3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 033-01289-D
Chapeau, Inc.
-------------
(Exact name of small business issuer as specified in charter)
Utah 87-0431831
---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Greg Street, Sparks , Nevada 89431
------------------------------- -----
(Address of principal executive offices) (Zip Code)
(916) 780-6764
--------------
(Issuer's Telephone number, including area code)
(Former name, former address, and former fiscal
year, if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
---------- ---------
As of May 15, 2003, the Issuer had 21,922,040 shares of its common stock,
par value $0.001 per share, issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
---------- ----------
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Chapeau, Inc., or Chapeau, has included its unaudited condensed
consolidated balance sheets as of March 31, 2003 and June 30, 2002 (the end of
our most recently completed fiscal year), and unaudited condensed consolidated
statements of operations for the three and nine months ended March 31, 2003 and
2002, and for the period from February 3, 2000 (date of inception of the
development stage), to March 31, 2003, and unaudited condensed consolidated
statements of cash flows for the nine months ended March 31, 2003 and 2002, and
for the period from February 3, 2000 (date of inception of the development
stage), through March 31, 2003, together with unaudited condensed notes thereto.
In the opinion of management of Chapeau, the financial statements reflect all
adjustments, all of which are normal recurring adjustments, necessary to fairly
present the consolidated financial condition, results of operations, and cash
flows of Chapeau for the interim periods presented. The financial statements
included in this report on Form 10-QSB should be read in conjunction with the
audited financial statements of Chapeau and the notes thereto for the year ended
June 30, 2002, included in our annual report on Form 10-KSB.
2
CHAPEAU, INC. AND SUBSIDIARY
dba BLUEPOINT ENERGY PRODUCTS, INC.
(A Development Stage Company)
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, June 30,
2003 2002
- ---------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 76,150 $ 445
Inventories and related deposits 1,141,095 274,445
Other current assets 38,786 13,872
- ---------------------------------------------------------------------------
Total Current Assets 1,256,031 288,762
Property and Equipment, net of accumulated
depreciation of $23,844 and $11,949 52,135 45,230
Other Assets 56,069 15,086
- ---------------------------------------------------------------------------
Total Assets $1,364,235 $ 349,078
===========================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 623,755 $ 430,715
Accrued liabilities 626,427 460,778
Customer deposits 494,280 -
Convertible and other promissory notes, less 43,300 805,053
unamortized discount
- ---------------------------------------------------------------------------
Total Current Liabilities 1,787,762 1,696,546
- ---------------------------------------------------------------------------
Long-Term Liabilities - Convertible Bonds 821,000 -
- ---------------------------------------------------------------------------
Total Liabilities 2,608,762 1,696,546
- ---------------------------------------------------------------------------
Stockholders' Deficit
Preferred Stock, $0.001 par value; 5,000,000
shares authorized; none issued and outstanding - -
Common stock, $0.001 par value; 325,000,000
shares authorized; 21,588,706 and 12,447,550
shares issued and outstanding at March 31, 21,589 12,448
2003 and June 30, 2002
Additional paid-in capital 4,796,144 2,360,706
Deferred compensation (52,623) -
Deficit accumulated prior to date of
inception of the development stage (259,373) (259,373)
Deficit accumulated from date of inception
of the development stage (5,750,264) (3,461,249)
- ---------------------------------------------------------------------------
Total Stockholders' Deficit (1,244,527) (1,347,468)
- ---------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficit $1,364,235 $ 349,078
===========================================================================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
CHAPEAU, INC. AND SUBSIDIARY
dba BLUEPOINT ENERGY PRODUCTS, INC.
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)
For the period
from February 3,
2000 (date of
inception of
For the Three Months For the Nine Months the
Ended Ended development
March 31, March 31, stage) through
------------------------- ---------------------------- March 31,
2003 2002 2003 2002 2003
-------------------------------------------------------------------------------------------------------
General and administrative
expense $ 398,043 $ 230,611 $ 982,259 $ 832,834 $ 2,495,437
Research and development
expense 76,491 75,742 204,039 303,400 850,190
Stock issued for compensation - - 350,000 - 355,000
Amortization of deferred
compensation from issuance
of stock options 5,093 - 27,468 - 27,468
Write off of intangible assets - - - - 318,531
Write off of note receivable - 57,330 - 57,330 57,330
In-process research and
development acquired - - - - 376,624
-------------------------------------------------------------------------------------------------------
Loss From Operations (479,627) (363,683) (1,563,766) (1,193,564) (4,480,580)
Other Income and Expense:
Interest income - 1,234 - 4,434 73,126
Interest expense (36,523) (48,543) (101,570) (56,686) (171,013)
Interest expense from
amortization of discount
on convertible promissory
notes and debt issue costs (220,886) (143,420) (623,679) (399,179) (1,171,797)
-------------------------------------------------------------------------------------------------------
Net Loss $ (737,036) (554,412) (2,289,015) (1,644,995) (5,750,264)
=======================================================================================================
Basic Loss Per Common Share $ (0.04) $ (0.04) (0.15) (0.13)
=======================================================================================
Weighted-Average Outstanding
Common Shares 18,242,269 12,375,265 15,369,064 12,192,612
=======================================================================================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
CHAPEAU, INC. AND SUBSIDIARY
dba BLUEPOINT ENERGY PRODUCTS, INC.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the period
from
February 3, 2000
(date of inception
For the Nine Months of the
Ended development
March 31, stage) through
----------------------------- March 31,
2003 2002 2003
- ---------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net loss $ (2,289,015) $ (1,644,995) $ (5,750,264)
Adjustments to reconcile net loss to net cash
used in operating activities
Amortization of discount on convertible 623,679 399,179 1,171,797
promissory notes and debt issue costs
Compensation and rent paid with common stock 381,000 - 386,000
Amortization of deferred compensation from
issuance of stock options 27,468 - 27,468
Depreciation and amortization 11,895 102,746 175,159
Write-off of in-process research and - - 376,624
development acquired
Write-off of intangible assets - - 318,531
