U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PUSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PUSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO ________________________
Commission File Number: 000-25973
JOYSTAR, INC.
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(Name of Small Business Issuer in its Charter)
California 68-0406331
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5 Whatney, Irvine, Ca. 92618
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(Address of Principle Executive Offices)
(949) 837-8101
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(Issuer's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
None
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.001 Par Value
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X ]No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The registrant's revenues for its most recent fiscal year were $43,170.
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 19, 2004 was $18,520,373 based upon the market
price of the registrant's Common Stock of $2.25 as of March 19, 2004.
The number of the Company's shares of Common Stock outstanding as of December
31, 2003 was 21,051,277.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
1
JOYSTAR, INC.
FORM 10-KSB ANNUAL REPORT
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
Forward-Looking Statements
PART I
Item 1. DESCRIPTION OF BUSINESS
Item 2. DESCRIPTION OF PROPERTIES
Item 3. LEGAL PROCEEDINGS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
Item 7. FINANCIAL STATEMENTS
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Item 8-A CONTROLS AND PROCEDURES
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Item 10. EXECUTIVE COMPENSATION
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
SIGNATURES
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-KSB contains forward-looking statements about the business,
financial condition and prospects of the Company that reflect assumptions made
by management and management's beliefs based on information currently available
to it. We can give no assurance that the expectations indicated by such
forward-looking statements will be realized. If any of management's assumptions
should prove incorrect, or if any of the risks and uncertainties underlying such
expectations should materialize, the Company's actual results may differ
materially from those indicated by the forward-looking statements.
The key factors that are not within the Company's control and that may have
a direct bearing on operating results include, but are not limited to, the
acceptance by customers of the Company's products and services, the Company's
ability to develop new products and services cost-effectively, the ability of
the Company to raise capital in the future, the development by competitors of
products or services using improved or alternative technology, the retention of
key employees and general economic conditions.
There may be other risks and circumstances that management is unable to
predict. When used in this Form 10-KSB, words such as, "believes," "expects,"
"intends," "plans," "anticipates" "estimates" and similar expressions are
intended to identify forward-looking statements, although there may be certain
forward-looking statements not accompanied by such expressions. All
forward-looking statements are intended to be covered by the safe harbor created
by Section 21E of the Securities Exchange Act of 1934.
3
PART I
Item 1. DISCRIPTION OF BUSINESS
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Overview
Joystar, Inc., formerly known as Advanced Refrigeration Technologies, Inc. (the
"Company") was incorporated in the State of California on February 5, 1998. Its
original business operations consisted of designing, manufacturing and marketing
an energy efficiency evaporator fan motor controller for walk-in refrigerators
and freezers that were designed to save the customer 25-50% in refrigeration
energy costs. The Company has not been able to successfully sell enough units to
be profitable and has sustained losses every year since inception. The Company
has not been successful in obtaining necessary funding to continue the business.
Since August, 2002, the Company has been actively engaged in finding a potential
investor to acquire the Company and bring in a new business.
The Acquisition of Joystar, Inc.
As of June 11, 2003, Joystar, Inc., formerly, Advanced Refrigeration
Technologies, Inc., a California corporation (the "Company") consummated a
transaction, whereby the Company acquired all of the issued and outstanding
shares of Joystar, Inc., a Nevada corporation ("Joystar") in exchange for the
issuance by the Company of a total of 13,880,599 newly issued restricted shares
of common voting stock to the Joystar shareholders pursuant to the Agreement and
Plan of Reorganization (the "Agreement"), dated as of June 10, 2003, by and
between the Company and Joystar (the "Closing").
The Company issued a total of 13,880,599 shares of common stock of Company to
Joystar shareholders in the transaction. Joystar, Inc. paid $60,000 at the
Closing of the transaction for some of the debts of Advanced Refrigeration
Technologies, Inc., and instead of signing a note for $55,000 to repay the
remaining debts, it assumed such liabilities. The cash paid by Joystar in the
transaction was determined by the amount of the outstanding liabilities of
Company that had to be paid and which Company's then current management
determined as priority debts needed to be repaid.
The Asset Sale and Purchase Contract which was entered by and between Advanced
Refrigeration Technologies, Inc. and Advanced Refrigeration Controls, Inc, a
newly formed corporation by the former shareholders, Allen and Clare Schrum, of
Advanced Refrigeration Technologies,Inc. included the total assets consisting of
inventories, fixed assets and patents for a total value of $85,063 and the
assumption of liabilities including primarily former shareholders loans, for a
total amount of $105,217. The Company had a gain of $20,154 on the disposition
of assets and liabilities.
Pursuant to the terms of the Agreement, Joystar provided the payment of debts of
Company in the amount of $60,000 and assumed additional liabilities of Company
in the approximate amount of $55,000. Immediately prior to the share exchange,
there were approximately 3,322,840 shares of the Company's common stock issued
and outstanding. As a result of the acquisition, there were approximately
17,203,439 shares of common stock issued and outstanding.
Upon the Closing, the all present officers of the Company (Rick McEwan, Allen
Schrum and Clare Schrum) resigned and William M. Alverson was appointed as the
Company's President, Chief Financial Officer and Secretary. Prior to the
Closing, Rick McEwan and Allen Schrum were the directors of the Company. Upon
the Closing, William M. Alverson was appointed to the Board of Directors of the
Company. Subsequently to the Closing, Rick McEwan resigned as a director of the
Company on June 13, 2003, and Katherine T. West was appointed as a new director
as of June 18, 2003. Allen Schrum resigned as the Company's director as of June
20, 2003. After June 20, 2003, the Board of Directors consisted of William M.
Alverson and Katherine T. West.
Business Development
Joystar is a provider of online and offline travel services for the leisure and
small business traveler. Joystar derives revenue from annual membership fees
from its partner agents as well as from travel transactions from its customers
and agents. Joystar offers reliable, real time access to research and
reservation services for over 400 airlines, 50,000 lodging properties, all major
cruise lines, tour operators, and car rental companies. By accessing Joystar's
website at www.joystar.com, both Joystar's agents and customers enter a one stop
shopping environment for their travel purchases 24 hours a day, 7 days a week.
The Company also develops and markets its Home and Office Based Travel Agencies
(website at Iamatravelagent.com)- the programs are targeted to two main groups:
(1) affluent leisure travelers and small business owners who are looking to save
money on their travel; and (2) the growing population of people who wish to
supplement their primary income working part-time as well as full-time
home-based entrepreneurs.
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Joystar's travel agent program, is designed for individuals from all walks of
life who desire to earn a part-time or full-time income from the comfort of
their home or office. The simplicity of the program allows people to receive
commissions on their travel as well as travel purchases made by people they
refer to the agency. The travel agent program centers more on loyalty marketing
than any special skills required by the independent agent as the actual
bookings, payment processing, and fulfillment are handled by Joystar or the
travel supplier (airline, hotel, cruise line, etc.).
The benefits of being an independent travel agent include access to "agent only"
specials and deeply discounted travel offered by travel suppliers, cash
incentives and the possibility of upgrades when the agent is traveling. Booking
tools, exclusive specials, on-line training and educational opportunities,
important news and comprehensive information for initiating and increasing sales
are all available to Joystar travel agents. Essential to this is building
meaningful preferred supplier relationships to the ultimate benefit of the
traveler. With the buying power of tens of thousands of travel agents, Joystar
can strive to provide exceptional value to its consumers and agents alike.
Joystar blends the best of the online model (instant access to vast amounts of
information) with personal service from experience travel agents. Joystar
provides its "outside" travel agents and their customers reliable, real-time
access to one of the largest databases of "published" travel products, including
over 400 airlines, 65,000 lodging properties, and all major car rental
companies. In addition, Joystar provides its agents access to "unpublished"
fares. An "unpublished" airfare is a consolidator (wholesaler) fare and is not
offered to the public. They are only available to the travel agents. Airlines
contract with consolidators for excess seats on certain flights. Consolidators
in turn, resell these seats to travel agents (with a small mark-up) allowing the
agent to mark up the fare and still offer the customer the same or lower fare
than what is "published" by the airline.
Joystar's Preferred Supplier Program is a resource to help increase Joystar
agents' earnings and drive the revenues of the Company. Through negotiated
discounts and overrides, Joystar agents enjoy commission increases of up to 20%
over industry standards for travel booking.
These products, in particular, offer our agents dramatically enhanced
commissions while still providing competitive prices to their retail customers.
Joystar's most basic assumption is that the Company has two key customers: the
consumer and the independent travel agent. Joystar's success depends on the
loyalty and growth of both groups.
Joystar's management believes that its success will be due to the advent of new
technologies, innovative marketing strategies and relentless focus on the
improvement of Joystar's customer service functions. Joystar intends to set an
outstanding example of building economic power and revenues through astute forms
of vertical relationships - downstream through our travel agents, upstream
through the travel suppliers (air consolidators, hotels, cruise lines, car
rental agencies, etc.). Joystar's strategy is lower cost information and
extensive use of outsourcing which allows the Company to rapidly scale
operations to meet the demands of its growing agent and traveler base.
The Company maintains its corporate offices in Irvine, California. The Company
occupies 6,200 square fees pursuant to the lease agreement entered in June,
2003. The Company pays $1.10 per square foot. The lease agreement is for a term
of one year with three one year options to extend the lease.
5
Company's Business Strategy
The Company is developing a global travel marketplace in which travel suppliers
can reach, in a highly efficient manner, a large audience of consumers who are
actively planning and purchasing travel. The Company offers suppliers a broad
range of merchandising strategies designed to increase their revenues.
The Company has three separate business models: the agency model, the merchant
model and the agent host model. Under the agency model, the Company acts as an
agent in the transaction, passing a customer's reservation to the travel
supplier (airline, hotel, car rental company or destination service provider).
The Company receives a commission from the travel supplier for our services as
an agent. In an agency transaction, the supplier sets the retail price paid by
the customer, and the supplier is the merchant of record for the transaction.
