services -- 32,275 32,275
Common stock issued for services 55,198 211,500 1,975,682
Common stock issued for Financial Software Inc. 1,089,903 -- 1,089,903
Fair value of options granted -- -- 2,082,113
(Increase)/decrease in accounts receivable (12,627) -- (12,627)
(Increase)/decrease in prepaid expenses 300 2,200 --
(Increase)/decrease in other assets (8,803) -- (8,803)
Increase/(decrease) in accounts payable 59,916 (67,463) 109,008
Increase/(decrease) in accrued interest 3,092 -- 3,092
Increase/(decrease) in due to affiliates 55,000 -- 55,000
Increase/(decrease) in convertible notes payable 26,000 -- 26,000
Increase/(decrease) in note payable 275,000 -- 275,000
----------- ----------- -----------
Net Cash (Used) by Operating Activities 1,416,256 (327,620) (836,537)
FINANCING ACTIVITIES
Proceeds from private placements -- -- 1,347,830
Proceeds from exercise of stock options -- -- 1,006,750
Proceeds from conversion of debenture -- 200,000 200,000
----------- ----------- -----------
Cash provided from financing activities -- 200,000 2,554,580
----------- ----------- -----------
INVESTING ACTIVITIES
Cost of patents -- (50,163) (168,430)
Proceeds from sale of marketable securities -- 93,499 93,499
Acquisition of software system (1,398,020) -- (1,398,020)
Investment in Rockford Technologies -- -- (207,756)
Investment in marketable securities (26,775) -- (36,775)
----------- ----------- -----------
Cash (used) in investment activities (1,424,795) 43,336 (1,717,482)
----------- ----------- -----------
Increase (decrease) in cash (8,539) (84,284) 561
Cash at beginning of period 9,100 93,384 --
----------- ----------- -----------
Cash at end of period $ 561 $ 9,100 $ 561
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of common stock for licensing agreements
and intellectual property $ -- $ 75,500 $ 2,005,350
=========== =========== ===========
Noncash investing and financing activities
Unrealized loss(gain) on available for sale stock $ (14,875) $ 7,476 $ 2,005,350
=========== =========== ===========
See accompanying notes to these consolidated financial statements.
F-6
SILVERADO FINANCIAL, INC.
(formerly Rhombic Corporation)
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 2002 AND 2001
Note 1 - ORGANIZATION AND BASIS OF PRESENTATION
Pursuant to an Agreement and Plan of Reorganization dated January 18, 2000,
Silverado Financial, Inc., formerly Rhombic Corporation , (the "Company")
acquired all the outstanding shares of common stock of Emerald Acquisition
Corporation ("Emerald"), a Delaware corporation, from the shareholders thereof
in an exchange for an aggregate of 200,000 shares of common stock of Silverado
("the Acquisition"). As a result, Emerald became a wholly owned subsidiary and
was later merged into the Company.
The Acquisition was approved by the unanimous consent of the Board of Directors
of the Company on January 18, 2000. The Acquisition was effective on January 20,
2000. Upon effectiveness of the Acquisition, pursuant to Rule 12g-3(a) of the
General Rules and Regulations of the Securities and Exchange Commission,
Silverado elected to become the successor issuer to Emerald for reporting
purposes under the Securities Exchange Act of 1934 and elected to report under
the Act effective January 20, 2000.
The Company has acquired rights to certain intellectual properties since its
inception and has subsequently recognized impairments to almost all of their
original value. The Company is determining its best use for the intellectual
property which includes evaluating potential sales.
On November 19th, 2002, the Company acquired all of the issued and outstanding
shares of Financial Software, Inc., (FSI) a New Jersey corporation engaged in
the development of Internet and Intranet financial software in edition to
operating several Financial Industry publishing web-sites. This acquisition was
completed on a share for share exchange basis for 22,000,000 shares of the
Company's common stock. FSI was acquired in order to gain access to certain
proprietary software products owned by FSI which the Company intends to further
develop and extend into comprehensive mortgage platforms called MortgageCenter
and FinanCenter.