Write-off of note receivable - 57,330 57,330
Interest paid with common stock - 23,430 23,430
Interest income accrued on advances to - - (5,348)
Specialized
Changes in assets and liabilities:
Inventories and related deposits (866,650) (43,435) (1,141,095)
Other current assets (24,914) 20,940 (35,618)
Other assets (40,983) 6,481 (56,069)
Accounts payable 276,811 121,494 691,775
Accrued liabilities 246,939 274,825 700,200
Customer deposits 494,280 - 494,280
- ---------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (1,159,490) (682,005) (2,565,800)
- ---------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Issuance of note receivable - - (200,000)
Advances paid to Specialized prior to - - (397,464)
acquisition
Collection of note receivable - 50,971 142,670
Cash acquired in acquisition of Specialized,
net of acquisition costs paid - - 97,018
Purchase of property and equipment (18,800) (48,575) (71,554)
- ---------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Investing
Activities (18,800) 2,396 (429,330)
- ---------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from issuance of common stock and 635,000 - 1,622,285
warrants, net of offering costs
Proceeds from issuance of convertible
promissory notes and related beneficial 685,071 472,111 1,238,501
conversion option
Proceeds from issuance of warrants and common
stock related to convertible promissory notes 114,929 137,889 391,499
Loan issue costs (181,005) - (181,005)
- ---------------------------------------------------------------------------------------------------
Net Cash Provided By Investing Activities 1,253,995 610,000 3,071,280
- ---------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash And Cash Equivalents 75,705 (69,609) 76,150
Cash And Cash Equivalents At Beginning of Period 445 108,610 -
- ---------------------------------------------------------------------------------------------------
Cash And Cash Equivalents At End Of Period $ 76,150 $ 39,001 $ 76,150
===================================================================================================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
CHAPEAU, INC. AND SUBSIDIARY
dba BLUEPOINT ENERGY PRODUCTS, INC.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(A) Significant Accounting Policies and Basis of Presentation
Basis of Presentation - The accompanying unaudited condensed consolidated
financial statements of Chapeau, Inc. ("Chapeau") and its subsidiary have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB. Accordingly, these financial statements do not
include all of the information and disclosures required by generally accepted
accounting principles for complete financial statements. These financial
statements should be read in conjunction with the annual financial statements
and the notes thereto for the year ended June 30, 2002 and for the period from
February 3, 2000 (date of inception of the development stage) through June 30,
2002, included in our annual report on Form 10-KSB, especially the information
included in Note 1 to those financial statements, "Nature of Operations and
Summary of Significant Accounting Policies." In the opinion of our management,
the accompanying unaudited condensed consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) and
disclosures required in interim financial information necessary to fairly
present Chapeau's consolidated financial position as of March 31, 2003, its
consolidated results of operations for the three months ended March 31, 2003 and
2002, and its consolidated results of operations and cash flows for the nine
months ended March 31, 2003 and 2002, and for the period from February 3, 2000
(date of inception of the development stage), through March 31, 2003. The
results of operations for the three months and nine months ended March 31, 2003,
may not be indicative of the results that may be expected for the year ending
June 30, 2003.
Business Condition - The accompanying unaudited condensed consolidated financial
statements have been prepared assuming that Chapeau will continue as a going
concern. Chapeau is in the development stage and has not generated any revenue.
Chapeau incurred losses of $737,036 and $554,412 during the three-month periods
ended March 31, 2003 and 2002, respectively, and incurred losses of $2,289,015
and $1,644,995 and used $1,159,490 and $682,005 of cash in its operating
activities during the nine-month periods ended March 31, 2003 and 2002,
respectively. Through March 31, 2003, Chapeau has accumulated a deficit during
the development stage of $5,750,264 and at March 31, 2003, Chapeau has a
shareholders' deficit of $1,244,527 and a working capital deficit of $531,731.
These conditions raise substantial doubt about Chapeau's ability to continue as
a going concern. The unaudited condensed consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Chapeau's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, which
may include the need to obtain additional financing, and ultimately to attain
profitable operations. While Chapeau has recently received some customer
deposits against future deliveries, the Company does not have sufficient cash
flow to finance its operations on an on-going basis. To date, Chapeau has met
its short-term cash needs through promissory notes, equity financing, and
customer deposits. However, there can be no assurance that such sources of
financing, if any, will continue to be available or, if available, that they
will be on terms favorable to Chapeau or in amounts sufficient to meet Chapeau's
cash flow requirements.
Stock-Based Compensation - At March 31, 2003, Chapeau has stock-based employee
compensation plans, which are described more fully in Note (E). Chapeau
accounts for those plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation expense is reflected in
net loss, as all options granted under those plans had an exercise price equal
to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss and on basic and diluted loss
per common share if Chapeau had applied the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation:
4
Three Months March 31, Nine Months March 31,
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------
Net loss:
As reported $ (737,036) $ (554,412) $ (2,289,015) $ (1,644,995)
Less: Total stock-
based compensation
expense determined
under fair value based
method (58,733) (29,973) (382,995) (101,427)
- ---------------------------------------------------------------------------------------
Pro forma $ (795,769) $ (584,385) $ (2,672,010) (1,746,422)
=======================================================================================
Basic and diluted loss
per share: $ (0.04) $ (0.04) $ (0.15) $ (0.13)
As reported
Pro forma $ (0.04) $ (0.05) $ (0.17) $ (0.14)
(B) Organization and Nature of Operations
Chapeau was organized under the laws of the State of Utah on September 19, 1985,
to provide a capital resource fund to be used to participate in business
opportunities. Chapeau completed a public offering of its common stock in March
of 1986. Initially, Chapeau engaged in the operation of sport clothing stores,
but was unsuccessful and closed its final store in May 1989. Chapeau did not
have active operations from May 1989 until February 3, 2000.
