UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
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Commission File Number 33-23473
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CORDIA CORPORATION
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(Name of small business issuer in its charter)
Nevada 112917728
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2500 Silverstar Road, Suite 500, Orlando, Florida 32804
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (866) 777-7777
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Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Exchange Act: None
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 the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the 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. [ ]
State issuer's revenues for its most recent fiscal year. $4,035,777
As of April 5, 2004, the issuer had 4,531,211 outstanding shares of its common
stock.
As of April 5, 2004, the aggregate market value of the issuer's common stock
held by non-affiliates was $544,341 (based upon the price at which the common
stock was sold on such date).
DOCUMENTS INCORPORATED BY REFERENCE
Part Item
1. Proxy Statement for the 2004 Annual Meeting
of Stockholders III 9, 10, 11, 12, 15
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business 1
Item 2. Description of Property 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 6
Item 6. Management's Discussion and Analysis or Plan of Operation 6
Item 7. Financial Statements 9
Item 8. Changes in and Disagreements with Accountants on Accounting 10
and Financial Disclosure
Item 8a. Controls and Procedures 10
PART III
Item 9. Directors and Executive Officers of the Registrant 10
Item 10. Executive Compensation 10
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 10
Item 12. Certain Relationships and Related Transactions 10
Item 13. Exhibits and Reports on Form 8-K 10
Item 14. Principal Accountant Fees and Services 11
SIGNATURES
CERTIFICATIONS
INDEPENDENT AUDITORS REPORT
i
Certain statements in this Report and in the documents incorporated by reference
herein constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Factors that might cause such a difference include,
among others, uncertainties relating to general economic and business
conditions; governmental regulations, industry trends; changes in demand for our
products and services; uncertainties relating to customer plans and commitments
and the timing of orders received from customers; announcements or changes in
our pricing policies or those of our competitors; unanticipated delays in the
development, market acceptance or installation of our products and services;
availability of management and other key personnel; availability, terms and
deployment of capital; relationships with third-party equipment suppliers; and
worldwide political stability and economic growth. The words "believe",
"expect", "anticipate", "intend" and "plan" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the statement
was made.
Part I
Item 1. Description of Business.
Overview
Cordia Corporation is a business services holding company that provides industry
specific Internet-enabled software systems, outsourcing solutions and services
to businesses and organizations. During 2001, we began developing proprietary
software systems and related outsourced solutions for the telecommunications
industry. In the third quarter of 2003, we began providing these outsourced
solutions to competitive local exchange carriers operating in the
telecommunications industry. In addition to the aforementioned web solutions,
Cordia provides retail and wholesale telecommunications services via its wholly
owned subsidiary, Cordia Communications Corp., which began providing
telecommunications services during the second quarter of 2002.
We believe the rapid growth and acceptance of the Internet as a global medium
for communication, information, and commerce has created opportunities to
perform business functions more efficiently and effectively through the
utilization of standardized Internet technologies, databases and applications.
Due to the specialized expertise we have developed, we can provide outsourced
solutions at lower costs and with higher quality while giving our customers the
freedom and ability to focus on providing telecommunication services.
Our expansion plans in the telecommunications industry include the deployment of
a Voice over Internet Protocol ("VoIP") network. We anticipate offering a voice
over broadband solution enabling delivery of voice services over any broadband
IP connection including third-party DSL, cable modems, T-carrier and wireless
circuits. Historically, the Federal Communications Commission ("FCC") has not
regulated the Internet or the services provided over it and recently the FCC
found that an entirely Internet-based VoIP service is an unregulated information
service. The FCC has however, initiated a proceeding to examine what its role
should be in this environment. We believe that the limited regulatory barriers
for VoIP services will permit us to rapidly enter and grow our VoIP business
both nationally and internationally. The ubiquitous nature of the Internet and
the open standards of both Session Initiation Protocol (SIP) and Internet
Protocol (IP) will allow us to deploy an efficient and economical VoIP network
in order to provide retail and wholesale VoIP services to our customers. At this
time, with the uncertainty as to future regulations and the direction of the
FCC, the impact these regulations would have on our business is unknown.
However, we would anticipate any regulation to have an effect on costs
associated with providing VoIP and our profits.
We also anticipate expanding our presence in the telecommunications industry by
entering the wireless telecommunications market by means of our wholly owned
subsidiary, My Tel Co, Inc. which has recently applied for wireless wholesale
status with Verizon Wireless, Inc. We believe that bundling of wireless services
with our local, long distance, data and VoIP services, will increase the
profitability from our retail and wholesale customer bases, while increasing
customer loyalty and reducing churn. Currently, resale wireless services are not
regulated by the FCC or by the state regulatory commissions, which allows new
entrants to avoid excessive regulatory expenses. By saving regulatory costs and
the costs associated with building our own wireless network, we will be able to
conserve capital for the purpose increasing growth and achieving profitability.
Our strategy is to accelerate our growth and increase our profitability through
the acquisition and internal development of businesses that provide either
industry-specific expert services or specialized business functions and by
broadening our presence in the telecommunications industry by providing local
and long distance services, wireless telecommunications services and VoIP. We
plan to utilize internally developed proprietary software systems that take
advantage of standardized Internet technologies to enhance both the quality and
efficiency of our services. We believe that properly designed and developed
systems and applications can allow us to leverage the expertise of our employees
and to deliver a superior service to our customers, which should give us a
competitive advantage over expert organizations that seek to provide their
services through traditional means.
1
TELECOMMUNICATIONS BUSINESSES
Cordia Communications Corp.
During 2001, we began to focus some of our resources on the development of
telecommunications services. To that end, we formed Cordia Communications Corp.
in July 2001 and began developing an integrated software system designed to
support providers of telecommunications services. To access these systems we
developed Web client front-ends permitting access via the Internet, which we
refer to as "Telecom Workspaces" or "Workspaces". During 2002, we began to
develop a Telecom Account Management System ("TAMS") which is a suite of
services including Data Interconnection, Rate Plan Administration, Rating and
Invoicing, and Ticketing and Transaction Posting that utilize Workspaces to
provide outsourced solutions to telecommunications providers. In addition,
during 2002, Cordia Communication Corp. became a licensed provider of local and
long distance telephone services in multiple states.
