SECURITIES AND EXCHANGE COMMISSION Washington D.C. FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 OR [ ] TRANSITION REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from________to________ Commission file number 0-16341 ADVA International Inc. (Name of small business issuer in its charter) Delaware 16-1284228 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 454 South Anderson Road Rock Hill, South Carolina 29730 803.327.6790 (Address and phone number of principal executive offices and place of business) APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the issuer filed all documents and reports required to be filed by section q2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes X No APPLICABLE TO CORPORATE ISSUERS The number of shares outstanding of the issuer's common stock as of September 19, 2002 is 13,185,194. 1ADVA INTERNATIONAL INC. AND SUBSIDERARY FORM 10 -QSB INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheet as of March 31, 2002 and September 30, 2002....................................................................4 Consolidated Statements of Operations for the three months ended September 30, 2002 and September 30, 2001, and for the six months ended September 30, 2002 and September 30, 2001, and the cumulative period April 2, 1998 (inception) through September 30, 2002.................6 Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for the cumulative period April 2, 1998 (inception) through September 30, 2002....................................................................7 Consolidated Statements of Cash Flows for the six months ended September 30, 2002 and September 30, 2001 and the cumulative period April 2, 1998 (inception) through September 30, 2002........................8 Notes to Consolidated Financial Statements..................................9 Item 2. Plan of Operation.....................................................19 PART II. OTHER INFORMATION Item 2. Changes in Securities.................................................20 Item 6. Exhibits and Reports on Form 8-K......................................20 SIGNATURES....................................................................20 2 Forward Looking Statements When used in this Form 10-QSB, the words "may", "might", "will", "should", "could", "expect(s)", "plan(s)", "intend(s)", "anticipate(s)", "believe(s)", "estimate(s)", "predicts", "potential", or "continue(s)" or the negative of such terms and other comparable terminology are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including but not limited to economic conditions, changes in laws or regulations, our history of operating losses, limited access to capital, demand for our products and services, dilution from issuance of additional shares, newly developing technologies, loss of permits, conflicts of interests in related party transactions, regulatory matters, the occurrence of events not covered by insurance, a substantial increase in interest rates, protection of technology, lack of industrial standards, raw material commodity pricing, the ability to receive bid awards, the inability to implement our growth strategy, the inability to maintain key employees, the effects of competition and our ability to obtain additional financing. Such factors, which are discussed in "The Plan Of Operation" and the notes to condensed consolidated financial statements, could effect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with undue reliance on any such forward-looking statements, which speak only as of the date made. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot and do not guarantee future results, levels of activity, performance or achievements. See "Plan of Operation". 3 Item 1. Financial information ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Consolidated Balance Sheet September 30, 2002 March 31, 2002 - --------------------------------------------------------------------------------------------------- (Unaudited) (Audited) Assets Current assets Cash and cash equivalents $ 640 $ 4,401 - 1,714 Receivables - --------------------------------------------------------------------------------------------------- Total current assets 640 6,115 Software 318,436 318,436 Property and equipment, net (note 12) 16,953 20,384 Deferred financing costs, net of accumulated amortization 420,937 512,740 of $496,563 and $450,662 (Notes 5 and 6) Security Deposit 2,979 2,979 - --------------------------------------------------------------------------------------------------- Total assets $ 759,945 $ 860,654 - --------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 4 ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Consolidated Balance Sheet -Continued- September 30, 2002 March 31, 2002 - --------------------------------------------------------------------------------------------------- (Unaudited) (Audited) Liabilities and Stockholders' (Deficiency) Current liabilities Notes payable (note 7) $ 85,000 $ 85,000 Accrued professional fees 293,050 294,895 Accrued interest 213,566 151,033 Accrued compensation 50,573 79,831 Accounts payable and accrued expenses, other 46,170 58,746 Debt due in one year 500,000 - Due to officer 9,990 39,440 - --------------------------------------------------------------------------------------------------- Total current liabilities 1,198,349 708,945 Long-term debt (Notes 5 and 6) 1,500,000 1,500,000 - --------------------------------------------------------------------------------------------------- Total liabilities 2,698,349 2,208,945 Commitments (Note 9) Stockholders' deficiency (Notes 5, 9 and 10) Class A preferred stock, no par value - - Authorized 4,000 shares, none issued Class B preferred stock, no par value - - Authorized 6,000 shares, none issued Common stock, $.001 par value Authorized 20,000,000 shares Issued and outstanding 13,185,194 shares 13,185 13,185 Additional paid-in capital 1,957,815 1,957,815 (Deficit) accumulated during the development stage (3,909,404) (3,319,291) Total stockholders' (deficiency) (1,938,404) (1,348,291) - --------------------------------------------------------------------------------------------------- Total liabilities and stockholders' (deficiency) $ 759,945 $ 806,654 - --------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements 5 ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Consolidated Statement of Operations Cumulative Period April 2, 1998 Three Months Ended Six Months Ended (Inception) September 30 September 30, through 2002 2001 2002 2001 September 30, 2002 2002 - ------------------------------------------------------------------------------------------------------------------ (Unaudited) (Unaudited) (Unaudited) Sales, license fees $ - $ - $ - $ - $ 8,484 Operating expenses Salary and employee related 67,226 64,723 131,545 115,334 717,578 General and administrative 140,414 221,858 300,516 481,682 1,509,011 Expenses related to merger - 5,000 - 25,336 