GOING CONCERN AND PLAN OF OPERATION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has had material
operating losses and has had to rely on offerings of its common stock to obtain
sufficient cash to meet its operating expenses. The Company has yet to generate
substantive revenue. Also, there can be no assurances that the intellectual
properties owned by the Company will be successfully developed to a marketable
prototype level to be used as the basis for licensing agreements or marketing
activity or that the book value of the investments in intellectual properties
and Financial Software Inc. will be realized. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability of the
carrying value of assets or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
F-7
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the results of operations, account
balances and cash flows of the Company and its wholly owned subsidiaries after
elimination of inter-company transactions
CASH AND EQUIVALENTS
The Company considers cash to be all short-term, highly liquid investments that
are readily convertible to known amounts of cash and have original maturities of
three months or less.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the U. S. dollar. Certain of the
Company's assets, liabilities and expenses are denominated in Canadian dollars.
Transactions denominated in Canadian dollars are translated to U.S. dollars
using an average exchange rate applicable for the month in which the
transactions occur. Assets and liabilities denominated in Canadian dollars are
translated to U.S. dollars at the exchange rate existing at the balance sheet
date. Foreign exchange transaction gains and losses have been immaterial.
FINANCIAL INSTRUMENTS
Financial instruments consist primarily of cash, investments in marketable
securities and obligations under accounts payable and accrued expenses. The
carrying amounts of cash, accounts receivable, accounts payable, notes payable
and accrued expenses approximate fair value because of the short term maturity
of those instruments. The Company has not determined the fair value of certain
of its investments due to the lack of marketability and liquidity of those
investments and the common director with one such investee.
INVESTMENTS
At December 31, 2002 and 2001, respectively, the Company's investments were held
for sale.
INTELLECTUAL PROPERTY
The Company's intellectual property is comprised of technological ideas and a
software platform acquired with Financial Services Inc. during 2002.
The technological ideas have been acquired through the issuance of shares of the
Company's common stock and further developed for cash. These intellectual
properties are valued at the estimated fair market value of the stock issued at
the time of purchase. The value of the common stock was determined by the
trading value of the shares at and near the date of the transaction less a 25%
discount to that trading value due to restrictions on those securities. All
stock issued in those transactions contains regulatory restrictions, and in some
cases contractual restrictions, on transferability. Management periodically
analyzes the values of the intellectual properties for impairment.
During 2002 and 2001, the Company evaluated its intellectual properties. With
respect to its technological ideas, the Company determined that based on the
limited resources of the Company, market for the end products and the potential
development times and required development costs, that it would not pursue
F-8
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
development of certain of the intellectual properties. The Company wrote off its
investments in those intellectual properties in 2002 and 2001. The purchase
price of the remaining intellectual properties will be amortized over the
estimated useful lives when revenue begins to be generated from those assets.
The Company periodically evaluates the recoverability of intangible assets and
takes into account events or circumstances that warrant revised estimates of
useful lives or that indicate that an impairment exists. The Company's
intangible assets will be subject to amortization when put into productive use.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event that facts and circumstances indicate that the cost of long-lived
assets, primarily intellectual property and patents, may be impaired, the
Company performs a recoverability evaluation. If an evaluation is required, the
discounted estimated future cash flows associated with the assets are compared
to the assets' carrying amount to determine whether a write-down to fair value
is required.
In August 2001, the FASB issued SFAS No. 144 ("SFAS 144") "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 became effective on
January 1, 2002 and supersedes SFAS No. 121 ("SFAS 121"), Accounting for the
Impairment of Long-Lived Assets and for accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business. The new standard establishes a single accounting model based on
the framework established in SFAS 121 for long-lived assets classified as held
for sale be presented separately in the consolidated Balance Sheet and
eliminates the requirement to allocate goodwill to long-lived assets to be
tested for impairment.
Effective January 1, 2002, impairment of goodwill and intangible assets with
indefinite lives will be determined under SFAS 142 as discussed above.
STOCK-BASED COMPENSATION
Statements of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, ("SFAS 123") established accounting and disclosure requirements
using a fair-value based method of accounting for stock-based employee
compensation. The Company periodically issues options to consultants and members
of the Board of Directors. The estimated value of these options is determined in
accordance with SFAS No. 123 and expensed as the granted options vest to the
grantees.