We believe that utilizing a network platform commonly referred to as unbundled
network elements-platform, or UNE-P has created significant opportunities to
develop a profitable Competitive Local Exchange Carrier (CLEC) business. With
UNE-P, we are able to lease all of the network elements required to provide
local telecommunications services from the Incumbent Local Exchange Carrier
(ILEC) on a month-to-month basis. UNE-P allows us to avoid the large capital
expenditures required to build an independent network, closely match our network
capacity to utilization and obtain gross margins. Although the fate of UNE-P has
been the subject of debate in recent months by the FCC we consider the Triennial
Review Order ("TRO") issued in August 2003 to be a victory for competitive local
exchange carriers. That decision, while changing some of the elements that must
be provided on an unbundled basis, preserved the essential tools necessary to
foster voice competition in the local market. The District Court issued a
decision on March 2, 2004, in which it struck down some of the rules compelling
Incumbent Local Exchange Carriers ("ILECs") to share their facilities. On March
31, 2004, the FCC urged telecommunications carriers to engage in a period of
good faith negotiations to arrive at commercially acceptable arrangements for
the availability of UNE-P. To provide additional time for these negotiations,
the FCC indicated its intent to petition the District Court for a 45 day
extension of the stay of the March 2, 2004 decision and to request the Solicitor
General to seek a comparable extension of the deadline for filing a petition for
certiori. Cordia has indicated to the FCC that it will participate in good faith
negotiations and support a stay of the District Court's decision. In light of
the circumstances, we believe that the Supreme Court will grant certiori and
overturn the District Court's decision on review and issue a decision in support
of competition as it did in May 2002. At this time, with the uncertainty as to
the Superme Court's decision to grant certori and issue a decision supporting
competition in the telecommunications industry, the effect on our business is
unknown, however we would anticipate an adverse effect on costs associated with
providing telecommunications services and our profits. While we are optimistic
that the Supreme Court will intercede and render a decision in favor of
competition, we recognize the possibility that a less favorable decision may be
rendered. Under these circumstances, we are hopeful that we can negotiate in
good faith with ILECS to reach a practical and equitable agreement concerning
the use of UNE-P.
In order to provide our telecommunications services, we have entered into
interconnection agreements with facilities-based local (ILECs) and long distance
providers. Our Workspaces serve as a middleware layer connecting our employees,
agents, wholesale and retail customers to the provisioning, repair, billing and
enhanced services functions of our underlying carriers. We continuously develop
and improve our Workspaces focusing on the most efficient and effective
underlying processes to enhance the performance of each core function of the
services provided while adapting our systems to those processes. We believe that
our dedication to a development strategy whereby the process itself governs
software development is far more favorable than the alternative methodology, in
which the limitations of software systems govern the adaptation and development
of the process.
We have identified the following three strategies that we intend to utilize,
through our Workspaces system in order to profit from the development of our
integrated software system designed to support providers of telecommunications
services in the domestic telecommunications market.
1. Retail Telecommunication Services. Cordia Communications Corp. is approved
to provide local and long distance telecommunications services in Florida,
Illinois, Michigan, New York, New Jersey, Ohio, and Pennsylvania. To date,
Cordia Communications has been actively marketing retail services and providing
services to end users in New York, New Jersey and Pennsylvania. We expect to
expand our retail service offerings into Illinois and Michigan during the
remainder of 2004. Management believes that the states in which we are offering
services to and our target states for this year offer the most attractive
opportunities. Management anticipates obtaining significant retail gross margins
in these states due to the relative size of their telecommunications markets and
relatively low wholesale prices as compared to anticipated average retail
revenue.
2. Wholesale Telecommunications Services. Cordia Communications began to offer
wholesale telecommunications services to other telecommunications providers in
November of 2002. Cordia Communications provides wholesale customers with
Internet access to our systems and data by means of our Workspaces. We believe
our systems and our focus on process engineering have created outsourced
solutions and services that will greatly facilitate the entry of our wholesale
customers into the CLEC business. We believe our wholesale customers will be
able to provide telecommunications services with less investment and greater
efficiency and expertise then may be possible for most CLECs who lack our
systems capabilities and the knowledge of our employees.
2
3. Professional Outsourced Telecommunications Systems ("POTS") and Solutions.
During the first quarter of 2003, we began marketing a suite of outsourced
services, designed around our Workspaces, to telecommunications providers. The
services we offer include Billing, New Order Provisioning, Repair, Level I
Customer Service, Secondary Provisioning, Collections and Regulatory services.
These services require the customer to subscribe to our Workspaces systems,
usually hosted within our facilities. Through Workspaces, we are able to provide
all or some of these specialized functions on an outsourced basis. Customers
will be attracted to these services because they can adopt and utilize those
functions that they believe are deficient within their own organizations. In
addition to long term outsourcing service, we will also be offering emergency
backup and transitional services that will allow our customers to outsource
these functions during times of unplanned facilities outages, loss of key
personnel or rapid growth.
Cordia Communications reported revenues of approximately $4,035,800 for the
year ended December 31, 2003 and reported revenues of approximately $720,400 for
the year ended December 31,2002. These revenues are inclusive of our continuing
operations only. Of the revenues reported for the year ended December 2003,
approximately $3,489,800 was generated from retail telecommunications services
and approximately $546,000 was generated from wholesale services or other
services. We expect to experience continued growth in our telecommunications
businesses during the remainder of 2004.
My Tel Co, Inc.
During the third quarter of 2003, we decided to expand our presence in the
telecommunications industry by entering the wireless telecommunications market.
To that end, we filed a wireless wholesale application on behalf of our wholly
owned subsidiary My Tel Co, Inc. ("My Tel") with Verizon Wireless, Inc. My Tel
was formed in June 2002 and in August 2002 My Tel was granted a Certificate of
Public Convenience and Necessity ("CPCN") by the New York Public Service
Commission to operate as a competitive local exchange carrier. My Tel has never
operated under the authority granted to it by the State of New York and has
remained an inactive subsidiary, reporting no revenues, of Cordia. During 2003,
our efforts consisted of preparing My Tel to become an operating subsidiary
providing wireless resale services in the upcoming year. We anticipate operating
as a wireless reseller in the latter half of 2004.
INSURANCE BUSINESSES
Insurance Solutions Group
Our insurance services business was operated primarily through our wholly owned
subsidiary, ISG Group, Inc. that conducted business under the name Insurance
Solutions Group ("ISG"). ISG provided comprehensive insurance solutions to
insurance companies, state insurance departments and self-insured entities in
conjunction with Universal Recoveries, Inc., a wholly-owned subsidiary of ISG
doing business as Subrogation Partners ("Subrogation Partners"); U.L.A.E., Inc.,
a wholly-owned subsidiary of ISG doing business as Claim Partners ("Claim
Partners"); and US Direct Agency, Inc.
During the first quarter of 2003, we undertook an evaluation of the relative
potential opportunities of our communications and insurance businesses. As part
of this evaluation, we took into consideration the limited capital resources
available to our company and despite its rapid growth over the last two years
the continued losses of ISG, as well as ISG's negative equity and working
capital position. As a result of this evaluation, we determined that it was in
the best interest of our shareholders to exit the operating portions of our
insurance-related subsidiaries and to reduce the significant infrastructure and
operating costs associated with those businesses.
On March 3, 2003, Cordia sold its equity interests in ISG to West Lane Group,
Inc., a company owned by the then current management of ISG for a purchase price
of $750,000. The $750,000 was represented by a two-year promissory note bearing
interest at a rate of 6% per annum and secured by 700,000 shares of Cordia's
stock owned by West Lane. Cordia also entered into a licensing and services
agreement with ISG whereby ISG purchased an unlimited license to SUBRO AGS
software. Under the terms of the agreement, ISG paid Cordia $100,000 upon
execution of the agreement and agreed to pay $6,000 per month (including
interest) for a period of twenty five (25) months.