995,278 - ------------------------------------------------------------------------------------------------------------------ Total operating expenses 207,641 291,581 432,062 622,352 3,221,868 - ------------------------------------------------------------------------------------------------------------------ (Loss) from operations (207,641) (291,581) (432,062) (622,352) (3,213,384) - ------------------------------------------------------------------------------------------------------------------ Other income (expense) Miscellaneous income - - - - 1,305 Interest (expense), Officer - (1,558) (519) (2,808) (14,664) Interest (expense), debt (81,877) (70,818) (157,532) (141,961) (714,734) Interest income - 1,905 - 7,453 32,073 - ------------------------------------------------------------------------------------------------------------------ Total other expense, net (81,877) (70,471) (158,051) (137,316) (696,020) - ------------------------------------------------------------------------------------------------------------------ Net loss $(289,518) $(362,052) $(590,113) $(759,668) $(3,909,404) - ------------------------------------------------------------------------------------------------------------------ Basic and diluted loss per share $(0.02) $(0.03) $(0.04) $ (0.06) $ (0.33) - ------------------------------------------------------------------------------------------------------------------ Weighted average shares outstanding 13,185,194 13,185,194 13,185,194 13,185,194 11,493,434 - ------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements 6 ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Consolidated Statements of Changes in Stockholders' Equity (Deficiency) Deficit Total Accumulated Stock- Additional During the Stock Holders Common Stock Paid-In Development Subscription Equity Shares Amount Capital Stage Receivable (Deficiency) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, April 2, 1998 (inception) - $ - $ - $ - $ - $ - Common stock issued, May 14, 1998 1,000 10 300,990 - (1,000) 300,000 Net (loss) - - - (287,851) - (287,851) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, March 31, 2000 1,000 10 300,990 (287,851) (1,000) 12,149 Original issue discount arising from options granted in connection with debt, Jan. 14, 2000 - - 900,000 - - 900,000 (Note 5) - - - (339,034) - (339,034) Net (loss) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, March 31, 2000 1,000 10 1,200,990 (626,885) (1,000) 573,115 Common stock issued, May 17, 2000 (Note 5) 13 - 300,000 - - 300,000 Stock options exercised, May 17, 2000 (Note 5) 176 2 449,998 - - 450,000 Recapitalization, March 2, 2001 (Note 1) 13,184,005 13,173 (13,173) - - - Receipt of stock subscription, March 2, 2001 - - - - 1,000 1,000 Net (loss) - - - (1,467,711) - (1,467,711) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, March 31, 2001 13,184,194 13,185 1,937,815 (2,094,596) - (143,596) Net (Loss) - - - (1,224,695) - (1,224,695) Options issued as compensation to nonemployees - - 20,000 - - 20,000 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, 31 March, 2002 13,184,194 13,185 1,957,815 (3,319,291) - (1,348,291) Net (Loss) (Unaudited) - - - (590,113) - (590,113) - ------------------------------------------------------------------------------------------------------------------------------------ Balance Sept. 30, 2002 13,185,194 $13,185 $1,957,815 $(3,909,404) $ - $(1,938,404) - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements 7 ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Consolidated Statement of Cash Flows Cumulative Period April 2, 1998 (Inception) Six Months Ended through September 30 June 30 2002 2001 2002 (Unaudited) (Unaudited) - ----------------------------------------------------------------------------------------------------------- Cash Flows from operating activities Net (loss) $(590,113) $(759,668) $(3,909,404) Adjustments to reconcile net (loss) to net cash used in operating activities Amortization of deferred finance costs 91,803 91,802 496,562 Depreciation 3,431 1,863 8,722 Options issued for services rendered - - 20,000 Changes in assets and liabilities (Increase) decrease in assets Receivables 1,714 (46) - Security deposit - (2,979) (2,979) Prepaid expenses - 17,083 - (Increase) decrease in liabilities - Accrued transaction and creditor payables (560) (299,440) Accounts payable and accrued expenses 19,415 207,886 603,366 - ----------------------------------------------------------------------------------------------------------- Net cash (used in) operating activities (474,311) (743,449) (2,783,737) - ----------------------------------------------------------------------------------------------------------- Cash flows from investing activities Capital expenditures - (25,677) (25,677) Expenditures for software - (71,936) (318,436) Loan from Officer (29,450) 2,809 9,990 - ----------------------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (29,450) (94,804) (334,123) - ----------------------------------------------------------------------------------------------------------- Cash flows from financial activities Proceeds of notes payable 500,000 - 585,000 Proceeds from long-term debt, net of finance fees - - 1,482,500 Proceeds from stock issuance and subscription - - 1,051,000 - ----------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 500,000 - 3,118,500 - ----------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (3,761) (838,313) 640 Cash and cash equivalents at the beginning of the period 4,401 961,483 - - ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents at the end of period 640 123,180 640 - ----------------------------------------------------------------------------------------------------------- Non cash activity During the year ended March 31, 2000, the Company incurred $900,000 in non-cash deferred finance charges from options for common stock issued with debt. The amount was credited to additional paid-in capital. - ----------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements 8 ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Notes to Consolidated Financial Statements 1. Organization On March 2, 2001, ADVA International Inc. ("ADVA"), Biotel, Inc. ("Biotel"), Global Information Group USA, Inc. ("GIG" or the "Company") and the stockholders of GIG (the "Stockholders") consummated a transaction pursuant to an Agreement of Stock Exchange dated June 19, 2000, as amended (the "Agreement"). Under the terms of the Agreement, the Stockholders exchanged all the issued and outstanding shares of GIG owned by them and received in return an aggregate of 12,468,750 shares of ADVA common stock, par value $0.001 ("Common Stock"), representing a 94.57% equity interest in ADVA (the "Stock Exchange"). GIG accordingly became a wholly owned subsidiary of ADVA. The remaining ADVA shares continued to be owned by the then-current stockholders of ADVA. ADVA functions as a holding company. Currently, its primary asset is all of the outstanding common stock of GIG. Accordingly, unless otherwise indicated or the context otherwise requires, use of the terms "Company", "we", "our" or "us" in this Report refers to GIG. ADVA currently possesses no employees but employs contracted consultants to run the day-to-day operations as well as the technical development of the company. 