Under the merchant model, the Company receives inventory (airline seats and
hotel rooms) from suppliers at negotiated rates. Then the Company determines the
retail price that the customer pays and process the transactions as the merchant
of record in the transaction. Acting as a merchant enables the Company to
achieve a higher level of gross profit per transaction than in the agency model
and provides better prices to customers than in agency transaction. Integrating
merchant inventory with the online booking technology platform enables the
Company to create that benefit both customers and suppliers. In addition to the
revenue the Company receives from the sale of travel planning services under the
agency and merchant models, the Company is also to derive revenue from sales of
advertisements on our websites, and licensing of components of our technology.
In addition to the travel revenue, Joystar offers hosting and support services
to home-based travel agents. The Company has three hosting packages priced at
$49, $149 and $479, depending on the scope of services offered. The Company also
derives revenue from transaction fees and commissions the agents create from
booking travel with their clients. The Company plans to develop a membership
base of 100,000 home-based agents over the next 3 years. As of September 30,
2004 the Company has had approximately 400 member travel agents. The majority of
the members' annual renewal fees will be $149. The Company believes that with
the tools, marketing resources, and support it provides, its agents can average
$10,000 per year in leisure bookings. Revenue on leisure travel is expected to
be approximately 15% or $1,500 per agent. One hundred thousand agents annually
renewing at $149 can be expected to generate $14,900,000 in membership revenue
and approximately $150 million in revenue on $1 billion in bookings if each
agent averages $10,000/year in bookings. There are no assurances that such a
plan of operations will be successful.
Market Target
The travel industry is very large and highly fragmented. According to the World
Travel and Tourism Council, worldwide travel and tourism spending for calendar
year 2003 was estimated to be $3.7 trillion.
Consumers planning and purchasing a trip generally engage in a predictable
process that begins with considering destinations, dates and budgets, and
progresses to a series of purchase decisions involving transportation,
accommodations and destination activities. Historically, this planning and
purchasing process has been inefficient because consumers have to spend a
significant amount of time piecing together the information from a variety of
sources. Consumers frequently consulted many different media and people, such as
guidebooks, magazines, travel agents, friends, co-workers and individual travel
suppliers. The supply side of the travel industry can be equally inefficient.
The supplier community includes hundreds of airlines, thousands of hotels,
dozens of car rental companies, numerous vacation packagers and cruise lines and
hundreds of thousands of destination services merchants such as restaurants,
attractions, and local transportation and tour providers. These suppliers spend
substantial amounts of money to reach and attract potential purchasers. The
fragmental nature of the global consumer travel market makes it difficult and
inefficient for suppliers to effectively target those consumers who are
currently engaged in the travel planning process.
Consumers and suppliers rely on travel agents as intermediaries to provide
information on their travel choices and help them purchase their trips. Joystar
travel agents have access to comprehensive information on the availability and
pricing of airline seats through global distribution systems. The Company makes
it possible for our travel agents to provide consumers reliable, personalized or
comprehensive travel information.
6
The Company has been able to combat the inefficiency and fragmentation of the
industry with technology. Joystar uses technology to make the process of
planning and purchasing travel easier for our customers. This technology
empowers web-savvy, "do-it yourself" customers to be their own travel agent and
make fully informed decisions about their choice of travel services.
GEOGRAPHIC AREA OF SERVICES. The Company plans to offer travel planning services
in the United Sates, the United Kingdom, Germany, Canada, France, Italy and the
Netherlands. Joystar products are planned to include direct-to- consumer travel
planning services sold via the Internet and call centers, our co-branded private
label business.
UNITED STATES
In the United States, Joystar offers customers a broad range of features and
travel products through the Joystar.com website, our live agent operations and
our co-branded and private label business.
FLIGHT, HOTEL, VACATION PACKAGE, CAR AND CRUISE. Consumers can search for and
compare airline, rental car, hotel room, destination services and cruise pricing
and availability information and can also purchase tickets or make reservations
by selecting from our published rate and negotiated rate offerings. In addition,
agent members can combine elements of their trip into custom built packages
through tools in the "Agent Only" section of Joystar.com. Joystar's co-branded
and private label program enables partners to market our suppliers' inventory to
consumers under their own brand.
Customer Service at 1-877-800-STAR. For all travel offerings, the Company
provides a competent agent-based support service. This service is accessible
through toll-free telephone support or via email. For purposes of operational
flexibility, the Company plans to provide this support infrastructure with a
combination of in-house and outsourced call centers. Customer support will be
split between our own call center and outsourced third parties. All supplier
support is managed by Joystar.
INTERNATIONAL
The Company's long term objective is to enter the international market in order
to leverage our technology platform with large existing travel markets and
established consumer behavior for planning and purchasing travel either on the
Internet or over the telephone. The Company plans to customize each of its
international points of sale to reflect language, customs, traveler behavior and
preferences, and available supplier inventory that may vary from country to
country. At this time, the Company does not have any specific timetable to
accomplish its goals with respect to its entrance to the international market.
GOVERNMENT REGULATION
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TRAVEL INDUSTRY REGULATION
Joystar must comply with laws and regulations relating to the travel industry
and the sale of travel services. These include registering with various states
and countries as a seller of travel, complying with certain disclosure
requirements and participating in state restitution funds. Both the Federal
Trade Commission and the Department of Transportation take the position that
their regulations prohibiting unfair and deceptive advertising practices apply
to our business.
REGULATIONS OF THE INTERNET
Currently, few laws and regulations apply directly to the Internet and
commercial online services and, to the extent such laws exist or apply to us, we
believe we are in compliance with all of them. The following summary does not
purport to be complete discussion of all enacted or pending regulations and
policies that may affect our business. This summary focuses primarily on the
enacted federal, state and international legislation specific to businesses that
operate as we do. For further information concerning the nature and extent of
federal, state and international regulation of online businesses, you should
review public notices and rulings of the U.S. Congress, state and local
legislature and international bodies.
7
Due to the growth of the Internet and online commerce, coupled with publicity
regarding Internet fraud, new laws and regulations are continually being
considered (at the federal, state and international levels) regarding property
ownership, sales and other taxes, pricing and content, advertising, intellectual
property rights, libel, user privacy, and information security. New laws or
different applications of existing laws would likely impose additional burdens
on companies conducting business online and may decrease the growth of the
Internet or commercial online services. In turn, this could decrease the demand
for our products and services or increase our cost of doing business. We cannot
predict whether any of the proposed privacy legislation currently pending will
be enacted and what effect, if any, it would have on our company.
TAXES. Federal regulation imposing limitations on the ability of states to
impose taxes on Internet-based sales was enacted in 1998 and extended in 2001.
The Internet Tax Non-Disclosure Act, as this legislation is known, exempts
certain types of sales transactions conducted over the Internet from multiple or
discriminatory state and local taxation through November 1, 2003. It is possible
this legislation will not be renewed when it terminates. Failure to renew this
legislation could allow state and local governments to impose taxes on
Internet-based sales, and these taxes could decrease the demand for our products
or services or increase our cost of operations.
PRIVACY. As an online business, customers provide us with personally
identifiable information (PII) that has been specifically and voluntarily given.
PII includes information that can identify a customer as a specific individual,
such as name, phone number, or e-mail address. This information is used only for
the purpose of responding to and fulfilling customer requests for our travel
products and services. We will only share customer PII with our authorized
travel service providers, and only as necessary in order to complete a
transaction that customers specifically request. We do not sell or rent PII to
anyone. We provide customers with choice and control over the collection and use
of their PII, as well as a means of updating, correcting, or removing any PII
stored in their customer profile. Customers are provided the opportunity to
specifically choose the promotional marketing communications they wish to
receive from our company. If they choose to opt-out any of the promotional
e-mail services that we provide, then we will only send e-mail that relates to a
specific travel purchase they have made through us.
CURRENT US FEDERAL PRIVACY REGULATION. Increasing concern over consumer privacy,
including regulations related to the use of the Internet for conducting
transactions and electronic commerce, has led to the introduction of proposed
legislation at the federal level. The most far-reaching of these current laws
are focused on financial institutions, health care providers, and companies that
voluntarily solicit information form children. For businesses that operate
online such as Joystar, the Unsolicited Electronic Mail Act of 1999 has been
enacted to protect individuals, families, and internet service providers form
unsolicited and unwanted electronic mail, commonly referred to as spamming.
Additionally, the Federal Trade Commission has a role in consumer privacy
protection and is involved with related enforcement activities.
CURRENT STATE PRIVACY REGULATION. Most states have enacted legislation to
regulate the protection of consumer's information on the Internet. Much of this
legislation is focused on financial institutions and health care providers. The
legislation that has become state law is a small percentage of the number still
pending, and is similar to what has been enacted at the federal level. The
Company cannot predict whether any of the proposed state privacy legislation
currently pending review will be enacted and what effect, if any, it would have
on our Company.
8
SPECIAL RISK FACTORS
Prospective investors should carefully consider the risks of an investment in
any speculative start-up business and the risks and the speculative factors
inherent to and affecting the Company's business described below.
Factors that may cause Joystar to fail are the following:
- The Company's prospects must be considered in light of the risks,
uncertainties, expenses and difficulties frequently encountered by
companies in their early stages of development.
- Our inability to obtain new customers at reasonable cost, retain existing
customers or encourage repeat purchases.
- Decreases in the number of visitors to our websites or our inability to
convert visitors to our websites into customers.
- Our inability to adequately maintain, upgrade and develop our websites, the
systems that we use to process customers' orders and payments or our
computer network.
- Our inability to retain existing airlines, hotels, rental car companies and
other suppliers of travel services ("travel suppliers") or to obtain new
travel suppliers .
- Our inability to obtain travel products on satisfactory terms from our
travel suppliers.
- The ability of our competitors to offer new or enhanced websites, services
or products.
- Fluctuating gross margins due to a changing mix of revenues.