As a result of the sale of its equity interest in ISG, employee stock options to
purchase 83,000 shares of common stock at an exercise price of $7.50 per share
expired.
During the third quarter of 2003, we re-evaluated the collectibility of the
principal and interest related to the note and recorded a reserve in the amount
of $165,000. The reserve was based on the financial situations of the debtor as
well as the current marketability of the collateral involved.
On December 10, 2003, Cordia agreed to accept a total of 312,500 shares of its
Common stock at $0.30 per share from West Lane Group, Inc. on behalf of itself,
affiliates and subsidiaries to satisfy $30,000 in principal and $33,750 in
interest on the promissory note and $30,000 in payment in arrears on the
licensing agreement. Upon transfer of the shares to the Company during the first
quarter of 2004, the shares were retired thereby reducing Cordia's outstanding
shares to 5,843,711.
At December 31, 2003, the Company reduced the initial promissory note reserve of
$165,000 to zero and reduced the promissory note balance to its net realizable
value of $595,000 based on the total value of the shares transferred back to the
Company in 2004.
In February 2004, in the interest of Cordia's shareholders, Cordia agreed to
accept another 1,412,500 shares of its common stock at $0.40 per share from West
Lane Group, Inc. to satisfy the remaining principal balance of the promissory
note. Upon transfer of the 312,500 shares and the 1,412,500 shares during the
first quarter of 2004, the shares were retired thereby reducing Cordia's
outstanding shares to 4,431,211, as described in Note 8 Subsequent Events, (a)
Mutual Release and Satisfaction of Promissory Note and License Agreement.
3
Our Business Strategy
We believe that the telecommunications industry is going to rapidly embrace VoIP
as a primary method of delivery voice services in the future. We believe that
our expertise in both system development and telecommunications provides us with
a competitive advantage in the coming conversion and will enable us to
participate in the enormous opportunities in retail, wholesale and outsourced
services generated from the rapid growth of VoIP.
We intend to focus on growing our retail telecommunications businesses while
leveraging our systems expertise to generate outsourcing and wholesale services
revenue from other traditional and VoIP telecommunications providers. We expect
to develop proprietary VoIP systems that will provide increased productivity,
enhanced quality of service and next generation integrated services to our
customers. In addition, we will continually look for acquisition and partnership
opportunities in telecommunications that will permit us to rapidly and
profitably grow our telecommunication-related revenues.
In addition to our telecommunications business, we plan to take advantage of the
recent business trend of outsourcing non-core specialized business services.
Some of our future development and acquisition opportunities are likely to be
characterized by outsourcing business services that will produce predictable and
recurring revenue streams, competitive advantages from effective process
management, proprietary systems and the provision of knowledge-rich services,
the development of niche markets and value-based pricing.
It is our intention to pursue our on-going growth strategy by developing
technology-based outsourcing solutions for businesses and organizations through
internal development and the acquisition of other businesses that meet our
selection criteria of offering specific expert services or specialized business
functions. In doing so, we intend to provide outsourcing solutions to a wide
range of businesses with the goal of increasing the productivity of their
skilled workers. In connection with this strategy, we expect to implement a
pricing strategy that will reward us for those productivity gains.
Sales and Marketing Strategies
We are currently marketing our retail telecommunications service offerings
through three channels. The first includes utilizing third party telemarketing
firms to solicit customers. These firms are paid on a per sale basis that varies
by the type, size and location of the customers sold. We are also seeking to
develop a network of independent sales agents to sell our telecommunications
services. We have developed an agent module to our Workspaces systems and a
related Internet site located at www.agents.cordia.us to assist us in attracting
and maintaining a network of qualified independent sales agents. Through
www.agents.cordia.us, our agents can track all customer activities on a real
time basis. These activities include order tracking, billing, payments and
ticketing systems that allow an agent to actively participate in our mutual
customer's telecommunications status and requirements. We generally pay our
independent agents both initial upfront commissions and residual commissions
based on customer payments. Finally, we have hired a small internal staff to
market our retail and wholesale telecommunications services. We believe our
ability to provide universal access to customer account information and
transactions will provide us with a competitive advantage in the acquisition and
retention of customers for our telecommunications services.
Competition
The telecommunications industry is highly competitive and many of our
competitors in the various business sectors in which we compete have
substantially greater financial resources, larger sales forces and larger and
more sophisticated network capabilities. Furthermore, the telecommunications
industry has been experiencing frequent regulatory changes and capital market
access volatility that may significantly impact our planned telecommunication
business. We are unable to determine the effect, if any, such changes may have
on our operations.
In our software and outsourced services business, we compete with the internal
departments of potential customers and others that provide similar services.
There are participants in the telecommunications, transaction processing and
software development industries that possess sufficient capital, and managerial
and technical expertise, to develop competitive services.
Government Regulation
Local and long distance telecommunications services are subject to regulation by
the Federal Communications Commission ("FCC") and by state regulatory
authorities. Among other things, these regulatory authorities impose regulations
governing the rates, terms and conditions for interstate and intrastate
telecommunications services and will require us to file tariffs for interstate
and international service with the FCC and obtain approval for any intrastate
service we provide in the states in which we elect to market our services. In
addition, we will be required to obtain and maintain certificates of public
convenience and necessity from regulatory authorities in the states in which we
operate. We will also be required to file and obtain prior regulatory approval
for tariffs and intrastate services. In addition, we must update or amend the
tariffs and, in some cases, the certificates of public convenience and
necessity, when rates are adjusted or new products are added to the local and
long distance services we offer. Changes in existing laws and regulations,
particularly regulations resulting in increased price competition, may have a
significant impact on our business activities and on our future operating
results. We will also be subject to Federal Trade Commission regulation and
other federal and state laws relating to the promotion, advertising and direct
marketing of our products and services. Certain marketing practices, including
the means to convert a customer's local or long distance telephone service from
one carrier to another, have recently been subject to increased regulatory
review of both federal and state authorities. Even though we have implemented
procedures to comply with applicable regulations, increased regulatory scrutiny
could adversely affect the transitioning of customers and the acquisition of new
customer bases. Amendments to existing statutes and regulations, adoption of new
statutes and regulations and expansion of our operations into new geographic
areas and new services could require us to alter our methods of operation or
obtain additional approvals, at costs which could be substantial. There can be
no assurance that we will be able to comply with applicable laws, regulations
and licensing requirements. Failure to comply with applicable laws, regulations
and licensing requirements could result in civil penalties, including
substantial fines, as well as possible criminal sanctions.
4
Employees
As of March 31, 2004, we had thirty-seven employees, thirty-five of whom were
employed on a full-time basis. At such date, fourteen of our employees were
located at our offices in White Plains, New York and twenty-three were located
at our executive office located in Orlando, Florida. None of our employees are
represented under a collective bargaining agreement. We believe our relations
with our employees to be good.
Our History
On June 22, 1988, we incorporated under the laws of New York and consummated an
initial public offering of our common stock on March 15, 1989. In the latter
half of 1999, we replaced our Board of Directors with two new members and
directed these individuals to seek, identify, engage and acquire new businesses.
In conjunction with our future plans, we elected to change our state of
incorporation from New York to Nevada on April 28, 2000.