2. Basis of Presentation The consolidated Financial statements are unaudited and have been filed without review or advice from either ADVA's independent accountants in accordance with the AICPA statement on auditing standards no. SAS 71 or outside legal counsel. These statements include the accounts of ADVA International Inc. ("ADVA") and its wholly owned subsidiary Global Information Group USA, Inc. ("GIG"). All significant inter-company accounts and transactions have been eliminated in consolidation. ADVA's independent accountants have indicated in their report on our audited financial statements (10KSB/A August 8, 2002) that our financial condition raises substantial doubt about our ability to continue as a going concern. New debt and equity issuances are expected to provide near term working capital until earnings from operations can support the Company. There can be no assurance that management will be successful in its efforts to attract such capital. In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made which are necessary to present fairly the financial position of the company as of March 31, 2002, and the results of its operations for the six months ended September 30, 2002. The results of operations experienced for the three months ended September 30, 2002 are not necessarily indicative of the results to be experienced for the fiscal year ended March 31, 2003. The statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying notes should therefore be read in conjunction with the Company's March 31, 2002 annual financial statements. 3. Business Operations And Basis of Presentation Business Operations From April 2, 1998 (inception) to March 31, 2000, the Company maintained operations in the Netherlands and in April 2000 moved all operations to the United States. The Company is in the development stage and planned principal operations have not yet commenced due to a chronic lack of funding. The Company develops applications software running on the Linux (the "Linux(R) OS") and UNIX (the "UNIX(R)OS") operating systems. The Company's present software product, first developed for the UNIX(R)OS, is believed to be the only complete 3D solid modeling, animation and rendering system currently available on the Linux(R)OS. The Company's software has been designed for use by digital content creators in the production of 3D film and video special effects, animation, computer-aided design/manufacture ("CAD/CAM") and scientific visualization, Internet web site, print graphics and virtual television production. Since acquiring the software and the related source code in February 2000, the Company has been developing and executing marketing plans for sales of the software to users in the Linux(R)and UNIX(R)OS communities as well as enhancing the compatibility of the products to these and other platforms. Although saleable in a variety of 3D graphics segments, the Company expects to focus its near-term marketing efforts on the CAD/CAM segment. The Companys success will depend in part on its ability to obtain patents and product license rights, maintain trademark protection and trade secrets, and operate without infringing on the proprietary rights of others, both in the United States and other countries. There can be no assurance that patents or trademarks issued to or licensed by the Company will not be challenged, invalidated, or circumvented, or that the rights granted thereunder will provide proprietary protection or competitive advantages to the Company Basis of Presentation The Company has no significant operating history and, from April 2, 1998 (inception) to September 30, 2002, has generated a net loss of $3,909,404. This loss has been financed by proceeds from equity and debt issuances. Also, as of September 30, 2002, the Company has a working capital deficiency of $1,197,709 and a stockholders' deficiency of $1,938,404. During fiscal 2003, management intends to commence principal operations. Earnings from operations are expected to provide working capital. In May 2002, the Company entered into a loan agreement that provided the Company with proceeds of $500,000 to work towards extinguishing outstanding liabilities and provide working capital through August 2002. In October 2002, the Company entered into a new loan agreements that provided the Company with proceeds of $280,000 to continue to extinguish outstanding liabilities, provide additional working capital and make investments in continuing software development. The Company is also seeking additional working capital through additional loan proceeds and/or the sale of additional shares of its common stock. There can be no assurance that management will be successful in its efforts. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. 9 ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Notes to Consolidated Financial Statements 4. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, GIG. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition Planned principal operations have not commenced and revenues since inception have not been significant. When planned principal operations begin, the Company will adopt AICPA Statement of Position 97-2, "Software Revenue Recognition", which requires that revenue recognized from software arrangements be allocated to each element of the arrangement based on the relative fair values of the elements, such as software products, upgrades, enhancements, post contract customer support, installation, or training. Revenue from product sales will be recognized upon shipment or transfer of title to the customer. Certain sales might require continuing service, support, and performance by the Company, and accordingly, a portion of the revenue will be deferred until the future service, support and performance are provided. Reserves for sales returns and allowances will be recorded in the same period as the related revenues. Cash Equivalents Cash and cash equivalents include cash and short-term investments with original maturities of 90 days or less. Research and Development Internal research and development costs are expensed as incurred. Research and development costs of approximately $11,500, $9,000 and $153,500 for the years ended March 31, 2002 and 2001 and for the cumulative period from April 2, 1998 (inception) through September 30, 2002, respectively, are included in general and administrative expenses in the accompanying statements of operations. Deferred Finance Costs The deferred finance costs arising from the incurrence of long-term debt are being amortized using the straight-line method over the five-year terms of the related debt. Software Costs Software costs represent amounts paid to third parties during February 2000 to acquire technologically feasible software and its related source code and $118,436 of additional development costs incurred during the year ended March 31, 2002 to modify and adapt the software to platforms other than Linux. The Company will begin amortizing, over a three-year period, the software costs when sales commence on a commercial basis. The Company will continue to evaluate any impairment to the software on a periodic basis. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Additions and betterments are capitalized and maintenance and repairs are charged to current operations. The cost of assets retired or otherwise disposed of and the related accumulated depreciation and amortization are removed from the accounts and the gain or loss on such dispositions is included in current operations. Depreciation and amortization are provided using the straight-line method over the estimated useful life of the respective assets. Accounting for Stock-Based Compensation The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with the provisions of SFAS No. 123, the Company applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its employee stock option plans. Credit Risk The Company's policy is to limit the amount of credit exposure to any one financial institution and places its investments with financial institutions evaluated as being credit worthy. At times, such amounts may be in excess of the Federal Deposit Insurance Corporation limits. 10 ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Notes to Consolidated Financial Statements Income Taxes The Company follows the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires a company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in its financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. 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. Long-Lived Assets The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable based on the sum of the expected future undiscounted cash flows. As of September 30, 2002, the Company has determined that no impairment has occurred. Expenses Related to Mergers These costs consist primarily of professional fees incurred in connection with the reverse merger between GIG and ADVA (see Note 1) and with other merger activities, which were not consummated. These costs also include the payments to be made for ADVA's transaction costs and creditor payables (see Note 1). Net Loss Per Share Historic basic and diluted net loss per share is calculated using the weighted average number of shares of common stock outstanding during each period. Equivalent common shares consist of options granted to officers, directors and consultants. These options have been excluded from the calculation of diluted net loss per share since the effect is antidilutive. 5. Share Purchase and Shareholders' Agreement In January 2000, GIG entered into a Share Purchase and Shareholders' Agreement with five other parties. The agreement was established in order to promote the growth of GIG either through an initial public offering or merger with a publicly held company. The agreement provided that one of the five parties purchase 100 shares of GIG stock from its chief executive officer and two other parties ("lenders") advance $300,000 to GIG in the form of loans (see Note 5). In addition, the agreement granted an option to purchase 30% of GIG's outstanding stock from its chief executive officer to a party providing consulting and other services. Such option was exercised on May 17, 2000 upon the advance to GIG of $400,000, representing the first tranche of additional loans aggregating $1,200,000 from the lenders. In connection with the granting of the option, GIG recorded deferred financing costs of $900,000 (representing the estimated fair value of the option based on application of the Black-Scholes option pricing model utilizing a risk free rate of 6.38%, volatility of .00001, and an expected life of five years). Amortization through September 30, 2002 totals $496,563. The consulting company was also granted additional options in connection with the above agreement to purchase an indefinite number of shares to be determined based on an agreed upon formula, exercisable upon GIG's sale, merger or initial public offering. When GIG entered into the agreement to merge with ADVA (see Note 1), the formula calculation resulted in a grant of options to purchase 176 shares representing approximately 13.8% of the total outstanding stock of GIG. Notification of intent to exercise the options was received on March 29, 2000. The stock was issued on May 17, 2000 for $450,000. This amount, credited to additional paid-in capital, was net of $750,000 that the consultant earned for investment advisory and other services. Since the options granted were contingent upon the consummation of then undetermined future equity transactions, no value was ascribed to the options as of the grant date. 11 ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Notes to Consolidated Financial Statements 6. Long-Term Debt In February 2000, the Company received the first advance from its lenders. The loan agreements provide for an aggregate amount of $1,500,000, of which $1,500,000 and $300,000 were outstanding as of March 31, 2001 and 2000, respectively. The loans carry an interest rate of 6.5% per annum. Interest on each advance is accrued on a daily basis and is payable 18 months from the date of each advance and, thereafter, at the end of each of the succeeding three month periods. Under the terms of the loan agreements, the first interest payment was due in August 2001. The Company has failed to make timely interest payments and as of March 31, 2002, the Company was in default of the loan agreements for which waivers were obtained. In connection with the granting of the waivers, the Company and its lenders have agreed to negotiate for the issuance of the Company's common stock to the lenders in satisfaction of any unpaid accrued interest on the loans until July 1, 2003 at a conversion price of $.70 per share. The loans are due generally five years from January 14, 2000. The loans were intended to be secured by an escrow agreement under which the source code for the Company's software is held as collateral. Such source code is being held as collateral under a vendor obligation. One of the lenders and certain common stockholders share a common managing director. Additionally, a director of the other lender owns shares in a stockholder of the Company. Deferred finance fees of $17,500, withheld from the loan proceeds, are being amortized over the five-year terms of the agreements. 