- The termination of existing relationships with key service providers or
failure to develop new ones.
- The amount and timing of operating costs relating to expansion of our
operations.
- Economic conditions specific to the Internet, online commerce and the
travel industry
- Attract additional travel suppliers and consumers to our service.
- Maintain and enhance our brand.
- Expand our service offerings.
- Operate, expand and develop our operations and systems efficiently.
- Maintain adequate control of our expense
- Respond to technological changes.
- Respond to competitive market conditions
- We may not be successful in accomplishing these objectives and our failure
to do so may have a material adverse effect on our business, operating
results and financial condition.
- We depend on our relationships with travel suppliers, licensees and
computer reservation systems; our business could be harmed by adverse
changes in these relationships.
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- Our business model relies on relationships with travel suppliers, and it
would be negatively affected by adverse changes in these relationships. We
depend on travel suppliers to enable us to offer our customers
comprehensive access to travel services and products. Consistent with
industry practices, we currently have few agreements with our travel
suppliers obligating them to sell services or products through our
websites. It is possible that travel suppliers may choose not to make their
inventory of services and products available through online distribution.
Travel suppliers could elect to sell exclusively through other sales and
distribution channels or to restrict our access to their inventory, either
of which could significantly decrease the amount or breadth of our
inventory of available travel offerings. We will also depend on travel
suppliers for advertising revenues.
- In addition to our relationships with travel suppliers, our business model
relies on our relationships with licensees and computer reservations
systems. Our license revenues are generated through new and existing travel
agents.
- Adverse changes in any of these relationships could have a material adverse
effect on our business, operating results and financial condition.
- A decline in commission rates or the elimination of commissions could hurt
our business.
- A substantial majority of our online revenues depends on the commissions
paid by travel suppliers for bookings made through our online travel
service. Generally, we do not have written commission agreements with our
suppliers. As is standard practice in the travel industry, we rely on
informal arrangements for the payment of commissions. Travel suppliers are
not obligated to pay any specified commission rate for bookings made
through our websites. We cannot assure you that airlines, hotel chains or
other travel suppliers will not reduce current industry commission rates or
eliminate commissions entirely, either of which could have a material
adverse effect on our business, operating results and financial condition.
For example, in 1995, most of the major airlines placed a cap on per-ticket
commissions payable to all travel agencies for domestic airline travel. In
September 1997, the major United States airlines 9 reduced the commission
rate payable to traditional travel agencies from 10% to 8%. In 1997, the
major United States airlines reduced the commission rate payable for online
reservations from 8% to 5%. In addition, since 1998, many airlines have
implemented a zero commission of for domestic round trip ticket sales.
- Consumers, travel suppliers and advertisers may not accept our website as a
valuable commercial tool which would harm our business.
- For us to achieve significant growth, travel agents, consumers, travel
suppliers, and advertisers must accept our website as a valuable commercial
tool. Consumers who have historically purchased travel products using
traditional commercial channels, such as local travel agents and calling
airlines directly must instead purchase these products through our website.
- Similarly, travel suppliers and advertisers will also need to accept or
expand their use of our website. Travel suppliers will need to view our
websites as an efficient and profitable channel of distribution for their
travel products. Advertisers will need to view our website as effective
ways to reach their potential customers.
- In order to achieve the acceptance of consumers, travel suppliers and
advertisers contemplated by our business plan, we will need to continue to
make substantial investments in our technology and brand. We cannot at this
time determine how much of an investment it will take nor, be assured that
we will be able to secure the funds required. We do not have specific plans
or budget at this time. Our failure to make progress in these areas may
harm our business.
- Intense competition could reduce our market share and harm our financial
performance.
- The markets for the products and services offered by us are intensely
competitive. We compete with other online travel reservation services,
traditional travel agencies, and travel suppliers offering their services.
We also compete with many of the same parties and others in the licensing
of technology to home based travel agents and corporate travel agencies.
10
- We compete with a variety of companies with respect to each product or
service we offer. These competitors include: Internet travel agencies such
as Expedia, Orbitz, and Travelocity; local, regional, and national and
international traditional travel agencies;consolidators and wholesalers of
airline tickets and other travel products, including online consolidators
such as Cheaptickets.com, Hotwire and Priceline.com.; individual airlines,
hotels, rental car companies, cruise operators and other travel service
providers, some of which are suppliers to our websites; operators of travel
industry reservation databases.
In addition to the traditional travel agency channel, many travel suppliers,
including many suppliers with which we will do business, also offer their travel
services as well as third- party travel services directly through their own
websites. Suppliers also sell their own services directly to consumers,
predominantly by telephone. As the market for online travel services grows, we
believe that the companies involved in the travel services industry, including
travel suppliers, traditional travel agencies and travel industry information
providers, will increase their efforts to develop services that compete with our
services by selling inventory from a wide variety of suppliers. We cannot assure
you that our online operations will compete successfully with any current or
future competitors.
Many of our competitors have longer operating histories, larger customer bases,
greater brand recognition and significantly greater financial, marketing and
other resources than we have and may enter into strategic or commercial
relationships with larger, more established and better-financed companies. Some
of our competitors may be able to secure services and products from travel
suppliers on more favorable terms, devote greater resources to marketing and
promotional campaigns and commit more resources to website and systems
development than we are able to devote. In addition, the introduction of new
technologies and the expansion of existing technologies may increase competitive
pressures. Increased competition may result in reduced operating margins, as
well as loss of market share and brand recognition. We cannot assure you that we
will be able to compete successfully against current and future competitors.
Competitive pressures faced by us could have a material adverse effect on our
business, operating results and financial condition.
We believe that establishing, maintaining and enhancing the Joystar brand will
be a critical aspect of our efforts to attract and expand our online traffic.
The number of Internet sites that offer competing services, many of which
already have well-established brands in online services or the travel industry
generally, increases the importance of establishing and maintaining brand
recognition. Promotion of the Joystar brand will depend largely on our success
in providing a high-quality online experience supported by a high level of
customer service. In addition, to attract and retain online users and to respond
to competitive pressures, we intend to increase our spending substantially on
marketing and advertising with the intention of expanding our brand recognition.
However, we cannot assure you that these expenditures will be effective to
promote our brand or that our marketing efforts generally will achieve our
goals.
If we are unable to provide high-quality online services or customer support, if
we fail to promote and maintain our brand or if we incur excessive expenses in
these efforts, our business, operating results and financial condition would be
materially adversely affected. If we are unable to introduce and sell new
products and services, our business may be harmed.
We need to broaden the range of travel products and services and increase the
availability of products and services that we offer in order to enhance our
service. We will incur substantial expenses and use significant resources trying
to expand the range of products and services that we offer. However, we may not
be able to attract sufficient travel suppliers and other participants to provide
desired products and services to our consumers. In addition, consumers may find
that delivery through our service is less attractive than other alternatives. If
we launch new products and services and they are not favorably received by
consumers, our reputation and the value of the Joystar brand could be damaged.
Our relationships with consumers and travel suppliers are mutually dependent
since consumers will not use a service that does not offer a broad range of
travel services. Similarly, travel suppliers will not use a service unless
consumers actively make travel purchases through it. We cannot predict whether
we will be successful in expanding the range of products and services that we
offer. If we are unable to expand successfully, our business, operating results
and financial condition may be materially adversely affected. We may be unable
to plan and manage our operations and growth effectively.
11
- Growth and our anticipated future operations will continue to place, a
significant strain on our management, systems and resources. We will
continue to increase the scope of our operations and the size of our
workforce. In addition to needing to train and manage our workforce, we
will need to continue to improve and develop our financial and managerial
controls and our reporting systems and procedures. A failure to plan,
implement and integrate these systems successfully could adversely affect
our business.
- Our growth may increase our expense levels and the difficulties we face in
managing our operations.
- Declines or disruptions in the travel industry, such as those caused by
terrorism or general economic downturns, could reduce our revenues.
- We rely on the health and growth of the travel industry. Travel is highly
sensitive to travel safety concerns, and thus declines may occur after acts
of terrorism that affect the safety of travelers. The terrorist attacks of
September 11, 2001 on the World Trade Center in New York City and the
Pentagon in northern Virginia using hijacked commercial airliners resulted
in bookings industry wide. The long-term effects of these events could
include, among other things, a protracted decrease in demand for air travel
due to fears regarding additional acts of terrorism, military responses to
acts of terrorism and increased costs and reduced operations by airlines
due, in part, to new security directives adopted by the Federal Aviation
Administration. These effects, depending on their scope and duration which
we cannot predict at this time together with any future terrorist attacks,
could significantly impact our long-term results of operations or financial
condition.
- In addition, travel is sensitive to business and personal discretionary
spending levels and tends to decline during general economic downturns,
which could also reduce our revenues. Other adverse trends or events that
tend to reduce travel are likely to hurt our business. These may include:
o Price escalation in the airline industry or other travel-related
industries.
o Increased occurrence of travel-related accidents.
o Airline or other travel-related strikes.
o Political instability.
o Regional hostilities and terrorism.
o Bad weather
o Interruptions in service from third parties could hurt our business.
- We rely on third-party computer systems and third-party service providers,
including the computerized central reservation systems of the airline,
hotel and car rental industries to make airline ticket, hotel room and car
rental reservations and credit card verifications and confirmations. Any
interruption in these third-party services or deterioration in their
performance could hurt our business. If our arrangement with any of these
third parties is terminated, we may not find an alternate source of systems
support on a timely basis or on commercially reasonable terms.
- Our success depends on maintaining the integrity of our systems and
infrastructure.
- As our operations grow in both size and scope, domestically and later
internationally, we will need to improve and upgrade our systems and
infrastructure to offer an increasing number of travel agents, customers
and travel suppliers enhanced products, services, features and
functionality. The expansion of our systems and infrastructure will require
us to commit substantial financial, operational and technical resources
before the volume of business increases, with no assurance that the volume
of business will increase. Travel agents, consumers and suppliers will not
tolerate a service hampered by slow delivery times, unreliable service
levels or insufficient capacity, any of which could have a material adverse
effect on our business, operating results and financial condition.