Effective November 30, 2000, pursuant to the terms of two separate Contribution
and Exchange Agreements with ISG and US Direct we acquired all of the issued and
outstanding capital stock of ISG and US Direct for an aggregate of approximately
4,330,200 shares of our common stock. All of our former management resigned at
the closing of these transactions and the businesses of each of ISG and US
Direct became our ongoing businesses.
On May 25, 2001, our stockholders approved a resolution to amend Article First
of our Articles of Incorporation to change our corporate name from
CyberOpticLabs, Inc. to Cordia Corporation. In July 2001, we formed Cordia
Communications Corp., which commenced operations during the second quarter of
fiscal 2002. On June 13, 2002, we formed My Tel Co, Inc. intending it to operate
as a competitive local exchange carrier. Since incorporation it has been an
inactive subsidiary, however we anticipate operating as wireless reseller in
2004.
On March 3, 2003, we sold all of our equity interests in ISG and its operating
subsidiaries.
Item 2. Description of Property.
As of March 31, 2003, we leased property at the following two locations: (1)
approximately 2,840 square feet of office space for our offices in White Plains,
New York at a rental price of $4,970 per month plus utilities for a term of five
years, expiring December 31, 2008, with an increase in rent in years three and
four and (2) approximately 4,000 square feet at our executive offices in
Orlando, Florida at a rental price of $3,301.50 per month plus utilities on a
month to month basis. We believe our existing facilities are sufficient for our
current operations.
Item 3. Legal Proceedings.
We are not currently a party to any legal proceedings that we believe will have
a material adverse effect on our financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
5
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
Since June 7, 2002, our common stock has been listed under the symbol "CORG" on
the OTC Bulletin Board. Prior to that time, we were listed on the OTC Bulletin
Board under the symbol "CORC" from June 5, 2001 to June 6, 2002 and under the
symbol "CYOL" from May 8, 2000 to June 4, 2001, The following table represents
the high and low per share bid information for our common stock for each
quarterly period in fiscal 2003 and 2002. Such high and low bid information
reflects inter-dealer quotes, without retail mark-up, mark down or commissions
and may not represent actual transactions. All share prices reflect the
one-for-five reverse stock split of common stock effective June 6, 2002.
Year Ended 2003 Year Ended 2002
--------------- ----------------
High Low High Low
---- --- ---- ---
Quarter ended March 31 $2.15 $0.55 $2.80 $0.75
Quarter ended June 30 0.65 0.25 7.00 0.52
Quarter ended September 30 0.48 0.22 6.50 2.02
Quarter ended December 31 0.36 0.22 4.40 2.50
As of April 5, 2004, there were 4,531,211 shares of our common stock outstanding
held by approximately 161 shareholders of record.
We do not currently pay dividends on our common stock. We do not intend to
declare or pay dividends on our common stock, but to retain earnings, if any,
for the operation and expansion of our business.
Recent Sales of Unregistered Securities
On November 26, 2002, we sold 60,000 shares of our common stock at a
purchase price of $1.00 per share for a total purchase price of $60,000, to an
unaffiliated third party in a private offering pursuant to an exemption under
Section 4(2) of the Securities Act of 1933, as amended. On February 15, 2003, we
sold 60,000 shares of common stock at a purchase price of $0.75 per share for a
total purchase price of $44,500, net of associated fees, to an unaffiliated
third party in a private offering pursuant to an exemption under Section 4(2) of
the Securities Act of 1933, as amended.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Please refer to the first page of this Report for
additional factors relating to such statements.
Cordia operates as a telecommunications service provider and provider of
outsorced services to other telecommunications carriers through its wholly-owned
subsidiary Cordia Communications Corp, which commenced operations in the second
quarter of 2002. Cordia currently offers services in New Jersey, New York, and
Pennslyvania and anticipates entering the telecommunications market in Illinois
and Michigan in 2004. Cordia is broadening the scope of its suite of
telecommunications services to include VoIP and wireless communications in the
upcoming year.
The detailed results of operations in 2003 follow. In instances where there is a
dramatic increase or decrease from the prior year it should be noted that we
anticipate revenue and costs to stabilize as 2003 represents growth of our
telecommunications from 2,000 to 10,000 lines. The dramatic increase or decrease
in percentages should not be relied upon as a forecast of future revenues and
costs.
6
Results of Operations
Year Ended 2003 Compared Year Ended 2002
Operating Revenues
Years Ended December 31
-----------------------
2003 2002
---- ----
Telecommunications revenue $ 3,489,800 $ 547,800
Other 546,000 172,600
----------- -----------
$ 4,035,800 $ 720,400
=========== ===========
Revenues for the year ended December 31, 2003 increased by approximately
$3,315,400 or approximately 460%, to approximately $4,035,800 as compared to
approximately $720,400 reported during the year ended December 31, 2002.
Telecommunications Revenue
=========================================
2003-2002 $ 2,942,000 537% increase
=========================================
Telecommunications revenue is earned from the provisioning of services
to business, residential and wholesale customers for basic telephone service,
including local and long distance service, as well as ancillary services such as
voice messaging and call waiting. Since we only began offering
telecommunications services during the second quarter of 2002, all of our 2003
revenue was derived from our efforts to grow our customer base. As of December
31, 2003 we had approximately ten thousand lines as compared to approximately
two thousand lines at the end of December 31, 2002 We anticipate a steady and
continued growth rate in the customer base of our telecommunications operations.
Other Revenue
=========================================
2003-2002 $373,400 216% increase
=========================================
Other revenue for 2003, consists primarily of revenue earned through
our wholesale services amounting to approximately $357,300, licensing revenue
earned of approximately $90,000 and outsourcing revenue derived as a result of
providing data and website technology, of approximately $98,700. As compared to
providing outsourcing revenue of approximately $23,000, and providing management
services for our former ISG subsidiary amounting to approximately $150,000 for
the year ended 2002. We expect that this number will decrease as we shift our
concentration of time and resources toward the growth of our telecommunications
business during 2004. We intend, however, to continue to offer technology
outsourcing to current and potential customers.
Operating Expenses
Years Ended December 31
-----------------------
2003 2002
---- ----
Resale and Wholesale Line Changes $1,814,600 $ 306,100
Payroll and Payroll Taxes 1,105,800 453,900
Advertising and Promotion 756,000 129,000
Professional and Consulting Fees 198,400 644,700
Depreciation 7,600 2,300
Insurance 87,800 26,500
Office Expense 43,400 17,100
Telephone 65,800 39,500
Rent and Building Maintenance 52,800 36,100
Other Selling, General and Administrative 623,400 142,000
---------- ----------
$4,755,600 $1,797,200
========== ==========
Consolidated operating expenses increased by approximately $2,958,400 or
approximately 165%, to approximately $4,755,600 during fiscal 2003 as compared
to approximately $1,797,200 during fiscal 2002. Consolidated operating expenses
grew less then revenue during fiscal 2003 as compared to fiscal 2002 on an
absolute and percentage basis. During both fiscal 2002 and 2003, the company
incurred expenses related to the hiring, development and deployment of
personnel, software systems and infrastructure necessary to support Cordia
Communications planned future growth. A significant portion of these development
expenses are not directly associated with revenue growth and should remain
relatively fixed in future periods. Therefore, we expect that future growth of
revenues will result in greater operating margins and profitability.