7. Notes Payable On November 27, 2001, the Company obtained financing pursuant to promissory notes with six lenders. The notes provide for an aggregate amount of $85,000, of which the entire amount was outstanding as of June 30, 2002. The notes carry an interest rate of 7.5% per annum. The notes and all accrued interest are payable within 12 months from the date of the advance. Subject to approval of the Company's Board of Directors, the notes, if unpaid at term, allow the lenders to convert any principal balance of the note and all outstanding accrued interest into common stock of the Company at a conversion rate of $0.70 per share within 12 months from the date of the advance. On May 1, 2002, the Board of Directors of the Company approved the terms of a promissory note with a finance company, which establishes a loan facility of $500,000 with an interest rate of 7.5% per annum, to be repaid, including all accrued interest, within one year from the date of the first advance. The loan proceeds are to be disbursed to the Company in four monthly tranches beginning in April 2002 to be used to pay outstanding salaries, expenses and fees and to provide working capital to the Company. Subject to approval of the Company's Board of Directors and within one year of issuance of the note, the note allows, if the loan is unpaid at term, the lender to convert the outstanding principal amount and outstanding interest into common stock of the Company at a conversion rate of $0.35 per share. As of September 30, 2002, $500,000 was outstanding. On October 8, 2002, the Board of Directors of the Company approved the terms of a two promissory notes establishing loan facilities totaling $280,000 with an interest rate of 7.5% per annum, to be repaid, including all accrued interest, within one year from the date of the receipt of funds. The loan proceeds were to be disbursed to the Company as of October 10, 2002 to be used to pay outstanding salaries, expenses, and fees and to provide working capital to the Company. Subject to approval of the Company's Board of Directors and within 90 days of issuance of the note, the note allows the lender to convert the outstanding principal amount and outstanding interest into common stock of the Company at a conversion rate of $0.18 per share. 12 ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Notes to Consolidated Financial Statements 8. Income Taxes The Company has net operating loss carry forwards aggregating approximately $2,042,000 at March 31, 2002, expiring through 2022. SFAS No. 109 requires the establishment of a deferred tax asset for all deductible temporary differences and operating loss carryforwards. Because of the uncertainty that the Company will generate income in the future sufficient to fully or partially utilize these carryforwards and that some losses may be limited to the extent they were generated from operations outside of the United States and due to recent changes in the Company's stock ownership, which could limit the utilization of the available carry forward for federal income tax purposes, a deferred tax asset of approximately $762,000 is offset by a valuation allowance of the same amount. 9. Commitments Leases In May 2001, the Company entered into a noncancelable lease agreement for office space in Rock Hill, South Carolina. The lease is for a three-year period with minimum annual rental payments of approximately $18,000. Rent expense for the quarter, was approximately $4,469 in 2002 and $4,469 in 2001. Employment and Consulting Agreements In January 2000, the Company entered into an employment agreement with the former chief executive officer that provided for payments of $110,000 per year along with certain other benefits in exchange for defined services to be performed by the employee. Effective May 1, 2002, the employment agreement was terminated and a consulting agreement to retain the services of the former chief executive officer was executed concurrently. On April 23, 2001, the Board of Directors granted an Incentive Stock Option (see Note 9) to the President of GIG who is also a Director to purchase 100,000 shares of common stock in connection with an employment agreement with GIG. The Incentive Stock Option will vest in four equal annual increments starting on April 23, 2001. The exercise price was based upon the closing price of the common stock on April 23, 2001 or $1.75 per share. Effective May 1, 2002, the employment agreement and Incentive Stock Option were terminated and on May 3, 2002, a consulting agreement, with the former president of GIG, was executed. On May 1, 2001, the Company entered into a one-year contractual agreement with a consultant who acted as chief financial advisor to the Company. The agreement provided for payment of $4,300 monthly. The Company also granted an Incentive Stock Option (see Note 9) to acquire 25,000 shares of common stock which vests in equal quarterly increments beginning August 1, 2001. Effective December 1, 2001, the agreement was canceled by the consultant, which resulted in the cancellation of the Incentive Stock Option. On April 1, 2002, the Company entered into a new six-month contractual agreement with this consultant. On November 1, 2002, the Company entered into a new, revised three month contractual agreement with this consultant. ADVA has temporarily replaced all of its employment contracts with Consulting Agreements until such time as it is viable for the company to recruit and retain full time employees again. Subsequent to March 31, 2002, the Company entered into five contractual agreements, generally for a six-month period, with consultants who will act as officers or occupy key positions in the Company and GIG. The agreements replace certain employment contracts described above, provide monthly payments between $2,000 and $10,000 and are cancelable by either the Company or the consultant with between 30-90 days notice. Additionally, certain of the agreements provided for the granting of Incentive Stock Options to acquire an aggregate of 107,500 shares of common stock, which vest between 90 and 180 days from the grant dates. The exercise price will be based on the per share market price on the date that the options were approved by the Board of Directors. The fair value of these options will be expensed in fiscal 2003. 