Control and management of Chapeau changed on February 3, 2000, when two former
principal shareholders entered into a Stock Purchase Agreement with a group of
investors. The new investors purchased 5,000,000 shares of common stock from
the two former principal shareholders. The two former principal shareholders
and one of the new investors agreed to return 7,820,049 shares of common stock
for cancellation to Chapeau for no consideration. The two former principal
shareholders also agreed to contribute notes payable and accrued interest
totaling $16,602 due to them to the capital of Chapeau for no consideration.
Additionally, the former board of directors resigned and the new investor group
appointed a new board of directors. As a result of the stock purchase and
change in management, Chapeau's operations were reactivated on
February 3, 2000, representing the inception of a new development stage for
financial reporting purposes. The development stage activities included raising
capital and seeking investment or merger opportunities.
In February 2001, two of the then-existing members of the board of directors and
all of the officers of Chapeau resigned their positions, and Thomas J. Manz and
Guy A. Archbold were appointed as directors of Chapeau to fill the vacancies
created by their resignations. In addition, Mr. Manz became the Chairman of the
Board and Mr. Archbold became the Chief Executive and Financial Officer.
On April 11, 2001, Chapeau merged a wholly owned Nevada subsidiary with
Specialized Energy Products, Inc., ("Specialized"), making Specialized a wholly
owned subsidiary of Chapeau. Specialized sells customized engines and control
panels for use in the development, assembly and marketing of packaged co-
generation and power generation systems to the electrical power market.
Specialized was acquired in exchange for the cancellation of advances totaling
$397,464 plus related accrued interest of $5,348, the initial issuance of
3,500,000 shares of Chapeau common stock and the potential issuance of an
additional 3,000,000 shares of Chapeau common stock upon the achievement of
certain benchmarks in the development of Specialized's business. In October,
2002, Chapeau and Specialized agreed in principal to reduce the number of
incentive shares from 3,000,000 to 1,500,000 shares of Chapeau common stock,
according to the following schedule, pending a formal amendment of the Plan of
Reorganization and Agreement among Chapeau, Specialized, and Chapeau Nevada,
Inc. approved April 11, 2001:
- - 500,000 shares upon initial receipt of revenues from the sale of its engine
and control panel products;
- - 500,000 shares upon the realization of gross revenues of not less than
$2,000,000 in any fiscal quarter; and
- - 500,000 shares upon the realization of gross revenues of not less than
$4,000,000 in any fiscal quarter.
5
(C) Basic and Diluted Loss Per Share
Basic loss per share amounts are computed by dividing net loss by the weighted-
average number of common shares outstanding during each period. Diluted loss per
share amounts are computed assuming the issuance of common stock for potentially
dilutive common stock equivalents. Antidilutive outstanding stock options,
warrants and convertible promissory notes have been excluded from the diluted
loss per share calculations. None of the total options or warrants to acquire
10,633,334 shares of common stock outstanding at March 31, 2003 were included in
the computations of diluted loss per share.
(D) Promissory Notes and Warrants
On August 14, 2002, Chapeau entered into a loan agreement with Calim Equity
Partners, LLC to borrow an amount up to $500,000. Under this agreement, Chapeau
could request drawings under the promissory note on a monthly basis, unless
otherwise authorized by Calim. On December 2, 2002, the promissory note was
amended to provide for an additional $300,000 to be borrowed under the loan
agreement. By December 31, 2002, Chapeau had drawn the entire $800,000 under
the loan agreement. The promissory note accrued interest at 12% per annum,
payable quarterly, with payments to commence November 1, 2002. The original due
date of the promissory note and any unpaid accrued interest was February 1,
2003. This loan was secured by a first lien security interest in and to all of
Chapeau's assets. As stated below, effective in February 2003, the promissory
note was converted into convertible bonds. Calim also earned loan placement
fees in the aggregate amount of $80,000 on the original loan amount and the
additional loan amount, which amount is included in accounts payable and is
currently past due.
Total debt issue costs, including loan placement fees, were $181,005 and were
amortized over the period from the date of the loan agreement (August 14, 2002)
or the amendment thereto (December 2, 2002), as appropriate, through February
1, 2003.
Effective in February 2003, Calim converted the $800,000 promissory note plus
accrued interest in the amount of $21,000 into convertible bonds, under the
terms of the loan agreement. The terms of the convertible bonds include 1) the
bonds are due five years after conversion; 2) the bonds are issued in units of
$1,000; 3) interest on the bonds accrues at 12% per annum, payable on a
semiannual basis; 4) the bonds are redeemable by Chapeau, but not earlier than
two years after conversion; 5) each $1,000 bond is convertible into 6,667 shares
of common stock plus warrants to purchase 6,667 shares of common stock at $0.25
per share, the warrants to expire two years after issuance; 6) the conversion
price of bonds will be subject to annual reset to provide for a twenty percent
increase in benefit to the holders; and 7) customary registration rights and
anti-dilution provisions.