7
Resale and Wholesale Line Charges
=========================================
2003-2002 $1,508,500 493% increase
=========================================
Resale and wholesale line charges are direct costs associated with our
telecommunications subsidiary, Cordia Communications Corp., and represent our
network access fees paid in order to provide local and long distance telephone
service to our customers. These expenses will rise or fall in direct correlation
to the size of our telecommunications customer base. The increase is due to our
concentration on growing our customer base by approximately 8000 lines during
2003.
Payroll and Payroll Taxes
=========================================
2003-2002 $651,900 144% increase
=========================================
This increase was directly related to the growth in 2003 of our
telecommunications company, and due to taking over complete operations of our
offices in Orlando, Florida. We expect that our payroll costs will continue to
increase over the next 12 months as we continue to expand and grow our customer
base.
Advertising and Promotion
=========================================
2003-2002 $627,000 486% increase
=========================================
Advertising and promotion costs, which consist of advertising,
marketing, travel and telemarketing expenses, increased dramatically for the
year ended December 31, 2003 as compared to 2002. It is expected that this
amount will continue to increase, although not as substantially, as our
telecommunications business will require the services of telemarketers to
continue to grow our customer base.
Professional and Consulting
=========================================
2003-2002 ($446,300) 69% decrease
=========================================
This decrease was primarily the result of us no longer granting stock
options to non-employees for consulting services during the year ended 2003.
Depreciation
=========================================
2003-2002 $5,300 230% increase
=========================================
The increase was primarily due to additions of depreciable office
equipment, which was necessary to facilitate the growth of Cordia
Communications.
Insurance
=========================================
2003-2002 $61,300 231% increase
=========================================
This increase is primarily due to our increased staff, equipment and
office space for our, subsidiary, Cordia Communications, as well as
industry-wide insurance cost increases we experienced in obtaining coverage.
Office Expense
Telephone
Rent and Building Maintenance
=========================================
2003-2002 $69,300 75% increase
=========================================
Consolidated office, telephone and rent and building expenses from
continuing operations increased by approximately $69,300 or 75%, from
approximately $92,700 to $162,000 for years ended December 31, 2003 and 2002
respectively. This increase was due to our efforts to grow our
telecommunications business, as well as the added expense (approximately $43,400
in 2003) of operating a new facility in Orlando, Florida for Cordia
Communications.
Other Selling, General and Administrative
==========================================
2003-2002 $481,400 339% increase
==========================================
Other selling, general and administrative expenses consist of expenses
such as bad debt, dues and subscriptions, commissions, bank and credit card
processing fees, license expense and registration fees, among others. The
increase is due to our expenses related to the growth of Cordia Communications,
and is expected to continue to increase, although not as dramatically during
2004 as we intend to expand and grow our telecommunications business.
Interest expense amounted to approximately $3,800 during year ended December 31,
2003, offset against approximately $46,800 of interest income, as compared to
approximately $1,907 in interest expense during year ended December 31, 2002.
The increase was primarily due to increased average borrowings. The interest
income is primarily due to interest paid to us by ISG in connection with our
note receivable from them.
8
Liquidity and Capital Resources
At December 31, 2003, we had cash and cash equivalents of approximately
$111,300, an increase of approximately $41,000 from amounts reported at December
31, 2002, and a working capital deficit of approximately ($739,100), which
represented an increase in working capital of approximately $181,000 from
amounts reported at December 31, 2002 of approximately ($920,100).
Net cash used by operating activities aggregated approximately $10,600 a
decrease of approximately $526,700 from the amount used during the year ended
December 31, 2002. The principal decrease in use of cash resulted from a
reported decrease in net loss from continuing operations of approximately
$325,000 from 2002, as well as an increase in change in accounts receivable of
approximately $578,000, offset by a change in accounts payable of approximately
$667,000.
Net cash used in investing activities for the year ended December 31, 2003
aggregated approximately $18,800 as compared to net cash used of $400 for the
year ended December 31, 2002. Cash used in investing activities consisted
primarily of purchased property and equipment, offset by proceeds received from
sale of certain investments of $6,550 and $9,457 for the year ended December 31,
2003 and 2002, respectively.
Net cash provided by financing activities aggregated approximately $70,400 and
$605,900 during the years ended December 31, 2003 and 2002, respectively. The
principle source of cash provided by financing activities in the years ended
December 31, 2003 and 2002 was due to proceeds received from the issuance of
common and subscribed stock of approximately $38,500 (2003) and $642,500 (2002),
offset by a use of cash for financing activities of approximately $10,000 and
$11,600 for repayments on borrowings during 2003 and 2002, respectively, and the
purchase of treasury stock of $25,000 in 2002.
During 2002, we received aggregate proceeds of approximately $582,500 from the
sale of our common stock in connection with the exercise of options and the
issuance of common stock for services. During the fourth quarter of 2002, we
sold in a private placement 60,000 shares of common stock for a purchase price
of $60,000. During the first quarter of 2003, we sold in a private placement an
additional 60,000 shares of common stock for a purchase price of $44,500, net of
associated fees.
We have generated operating losses for both of the last two fiscal years. The
losses were primarily due to the large initial expenses we incurred from
corporate staffing, system development and sales and marketing. In addition to
our corporate staff, we currently employ five (5) full-time system developers.
As our Telecommunications revenues grow in the future, we do not expect to
materially increase our corporate and system development staffs.
During fiscal 2003, we had sales and promotional expenses of approximately
$756,000 or approximately 19% of revenues. We expect our sales and promotional
expenses to continue to grow in the future but at a slower rate than revenue
growth. Therefore, in future periods we expect total sales and promotional
expenses to be a smaller portion of revenue. Sales and promotional expenses are
primarily outsourced telemarketing expenses. We have not entered into volume
commitments with any of our third party sales organizations. By avoiding volume
commitments, we are better able to control our levels of sales expenditures. We
believe that this flexibility affords us the opportunity to aggressively grow
our revenues while maintaining the short-term ability to adjust our expenditures
based on our available working capital and liquidity.
We believe that as our revenues grow our corporate staffing, system development
and sales and marketing expenses as a percent of total revenues will continue to
decrease. With our current level of expenditures and our current gross margins,
we expect to reach a break even level on an operating basis when revenues exceed
approximately $8,000,000. We believe that so long as there is not a material
change in retail or wholesale pricing or a material change in the regulatory
status of UNE-P, we will reach breakeven on an operating basis when our retail
customer exceeds approximately 15,000 UNE-P lines. Management expects to reach
15,000 retail UNE-P lines by the end of the third fiscal quarter of 2004.