12
- In this regard, our operations face the risk of systems failures. Our
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and
similar events. Business interruption insurance may not adequately
compensate us for losses that may occur. The occurrence of a natural
disaster or unanticipated problems at our leased facilities could cause
interruptions or delays in our business, loss of data or render us unable
to process reservations. In addition, the failure of our computer and
communications systems to provide the data communications capacity required
by us, as a result of human error, natural disaster or other operational
disruption could result in interruption of our service. The occurrence of
any or all of these events could adversely affect our reputation, brand and
business.
- Rapid technological changes may render our technology obsolete or decrease
the competitiveness of our services.
- To remain competitive, we must continue to enhance and improve the
functionality and features of our website. The Internet and the online
commerce industry are rapidly changing. If competitors introduce new
services embodying new technologies, or if new industry standards and
practices emerge, our existing website and proprietary technology and
systems may become obsolete. Our future success will depend on our ability
to do the following:
o Enhance our existing services.
o Develop and license new services and technologies that address the
increasingly sophisticated and varied needs of our prospective
customers and suppliers.
o Respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis
Developing our website and other proprietary technology entails significant
technical and business risks. We may use new technologies ineffectively or we
may fail to adapt our websites, transaction-processing systems and network
infrastructure to customer requirements or emerging industry standards. If we
face material delays in introducing new services, products and enhancements, our
customers and suppliers may forego the use of our services and use those of our
competitors.
The success of our business will depend on continued growth of online commerce
and the Internet.
Our future revenues and profits depend upon the widespread acceptance and use of
the Internet and online services as a medium for commerce. Rapid growth in the
use of the Internet and online services is a recent phenomenon. This growth may
not continue. A sufficiently broad base of consumers may not accept, or continue
to use, the Internet as a medium of commerce. Demand for and market acceptance
of recently introduced products and services over the Internet are subject to a
high level of uncertainty.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a reliable
network backbone with the necessary speed, data capacity and security and the
timely development of complementary products for providing reliable Internet
access and services. Major online service providers and the Internet itself have
experienced outages and other delays as a result of software and hardware
failures and could face such outages and delays in the future. Outages and
delays are likely to affect the level of Internet usage and the processing of
transactions on our websites. In addition, the Internet could lose its viability
because of delays in the development or adoption of new standards to handle
increased levels of activity or of increased government regulation. The adoption
of new standards or government regulation may require us to incur substantial
compliance costs.
- Our business is exposed to risks associated with online commerce security
and credit card fraud.
13
Consumer concerns over the security of transactions conducted on the Internet or
the privacy of users may inhibit the growth of the Internet and online commerce.
To transmit confidential information such as customer credit card numbers
securely, we rely on encryption and authentication technology. Unanticipated
events or developments could result in a compromise or breach of the systems we
use to protect customer transaction data. Furthermore, our servers may also be
vulnerable to viruses transmitted via the Internet. While we proactively check
for intrusions into our infrastructure, a new and undetected virus could cause a
service disruption.
Under current credit card practices, we may be held liable for fraudulent credit
card transactions and other payment disputes with customers. A failure to
control fraudulent credit card transactions adequately would adversely affect
our business.
- Our planned international operations will involve risks.
At some time in the future, we plan to operate in the United Kingdom, Germany,
Canada, France, the Netherlands and Italy and may expand our operations to other
countries. In order to achieve widespread acceptance in each country we enter,
we believe that we must tailor our services to the unique customs and cultures
of that country. Learning the customs and cultures of various countries,
particularly with respect to travel patterns and practices, is a difficult task
and our failure to do so could slow our growth in those countries. We will be
subject to the normal risks of doing business internationally, as well as risks
specific to Internet-based companies in foreign markets. These risks include:
o Delays in the development of the Internet as a broadcast, advertising
and commerce medium in international markets.
o Difficulties in managing operations due to distance, language and
cultural differences, including issues associated with establishing
management systems infrastructures in individual foreign markets.
o Unexpected changes in regulatory requirements.
o Export and import restrictions.
o Tariffs and trade barriers and limitations on fund transfers.
o Difficulties in staffing and managing foreign operations.
o Potential adverse tax consequences.
o Exchange rate fluctuations.
- Increased risk of piracy and limits on our ability to enforce our
intellectual property rights.
Any of these factors could harm our business. We may not elect to hedge our
foreign currency exposures.
We may be found to have infringed on intellectual property rights of others
which could expose us to substantial damages and restrict our operations.
We could be subject to claims that we have infringed the patents, copyrights or
other intellectual property rights of others. In addition, we may be required to
indemnify travel suppliers for claims made against them. Any claims against us
could require us to spend significant time and money in litigation, delay the
release of new products or services, pay damages, develop new intellectual
property or acquire licenses to intellectual property that is the subject of the
infringement claims. These licenses, if required, may not be available on
acceptable terms or at all. As a result, intellectual property claims against us
could have a material adverse effect on our business, operating results and
financial condition.
- Because our market is seasonal, our quarterly results will fluctuate.
14
- Our limited operating history and anticipated rapid growth will make it
difficult for us to assess the impact of seasonal factors on our business.
Nevertheless, we expect our business to be subject to seasonal
fluctuations, reflecting seasonal trends for the products and services
offered by our websites. For example, demand for travel bookings may
increase in anticipation of summer vacations and holiday periods, but
online travel bookings may decline with reduced Internet usage during the
summer months. These factors could cause our revenues to fluctuate from
quarter to quarter. Our results may also be affected by seasonal
fluctuations in the inventory made available to our service by travel
suppliers. Airlines, for example, typically enjoy high demand for tickets
through traditional distribution channels for travel during holiday
periods. As a result, during these periods, airlines may either have fewer
inventories to offer through our service or available tickets may be less
competitively priced. These same factors are expected to affect rental
cars, hotels and other travel products and services.
- Our success depends in large part on the continuing efforts of a few
individuals and our ability to continue to attract, retain and motivate
highly skilled employees.
- We will depend substantially on the continued services and performance of
our senior management, particularly William M. Alverson, our Chief
Executive Officer and President. The loss of the services of any executive
officers or other key employees could hurt our business.
- Our website will rely on intellectual property, and we cannot be sure that
this intellectual property will be protected from copy or use by others,
including potential competitors.
- We regard some of our content and technology as proprietary and will try to
protect our proprietary technology by relying on trademarks, copyrights,
trade secret laws and confidentiality agreements with consultants. In
connection with our license agreements with third parties, we seek to
control access to and distribution of our technology, documentation and
other proprietary information. Even with all of these precautions, it is
possible for someone else to copy or otherwise obtain and use our
proprietary technology without our authorization or to develop similar
technology independently. Effective trademark, copyright and trade secret
protection may not be available in every country in which our services are
made available through the Internet, and policing unauthorized use of our
proprietary information is difficult and expensive. We cannot be sure that
the steps we will take will prevent misappropriation of our proprietary
information. This misappropriation could have a material adverse effect on
our business. In the future, we may need to go to court to enforce our
intellectual property rights, to protect our trade secrets or to determine
the validity and scope of the proprietary rights of others. This litigation
might result in substantial costs and diversion of resources and management
attention.
- We plan to license from third parties, certain technologies incorporated
into our website. As we introduce new services that incorporate new
technologies, we may be required to license additional technology from
third parties. We cannot be sure that these third-party technology licenses
will continue to be available on commercially reasonable terms, if at all.
- Critical Accounting Policies and Estimates
a) Revenue Recognition
We recognize agency revenues on hotel, cruise and car rental reservations at the
earlier of notification of the amount of the commission from a commission
clearinghouse or a supplier or on receipt of the commissions from an individual
supplier. Override commissions are recognized each period based upon our
projected and actual attainment of predetermined target sales levels. Where
historical financial data is not available to project the target sales levels,
we record the override commission upon receipt of the commission from the
supplier.
Our merchant revenues are derived from transactions where we are the merchant of
record and determine the price. We have agreements with suppliers for blocks of
inventory that we sell and these sales generate the majority of our total
merchant revenues. We do not have purchase obligations for unsold inventory.
Recognition of merchant revenue occurs on the date the traveler uses the
inventory, such as the date of airline departure or hotel stay.
15
b) Reserves
Accounting estimates are an integral part of the financial statements prepared
by management and are based on management's current judgments. Those judgments
are normally based on knowledge and experience about past and current events and
on assumptions about future events.
We are potentially subject to a concentration of credit risk from our accounts
receivable. Also, we record a reserve against the use of fraudulent credit cards
on our Web sites and customer service related chargebacks.
- We are subject to other risks and uncertainties common to growing
technology-based companies, including rapid technological change, growth
and commercial acceptance of the Internet, dependence on third-party
technology, challenges to patents, new service introductions and other
activities of competitors, dependence on key personnel, international
expansion, and limited operating history. In addition, we are subject to
uncertainty caused by economic, political and transportation climates and
events, such as the September 11, 2001 terrorist activities, which may
impact future demand for the products and services that we sell.
Regulatory and legal uncertainties could harm our business.
The laws and regulations applicable to the travel industry affect us and our
travel suppliers. We are subject to laws and regulations relating to the sale of
travel services, including those prohibiting unfair and deceptive practices and
those requiring us to register as a seller of travel, comply with disclosure
requirements and participate in state restitution funds. In addition, many of
our travel suppliers and computer reservation systems providers are heavily
regulated by the United States and other governments. Our services are
indirectly affected by regulatory and legal uncertainties affecting the
businesses of our travel suppliers and computer reservation systems providers.