In further consideration for making this loan, Chapeau granted to Calim options
to purchase up to an aggregate of 1,300,000 shares of its common stock at a
price of $0.10 per share, vesting immediately, exercisable for five years
following the date of the loan agreement or amendment. The total fair value of
the options was $135,500 ($0.1042 per share) on the dates issued, which was
determined using the Black-Scholes Option-Pricing model with the following
weighted-average assumptions: risk-free interest rate of 3.25%, expected
dividend yield of 0%, expected volatility of 195%, and expected life of five
years.
As additional consideration for making this loan, Chapeau designated Calim as
its exclusive agent to place a convertible bond issue in the principal amount
not to exceed $1,500,000 on terms and conditions reasonably satisfactory to
Calim and Chapeau. The terms of the bonds in this placement are to include 1)
bonds are to be due five years after placement; 2) bonds will be issued in units
of $1,000; 3) interest on the bonds will accrue at 10% per annum, payable on a
semiannual basis; 4) bonds are to be redeemable by Chapeau, but not earlier than
two years after placement; 5) each $1,000 bond is convertible into 2,000 shares
of common stock plus warrants to purchase 2,000 shares of common stock at $1.00
per share, warrants to expire two years after issuance;
6) conversion price of bonds will be subject to annual reset to provide for a
twenty percent increase in benefit to the holders; and 7) customary registration
rights and anti-dilution provisions.
The proceeds from the Calim note and options were allocated to the financial
instruments issued based upon their relative fair values and resulted in
allocating $440,373 to the convertible promissory note, $114,929 to the options,
and $244,698 to the beneficial conversion option of the notes. The portions of
the proceeds allocated to the options and to the beneficial conversion feature
were accounted for as a discount to the note and were amortized over the period
from August 14, 2002 or December 2, 2002, as appropriate, through February 1,
2003. In accordance with the Emerging Issues Task Force ("EITF") Issue No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Continently Adjustable Conversion Ratios," and EITF Issue No. 00-27,
6
"Application of Issue No. 98-5 to Certain Convertible Instruments," Chapeau
determined that there was not a beneficial conversion feature on the date the
original $500,000 note was issued (August 14, 2002), but that there was a
beneficial conversion feature associated with the $300,000 amendment to the note
on December 2, 2002.
As required by the Calim loan agreement, holders of convertible promissory notes
in the aggregate principal amount of $830,000 previously issued by Chapeau
entered into forbearance and subordination agreements whereby they agreed to 1)
extend the maturity dates of their notes and accrued interest until February 2,
2003 and 2) subordinate their security interest in Chapeau's assets to the
security interest of Calim. As part of the forbearance agreements, Chapeau
agreed to issue one share of common stock to the noteholders for each dollar of
principal outstanding under such notes for a total of 830,000 shares of common
stock. The market value of these shares of common stock was $58,100 ($0.07 per
share), was recorded as a payment resulting in an additional discount on these
promissory notes, and was amortized over the period from August 14, 2002 through
February 2, 2003. Effective February 2, 2003, these convertible promissory
notes in the aggregate principal amount of $830,000, plus accrued interest of
$60,290, were converted into 3,561,156 shares of common stock.
On March 31, 2003, Chapeau entered into a deferred payment and settlement
agreement with its landlord in Sparks, Nevada. Under the terms of this
agreement, Chapeau converted past due rent into a note payable to the landlord
in the principal amount of $43,300. The note is due October 1, 2003 and bears
interest at 10%. As further consideration for entering into the settlement,
Chapeau agreed to issue the landlord 100,000 shares of common stock, valued at
$31,000 ($0.31 per share), which was the market price of the stock on the date
of the settlement.
7
Information regarding promissory notes for the nine months ended March 31, 2003
is as follows:
Unamortized Promissory
Discount on Notes, Less
Promissory Promissory Unamortized
Notes, Gross Notes Discount
- ------------------------------------------------------------------------------------------
Balance at June 30, 2002 $ 830,000 $ (24,947) $ 805,053
Nine months ended March 31, 2003:
Draws under the Calim note 800,000 (359,627) 440,373
Stock issued for extension of notes - (58,100) (58,100)
Amortization of discount - 442,674 442,674
Note issued to landlord 43,300 - 43,300
Conversion of Calim note into long (800,000) - (800,000)
term bonds
Conversion of subordinated notes
into common stock (830,000) - (830,000)
- ------------------------------------------------------------------------------------------
Balance at March 31, 2003 $ 43,300 $ - $ 43,300
==========================================================================================
(E) Common Stock and Options
In October 2002, the Board of Directors of Chapeau awarded 2,000,000 shares of
common stock to the Chief Executive Officer as a stock bonus. The award has
been accounted for at its estimated fair market value of $350,000 and charged to
expense during the quarter ended December 31, 2002 under the caption "stock
issued for compensation".
Also in October 2002, options to acquire an aggregate of 2,300,000 shares of
common stock of Chapeau were awarded to the current members of the Board of
Directors, including the two principal executive officers. These options are
exercisable at $0.25 per share and subject to certain vesting criteria. The
Board of Directors also awarded an option to a consultant to Chapeau to acquire
400,000 shares of common stock at $0.25 per share in connection with his
services to the Company. Vesting under this option was immediate for 100,000
shares and monthly for three years for the other 300,000 shares. This option
expires in October 2007.
In December 2002, Chapeau sold 400,000 shares of common stock at $0.25 per share
in a private placement. The net proceeds to Chapeau were $95,000, net of a
transaction fee of $5,000.
In February 2003, Chapeau issued 250,000 shares of common stock to an outside
consultant in cancellation of an account payable in the amount of $40,472
(weighted average of $0.1619 per share). The price per share was based on the
historical price per share of Chapeau's common stock at the time the
consultant's services were rendered.