INCOME TAXES
The Company accounts for income taxes under the liability method pursuant to the
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, ("SFAS 109"). Deferred taxes arise from temporary differences, due to
differences between accounting methods for tax and financial statement purposes.
F-9
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LOSS PER SHARE
Net loss per share is calculated using the weighted average number of shares of
common stock outstanding during the year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NEW TECHNICAL PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. This statement establishes accounting and reporting standards for
goodwill and intangibles for years commencing after December 15, 2001. Whether
already acquired or subsequently acquired after the effective date, companies
are required to identify intangibles with finite lives and those with indefinite
lives. Those intangibles with finite lives are to be amortized over the
estimated useful lives of the assets while those with indefinite lives are not
to be amortized. Each intangible or goodwill asset should be analyzed at least
annually for impairment where the carrying value is in excess of the fair value
of the intangibles and in excess of the implied fair value in the case of
goodwill assets. The asset's carrying value is to be reduced by a charge to
income if the fair value is lower than the carrying value. The effect of
implementing this new standard January 1, 2002 did not have a material impact on
the Company for the year ended December 31, 2002.
Note 3 - INTELLECTUAL PROPERTY
Since its inception, the Company entered into numerous agreements as a result of
having acquired certain rights to various complex intellectual properties. It
may sell or license these rights and transfer the control of such to the buyer
or licensee. The acquisitions of these intellectual properties have occurred
since 1995. The intellectual properties include titles such as; Nuclear Battery,
Radio Nuclide Battery, Inertial Electrostatic Confinement, Diamond Film
Electromechanical Battery and Disperse Composite Material. There has yet to be
proven profitable commercial applications for these intellectual properties. The
Company has consulted with U.S. universities and their professors to further
develop these intellectual properties through funding of research projects. In
most cases, the rights to the intellectual properties were acquired from the
universities, or from the professors or inventors to the extent they had rights
to the intellectual properties. The consideration given by the Company for the
most part was shares of the Company's common stock. The value of the shares
given was the basis for the recorded value of the purchases.
The Company periodically analyzes the investments in these intellectual
properties for impairment. The stages of development in which these intellectual
properties are in make estimation of value or determination of impairment a
difficult task. There have been no substantive revenues generated from the
technologies. The Company has determined that there is no evidence that the book
values of these intellectual properties are impaired until it has been
determined that there is no likely commercial
F-10
Note 3 - INTELLECTUAL PROPERTY (continued)
application or one that will produce adequate cash flow to support those values.
The Company believes that its current intellectual properties each require
substantial development and dedication of resources, in both financial and human
resources. The Company has determined to pursue a limited number of these
intellectual properties and not pursue a number of others for various reasons.
Therefore, the Company has taken a write off of those intellectual properties
that it does not intend to pursue. The Company is seeking joint venture partners
for funding further research and is more actively marketing and seeking
strategic partners for the remaining intellectual properties. However, any
change in estimates of impairment may have a significant effect on the financial
condition and results of operations of the Company.
On November 19, 2002, in connection with the acquisition of Financial Software,
Inc., the Company acquired certain software, web sites and intellectual property
which can aggregate financial information from a large number of data sources on
an individual basis, amalgamate the data and provide accurate and detailed
insight into an individual's personal financial picture on a real time basis.
This software can manage a host of disparate objectives as they relate to a
persons financial goals, be they investment or debt related or any combination.
This software suite, together with mortgage generation capabilities can create a
variety of new and different mortgage, investment or insurance products. The
Company recorded the software on its books at the seller's basis of $1,398,020.