In addition to our plans to aggressively grow our telecommunications and
outsourced service businesses, we also expect to increase our expenditures on
our planned rollout of VoIP and wireless services. We believe our cash and cash
equivalent assets at December 31, 2003 may not provide us with sufficient
liquidity to do so, although management believes it will be able to generate
sufficient cash flows to meet its obligations as they come due during 2004. In
recognition of the potential need for additional working capital, management
intends to seek additional sources of capital, which sources may include public
and private sales of our securities and additional borrowings from both
affiliates and non-affiliates. Given current market conditions, there can be no
assurance that we will be able to obtain such funding when needed, or that such
funding, if available, will be obtainable on acceptable terms. Our inability to
obtain sufficient working capital may restrict our ability to carry out our
operating plans, which would result in the continuance of unprofitable
operations.
Item 7. Financial Statements.
The following consolidated financial statements, notes thereto, and the related
independent auditors' report contained on page F-1 to the Company's consolidated
financial statements are herein incorporated:
Consolidated balance sheets - December 31, 2003 and 2002
Consolidated statements of operations - Years ended December 31, 2003
and 2002
Consolidated statements of stockholders' equity deficit - Years ended
December 31, 2003 and 2002
Consolidated statements of cash flows - Years ended December 31, 2003
and 2002
Notes to consolidated financial statements - Years ended December 31,
2003 and 2002
9
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On January 7, 2004, our former auditors resigned and on January 19,
2004, we engaged the services of Lazar, Levine & Felix LLP to serve as our new
principal independent accountants for our audit for the year ending December
2003, for which an 8K was filed.
Item 8a. Controls and Procedures.
(a) Based upon an evaluation performed within 90 days of this Report, our Chief
Executive Officer ("CEO") and Chief Accounting Officer ("CAO") have each
concluded that our disclosure controls and procedures are effective to ensure
that material information relating to our Company is made known to management,
including the CEO and CAO, particularly during the period when our periodic
reports are being prepared, and that our internal controls are effective to
provide reasonable assurances that our financial condition, result of operations
and cash flows are fairly presented in all material respects
(b) The CEO and CAO each note that, since the date of his/her evaluation until
the date of this Report, there have been no significant changes in internal
controls or in other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Part III
Item 9. Directors and Executive Officers of the Registrant.
Directors and Executive Officers.
Information regarding our directors and executive officers is incorporated by
reference to the section entitled "Election of Directors" appearing in our Proxy
Statement for our Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission (the "Commission") within 120 days after the end of our
year ended December 31, 2003.
Item 10. Executive Compensation.
Information regarding executive compensation is incorporated by reference to the
information set forth under the caption "Executive Compensation" in our Proxy
Statement for our Annual Meeting of Stockholders to be filed with the Commission
within 120 days after the end of our year ended December 31, 2003.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the information set forth under the
caption "Security Ownership of Certain Beneficial Owners and Management
Ownership" in our Proxy Statement for our Annual Meeting of Stockholders to be
filed with the Commission within 120 days after the end of our year ended
December 31, 2003.
Item 12. Certain Relationships and Related Transactions.
Information regarding certain relationships and related transactions is
incorporated by reference to the information set forth under the caption
"Certain Relationships and Related Transactions" in our Proxy Statement for our
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of our year ended December 31, 2003.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following exhibits are filed herewith or are
incorporated by reference to exhibits previously filed.
Exhibit No. Description
2.1 Articles of Incorporation (incorporated by reference to
Exhibit B(1) to our Form 10-Q filed with the Commission on
May 16, 2000).
2.2 Revised Bylaws (incorporated by reference to Exhibit B(4)
to our Form 10-Q filed with the Commission on May 16,
2000).
2.3 Articles of Merger of Vestex, Inc. and CyberOpticLabs, Inc.
(incorporated by reference to Exhibit B(2) to our Form 10-Q
filed with the Commission on May 16, 2000).
4.1 Specimen Common Stock Certificate. (incorporated by
reference to Exhibit 4.1 to our Form 10-KSB filed with the
Commission on April 14, 2001).
10.1 Cordia Corporation 2001 Equity Incentive Plan (incorporated
by reference to Exhibit 10.1 to our Form 10-KSB filed with
the Commission on April 14, 2001).
10
10.2 Promissory Note, dated March 3, 2003, of West Lane Group,
Inc. in favor of our company (incorporated by reference to
Exhibit 10.2 to our Form 8-K filed with the Commission on
March 5, 2003).
10.3 License Agreement, dated March 3, 2003, between I.S.G.
Group, Inc., d/b/a Insurance Solutions Group and our
company (incorporated by reference to Exhibit 10.2 to our
Form 8-K filed with the Commission on March 5, 2003).
21 Subsidiaries - list of all subsidiaries, jurisdiction of
incorporation and names under which subsidiaries do
business.
31.1 Certification of Cordia Corporation's Principal Executive
Officer, Patrick Freeman, pursuant to Section 302 of the
Sarbanes-Oxley of 2002.
31.2 Certification of Cordia Corporation's Principal Financial
Officer, Lorie M. Guerrera, pursuant to Section 302 of the
Sarbanes-Oxley of 2002.
32.1 Certification of Cordia Corporation's Principal Executive
Officer, Patrick Freeman, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Cordia Corporation's Principal Financial
Officer, Lorie M. Guerrera, pursuant to Section 906 of the
Sarbanes-Oxley of 2002.
(b) Reports on Form 8-K.
We filed a Current Report on Form 8-K, dated November 15, 2002, furnishing under
Items 7 and 9 the transmittal letter and certifications of our Principal
Executive Officer, Craig C. Gironda, and our Principal Financial Officer, Lorie
M. Guerrera, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which
accompanied our Quarterly Report on Form 10-QSB filed with the Commission on
November 14, 2002.
We filed a Current Report on Form 8-K, dated January 2, 2003, furnishing under
Items 5 and 7 the letter of resignation of Craig C. Gironda from his positions
as a director and chief executive officer of the Company.
We filed a Current Report on Form 8-K, dated March 3, 2003, furnishing under
Items 2 and 7 the Agreement and Plan of Reorganization and Corporate Separation,
dated March 3, 2003, by and between our company and West Lane Group, Inc., the
Promissory Note, dated March 3, 2003, of West Lane Group, Inc. in favor of our
company and the License Agreement, dated March 3, 2003, between our company and
I.S.G. Group, Inc., d/b/a Insurance Solutions Group.
We filed a Current Report on Form 8-K, dated January 7, 2004, furnishing under
Items 4 and 7 correspondence from Cipolla Sziklay, LLC indicating agreement with
the statements relating to Cipolla Szicklay's resignation from its position as
independent auditor.
We filed a Current Report on Form 8-K, dated January 7, 2004, under Item 5
regarding the Board of Directors' decision to authorize the management of Cordia
to spend an aggregate of $100,000 during 2004 to re-purchase the Company's
Common Stock when market conditions are favorable for that purpose.
We filed a Current Report on Form 8-K, dated January 19, 2004, under Item 4
regarding the engagement of Lazar, Levine & Felix, LLP as our new principal
independent accountants for our upcoming audit for the year ended December 2003.