13 ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Notes to Consolidated Financial Statements Consultant Contracts Ernst R. Verdonck. Mr. Verdonck serves as the President, Chief Executive Officer and Chief Financial Officer of ADVA. A Consulting Agreement between the Company and Mr. Verdonck, which secured Mr. Verdonck's services for a six-month term, was approved by ADVA's Board of Directors (with Mr. Verdonck abstaining) effective as of May 1, 2002. It includes "work-for-hire", non-disclosure, non-competition, travel and expense reimbursement clauses typically found in such agreements. The agreement includes a retainer of eighty (80) hours per month, with the option to reserve an additional 24 hours per month at a higher rate. The base monthly payment equals $9,000. ADVA reimburses Mr. Verdonck's reasonable, approved business travel and associated expenses. The agreement is renewable and termination of the agreement is possible by either party with ninety (90) days notice. Mr. Verdonck is to serve as the President of ADVA and provide management services related to ADVA's corporate and Board functions. Subject to Board approval, Mr. Verdonck will also be granted a stock option to purchase 30,000 shares of ADVA Common Stock if he achieves certain specific goals. The agreement also provides for certain incentive compensation based on achieving performance-related milestones as measured by stock trading, share price and the timely accomplishment of specific business goals. Anthony E. Mohr Mr. Mohr was employed by ADVA in January 2000 to serve as its President and Chief Executive Officer. The relatedagreement was terminated on April 30, 2002. The agreement provided Mr. Mohr for a severance package which on the date of termination would totalapproximately $75,000. Mr. Mohr's Termination Agreement provides for the repayment of approximately $67,450 in loans, accrued interest, un-reimbursed expenses and deferred salary to be divided into four equal tranches paid monthly commencing on May 1, 2002. A Consulting Agreement between ADVA and Prûdens~Consulo LLC, which retained Mr. Mohr's services for a one year term, was approved by the ADVA Board of Directors (with Mr. Mohr abstaining) with an effective date of May 1, 2002. It includes "work-for-hire", non-disclosure, non-competition, travel and expense reimbursement clauses typically found in such agreements. The Consulting Agreement includes a base retainer of eighty (80) hours per month with the option to retain an additional twenty-four (24) hours per month at a higher rate. The base monthly payment equals $10,000 and ADVA reimburses Mr. Mohr's reasonable, approved business travel and associated expenses. Mr. Mohr is eligible for a monthly reimbursement for personal automobile usage at a rate of $0.35 per mile when on company business. The Consulting Agreement is renewable and termination is possible by either party with ninety (90) days notice. Mr. Mohr's charter is to provide strategic consultation on all aspects of operations, technology and marketing. Subject to Board approval, Mr. Mohr will also be granted a stock option to purchase 25,000 shares of ADVA Common Stock. If ADVA fulfills the terms of both the Termination and Consulting Agreements, Mr. Mohr has agreed to waive his rights to the severance package due him under his prior Employment Agreement. If ADVA defaults on the terms of either agreement, all monies due Mr. Mohr, including the total value of the severance package will become due and owing immediately and ADVA will be required to pay in a lump sum total within ten (10) days of the default. As of August 3, 2002, ADVA was in default under certain terms of the Termination Agreement. Mr. Mohr hads orally agreed to waive this default until the earlier of ADVA's cure of the default, or September 1, 2002. The parties are prepared and executed documentation memorializing the oral waiver for execution. 14 ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Notes to Consolidated Financial Statements George L. Down Mr. Down was previously employed by GIG to serve as its President. Mr. Down's Employment Agreement, signed on May 1, 2001, was terminated on May 1, 2002. This agreement provided for a severance package with an approximate value of $35,000 at the date of his termination. His Termination Agreement provides for the repayment of approximately $31,250 in un-reimbursed expenses and deferred salary to be divided into four equal tranches paid monthly commencing on May 3, 2002. The Termination Agreement also calls for the vesting as of May 1, 2002 of 75,000 share options previously included in his Employment Agreement. A Consulting Agreement between ADVA and Mr. Down, which secured Mr. Down's services for a six-month term, was approved by the ADVA Board of Directors (with Mr. Down abstaining) with an effective date of May 3, 2002. It includes customary "work-for-hire", non-disclosure, non-competition, travel and expense reimbursement clauses typically found in contracts of this type. Mr. Down's Consulting Agreement includes a retainer of one hundred (100) hours per month with the option to reserve an additional thirty (30) hours per month at a higher rate. The base monthly payment equals $6,250. ADVA reimburses Mr. Down's reasonable, approved business travel and associated expenses. Mr. Down is eligible for a monthly reimbursement for personal automobile usage at a rate of $0.35 per mile when on company business, including when commuting to and from the ADVA office. The Consulting Agreement is renewable and termination is possible by either party with ninety (90) days notice. Mr. Down is to serve as the President of GIG and provide management services related to ADVA's corporate and Board functions. Subject to Board approval, Mr. Down will also be granted a stock option to purchase 100,000 shares of ADVA Common Stock. The first 50,000 shares vest on the effective date of Mr. Down's Consulting Agreement. The remaining shares vest if specific performance goals are achieved. If ADVA fulfills the terms of both the Termination and Consulting Agreements, Mr. Down will waive his rights to the severance package due him under his prior employment agreement. If ADVA defaults on the terms of either agreement, all monies due Mr. Down, including the current value of the severance package, will become due and owing immediately and ADVA will be required to pay a lump sum total within ten (10) days of the default. As discussed above in connection with Mr. Mohr, ADVA is in default of certain terms of the Termination Agreements. Mr. Down has orally agreed to waive this default until the earlier of ADVA's cure of the default, or September 1, 2002. The parties have prepared and executed d ocumentation memorializing the oral waiver. Thomas A. Kruger Effective May 1, 2002, Mr. Kruger serves as a financial controller for a six (6) month term under a consulting agreement. Mr. Kruger is reimbursed at the rate of $50 per hour based on a minimum of 86 hours per month. Additional hours requested by ADVA or GIG is charged at a rate of $75 per hour. Mr. Kruger has also been granted options to purchase 25,000 shares of ADVA Common Stock. Of these, 6,250 options vested on February 1, 2002, with additional tranches of 6,250 options vesting on each of May 1, August 1 and November 1, 2002. On November 1, 2002, a new three (3) month consultant agreement was made with Mr. Kruger calling for an hourly rate of $75 based upon a minimum of 86 hours per month. Additional hours are charged at $100.00. Mr. Kruger has been granted an additional option of 6,250 shares as part of this agreement. Robert Eijkelhof Effective May 1, 2002, Mr. Eijkelhof serves as Vice President Investor Relations for a six-month term, as approved by ADVA's Board of Directors. Mr. Eijkelhof's agreement includes "work-for-hire", non-disclosure, non-competition, travel and expense reimbursement clauses typically found in such agreements. The agreement includes a retainer of forty (40) hours per month, reimbursed at the rate of $50 per hour, with the option to reserve an additional 12 hours per month at a $70 per hour rate. The base monthly payment equals $2,000. ADVA reimburses Mr. Eijkelhof's reasonable, approved business travel and associated expenses. The agreement is renewable and termination of the agreement is possible by either party with ninety (90) days notice. 