Note 4 - INVESTMENTS
The Company has the following investments at December 31, 2002 and 2001:
December 31, 2002 December 31, 2001
--------------------- ---------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
AVAILABLE FOR SALE SECURITIES
Showintel Networks, Inc. $26,775 $41,650 $ 0 $ 0
Rockford Technologies, Inc. 12,042 12,042 24,750 17,274
------- ------- ------- -------
Totals $38,817 $53,692 $24,750 $17,274
======= ======= ======= =======
Statements of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, ("SFAS 115") requires that all
applicable investments be classified as trading securities, available for sale
securities or held to maturity securities. The Company did not have any
investments classified as trading securities or held-to-maturity securities. The
statement further requires that available for sale securities be reported at
fair value, with unrealized gains and losses excluded from earnings but reported
in a separate component of shareholders' equity (net of the effect of income
taxes) until they are sold. At the time of sale, any gains or losses will be
recognized as a component of operating results.
At December 31, 2002, the estimated fair value of the 297,500 shares of
Showintel Networks, Inc. was estimated based on the quoted trading price of the
security at December 31, 2002. The value of the Showintel Networks, Inc. common
stock is recorded at its fair market value as of December 31, 2002.
The Company acquired 2,900,000 shares of Rockford Technologies, Inc.
("Rockford") in the year ended December 31, 1999 for $207,756 as part of a legal
settlement with Rockford. The 2,900,000 shares
F-11
Note 4 - INVESTMENTS (continued)
represented an approximate 15% interest in Rockford. As part of that settlement,
members of the Company's Board of Directors assumed half of the Board seats of
Rockford. At December 31, 2001 and 2002, respectively, one of the Company's
directors was also one of three directors of Rockford. Rockford had no material
operations during the two years ended December 31, 2001 and 2002. During 2001,
the Company sold 1,654,519 shares and distributed 900,000 shares for goods and
services. The Company realized a loss of $66,464. At December 31, 2001 the
Company had an unrealized loss on available stock for sale of $7,476 and on
December 31, 2002 the company had an unrealized gain on available stock for sale
of $14,875.
Note 5 - ASSET IMPAIRMENT CHARGES
The Company recognized asset impairment charges of $276,250 during 2002
attributable to the Excimer Lamp. The Company was required to reduce the
carrying value of the assets to fair value and recognized asset impairment
charges, because the carrying value of the affected assets exceeded the
projected future discounted cash flows.
Note 6 - INCOME TAXES
The Company does not provide any current or deferred income tax provision or
benefit for any period presented because it has experienced operating losses
since inception. The Company has provided a full valuation allowance because of
the uncertainty regarding the utilization of the net operating loss carry
forwards.
For the year ended December 31,
-------------------------------
2002 2001
--------- ---------
Current income tax benefit $ 51,956 $ 238,115
--------- ---------
Deferred income tax benefit $ 113,263 $ 165,705
--------- ---------
Total current and deferred income tax benefit 165,219 403,820
Valuation allowance (165,219) (403,820)
--------- ---------
Benefit of income taxes $ 0 $ 0
========= =========
Income tax expense does not differ from amounts computed by applying the U.S.
Federal income tax rate of 34% and the state rate of 7% at December 31, 2002 and
2001, except for the valuation allowance.
At December 31, 2002, the Company had realized net operating losses of
approximately $6,962,672. Future realization of the net deferred tax assets is
dependent on generating sufficient taxable income prior to their expiration. The
realized net operating losses expire, as follows:
F-12
Note 6 - INCOME TAXES (continued)
Expiration Federal State
---------- ------- -----
2003 $ 861,526
2004 603,950
2005 3,670,269
2006 578,596
2007 126,723
2009 $44,994
2010 379,485
2011 461,101
2012 236,028
2018 861,526
2019 603,950
2020 3,670,269
2021 578,596
2022 126,723
---------- ----------
Total net operating loss available $6,962,672 $5,841,064
========== ==========
Note 7 - NOTES PAYABLE
Note Payable
As part of the acquisition of Financial Services Software, the Company became
obligated under a note for $275,000 at 8% per annum, payable monthly, in arrears
and amortized over eighteen equal installments of $16,258. Principal and
interest payments due under the note are abated until the Company has raised
sufficient capital through the sale of stock and /or notes to raise a minimum of
four times the monthly payment due. Further additional monthly payments are
abated until the Company is able to maintain sufficient capital to allow it to
remain cash flow positive and continue making the payments. There was $2,592 of
accrued unpaid interest at December 31, 2002.