We filed a Current Report on form 8-K, dated February 6, 2004, furnishing under
Items 5 and 7 the Mutual Release and Satisfaction of Promissory Note and License
Agreement, dated February 6, 2004, by and between our company and West Lane
Group, Inc., the Stock Option Agreement dated February 6, 2004, by and between
our company and West Lane Group, Inc. and our Press Release announcing the
reduction of shares outstanding that resulted from the Mutual Release and
Satisfaction of Promissory Note and License Agreement.
Item 14. Principal Accountant Fees and Services.
Information regarding our principal accountant fees and services is incorporated
by reference to the information set forth under the caption "Principal
Accountant Fees and Services" in our Proxy Statement for the Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
our year ended December 31, 2003.
11
SIGNATURES
In accordance Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CORDIA CORPORATION
Date: April 14, 2004 By: /s/ Patrick Freeman
-------------------------------------
Patrick Freeman
President and Chief Executive Officer
Date: April 14, 2004 By: /s/ Lorie M. Guerrera
-------------------------------------
Lorie M. Guerrera
Chief Accounting Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities stated on
April 14, 2004.
Signature Title
--------- -----
/s/Patrick Freeman President, Director (Principal
---------------------------------- Executive Officer)
/s/John Scagnelli Director
----------------------------------
/s/Wesly Minella Secretary, Director
----------------------------------
CORDIA CORPORATION AND SUBSIDIARY
DECEMBER 31, 2003 AND 2002
CONTENTS
Page
Independent Auditors' Report - Current Auditor F-1
Independent Auditors' Report - Predecessor Auditor F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Financial Statements F-7 - F-16
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cordia Corporation
We have audited the accompanying consolidated balance sheet of Cordia
Corporation and subsidiaries as of December 31, 2003, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 Cordia Corporation
and subsidiaries as of December 31, 2003, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 1 to the
financial statements, the company has suffered recurring losses from operations
that raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to those matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ LAZAR, LEVINE & FELIX, LLP
New York, New York
March 24, 2004
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Cordia Corporation
We have audited the accompanying consolidated balance sheet of Cordia
Corporation and subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 Cordia Corporation
and subsidiaries as of December 31, 2002, and the results of their operations
and their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ CIPOLLA SZIKLAY L.L.C.
West Orange, New Jersey
April 2, 2003
F-2
CORDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
2003 2002
----------- -----------
ASSETS
Current Assets
Cash $ 111,288 $ 70,243
Accounts receivable, less allowance for doubtful accounts of
$111,167 (2003) and $12,416 (2002) 600,840 130,351
Investments - 2,800
Prepaid expenses and other current assets 193,157 47,305
Loans receivable from affiliates 30,000 57,924
Other loans receivable - 1,750
Net assets of discontinued subsidiary - 872,726
----------- -----------
TOTAL CURRENT ASSETS 935,285 1,183,099
----------- -----------
Property and equipment, at cost
Office equipment 39,759 12,646
Less: Accumulated depreciation 10,241 2,634
----------- -----------
NET PROPERTY AND EQUIPMENT 29,518 10,012
----------- -----------
Other Assets
Note Receivable 595,000 -
Security Deposits 77,414 33,764
----------- -----------
TOTAL OTHER ASSETS 672,414 33,764
----------- -----------
TOTAL ASSETS $ 1,637,217 $ 1,226,875
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses $ 1,427,576 $ 462,975
Unearned income 181,763 9,904
Loans payable to affiliates 8,074 -
Loans payable-other 57,000 15,000
Net liabilities of discontinued subsidiary - 1,615,335
----------- -----------
TOTAL CURRENT LIABILITIES 1,674,413 2,103,214
----------- -----------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Preferred stock, $.001 par value; 5,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $.001 par value; 20,000,000 shares authorized,
6,156,211 (2003) and 5,701,211 (2002) shares issued and outstanding 6,156 5,701
Additional paid-in capital 4,271,622 3,956,739
Common stock subscribed - 60,000
Accumulated deficit (4,289,974) (4,873,779)
------------ -----------
(12,196) (851,339)
Less Treasury stock, 10,000 common shares at cost (25,000) (25,000)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (37,196) (876,339)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,637,217 $ 1,226,875
============ ===========
See notes to consolidated financial statements.
F-3
CORDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
-----------------------------
2003 2002
----------- -----------
Revenues
Telecommunications revenue $ 3,489,779 $ 547,780
Other 545,998 172,667
----------- -----------
4,035,777 720,447
----------- -----------
Operating Expenses
Resale and wholesale line charges 1,814,602 306,124
Payroll and payroll taxes 1,105,818 453,935
Advertising and promotion 755,965 129,017
Professional and consulting fees 198,411 644,689
Depreciation 7,607 2,274
Insurance 87,817 26,502
Office expense 43,408 17,076
Telephone 65,814 39,516
Rent and building maintenance 52,795 36,078
Other selling, general and administrative 623,401 141,995
----------- -----------
4,755,638 1,797,206
----------- -----------
Operating Loss (719,861) (1,076,759)
----------- -----------
Other Income (Expenses)
Impairment loss on note receivable (155,000) -
Income(loss) on investments 3,750 (75,708)
Other expense (1,640) (355)
Interest income 46,775 14
Interest expense (3,799) (1,921)
----------- -----------
(109,914) (77,970)
----------- -----------
Loss From Continuing Operations (829,775) (1,154,729)
----------- -----------
Income (Loss) from Discontinued Operations
Gain on disposal of subsidiaries 1,554,306 337,793
Loss from operations of ISG & subsidiary (140,726) (326,633)
Loss from operations of discontinued segments - (13,815)
----------- ------------
1,413,580 (2,655)
----------- -----------
Net Income(loss) $ 583,805 $(1,157,384)
=========== ===========
Basic and Diluted Income(loss) per Share $ .10 $ (0.21)
=========== ===========
Weighted Average Shares Outstanding 5,796,581 5,603,952
=========== ===========
See notes to consolidated financial statements.
F-4
CORDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2003 AND 2002
Common Stock Treasury Stock
--------------------- Additional Common --------------
Number of Paid-In Stock Number of Accumulated
Shares Amount Capital Subscribed Shares Amount Deficit Total
--------- ------ ---------- ---------- -------- -------- ----------- -----------
Balance, December 31, 2001 5,445,811 $5,446 $2,880,438 $ - - $ - $(3,716,395) $ (830,511)
Options granted and consulting
expense
Employees - - 30,000 - - - - 30,000
Non-employees - - 420,156 - - - - 420,156
Options exercised
Employees 55,000 55 137,445 - - - - 137,500
Non-employees 190,000 190 444,810 - 10,000 (25,000) - 420,000
Common stock subscribed by
nonaffiliates - - - 60,000 - - - 60,000
Common stock issued to non-employees
For professional fees 10,400 10 43,890 - - - - 43,900
Net Loss - - - - - - (1,157,384) (1,157,384)
--------- ------ --------- ------- ------- -------- ----------- -----------
Balance, December 31, 2002 5,701,211 $5,701 $3,956,739 $60,000 10,000 $(25,000) $(4,873,779) $ (876,339)
Common stock purchased by
nonaffiliates 60,000 60 44,440 - - - - 44,500
Common stock issued
Employees 335,000 335 100,165 - - - - 100,500
Non-employees, net of expenses 60,000 60 53,940 (60,000) - - - (6,000)
Options granted and consulting
expense
Employees - 15,000 - - - - 15,000
Non-employees - - 101,338 - - - - 101,338
Net Income - - - - - - 583,805 583,805
--------- ------ --------- ------- ------- -------- ----------- -----------
Balance December 31, 2003 6,156,211 $6,156 $4,271,622 $ - 10,000 $(25,000) $(4,289,974) $ (37,196)
========= ====== ========== ======= ======= ========= =========== ===========
See notes to consolidated financial statements.