We are also subject to laws and regulations applicable to businesses generally
and online commerce. Currently, few laws and regulations directly apply to the
Internet and commercial online services. Moreover, there is currently great
uncertainty about whether or how existing laws governing issues such as property
ownership, sales and other taxes, libel and personal privacy apply to the
Internet and commercial online services. It is possible that laws and
regulations may be adopted to address these and other issues. Further, the
growth and development of the market for online commerce may prompt calls for
more stringent consumer protection laws. New laws or different applications of
existing laws would likely impose additional burdens on companies conducting
business online and may decrease the growth of the Internet or commercial online
services. In turn, this could decrease the demand for our products and services
increase our cost of operations or otherwise hurt our business.
The market price for our common stock is likely to be highly volatile and
subject to wide fluctuations in response to factors including the following:
o Actual or anticipated variations in our quarterly operating results.
o Announcements of technological innovations or new services by us or
our competitors.
o Changes in financial estimates by securities analysts.
o Conditions or trends in the Internet or online commerce industries.
o Changes in the economic performance or market valuations of other
Internet, online commerce or travel companies.
o Announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments.
o Additions or departures of key personnel.
o Release of lock-up or other transfer restrictions on our outstanding
shares of common stock or sales of additional shares of common stock.
o Potential litigation
16
The market prices of the securities of Internet-related and online commerce
companies have been especially volatile. Broad market and industry factors may
adversely affect the market price of our common stock, regardless of our actual
operating performance. In the past, following periods of volatility in the
market price of their stock, many companies have been the subject of securities
class action litigation. If we were sued in a securities class action, it could
result in substantial costs and a diversion of management's attention and
resources and would adversely affect our stock price.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Sales of substantial amounts of our
common stock in the public market after the restrictions lapse could adversely
affect the prevailing market price and impair our ability to raise equity
capital in the future.
We will need to raise additional capital in order to remain competitive in the
online travel services industry. This capital may not be available on acceptable
terms, if at all.
We will not be able to fund our growth if we lack adequate resources. If we
raise additional funds by issuing equity or convertible debt securities, the
percentage ownership of our stockholders will be diluted. Any securities could
have rights, preferences and privileges senior to those of the common stock.
Item 2. DISCRIPTION OF PROPERTY
-----------------------
The Company maintains its corporate offices in Irvine, California. The Company
occupies 6,200 square fees pursuant to the lease agreement entered in June,
2003. The Company pays $1.10 per square foot. The lease agreement is for a term
of one year with three one year options to extend the lease.
Item 3. LEGAL PROCEEDINGS
-----------------
In March, 2004 a former employee of the Company who was terminated prior to the
acquisition of Joystar, filed a lawsuit in Orange County Superior Court for
breach of contract and specific performance relating to the exercise of options,
among other causes of action. The amount of damages is not specified in the
complaint. Damages may vary depending on number of options allegedly exercises,
the value of shares over the period of time they might have been exercised and
other factors. The Company considers the basis of the lawsuit without merit and
intends to vigorously defend itself.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the fourth quarter of the fiscal year ended
December 31, 2003.
17
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
-----------------------------------------------------------------
Matters
-------
Advanced Refrigeration Technologies, Inc., common stock trades under the symbol
ARGT on the NASD Over The Counter Bulletin Board (OTCBB). There were 81
shareholders of record as of December 31, 2003. The price of the Company's
common stock as of DECEMBER 31, 2003 WAS $2.00 (OPEN) AND $2.20 (CLOSE).
THE COMPANY'S HIGH AND LOW CLOSING BID AND CLOSE INFORMATION FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2003 IS LISTED BELOW AS PROVIDED BY THE NASD OTC BULLETIN
BOARD. QUOTATIONS REFLECT INTER-DEALER PRICES, WITHOUT RETAIL MARK-UP, MARKDOWN,
OR COMMISSION AND MAY NOT REPRESENT ACTUAL TRANSACTIONS.
-------------- ------------ ------------ ------------ ------------
DATE OPEN HIGH LOW CLOSE
-------------- ------------ ------------ ------------ ------------
JAN-03 0.01 0.01 0.01 0.01
-------------- ------------ ------------ ------------ ------------
FEB-03 0.01 0.01 0.01 0.01
-------------- ------------ ------------ ------------ ------------
MAR-03 0.01 0.07 0.01 0.02
-------------- ------------ ------------ ------------ ------------
APR-03 0.02 0.04 0.01 0.04
-------------- ------------ ------------ ------------ ------------
MAY-03 0.03 0.03 0.03 0.03
-------------- ------------ ------------ ------------ ------------
JUN-03 0.03 1.00 0.03 0.68
-------------- ------------ ------------ ------------ ------------
JUL-03 0.68 0.68 0.40 0.55
-------------- ------------ ------------ ------------ ------------
AUG-03 0.55 2.35 0.55 2.10
-------------- ------------ ------------ ------------ ------------
SEP-03 2.08 2.40 1.05 1.80
-------------- ------------ ------------ ------------ ------------
OCT-03 1.80 2.05 1.60 1.90
-------------- ------------ ------------ ------------ ------------
NOV-03 1.90 2.00 1.55 2.00
-------------- ------------ ------------ ------------ ------------
DEC-03 2.00 2.25 1.35 2.20
-------------- ------------ ------------ ------------ ------------
The Company has not paid any cash dividends since its inception and does not
contemplate paying any in the foreseeable future. It is anticipated that
earnings, if any, will be retained for the operation of the Company's business.
Sales of Unregistered Securities
During the quarter ended September 30, 2003, the Company sold in its private
placement a total of 316,267 shares of its common stock at a purchase price of
$1.50 per share, for the total purchase price of $474,400. During the quarter
ended June 30, 2003, the Company sold 60,000 shares of its common stock at a
purchase price of $1.50 in its private placement. The shares of the Company's
common stock were issued and sold in reliance upon the exemption provided by
Section 4(2) and Section 506 of Regulation D of the Securities Act of 1933. The
offers and sales in the Company's private placement were made to accredited
investors only.
During the quarter ended September 30, 2003, the Company approved various
employment and consulting agreements and the issuances of common stock and
options to issue the Company's common stock for services to the Company pursuant
to such agreements. See Financial Statements. None of the shares or options
issuable pursuant to the above agreements were issued in the quarter ended
September 30, 2003. None of the above options are issuable under the Company's
2003 Equity Compensation Plan.
18
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
---------------------------------------------------------
The information contained in this section has been derived from our consolidated
financial statements and should be read together with our consolidated financial
statements and related notes included elsewhere in this annual report. The
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those expressed or
implied in these forward-looking statements as a result of various factors,
including those set forth at the end of this section under "Factors That May
Impact Our Results of Operations".
Overview
Agency revenues are derived from airline ticket transactions, hotel, cruise,
vacation packages, and car rental reservations. Although it is customary in the
travel industry, absent a contractual arrangement with us, travel suppliers are
not obligated to pay any specified fees rate for supplies or bookings made
through our agency and website. Also customary, in the travel industry certain
suppliers will pay us override commission compensation typically related to
achieving specific performance targets.
We recognize agency revenues on air transactions when the reservation is made
and secured by a credit card. We recognize agency revenues on hotel, cruise, and
car rental reservations on receipt of the commission. Override commissions are
recognized each period based upon our projected and actual attainment of
predetermined target sales levels. We record the override commission upon
receipt of the commission from the supplier.
Our merchant revenues are derived from transactions where we are the merchant of
record and determine the price. We access hotel suppliers and air consolidators
for blocks of inventory that we sell and these sales generate the majority of
our total merchant revenues. We do not have purchase obligations for unsold
inventory. Recognition of merchant revenue occurs on the date the traveler uses
the inventory (e.g., the date of airline departure or hotel stay)
We also sell travel services through other websites and distribution channels.
We offer co-branded online travel businesses that supply Joystar services and
inventory to certain third party websites. When a customer books travel on a
Joystar co-branded site, we collect the revenue and pay the third party a
transaction fee for each sale generated through the partners' websites.
We have applied the accounting methodology and revenue presentation required by
Emerging Issues Task Forces (EITF) Issue No. 99-19, reporting Revenue Gross as a
Principal versus Net as an Agent. All merchant transactions are recorded at the
net amount, which is the amount charged to the customer less the amount paid to
the supplier. Recognition of merchant revenue occurs on the date of the
traveler's flight or stay.
All of the Company's revenue through December 31, 2003 has been from travel
agent programs and commission on travel sales as set forth above.
We derive revenues from annual membership fees from our growing network of
Independent Travel Agents and from the sales of advertisements on our websites.
We generally recognize advertising and membership revenues ratably over the
membership or advertising period, depending on the terms of the contract. Fees
from the licensing of our software are another source of revenues. The fixed
portion of these license fees are recognized ratably over the lives of the
contracts. Transaction-based fees are recognized when the relevant transactions
occur. Through December 31, 2003 the Company has not had any income from this
source other than as disclosed above.
The costs of agency revenues and membership consist primary of fees paid to our
fulfillment vendors for customer service and reserves and related payments for
travel products purchased with fraudulent credit cards, fees paid to our
licensing partners for use of their computer reservation and information
services system and allocated and direct internal costs for the operation of our
data center and call center. The costs of membership revenues consist of credit
card merchant fees and allocated and direct costs for the operation of our data
center and the internal and direct costs of operating the call centers.
Our direct production development expenses consist primarily of compensation for
personnel and development and maintenance of our websites, including
enhancements to and maintenance of the sites. Our direct sales and marketing
expenses consist of advertising, distribution and public relations expenses as
well as personnel-related costs. Our distribution activities relate to associate
marketing agreements with internet websites. Our direct general and
administrative expenses consist primarily of compensation for personnel to
support functions such as finance, legal, and human resources.
Our revenues are impacted by the seasonality of the travel industry. Traditional
leisure travel supplier and agency bookings typically are highest in the first
two calendar quarters of the year as consumers plan and purchase their spring
and summer travel and then the number of bookings flattens in the last two
calendar quarters of the year. Our growth should show seasonal trends, however,
with the highest sequential revenue growth occurring the first calendar quarter
and then slowing in the remaining three quarters of each year. Growth will be
driven by the continuing shift by customers from offline travel planning to
online planning and our continued market share growth.