Effective in March 2003, Chapeau issued 2,000,000 shares of common stock at
$0.30 per share in a private placement. The net proceeds to Chapeau were
$540,000, net of a transaction fee of $60,000. In connection with the private
placement, Chapeau also issued warrants to acquire 4,000,000 shares of common
stock, which warrants have an exercise price of $0.50 and expire in March 2008.
The placement also provided the option to purchase an additional 333,334 shares
of common stock and issuance of warrants to acquire an additional 666,668 shares
of common stock under the same terms as the original purchase. This purchase
option was exercised subsequent to March 31, 2003, resulting in net proceeds to
Chapeau of $90,000, net of a transaction fee of $10,000.
8
(F) Strategic Alliance Agreement
In February 2003, Chapeau entered into a Strategic Alliance Agreement ("Alliance
Agreement") with URS Corporation ("URS"), whereby, among other things, Chapeau
and URS will jointly market the Company's Lean-One Combined Heat and Power
Systems ("Systems"). Under the terms of the Alliance Agreement, among other
things, Chapeau will, together with URS, formalize a management structure for
the alliance and establish guiding principles and objectives for marketing the
Systems, and URS will provide engineering services required for the
implementation of the Systems.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Forward Looking Statements
This discussion and analysis is designed to be read in conjunction with the
Management's Discussion and Analysis and Risk Factors set forth in Chapeau's
Form 10-KSB for the fiscal year ended June 30, 2002. As used herein, "we,"
"our," "us" and the like refer to Chapeau, Inc.
This report and other information made publicly available by Chapeau from
time to time may contain certain forward looking statements and other
information relating to Chapeau and its business that are based on the beliefs
of our management and assumptions made concerning information then currently
available to management. Such statements reflect the views of our management at
the time they are made and may not be accurate descriptions of the future. The
discussion of future events, including the business prospects of Chapeau, is
subject to the material risks listed below and based on assumptions made by
management. These risks include the viability of the planned market penetration
that we intend to make as a result of the Specialized merger, our ability to
identify and negotiate transactions that provide the potential for future
shareholder value, our ability to attract the necessary additional capital to
permit us to take advantage of opportunities with which we are presented, and
our ability to generate sufficient revenue such that we can support our current
cost structure and planned future operations, as well as to pay prior
liabilities incurred. Should one or more of these or other risks materialize or
if the underlying assumptions of management prove incorrect, actual results of
Chapeau may vary materially from those described in the forward looking
statements. We do not intend to update these forward looking statements, except
as may occur in the regular course of our periodic reporting obligations.
Risk factors
The material risks that we believe are faced by Chapeau as of the date of
this report are set forth below. This discussion of risks is not intended to be
exhaustive. The risks set forth below and other risks not currently anticipated
or fully appreciated by the management could adversely affect the business and
prospects of Chapeau.
Need for additional working capital. We have not generated any operating
revenues and expect to operate at a loss at least for the near term. Our
expenses are expected to continue to grow as we attempt to sell significant
number of systems. Although we have recently received some funding to continue
and expand our business and have secured some customer deposits against future
deliveries anticipated in our fiscal fourth quarter, we will need substantial
additional working capital either from purchase orders from customers with
corresponding cash deposits or from alternative sources of financing. We can
provide no assurance that we can secure such purchase orders or obtain such
financing, on terms acceptable to us or at all, or in amounts sufficient to meet
our cash flow requirements.
History of operating losses. During the nine months ended March 31, 2003
Chapeau has incurred a loss of $2,289,015 and during this past fiscal year,
Chapeau sustained a loss of $2,462,779. We cannot continue to sustain
significant losses for an extended period of time and expect to continue in
business.
Competition. We face substantial competition in the sale of co-generation
and power generation systems. Most of our competitors have substantially
greater resources than we do.
Customers need for third party financing. A number of our potential
customers have indicated that the finalization of purchase orders require the
customer to obtain third party financing. We can provide no assurance that such
financing will be available for our customers. If such financing is not
generally available, our sales efforts will be adversely affected.
Dependence on a few key employees. We are dependent upon the skill and
ability of our management, which currently consists of only two persons. We
currently lack depth of management and there is no assurance that we can hire
10
additional qualified personnel, even if our order flow increases and requires
additional personnel to conduct our business.
Poor market for capital expenditures. Many companies, including potential
customers, have substantially decreased their purchases of capital assets. A
continuation of this trend would undoubtedly adversely affect our sales efforts.
Lack of operating history of product systems. While our lead product has
been thoroughly tested in the laboratory, our product does not have a history of
operations in the field. Any failure in field performance would adversely
affect our business.
Dependence on a few suppliers. We currently rely on only a limited number
of suppliers for engines, digital controls, and certain other system components.
Any problems with these suppliers may adversely affect our business.
Lack of credit. While we believe that we have good relationships with our
suppliers, credit from these suppliers is not easily obtained. Failure to be
able to purchase materials on credit in the future would adversely affect our
business.
Limited public market for Chapeau's shares. Although our common stock
has been traded on the OTC Bulletin Board, trading has been sporadic and without
significant volume. There can be no assurance that an active public market for
our common stock will develop or be sustained.
Use of estimates
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require us to make estimates and
judgments that affect the reported amounts in the financial statements and the
related disclosures. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Estimated amounts may differ under different assumptions or
conditions, and actual results could differ from the estimates.
Overview
Chapeau was organized under the laws of the State of Utah on
September 19, 1985, to provide a capital resource fund to be used to participate
in business opportunities. Chapeau completed a public offering of its common
stock in March of 1986. Initially, Chapeau engaged in the operation of sport
clothing stores, but was unsuccessful and closed its final store in May 1989.