Convertible Notes payable
The Company has two convertible notes payable totaling $26,000 at 10% per annum
maturing during the third quarter of 2003. If the Company's stock price is less
than $0.08 per shares at the due date of the note, the Company can extend the
note for one additional year. If the Company's stock price is trading at or
above $0.08 per share, the Company has the right to convert the note and
interest to common stock at $0.08 per share. There was $500 of accrued unpaid
interest at December 31, 2002.
Assuming the Company has the ability to make all note payments under their terms
commencing October 1, 2003 and does not convert or extend the convertible notes
payable, the minimum annual payments are as follows:
Year Amount
---- ------
2003 $ 77,374
2004 195,096
2005 65,032
--------
Total $337,502
========
F-13
Note 8 - COMMITMENTS
The Company's acquisition agreements for intellectual properties generally
contain requirements to pay royalties to the sellers when revenue is generated
from those intellectual properties. At December 31, 2002 and 2001, the Company
had no royalties payable.
The Company has periodically entered into agreements with third parties,
primarily U.S. universities, to fund research projects related to its
intellectual properties. At December 31, 2002 and 2001, there were no long-term
commitments under such arrangements.
On October 18, 2002 the Company entered into a lease for 3,179 square feet in an
office building in Campbell, California. The lease is for a period of two years
ending on October 31, 2004. The base rental under the lease is $80,111 per annum
($6,675.90 per month) during the first twelve month period and $82,514
($6,876.17 per month) during the second twelve month period. The lease provides
for the Company to pay its proportionate share of the landlord's common costs
during second twelve month period.
Rent expenses totaled $15,773 and $26,456 for 2002 and 2001 respectively.
Minimum future commitments under all operating leases are as follows:
Years Ending
December 31, Amount
------------ ------
2003 $ 80,511
2004 68,762
-------
$149,273
========
Note 9 - CONVERTIBLE DEBENTURES
During 2002, the Company issued $26,000 in convertible debentures at 10% per
annum. The holders can convert the principal and accrued interest at any time
into common stock at $0.08 per share and have warrants to purchase 325,000
shares of common stock at $0.09 a share. If the Company's stock price is less
than $0.08 per shares at the due date of the note, the Company can extend the
note for one additional year. If the Company's stock price is trading at or
above $0.08 per share, the Company has the right to convert the note and
interest to common stock at $0.08 per share. There was $500 of accrued unpaid
interest at December 31, 2002.
During 2001, the Company issued $200,000 of 10% convertible debentures. These
debentures were converted during 2001 into 1,166,142 shares of common stock.
Note 10 - STOCKHOLDERS' EQUITY
The Company issues common stock as compensation to consultants and to acquire
intellectual properties. On June 30, 2002 the Company issued 1,302,958 of its
common stock for services rendered by its officers and consultants. On November
19, 2002 the Company acquired Financial Software, Inc.
F-14
Note 10 - STOCKHOLDERS' EQUITY (continued)
for 22,000,000 restricted common shares. The value of those transactions was
determined based upon the trading value of the Company's common stock at the
time of the transactions.
Note 11 - STOCK OPTIONS
The Company issues stock options periodically to consultants and members of the
Board of Directors. The Company has adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation". The options
granted in the years ended December 31, 2002 and 2001, were granted to other
than employees, the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", does not
apply. Accordingly, compensation cost has been recognized for the stock options
granted to other than employees.
Under the provisions of SFAS No. 123, the number of fully vested options granted
of 0 and 1,500,000 options for the years ended December 31, 2002 and 2001,
respectively, were used to determine compensation cost. There was no charge to
expense for the value of options during the years ended December 31, 2002 and
2001.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for year ended
December 31, 2001:
2001
----
Dividend Yield None
Volatility 0.894
Risk free interest rate 4.07%
Expected asset life 7.5 months
The Board of Directors authorized the granting of 0 and 1,500,000 options during
the years ended December 31, 2002 and 2001. The price of the options granted
pursuant to these grants is not to be less than 100 percent of the fair market
value of the shares on the date of grant. The options expire one year from date
of grant and are immediately vested.