19
Our business is dependent on the health and growth of the travel industry.
Travel is highly sensitive to traveler safety concerns, and thus declines after
acts of terrorism that affect the safety of travelers. The terrorist attacks of
September 11, 2001, resulted in a decrease in new travel bookings worldwide and
may reduce our revenues in future quarters. The long-term effects of these
events could include, among other things, a protracted decrease in demand for
air travel due to fears regarding additional acts of terrorism, military
responses to acts of terrorism and increased costs and reduced operations by
airlines due, in part, to new security directives adopted by the Federal
Aviation Administration. These effects, depending on their scope and directives,
which we cannot predict at this time, together with any future terrorist
attacks, could significantly impact our long-term results of operations or
financial condition.
In July 2003, our Board of Directors and majority shareholder approved a name
changed from "Advanced Refrigeration Technologies, Inc." to "Joystar, Inc."
RESULTS OF OPERATIONS
The Company has been in the development stage since its inception.
Revenues for the year ended December 31, 2003 increased to $43,170 from $6,263
for the year ended December 31, 2002. The increase of $36,907, 589% is due to
increased sales effort. To date income has only been from travel agent programs
and commissions earned on travel sales. No revenues have been generated from
other types of services that the Company is developing.
Marketing and sales expenses for the year ended December 31, 2003 increased to
$400,868 from $122,418 for the year ended December 31, 2002. The increase of
$278,450, 227% is due primarily to the increased use of independent contractors
$142,500, increased sales and marketing materials $56,100, increased telephone
use for tele-marketing activities $15,400 and additional printing and
reproduction expenses $12,800.
General and Administrative expenses for the year ended December 31, 2003
increased to $655,535 from $190,518 for the year ended December 31, 2002. The
increase of $465,017, 244% is due primarily to the increased salaries and wages
$309,000, increased legal and accounting expenses related to the merger of
Joystar, Inc. $59,300, increased insurance expense $12,000 and an increase in
all other general and administrative expenses of $80,000.
Interest expense for the year ended December 31, 2003 increased to $5,644. There
was no interest incurred in the year ended December 31, 2002. The increase was
due to the necessity for the Company to borrow operating funds.
Net loss for the year ended December 31, 2003 increased to $1,018,877 from
$306,673 for the year ended December 31, 2002. The increase in loss $712,204,
232% was primarily due to the increased expenses detailed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a cash balance of $136,319 at December 31, 2003 as compared to
$5,025 at December 31, 2002.
The Company had negative working capital at December 31, 2003. The Company has
been able to raise sufficient capital to continue operations by selling stock.
In 2002 the Company raised $105,000 and in 2003, a total of $673,800. The
Company has funded certain expenses by issuing shares for compensation and
services. During the year ended 2003 the Company issued 3,453,571 shares valued
at $1,098,728, of which $204,478 were for current year expenses and $894,250
were deferred to future year expenses.
In order to achieve the acceptance of consumers, travel suppliers and
advertisers, we will need to continue to make substantial investments in our
technology and brand. We cannot at this time determine how much of an investment
it will take nor be assured that we will be able to secure the funds required.
We do not have specific plans or budget at this time.
20
Item 7. FINANCIAL STATEMENTS
--------------------
The consolidated financial statements of the Company required to be included in
Item 7 are listed in this index, and follow this page:
Report of Independent Certified Public Accountant F-1
Financial Statements
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statement of Shareholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
21
INDEPENDENT AUDITORS REPORT
To the Board of Directors of Advanced Refrigeration Technologies, Inc. and
Subsidiary
We have audited the accompanying consolidated balance sheets of Advanced
Refrigeration Technologies, Inc. and Subsidiary (formerly known as Solutions
Resource, Inc. and a development stage company) as of December 31, 2003 and 2002
and the related statements of operations, shareholders' equity (deficit) and
cash flows for the years then ended and for the period from inception (May 23,
2001) through December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform our audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced
Refrigeration Technologies, Inc. and Subsidiary as of December 31, 2003 and
2002, and the results of its operations and cash flows for the years then ended
and for the period from inception (May 23, 2001) through December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed further in Note 3,
the Company has been in the development stage since its inception ( May 23,
2001) and continues to incur significant losses. The Company's viability is
dependent upon its ability to obtain future financing and the success of its
future operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plan in regard to these
matters is also described in Note 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
MENDOZA BERGER & COMPANY, LLP
March 24, 2004
Irvine, California
F-1
ADVANCED REFRIGERATION TECHNOLOGIES, INC. & SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------------------
ASSETS
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
Current assets:
Cash $ 136,319 $ 5,025
Other receivables 2,000 --
Prepaid expenses 8,042 --
------------ ------------
Total current assets 146,361 5,025
------------ ------------
Property and equipment, net 22,690 2,406
------------ ------------
Total assets $ 169,051 $ 7,431
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 132,198 $ 9,718
Accrued salaries and payroll taxes 198,474 81,811
Accrued rent 35,000 54,000
Loans from shareholder 83,795 62,577
------------ ------------
Total current liabilities 449,467 208,106
------------ ------------
Commitments and contingency -- --
Stockholders' equity:
Preferred stock (no par value) 10,000,000 shares authorized;
none issued -- --
Common Stock, no par value, 50,000,000 shares authorized;
21,051,277 and 16,785,667 shares issued and outstanding at
December 31, 2003 and December 31, 2002, respectively 1,895,241 122,713
Stock issued for deferred compensation (894,250) --
Stock subscribed not issued, 118,667 shares 176,800 --
Deficit accumulated during development stage (1,458,207) (323,388)
------------ ------------
Total stockholders' (deficit) (280,416) (200,675)
------------ ------------
Total liabilities and stockholders' equity $ 169,051 $ 7,431
============ ============
The accompanying notes to financial statements are an integral part of these statements
F-2
ADVANCED REFRIGERATION TECHNOLOGIES, INC. & SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------------------------
CUMULATIVE AMOUNTS
FROM INCEPTION
FOR THE YEAR FOR THE YEAR (MAY 23, 2001)
ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2003
-------------- -------------- --------------
Income:
Travel agent program and
commissions from travel sales $ 43,170 $ 6,263 $ 49,433
-------------- -------------- --------------
Operating expenses:
General and administrative 655,535 190,518 862,768
Marketing and sales 400,868 122,418 523,286
-------------- -------------- --------------
Total operating expenses 1,056,403 312,936 1,386,054
-------------- -------------- --------------
Loss from operations before interest and taxes (1,013,233) (306,673) (1,336,621)
-------------- -------------- --------------
Interest 5,644 -- 5,644
Provision for taxes -- -- --
-------------- -------------- --------------
Net loss $ (1,018,877) $ (306,673) $ (1,342,265)
============== ============== ==============
Loss per share $ (0.06) $ (0.02)
============== ==============
Weighted average number of common
shares outstanding 18,106,979 16,822,686
============== ==============
The accompanying notes to financial statements are an integral part of these statements
F-3
ADVANCED REFRIGERATION TECHNOLOGIES, INC. & SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FROM INCEPTION MAY 23, 2001 TO DECEMBER 31, 2003
---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
---------------------------
Deficit
Stock issued Stock Accumulated Total
for Subscribed During the Stockholders'
Number of Deferred not Development Equity
Shares Amount Compensation Issued Stage (Deficit)
------------ ------------ ------------ ------------ ------------ ------------
Balance at inception - May 23, 2001 -- $ -- $ -- $ -- $ -- $ --
Stock issued for services 16,715,000 16,715 -- -- -- 16,715
Net loss -- -- -- -- (16,715) (16,715)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 16,715,000 16,715 -- -- (16,715) --
Stock issued various dates for cash
at $1.50 per share 70,667 105,998 -- -- -- 105,998
Net loss -- -- -- -- (306,673) (306,673)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 16,785,667 122,713 -- -- (323,388) (200,675)
Shares canceled by majority
shareholder (3,000,000) -- -- -- -- --
Stock issued various dates
for cash at $1.50 per share 94,932 142,300 -- -- -- 142,300
------------ ------------ ------------ ------------ ------------ ------------
Balance June 11, 2003 date of
acquisition of Joystar, Inc. shares
in a reverse merger 13,880,599 265,013 -- -- (323,388) (58,375)
Cancel Joystar shares (13,880,599) -- -- -- -- --
Advanced Refrigeration shares
outstanding at June 11, 2003 3,322,840 -- -- -- -- --
Issue Advanced Refrigeration
Technologies, Inc. shares 13,880,599 -- -- -- (115,942) (115,942)
Stock issued pursuant to the
stock option plan June 11, 2003
at market value of
stock $0.03 per
share 810,000 24,300 -- -- -- 24,300
Stock issued for services 215,000 15,000 -- -- -- 15,000
Stock issued for past and future
compensation 2,400,000 1,008,000 -- -- -- 1,008,000
Future compensation deferred until earned -- -- (894,250) -- -- (894,250)
Stock issued various dates for cash
at between $0.50 and $1.50 per share 394,267 531,500 -- -- -- 531,500
Stock issued for services 28,571 51,428 -- -- -- 51,428
Stock subscribed not issued 118,667 shares -- -- -- 176,800 -- 176,800
Net loss -- -- -- -- (1,018,877) (1,018,877)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2003 21,051,277 $ 1,895,241 $ (894,250) $ 176,800 $(1,458,207) $ (280,416)
============ ============ ============ ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements
F-4
ADVANCED REFRIGERATION TECHNOLOGIES, INC. & SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------------
CUMULATIVE AMOUNTS
FROM INCEPTION
FOR THE YEAR FOR THE YEAR (MAY 23, 2001)
ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2003
-------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (1,018,877) $ (306,673) $ (1,342,265)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 2,608 -- 2,608
Stock issued for services 204,478 -- 221,193
Changes in assets and liabilities:
Increase in prepaid expenses (8,042) -- (8,042)
Increase in other receivables (2,000) -- (2,000)
Increase in accounts payable 122,480 9,718 132,198
Increase in accrued salaries and payroll taxes 116,663 81,811 198,474
Increase (decrease) in accrued rent expense (19,000) 54,000 35,000
-------------- -------------- --------------
Net cash used by operations (601,690) (161,144) (762,834)
-------------- -------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (22,892) (2,406) (25,298)
-------------- -------------- --------------
Net cash used by investing activities (22,892) (2,406) (25,298)
-------------- -------------- --------------
Cash flows from financing activities:
Loans from shareholders - net 21,218 62,577 83,795
Issuance of common stock 673,800 105,998 779,798
Stock subscribed not issued 176,800 -- 176,800
Payment of debt assumed in reverse acquisition (115,942) -- (115,942)
-------------- -------------- --------------
Net cash provided by financing activities 755,876 168,575 924,451
-------------- -------------- --------------
Net increase in cash 131,294 5,025 136,319
Cash, beginning of period 5,025 -- --
-------------- -------------- --------------
Cash, end of period $ 136,319 $ 5,025 $ 136,319
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Issuance of stock for services $ 204,478 $ 16,715 $ 221,193
============== ============== ==============
The accompanying notes to financial statements are an integral part of these statements
F-5
ADVANCED REFRIGERATION TECHNOLOGIES, INC. & SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
AND CUMULATIVE FROM INCEPTION MAY 23, 2001 TO DECEMBER 31, 2003
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
---------------------
On June 11, 2003, Advanced Refrigeration Technologies, Inc. a
California corporation (" the Company") acquired all of the issued and
outstanding common stock of Joystar, Inc., a Nevada corporation
("Joystar") in exchange for the issuance by the Company of a total of
13,880,599 newly issued restricted shares of common voting stock to the
Joystar shareholders pursuant to the Agreement an Plan of
Reorganization dated as of June 10, 2003. Prior to the issuance of the
shares, the Company had 3,322,840 shares of common stock issued and
outstanding. Subsequent to the exchange there were 17,203,439 shares
issued and outstanding. The shareholders of Joystar own 81% of the
common stock outstanding of the Company after the issuance of the
13,880,599 shares.