15 ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Notes to Consolidated Financial Statements ADVA expects to retain other staff for technology and marketing efforts in the near future. Employment and Consulting Agreement Wavers As of September 30, 2002, ADVA was in default under certain terms of Mr. Mohr's and Mr. Down's Termination Agreements requiring ADVA to pay all their accrued back pay and unpaid reimbursable expenses and, in the case of Mr. Mohr, all loans (plus accrued interest), in four monthly installments commencing May 1, 2002. The Termination Agreements also provide that, so long as ADVA remains current in these repayment obligations, then Messrs. Mohr and Down each waive their rights to severance packages otherwise due them under the terms of their respective Employment. Messrs. Mohr and Down have orally agreed to waive ADVA's default until the earlier of ADVA's cure of the default, or September 1, 2002. The parties prepared written waivers memorializing their oral agreements for execution through September 1, 2002. Certain consultants executed addenda to their Consulting Agreements allowing ADVA to defer reimbursement of consultant expenses and payment of additional consultant fees for services rendered based upon contractual obligations waiving any defaults in connection with such deferral until the earlier of ADVA's payment of such deferred amounts or September 1, 2002. As of September 30, 2002, The Company was in default of these certain Consultant agreements and wavers regarding expenses and additional consultant fees. Consulting Contract Extensions On October 30,2002, The Board of Directors agreed to extend for three months the consultant agreements for Messrs. Ernst R. Verdonck, George L. Down and R. A. Eijkelhof with an option for a further ninety (90) day renewal.. The stock option clauses for these three (3) contract extensions were tabled pending further research, discussion, and negotiation for thirty days. Independent Accountants and Outside Legal Counsel Due to the lack of funds, ADVA ceased making payments to its independent accountants and outside legal counsel near the end of calendar 2001. Upon receipt of loan proceeds of approximately $500,000 in April 2002, ADVA entered into agreements with each of its independent accountants and outside legal counsel providing for the payment of these outstanding obligations aggregating approximately $227,000. As of September 30, 2002, these outstanding obligations totaled $222,746. 16 ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Notes to Consolidated Financial Statements 10. Stock Option Plan The Company, upon approval of the stockholders on September 26, 2001, adopted the 2001 Stock Option Plan (the "Plan") to provide for grants of options to purchase shares of common stock to officers, key employees, directors and consultants of the Company who are eligible to participate in the Plan. 1,400,000 shares of common stock have been reserved for issuance under the Plan. Options granted under the Plan will be either Incentive Stock Options or Non-Qualified Stock Options and will be granted at a price equal to the fair market value of the Company's common stock at the date of grant. In addition, no Incentive Stock Option may be granted to an employee owning directly or indirectly stock having more than 10% of the total combined voting power of all classes of stock of the Company, unless the exercise price is set at not less than 110% of the fair market value of the shares subject to such Incentive Stock Option on the date of the grant and such Incentive Stock Option expires not later than five years from the date of grant. Generally, the Incentive Stock Options and Non-Qualified Stock Options have terms of ten years from the date of grant. 20% of the options vest immediately on the date of grant. On each anniversary date of the grant, the options vest in increments of 20%. The options become fully vested and exercisable four years from the date of grant. Notwithstanding the preceding, the Board of Directors determines the terms of options granted on a case-by-case basis. The Company has granted options to acquire shares of common stock to officers, directors, and consultants, as follows: Option Shares - ---------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------ --------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price - -------------------------------------------------------------------------------- Balance, March 31, 2001 -- $ -- -- $ -- Granted 137,750 1.61 -- -- Exercised -- -- -- -- Forfeited (25,500 ) 1.24 -- -- - -------------------------------------------------------------------------------- Balance, March 31, 2002 112,250 $ 1.69 27,450 $ 1.65 - ------------------------------------------------------------------------------- The following table summarizes information about stock options outstanding at June 30, 2002. Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life (yrs) Price Exercisable Price - -------------------------------------------------------------------------------- $.01 - $.75 2,250 9.50 $ .58 450 $ .58 1.25 10,000 9.63 1.25 2,000 1.25 1.75 100,000 9.08 1.75 25,000 1.75 - -------------------------------------------------------------------------------- $.01 - $1.75 112,250 9.14 $ 1.69 27,450 $1.65 ================================================================================ The options were to generally vest at various dates through April 2004. (See Note 8). Pro forma information regarding net income is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method defined in this statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for 2002: 2002 ------- Risk-free interest rate 4.65% Volatility factor 100% Expected dividend yield 0% Weighted-average expected life 10 years The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect fair value estimate, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 17 ADVA INTERNATIONAL AND SUBSIDIARY (A Development Stage Enterprise) Notes to Consolidated Financial Statements For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net loss was as follows: Year ended March 31, 2002 --------------------------------------------------------------- Net loss - as reported $(1,224,695) Net loss - pro forma (1,264,695) Basic and diluted loss per share As reported $ (.09) Pro forma (.10) --------------------------------------------------------------- 11. Property and Equipment As of September 30, 2002, property and equipment consisted of the following: September 30, 2002, 2002 --------------------------------------------------------------- Estimated Useful Life in Years --------------------------------------------------------------- Computers and office equipment 3 $12,943 Furniture and fixtures 5 12,734 --------------------------------------------------------------- 25,677 Less accumulated depreciation 8,724 --------------------------------------------------------------- $16,953 --------------------------------------------------------------- Depreciation expense for the quarters ended June 30, 2002 and 2001 was $1,715 and $-0-, respectively. 