The summary of activity for the Company's stock options is presented below:
Weighted Weighted
Average Average
Exercise Exercise
2002 Price 2002 2001 Price 2001
---- ---------- ---- ----------
Options outstanding at beginning of year 2,000,000 $0.086 1,100,000 N/A
Granted -- N/A 1,500,000 $0.50
Exercised -- N/A -- N/A
Terminated/Expired (2,000,000) $0.086 (600,000) $1.00
Options outstanding at end of year -- N/A 2,000,000 $2.30
Options exercisable at end of year -- N/A 2,000,000 $2.30
Options available for grant at end of year -- N/A -- N/A
Price per share of options outstanding -- $0.50 - $0.50
Weighted average remaining contractual lives -- 7.5 MONTHS
Weighted average fair value of options granted
during the year -- $0.050
F-15
Note 12 - LOSS PER SHARE
At December 31, 2002, there were no outstanding options; however, there were
convertible debentures with exercisable warrants outstanding. Outstanding
options, warrants and convertible securities to purchase common stock were not
considered in the calculation for diluted earnings per share for the years ended
December 31, 2002 and 2001 because the effect of their inclusion would be
antidilutive. A reconciliation of the numerator and denominator of the basic and
diluted per share calculations for the loss from continuing operations is as
follows:
2002 2001
------------------------------ ------------------------------
Loss Shares Per share Loss Shares Per share
---- ------ --------- ---- ------ ---------
Net (Loss) $(402,973) $(984,928)
BASIC LOSS PER SHARE
Loss available to common
stockholders $(402,973) 31,949,226 $(0.01) $(984,928) 27,097,894 $(0.04)
Effect of dilutive securities N/A N/A
DILUTED LOSS PER SHARE $(0.01) $(0.04)
Convertible notes and warrants to purchase 650,000 shares and options to
purchase 1,500,000 shares of common stock were outstanding at December 31, 2002
and 2001, respectively, and were excluded from the computation of diluted loss
per share because the effect of their inclusion would be anti-dilutive.
Note 13 - CREDIT RISK AND OTHER CONCENTRATIONS
The Company has historically relied upon cash raised in private placements of
the Company's common stock for working capital. At times, the Company maintains
cash balances at banks that exceed insured limits. At December 31, 2002 and 2001
the Company did not have funds on deposit that exceeded the insured limits.
Note 14 - RELATED PARTY TRANSACTIONS
On December 18, 2002, the company entered into a memorandum of understanding
with Realty Capital Corporation whereby Realty Capital Corporation would utilize
office space and telephone services at the Company's offices in Campbell,
California in exchange for payment of $15,000 per month. Realty Capital
Corporation is majority controlled by the President of Silverado Financial, Inc.
Note 15 - SUBSEQUENT EVENTS
On February 11, 2003 the Company filed a Form 14C Definitive Statement with the
Securities and Exchange Commission explaining that there was a majority of
shareholders which approved amending the articles of incorporation to change the
name of the Company to Silverado Financial Inc. and increasing the authorized
common shares to 100,000,000 having a $0.001 par value, and authorizing
5,000,000 shares of Preferred Stock having a $0.001 par value.
F-16
Note 15 - SUBSEQUENT EVENTS (continued)
On April 4, 2003 the Company announced that it will be applying to the NASD for
a change in trading symbol and CUSIP number as well as affect a five for one
reverse split of its stock. The number of authorized shares would also be split
back five for one. The new capitalization would be as follows:
Pre Split Post Split
--------- ----------
Authorized:
Common: 100,000,000 20,000,000
Preferred: 5,000,000 1,000,000
Issued & Outstanding:
Common: 54,173,936 10,834,787
Preferred: 0 0
On April 8, 2003 the company entered into a binding Letter of Intent with Realty
Capital Corporation whereby the Company will acquire Realty Capital Corporation
for a purchase price to be determined by the net asset value of Realty Capital
as determined by an independent, third party valuation. The transaction is
subject to receipt by the company of said valuation as well as financial
statements and the affirmative vote of the majority of the shareholders. Realty
Capital Corporation is majority controlled by the President of Silverado
Financial, Inc., John E. Hartman and his spouse.
F-17