The acquisition of Joystar by the Company on June 11, 2003 has been
accounted for as a purchase and treated as a reverse acquisition since
the former owners of Joystar controlled 81% of the total shares of
Common Stock outstanding of the Company immediately following the
acquisition.
On this basis, the historical financial statements prior to June 11,
2003 have been restated to be those of the accounting acquirer Joystar.
The historical stockholders' equity prior to the reverse acquisition
has been retroactively restated (a recapitalization) for the equivalent
number of shares received in the acquisition after giving effect to any
difference in par value of the issuer's and acquirer's stock. The
original 3,322,840 shares of common stock outstanding prior to the
exchange reorganization have been reflected as an addition in the
stockholders' equity account of the Company on June 11, 2003.
The Company has been in the development stage since its inception May
23, 2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of the
Company, and its wholly owned subsidiary Joystar, Inc.. All material
inter-company balances and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
--------------------
The Company recognizes revenue when the earnings process is complete.
The Company records revenues from travel related sales transactions
where the Company both purchases from the supplier and sells to the
customer the requested travel service. This is reflected in the
Consolidated Statement of Operations at the net amount, which reflects
the gross amount charged to the customer less the cost paid to the
supplier. The Company also receives commissions from travel suppliers
for processing reservations. To date all revenues have been derived
from such transactions.
Revenues derived in the future from annual memberships or other
activities where a time factor is involved will be deferred over the
appropriate period and recognized as earned.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful life of the assets,
which is three to seven years for furniture and equipment and three
years for computer equipment.
USE OF ESTIMATES
----------------
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-6
INCOME TAXES
------------
Deferred income taxes are reported using the liability method. Deferred
tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
NET LOSS PER SHARE
------------------
In February 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 128 "Earnings Per Share" which requires the Company to
present basic and diluted earnings per share, for all periods
presented. The computation of loss per common share (basic and diluted)
is based on the weighted average number of shares actually outstanding
during the period. The Company has no common stock equivalents, which
would dilute earnings per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
Financial instruments consist principally of cash and various current
liabilities. The estimated fair value of these instruments approximates
their carrying value.
RECLASSIFICATIONS
-----------------
Certain amounts in the prior period presented have been reclassified to
conform to the current period financial statement presentation. These
reclassifications have no effect on previously reported change in
accumulated deficit.
3. GOING CONCERN
-------------
The accompanying financial statements, which have been prepared in
conformity with accounting principles generally accepted in the United
States of America, contemplates the continuation of the Company as a
going concern. However, the Company has been in the development stage
since its inception (May 23, 2001), sustained significant losses and
has used capital raised through the issuance of stock and debt to fund
activities. Continuation of the Company as a going concern is
contingent upon establishing and achieving profitable operations. Such
operations will require management to secure additional financing for
the Company in the form of debt or equity.
Management believes that actions currently being taken to revise the
Company's funding requirements will allow the Company to continue its
development stage operations. However, there is no assurance that the
necessary funds will be realized by securing debt or through stock
offerings.
F-7
4. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consist of the following:
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
Office furniture $ 11,900 $ 1,864
Computers 13,398 542
--------------- ---------------
25,298 2,406
Less: accumulated depreciation 2,608 --
--------------- ---------------
$ 22,690 $ 2,406
=============== ===============
5. CAPITAL STOCK
-------------
COMMON STOCK
------------
On November 2, 2001, the Company issued 16,715,000 (post-forward-split)
restricted shares of common stock at $0.001 per share totaling $16,715
for services rendered in connection with the start up of the Company.
At various dates in 2002, the Company issued for cash of $105,998,
70,667 shares of common stock at $1.50 per share through a private
placement, pursuant to provisions of Section 4(2) of the Securities Act
of 1933 and Rule 506 of Regulation D.
At various dates in 2003, the Company issued for cash of $673,800,
489,199 shares of common stock at $0.50 to $1.50 per share through a
private placement, pursuant to provisions of Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D.
Subsequent to year end, the Company issued 62,000 shares of common
stock for cash of $93,000 and 20,000 shares of common stock in exchange
for services rendered in the amount of $30,000 which is $1.50 per
share.
COMMON STOCK SPLIT
------------------
On November 1, 2001, the Board of Directors of the Company approved a
forward stock split of the Company's common stock at a ratio of 1,000
for 1. All references in the accompanying financial statements to the
number of common stock and per share amounts reflect the stock split.
STOCK CANCELED
--------------
A majority shareholder, William M. Alverson, canceled 3,000,000 shares
of stock in anticipation of the acquisition of Advanced Refrigeration
Technologies, Inc on June 11, 2003.
STOCK ISSUED IN REVERSE MERGER JUNE 11, 2003
--------------------------------------------
The Company acquired all of the issued and outstanding common stock of
Joystar, Inc., a Nevada corporation ("Joystar") in exchange for the
issuance by the Company of a total of 13,880,599 newly issued
restricted shares of common voting stock dated as of June 10, 2003.
STOCK ISSUED UNDER STOCK OPTION PLAN AND FOR PAYMENT OF SERVICES
----------------------------------------------------------------
The Company issued 810,000 shares of common stock pursuant to the
Company's Stock Option Plans on June 11, 2003 valued at the market
price of the stock on that date $0.03.
The Company issued 215,000 shares of common stock in payment of
invoices for professional services of $15,000 in June, 2003.
On July 30, 2003 the Company entered into a two and three year
employment Agreement with two employees. The agreement provided for
100,000 and 300,000 Shares of restricted common stock to be issued. The
value of the compensation was based on the stock price on the agreement
date of $0.42, a total $168,000. The Company issued the 400,000 shares
November 14, 2003 and recorded compensation expense of $26,250 for
period ended December 31, 2003 and deferred compensation of $141,750.
F-8
On July 30, 2003 the Company entered into a four-year employment
agreement for a Vice President of Business Development. The agreement
provides for 2,000,000 shares of restricted Common stock to be issued.
The value of the compensation was based on the stock price on the
agreement date of $0.42, a total of $840,000. The Company issued the
2,000,000 shares November 14, 2003 and recorded compensation expense of
$87,500 for period ended December 31, 2003 and deferred compensation of
$752,500.
On November 11, 2003 the Company issued 28,571 common shares of
restricted stock for services valued at the closing market price of the
Company's stock on that date of $1.80, or $51,428.
6. RELATED PARTY TRANSACTIONS
--------------------------
The Company received loans in the amount of $80,570 and $5,000 from two
shareholders. The $80,570 bears interest at 10% and is evidenced by a
note payable to the shareholder and can be converted to common stock at
$1.50 per share. The $5,000 bears interest at 10%, but is not evidenced
by a note.
7. STOCK OPTIONS
-------------
The Board of Directors has approved in April, 2003 a Company stock
option plan, which was amended by the Company in July, 2003. All the
shares (480,000 shares) under 2002 Equity and Stock Option Plan were
issued in June, 2003. In July, 2003, the Company approved 2003 Equity
Compensation Plan which provides for the grant to directors, officers,
employees and consultants of the Company of stock based awards and
options to purchase up to an aggregate of 2,500,000 shares of Common
Stock. No grants have been made yet under 2003 Equity Compensation
Plan.
On June 11, 2003 the Company granted and issued a total of 810,000
shares under the 2000 and 2002 stock compensation plans for services to
the Company. The valuation of the shares issued were at the market
price on the Grant date of $0.03, or $24,300.