12. ADVA Outside Director Options On April 30, 2002, the Board of Directors in special consideration for advisory services rendered to ADVA International Inc. granted a Director a Non-Qualified Stock Option for 10,000 shares of stock at an exercise price based upon the closing price of ADVA (ADII) on April 30, 2002. 13. Director Changes None 18 Item 2. Plan of Operations The following information should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Form 10-QSB. Our short-term objectives are four fold: o To attract sufficient funding to operate the company and realize our business plans until such time as income is sufficient to do so. To build out from the current source code a universal rendering module (GIGSTAR) for marketing as a Component Technology product to third parties o To further enhance the compatibility of our CAD visualization product (GIGVIZ) with the three major 3D solid modeling kernels thereby gaining complete compatibility with nearly five (5) million CAD users as potential o To begin marketing our products and technology and create multiple revenue streams With adequate funding, we expect to commence sales during the fourth quarter of fiscal 2003. We expect to be in a position to show our GIGSTAR component in beta form to a variety of potential clients at various CAD/CAM oriented trade shows commencing in February 2003. The success of this plan depends, in part, on our ability to forge cooperative relationships with the major hardware and software vendors in the CAD/CAM market. We shall also seek to sell our products worldwide directly over the Internet and via the reseller channel for CAD solutions commencing in the above-mentioned period We expect to introduce our CAD visualization product on the three largest distributions of the UNIX® OS: H-P UNIX®, SGI Irix and SUN Solaris, during the coming year. Our long-term objectives are to generate steadily increasing revenues and obtain the capital necessary to acquire or license other promising technologies. We are also exploring several new technology opportunities for future development and marketing enterprises. During the Quarter ended September 30, 2002, ADVA suffered a loss from operations of $(289,518). We funded our operating losses during this period through the proceeds from long-term debt. During the year ended March 31, 2002, we generated operating losses of $(940,977). We funded our operating losses during this period through the proceeds from long-term debt. We do not have available creditor, bank financing or other external sources of funding. Due to historical operating losses, our operations have not generated positive cash flow. In order to obtain capital we may need to sell additional shares of common stock and/ or borrow funds from private lenders, some of which may take the form of a Convertible loan. There is no assurance if we do receive a convertible loan we will be able to pay this money back to the lender prior to its due date, thus having to convert the loan to stock. The Company is actively seeking fresh capital from a pool of accredited investors, some of which are existing investors. Based upon the anticipated combination of an infusion of capital through low interest loans, convertible to stock after one year (or less), capital raised through the sale of additional stock plus anticipated revenue from joint venture agreements with hardware and software manufacturers in the 3D, Animation and CAD marketplaces, we believe we will have adequate funds to meet our projected cash needs through Dec. 30, 2002. However, should we not receive an infusion of capital, and or not execute anticipated agreements with hardware and software manufacturers, the Company will continue to incur additional losses and may be forced to cease operations. No assurances can be given at this time as to the availability of the new funding, the terms thereof, or the execution of revenue generating agreements. Going forward, we have reduced our total number of employees to zero, now relying on outside vendors and contract consultants for the Company's day-to-day operation and technology development. 19 PART II. OTHER INFORMATION Item 2. Changes in Securities None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits No. Description - --- ----------- 10.1 Thomas Kruger Consulting Agreement (1) Lagan Investments Ltd. Promissory Note previously filed with the Securities and Exchange Commission on November 12, 2002 on Form 8-K. (2) H.J. Heerema Promissory Note previously filed with the Securities and Exchange Commission on November 12, 2002 on Form 8-K. (3) Ernst R Verdonck Addendum to Consulting Agreement previously filed with the Securities and Exchange Commission on 10-KSB July 15, 2002. (4) Anthony E Mohr Addendum to Consulting Agreement previously filed with the Securities and Exchange Commission on 10-KSB July 15, 2002. (5) George L Down Addendum to Consulting Agreement previously filed with the Securities and Exchange Commission on 10-KSB July 15, 2002. (6) Robert A. F. Eijkelhof Addendum to Consulting Agreement previously filed with the Securities and Exchange Commission on 10-KSB July 15, 2002. (7) Anthony E Mohr Waver to Termination Agreement previously filed with the Securities and Exchange Commission on 10-KSB/A 0n August 8, 2002. (8) George L Down Waver to Termination Agreement previously filed with the Securities and Exchange Commission on 10-KSB/A 0n August 8, 2002. 99.1 Certification Pursuant to 18 A.S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. (b) Reports on Form 8-K An 8-K Report was filed on November 12, 2002 during the quarter following this report. 20 Signatures In accordance with the requirements of the Exchange Act, the issuer caused this report to be signed on its behalf by the undersigned, thereunto duly signed. /s/ Ernst R. Verdonck ------------------------ Ernst R. Verdonck CEO, President and CFO Date: November 19, 2002
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10QSB Filing
Adva International (ADII) Inactive 10QSB2003 Q2 Quarterly report (small business)
Filed: 19 Nov 02, 12:00am