Chapeau did not have active operations from May 1989 until February 3, 2000.
Control and management of Chapeau changed on February 3, 2000, when two
former principal shareholders entered into a Stock Purchase Agreement with a
group of investors. The new investors purchased 5,000,000 shares of common
stock from the two former principal shareholders. The two former principal
shareholders and one of the new investors agreed to return 7,820,049 shares of
common stock for cancellation to Chapeau for no consideration. The two former
principal shareholders also agreed to contribute notes payable and accrued
interest totaling $16,602 due to them to the capital of Chapeau for no
consideration.
Additionally, the former board of directors resigned and the new investor
group appointed a new board of directors. As a result of the stock purchase and
change in management, Chapeau's operations were reactivated on February 3, 2000,
representing the inception of a new development stage for financial reporting
purposes. The development stage activities included raising capital and seeking
investment or merger opportunities.
In February 2001, two of the then-existing members of the board of
directors and all of the officers resigned their positions, and Thomas J. Manz
and Guy A. Archbold were appointed as directors of Chapeau to fill the vacancies
created by their resignations. In addition, Mr. Manz became the Chairman of the
Board and Mr. Archbold became the Chief Executive and Financial Officer.
11
On April 11, 2001, Chapeau merged a wholly owned Nevada subsidiary with
Specialized Energy Products, Inc., or Specialized, making Specialized a wholly
owned subsidiary of Chapeau. Specialized sells customized engines and control
panels for use in the development, assembly and marketing of packaged co-
generation and power generation systems to the electrical power market.
Specialized was acquired in exchange for the cancellation of advances totaling
$397,464 plus related accrued interest of $5,348, the initial issuance of
3,500,000 shares of Chapeau common stock and the potential issuance of an
additional 3,000,000 shares of Chapeau common stock on the achievement of
certain benchmarks in the development of Specialized's business. In October,
2002, Chapeau and Specialized agreed in principal to reduce the number of
incentive shares from 3,000,000 to 1,500,000 shares of Chapeau common stock,
according to the following schedule, pending a formal amendment of the Plan of
Reorganization and Agreement among Chapeau, Specialized, and Chapeau Nevada,
Inc. approved April 11, 2001:
- - 500,000 shares upon initial receipt of revenues from the sale of its engine
and control panel products;
- - 500,000 shares upon the realization of gross revenues of not less than
$2,000,000 in any fiscal quarter; and
- - 500,000 shares upon the realization of gross revenues of not less than
$4,000,000 in any fiscal quarter.
Operations
Chapeau has been in the development stage since February 3, 2000 and has
had no sales through March 31, 2003, with initial sales anticipated during the
fourth quarter of fiscal 2003. Prior to the change in managerial control, the
expenses of Chapeau were not significant and were composed of general and
administrative expenses principally for travel and professional fees. Chapeau
has incurred general and administrative expenses in the amount of $2,495,437,
and research and development costs of $850,190 for the period from February 3,
2000 (date of inception of the development stage) to March 31, 2003, principally
since February 2001. General and administrative expenses principally consist of
compensation to management and the board of directors, legal fees, and
consulting services. Research and development expenses principally consist of
employee compensation, prototype materials, and outside service costs.
At March 31, 2003, Chapeau had current assets of $1,256,031 and current
liabilities of $1,787,762, resulting in a working capital deficit of $531,731.
Current assets principally consist of inventories and deposits toward the
purchase of inventories. Inventories and related deposits principally represent
the cost of engines and related components for the initial systems to be
assembled. Current liabilities are principally composed of: (i) accounts payable
to various service and materials providers, and to Calim for financial advisory,
legal, and placement fees; (ii) accrued liabilities principally composed of
unpaid compensation to our management, employees, and directors, and related
payroll taxes; and (iii) customer deposits received under purchase orders for
our products.
Plans for Research and Development
We anticipate delivering our initial commercial cogeneration system during
our upcoming fiscal fourth quarter. This system utilizes an industry-
recognized, well-established natural gas reciprocating engine, is fully
functional and is in process of receiving UL Listing and has received a South
Coast Air Quality Management District ("SCAQMD") emission certification from a
California Air Resources Board certified lab. The system employs a proprietary
emission process utilizing our exclusive exhaust gas recirculation ("EGR")
system. Initial independent emissions testing have yielded very favorable
results. The system, referred to as "Lean-One" for its lean burn configuration
and characteristics, continues under examination for patent application. We
developed our emission process to enable our products to meet and exceed the
most stringent air quality management district standards in the U.S. market
while maintaining the characteristics of lean burn engine technology, thereby
producing high engine efficiencies and longer engine life. To that end,
independent testing of the Lean-One system was performed by Best Environmental,
a California Air Resources Board ("CARB") certified laboratory, at our facility
in Sparks, Nevada during the fourth quarter of fiscal 2002 and again in
September 2002. Best Environmental confirmed again in September 2002 that the
Lean-One system exceeded the requirements of SCAQMD, one of the most restrictive
air containment zones in the United States. The Lean-One test results
registered 0.009 grams nitrogen oxides per brake-horsepower hour. The SCAQMD
requirement is 0.15 grams NOx per b/hp-hr. In anticipation of initial
12
commercial deliveries of our Lean-One product, we will continue to work toward
securing exclusive supply arrangements with certain vendors, including our
engine supplier and a developer of certain digital control systems incorporated
in the Lean-One system.
Dependent on our ability to generate sufficient cash flow from operations
and/or obtain additional financing, we anticipate developing CHP cogeneration
and power generation systems complimentary to the Lean-One over the next twelve
months in additional power configurations.