8. INCOME TAXES
------------
The components of the deferred tax asset is as follows:
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
Deferred tax assets:
Net operating loss carry-forward $ 530,000 $ 128,000
Less: valuation allowance (530,000) (128,000)
-------------- --------------
Net deferred tax assets $ -- $ --
============== ==============
The Company's operations are headquartered in the State of California
and are subject to California state income taxes. The Company had
available approximately 1,328,000 and $323,000 of unused Federal and
State net operating loss carry-forwards at December 31, 2003 and
December 31, 2002, respectively that may be applied against future
taxable income. These net operating loss carry-forwards expire through
2022 for Federal purposes. There is no assurance that the Company will
realize the benefit of the net operating loss carry-forwards.
SFAS No. 109 requires a valuation allowance to be recorded when it is
more likely that some or all of the deferred tax assets will not be
realized. At December 31, 2002 and 2001, valuations for the full amount
of the net deferred tax asset were established due to the uncertainties
as to the amount of the taxable income that would be generated in
future years.
F-9
Reconciliation of the differences between the statutory tax rate and
the effective income tax rate is as follows:
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
Statutory federal tax (benefit) rate (34.00)% (34.00)%
Statutory state tax (benefit) rate (5.83)% (5.83)%
----------------- -----------------
Effective tax rate (39.83)% (39.83)%
Valuation allowance 39.83% 39.83%
----------------- -----------------
Effective income tax rate 0.00% 0.00%
================= =================
9. COMMITMENTS AND CONTINGENCY
---------------------------
LEGAL PROCEEDINGS
-----------------
In March, 2004 a former employee of the Company who was terminated
prior to the acquistion of Joystar, filed a lawsuit for breach of
contract and specific performance relating to the exercise of options,
among other causes of action. The Company considers the basis of the
lawsuit without merit and intends to vigorously defend itself.
OPERATING LEASE
---------------
The Company leases office space under an operating lease, which expires
in April of 2004. As of December 31, 2003, future minimum lease
payments for 2004 are $18,000.
Rental expense was $47,000 and $54,000 for the years ended December 31,
2003 and 2002, respectively
F-10
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL MATTERS
-----------------
There have been no change in auditors nor disagreements on accounting
and financial matters with the auditors and accountants.
Item 8-A. CONTROLS AND PROCEDURES
-----------------------
Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of December 31, 2003, that the design and operation
of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective
to ensure that information required to be disclosed by us in the reports filed
or submitted by us under the Exchange Act is accumulated, recorded, processed,
summarized and reported to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
whether or not disclosure is required.
During the quarter ended December 31, 2003, there were no changes in
our internal controls over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.
32
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
-------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
The Directors and Executive Officers of the Company, and their ages, are as
follows:
Name Age Position
---- --- --------
William Alverson 39 Director, Chief Executive Officer and
Chief Financial Officer
Katherine West 34 Director and Executive Vice President
William M. Alverson, Chief Executive Officer, Chief Financial Officer and
Director. Mr. Alverson has been an officer and director of the Company since its
inception. Mr. Alverson has spent the last fifteen years working in the
financial and travel services industries. He began his career as a financial
advisor at American Express. He also served as Chairman and Chief Executive
Officer at a financial services firm where he guided private companies through
their first rounds of financing and public listings. In 1995, Mr. Alverson
founded and served as Chairman and CEO of Travelmax, Inc. Under his leadership,
that company grew from seven to 220 employees handling the back office support
to over 44,000 travel agents nationwide. Since then he has been active in
financing and consulting to both private and public companies including Baby
Genius, Inc. and FreeRealTime.com. He is married to Katherine West, the
co-founder of the Company.
Katherine West, Executive Vice President and Director. West has been the Officer
and Director of the Company since the inception of Joystar, Inc. Mrs. West
supervises the Vice President of Agent Services and Vice President of Travel
Services. Additionally, she is responsible for the day to day management and
supervision of customer service, human resources, accounting, budget, payroll
and contracts. Mrs. West began her management career in the travel industry in
1989 with Thrifty Car Rental where she was responsible for the franchise's
operations, reporting, forecasting, and accounting & tax preparation. From 1992
to 1996 she held the position of Senior Account Executive with Metromedia
Communications, Inc. During her career with the telecom giant, she consistently
exceeded revenue targets with a primary focus on small to mid-sized businesses
and trade associations. She is married to William M. Alverson, the founder of
the Company.
Compliance with Beneficial Ownership Reporting Rules
Section 16(a) of the Securities Act of 1934, as amended ("Exchange Act"),
requires the Company's executive officers and directors, and persons who
beneficially own more than 10% of a registered class of the Company's common
stock to file initial reports of ownership and reports of changes in ownership
with the Securities and Exchange Commission ("Commission"). Such officers,
directors and shareholders are required by Commission regulations to furnish the
Company with copies of all such reports that they file.
Based solely upon a review of copies of such reports furnished to the Company
during its fiscal year ended December 31, 2003 and thereafter, the Company
believes that, during the Company's 2003 fiscal year, all Section 16(a) filing
requirements applicable to the Company's reporting persons were complied with,
however, some of the reports may have been filed late. The Company does not know
if all the former officers and directors of the Company complied with the
requirements of Section 16(a).
33
Item 10. Executive Compensation
----------------------
The following table sets forth all compensation awarded or paid by the Company
to its Chief Executive Officer and all other executive officers for services
rendered during the fiscal year ended December 31, 2003 and the fiscal year
December 31, 2002.
Summary Compensation Table
Awards
------
Annual Other
Name and Position Year Salary Bonus Compensation
-----------------------------------------------------------------------------------------
William Alverson 2003 120,000
CEO and CFO 2002 46,000
Katherine West 2003 60,000
Executive VP 2002 35,000
Rick R. McEwan 2001 8,000 -0- -0-
former President(1) 2002 18,000 -0- -0-
Allan E. Schrum 2001 2,000 -0- -0-
former Vice President
Engineering (1) 2002 4,500 -0- -0-
David J. Kimber 2001 52,000 -0- -0-
former Vice President/
Marketing (until 5/2002)
Clare C. Schrum 2001 6,000 -0- -0-
former Secretary,
Chief Financial Officer (1) 2002 13,500 -0- -0-
(1) Until June, 2003
The following table sets forth for each of the named executives certain
information concerning stock and stock options granted during fiscal 2003.
----------------------------------------------------------------------------------------------
Name and Position Number of Securities % of Total Options
Underlying Granted to Exercise Price Expiration
Options Employees per Share Date
----------------------------------------------------------------------------------------------
William M. Alverson 300,000 37% $0.03 June 11, 2003
Katherine West 150,000 18.5% $0.03 June 11, 2003
34
Item 11. Securities Ownership of Certain Beneficial Owners and Management
----------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the shares of Common Stock of the Company as of March 31, 2004, by
(i) each person who is known by the Company to be the beneficial owner of more
than five percent (5%) of the issued and outstanding shares of common stock,
(ii) each of the Company's directors and executive officers, and (iii) all
directors and executive officers as a group.
Percent of
Number of Outstanding
Name and Address Voting Shares Voting Shares
---------------- ------------- -------------
William M. Alverson 12,820,000 (1) 60.57%
Director, President
CFO & Secretary
5 Whatney
Irvine, CA 92618
Katherine T. West 12,820,000 (2) 60.57%
Director
5 Whatney
Irvine, CA 92618
Tydus Richards 2,000,000 (3) 9.45%
5 Whatney
Irvine, CA 92618
Rick McEwan -0-
Former Officer & Director
Allan E. Schrum -0-
Former Director & Officer
Clare C. Schrum -0-
Former Officer
All directors and officers 12,820,000 60.57%
as a group (2 persons)
(1) Includes 2,000,000 shares of common stock held by Katherine T. West
with respect to which shares Mr. Alverson, her husband, disclaims
beneficial ownership.
(2) Includes 10,820,000 shares of common stock held by William Alverson
with respect to which shares Ms. West, his wife, disclaims beneficial
ownership.
(3) Mr. Richards is an employee of the Company. Mr. Richards' shares were
issued pursuant to an employment agreement by and between him and the
Company (the "Agreement"). The share certificate was issued to Mr.
Richards for 2,000,000 shares of common stock includes a restrictive
legend indicating that Mr. Richards is entitled to the shares pursuant
to the terms. The 2,000,000 shares will be deemed earned and fully paid
for upon the completion of the term of the Agreement.
The Company had 21,163,277 shares of common stock issued and outstanding as of
March 31, 2004. The Company had 82 shareholders as of March 31, 2004.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
There have been no transactions since the beginning of fiscal year 2003
or any currently proposed transactions, or series of similar transactions, to
which the Company was or is to be a party, in which the amount involved exceeds
$60,000, and in which any of the officers, or directors, or holders of over 5%
of the Company's stock have or will have any direct or indirect material
interest other than as disclosed in Note 6 to the Financial Statements. The
Company does not currently have any policy toward entering into any future
transactions with related parties.
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PART IV
Item 13. Exhibits and Reports On Form 8-K
--------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
Exhibit 31 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER PURSUANT
TO SECTION 302 OF THE SARBANES-OXLEY ACT
Exhibit 32 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
fourth quarter ended December 31, 2003.
Item 14. Principal Fees and Services.
----------------------------
Set forth below are fees paid to the Company's independent accountants
for the past two years for the professional services performed for the
Company.
Audit Fees: During 2003 and 2002 the Company paid Mendoza Berger &
Company LLP a total of $7,700 and $5,000 for professional services
rendered in connection with performance of our independent audits for
the years ending December 31, 2002 and 2001, respectively.
All Other Fees: During 2003 and 2002 the Company paid Mendoza Berger &
Company LLP a total of $11,000 and $6,600 for professional services
rendered in connection with the reviews of the March 31, 2003,June 30,
2003 and September 30, 2003, Forms 10-QSB and the March 31, 2002,June
30, 2002 and September 30, 2002, Forms 10-QSB, respectively.
Tax Fees: None
36
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, hereunto duly authorized.
ADVANCED REFRIGERATION TECHNOLOGIES, INC.
Dated: November 4, 2004 By: /s/ William M. Alverson
--------------------------------
William M. Alverson,
President, Chief Financial Officer
And Secretary
37