Liquidity and Sources of Financing
As discussed in further detail herein, we have secured our initial customer
orders from customers for the purchase of our Lean-One Systems and anticipate
commencing deliveries during the fourth quarter of fiscal 2003. While we
anticipate that our current cash balances and collection of pending accounts
receivable in connection with these sales will enable the Company to meet its
immediate cash needs, additional capital will be required for us to continue as
an on-going concern over the next 12 months absent our receipt of sufficient
purchase orders from customers and associated cash deposits. Concurrent with
the foregoing, we will continue to evaluate alternative sources of capital to
meet our cash requirements, including other debt financing, issuing equity
securities and entering into other financing arrangements. There can be no
assurance, however, that any of the contemplated financing arrangements
described herein will be available and, if available, can be obtained on terms
favorable to us or in amounts sufficient to meet our cash flow requirements. If
we are unable to secure sufficient purchase orders from customers with
corresponding cash deposits and/or secure additional working capital as
indicated herein, then we may not be able to meet our near-term cash
requirements to continue business operations as an ongoing concern.
Plan of Operations
We plan to focus sales and marketing efforts of our CHP systems nationally,
with particular emphasis initially in California and New York, with plans to
subsequently expand distribution worldwide. We are seeking to form strategic
partnerships and other alliances with certain companies engaged in the
distribution of power generation products to achieve both domestic and
international marketing and sales objectives. As discussed in further detail
below, we have recently entered into an Agreement with The Gas Company, an
Alliance Agreement with URS and we are currently in discussion with several
other companies in connection with sales and marketing of our initial product.
While we are optimistic that the Agreement, the Alliance Agreement and these
other discussions will result in positive outcomes for Chapeau, there can be no
assurance that any other strategic partnerships or other alliances will be
formed or, if formed, will be on terms favorable to Chapeau or will result in
significant sales, if any, of our products.
As a consequence of the above noted CARB certified testing results and
various reviews of the commercial iteration of the Lean-One System, we have
received several inquiries concerning availability and sales of our Lean-One
system. We received our initial orders from customers for the purchase of our
Lean-One Systems, together with corresponding deposits, during the recently
ended third quarter and we are currently negotiating for the sale of our CHP
cogeneration and power generation systems to several public utilities and other
energy service companies, with significant interest for applications in high
demand areas throughout the United States. In addition, during the quarter
ended December 31, 2002 we entered into a Joint Strategic Agreement
("Agreement") with Southern California Gas Company ("The Gas Company") whereby
The Gas Company will provide internal funding to certain of its commercial
customers sponsoring showcase centers within Gas Company's service territory of
central and southern California with the goal of demonstrating the capabilities
of distributed power generation and cogeneration utilizing the Lean-One System.
Also, as discussed in further detail in Note F of the Notes to Condensed
Consolidated Financial Statements included in Part I of this Form 10-QSB, we
recently entered into a Strategic Alliance Agreement ("Alliance Agreement") with
URS Corporation ("URS") whereby Chapeau and URS will jointly market our Lean-One
Combined Heat and Power Systems. Our management anticipates that we should be
able to significantly finance our operations from the proceeds from sales
resulting from the Agreement and Alliance Agreement, if and when realized.
However, while we believe that the Agreement and Alliance Agreement will help
endorse our other selling efforts, there can be no assurance that we will
realize additional sales, if any, as a consequence of the Agreement or Alliance
Agreement.
If we achieve the financing necessary to pursue our plan of operations for
the next twelve months, however, we anticipate adding a significant number of
employees during that period.
13
At present, a significant sole-source supplier provides the gas-fired
engine that is the core of our product. We have, however, and intend to
continue evaluating alternative engines that would be suitable for use in our
products in the future.
As discussed in further detail herein, while we recently entered into an
Alliance Agreement with URS pursuant to which we will jointly market our Lean-
One Systems, we are continuing to evaluate alternative distribution channels for
our products, including, among others, a direct sales force as well as third
party distributors, both domestically and abroad. Our primary initial target
market remains principally commercial and industrial power users as well as gas
and electric utilities with application requirements under 1.4 megawatts.
The market for small scale CHP cogeneration equipment is competitive and
many of our competitors have more business experience and financial resources
than we do. In addition, the public utility grid notwithstanding, there are
several competing technologies used to support cogeneration applications in our
initial target market.
Proprietary protection for our products, processes and know-how is
important to our business. We also rely upon trade secrets, know-how and
continuing technological innovation to develop and maintain our competitive
position. Our intention remains to file patent and other applications to
protect our technology, inventions and improvements as soon as practicable.
We are also subject to various federal, state and local laws, regulations
and recommendations relating to safe working conditions, laboratory and
manufacturing practices, and the use and disposal of hazardous or potentially
hazardous substances. Further, the use of our cogeneration equipment is subject
to regulation by the Environmental Protection Agency of the federal government
as well as certain state and local regulatory agencies. The extent of
government regulation that might result from any future legislation or
administrative action cannot be accurately predicted.
Recent Accounting Pronouncements
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses
accounting for restructuring and similar costs. SFAS 146 supercedes previous
accounting guidance, principally Emerging Issues Task Force issue No. 94-3
("EITF 94-3"). We have adopted the requirements of SFAS 146 for restructuring
activities initiated after December 31, 2002. SFAS No. 146 requires that the
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF 94-3, a liability for an exit cost
was recognized at the date of the company's commitment to an exit plan. SFAS 146
also established that the liability should initially be measured and recorded at
fair value. Our adoption of SFAS 146 in the quarter ended March 31, 2003 did
not have a material impact on our financial position or results of operations,
but may affect the timing of recognizing future restructuring plans, if any.
In November 2002, the Emerging Issues Task Force ("EITF") finalized its
consensus on EITF 00-21, "Revenue Arrangements with Multiple Deliverables,"
which provides guidance on the timing and method of revenue recognition for
sales arrangements that include the delivery of more than one product or
service. EITF 00-21 is effective prospectively for arrangements entered into in
fiscal periods beginning after June 15, 2003. Under EITF 00-21, revenue must be
allocated to all deliverables regardless of whether an individual element is
incidental or perfunctory. Chapeau is in the development stage and has not had
any sales as of March 31, 2003. We are currently analyzing the impact of the
adoption of EITF 00-21 on the future sales and financial statements of Chapeau.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure". This statement amends Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. It also amends the
disclosure provisions of Statement No. 123 to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. Statement No. 148 also
requires disclosure about those effects in interim financial information. We
adopted the disclosure requirements of Statement No. 148 for the quarter ended
March 31, 2003 (see Note E to the Financial Statements).
14
ITEM 3. CONTROLS AND PROCEDURES
Based on their evaluation of Chapeau's controls and other procedures
conducted within 90 days of the date of filing this report on Form 10-QSB, our
Principal Executive Officer and Principal Financial Officer have concluded that
Chapeau's disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) promulgated under the Securities and Exchange Act of 1934, as amended)
are effective. There have been no significant changes in Chapeau's internal
controls or in other factors that could significantly affect those controls
subsequent to the date of their evaluation.
15
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Effective February 2, 2003, convertible promissory notes totaling $830,000,
plus accrued interest of $60,290, were converted into 3,561,156 shares of common
stock. This stock was issued pursuant to Section 4(2) of the Securities Act of
1933, as amended ("Section 4(2)").
During the quarter ended March 31, 2003, Chapeau entered into a deferred
payment and settlement agreement with its landlord in Sparks, Nevada. Under the
terms of this agreement, among other things, Chapeau agreed to issue the
landlord 100,000 shares of common stock. This stock was issued pursuant to
Section 4(2) of the Securities Act of 1933, as amended.
In February 2003, Chapeau issued 250,000 shares of common stock to an
outside consultant in cancellation of an account payable in the amount of
$40,472. This stock was issued pursuant to Section 4(2) of the Securities Act of
1933, as amended.
In March 2003, Chapeau sold 2,000,000 shares of common stock in a private
placement at $0.30 per share. The net proceeds to Chapeau were $540,000, net of
a transaction fee of $60,000. This stock was issued pursuant to Section 4(2).
Furthermore, warrants to acquire 4,000,000 shares of common stock and an option
to purchase 333,334 shares of common stock were issued to the purchaser in
connection with this placement. The warrants vested immediately, have an
exercise price of the warrants is $0.50 per share and expire in March 2008. The
option vested immediately, has an exercise price of $0.30 per share and expires
December 31, 2003. The warrant and option were issued pursuant to Section 4(2).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Chapeau has made no interest payments or paid the loan placement fee due
under the Calim loan agreement. Calim has not delivered a notice of default in
connection with the referenced payments, however, and in January 2003, Calim
delivered to Chapeau its notice to convert the aggregate amount of outstanding
principal and interest under the related note in accordance with its terms,
pending other noteholders converting their respective notes which did take
place. As discussed in further detail in Note D of the Notes to Condensed
Consolidated Financial Statements included in Part I of this Form 10-QSB, during
the recently ended third quarter the aggregate amount of approximately $821,000,
representing the outstanding principal and substantially all of the accrued
interest due under the Calim loan agreement, was converted into convertible
bonds. Unpaid loan placement fees and accrued interest in the aggregate amount
of approximately $90,000 is included in current liabilities.
As also discussed in further detail in Note D of the Notes to Condensed
Consolidated Financial Statements included in Part I of this Form 10-QSB, all of
the other promissory notes and substantially all of the associated accrued
interest were converted during the quarter ended March 31, 2003. As a
consequence of these actions, the Company converted approximately $890,000 in
outstanding principal and interest under these notes into approximately
3,561,000 shares of Chapeau's common stock. Accrued interest not converted in
the amount of approximately $28,000 is included in current liabilities at March
31, 2003.
16
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
SEC
Exhibit Reference
Number Number Title of Document Location
- -------------------------------------------------------------------------------
1 (10) Stock Purchase Agreement with MFPI, LLC and This filing
related warrant
2 (99) Certification of Guy A. Archbold, Chief This filing
Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Reports on Form 8-K
During the quarter ended March 31, 2003, Chapeau did not file a report on
Form 8-K.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHAPEAU, INC.
Dated: May 15, 2003 By /s/ Guy A. Archbold
-------------------------
Guy A. Archbold, Director
(Principal Executive Officer and
(Principal Financial Officer)
18
Certification of Chief Executive Officer and Chief Financial Officer
I, Guy A. Archbold, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Chapeau,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly report;
4. Chapeau Inc.'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 Chapeau Inc. 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 quarterly
report is being prepared;
b) evaluated the effectiveness of Chapeau Inc.'s disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. Chapeau's other certifying officers and I have disclosed, based
on our most recent evaluation, to Chapeau Inc.'s auditors and the
audit committee of Chapeau Inc.'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 Chapeau's ability to
record, process, summarize and report financial data and have
identified for Chapeau'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 Chapeau's internal
controls; and
6. Chapeau's other certifying officers and I have indicated in this
quarterly 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: May 15, 2003
/s/ Guy A. Archbold
-----------------------------------
Guy A. Archbold, Chief Executive
Officer and Chief Financial Officer
19