F-5
CORDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
------------------------------
2003 2002
----------- -----------
Cash Flows From Operating Activities
Net(loss) from continuing operations $ (829,775) $(1,154,729)
Adjustments to reconcile net loss to net cash
provided(used) by operations
(Gain) loss on investments (3,750) 75,708
Compensatory stock expense 216,838 450,156
Professional fees - 43,900
Provision for accounts receivable 247,668 12,515
Depreciation expense 7,607 2,274
Impairment loss on note receivable 155,000 -
(Increase) decrease in assets:
Accounts receivable (718,158) (140,366)
Other receivables 46,082 (77,832)
Prepaid expenses and other current assets (145,850) (43,235)
Security deposits (43,650) (33,764)
Increase (decrease) in liabilities:
Accounts payable 964,599 297,718
Unearned income 171,859 9,904
----------- -----------
Net cash provided (used) by continuing operations 68,470 (557,751)
Net cash (used) provided by discontinued operations (79,029) 20,477
----------- -----------
NET CASH (USED) IN OPERATING ACTIVITIES (10,559) (537,274)
----------- -----------
Cash Flows From Investing Activities
Decrease (increase) in other loans receivable 1,750 (1,750)
Proceeds from sale of investments 6,550 9,457
Purchase of property and equipment (27,113) (8,107)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (18,813) (400)
----------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of common stock - 582,500
Proceeds from loans payable - other 42,000 -
Payments of loans payable - other (10,083) (11,609)
Purchase of treasury stock - (25,000)
Proceeds from sale of subscription stock 38,500 60,000
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 70,417 605,891
----------- -----------
Increase in Cash 41,045 68,217
Cash, Beginning 70,243 2,026
----------- -----------
Cash, Ending $ 111,288 $ 70,243
=========== ===========
Supplemental Disclosures of Cash Flow Information - Cash paid during the year
for:
Interest $ 3,799 $ 1,921
=========== ===========
Non Cash Items:
Common stock issued $ 54,000
===========
See notes to consolidated financial statements.
F-6
CORDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
The Company
Cordia Corporation (formerly CyberOpticLabs, Inc.) ("Cordia") was organized on
June 22, 1988 and consummated an Initial Public Offering of its common stock on
March 15, 1989. On February 26, 1992, Cordia filed a current report on Form 8-K
reporting that it had ceased operations and was liquidating its assets to pay
off existing liabilities due to a lack of working capital.
On November 30, 2000, Cordia acquired all of the outstanding common stock of ISG
Group, Inc. ("ISG") and U.S. Direct Agency, Inc. ("USD") in exchange for
4,330,200 shares of Cordia's common stock (approximately 84 percent of Cordia's
common shares issued and outstanding). For accounting purposes, the transaction
had been treated as the acquisition of Cordia by ISG and USD, with ISG and USD
as the acquirer (reverse acquisition).
The acquisition of Cordia had been accounted for as a series of capital stock
transactions by ISG and USD. Accordingly, no goodwill had been recorded and no
pro-forma information had been provided.
Operations
Cordia Communications Corp. ("CCC"), a wholly-owned subsidiary, which was formed
during 2001 and commenced operations during 2002, is a competitive local
exchange carrier that provides local and long distance telecommunications
services to businesses and individuals in New York, New Jersey and Pennsylvania.
The telecommunications services provided by CCC are subject to significant
regulation at the federal, state and local levels. Delays in receiving required
regulatory approvals or the enactment of new adverse regulation or regulatory
requirements may have a material adverse effect upon CCC.
Principles of Consolidation
The consolidated financial statements include the accounts of Cordia, My Tel (an
inactive subsidiary) and CCC for the years ended December 31, 2003 and 2002. The
consolidated financial statements also include the accounts of its discontinued
business segment, RiderPoint Inc. and Subsidiary for the period January 1, 2002
through June 27, 2002 (date of disposal) and the period January 1, 2002 through
March 3, 2003 (date of disposal) for its ISG and Subsidiary discontinued
segment. All material intercompany balances and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity 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 at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ from those
estimates.
F-7
CORDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (cont'd)
Basis of Presentation
These consolidated financial statements have been prepared assuming that Cordia
and its subsidiaries ("the Company") will continue as a going concern. The
Company has incurred substantial losses since its inception and also has a
negative working capital and deficiency in stockholders' equity as of December
31, 2003. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. As discussed above, during 2003, the Company
sold its interests in ISG. As a result of this transaction, the Company's
stockholders' equity increased by approximately $1,556,000. The Company disposed
of business segments that have historically generated net losses and working
capital deficiencies, and the Company received a $750,000 note secured by
700,000 shares of the Company's common stock. In addition, the Company's
remaining business segment, CCC, was profitable in 2003. Accordingly, management
believes that the Company will be able to generate sufficient cash flows to meet
its obligations as they come due during 2004. Management of the Company also
intends to seek additional sources of capital, which sources may include public
and private sales of the Company's securities and additional borrowings from
affiliates and non-affiliates. Given current market conditions, there is no
guarantee that the Company will be able to obtain such funding when needed, or
that such funding, if available, will be obtainable on acceptable terms. These
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Cash and Cash Equivalents
The Company classifies as cash and cash equivalents amounts on deposit in banks
and cash invested temporarily in various instruments with maturities of three
months or less at time of purchase.
Fair Value of Financial Instruments
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash, accounts receivable and trading
securities. Concentrations with regard to accounts receivable are limited due to
the Company's large customer base.
The Company from time to time may maintain cash balances which exceed the
Federal Depository Insurance Coverage limit. The Company performs periodic
reviews of the relative credit rating of its bank to lower its risk.
The carrying amounts of cash, accounts receivable, trading securities, accounts
payable and accrued expenses approximate fair value due to the short-term nature
of these items. The carrying amount of debt also approximates fair value since
the interest rates on these instruments approximate market interest rates.
Investments
The Company's investments in marketable equity securities have been recorded at
fair value, and are classified as trading securities.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. For
financial reporting purposes, depreciation is provided using straight-line and
accelerated methods over useful lives ranging from three to seven years.
Expenditures that significantly increase value or extend useful asset lives are
capitalized. Expenditures for maintenance, repairs and renewals of a minor
nature are charged against operations as incurred.
Revenue Recognition
Telecommunication income is recognized as services are provided. The Company
recognizes revenues in accordance with the Securities and Exchange Commission,
Staff Accounting Bulletin 104, "Revenue Recognition"("SAB 104"). Under SAB 104,
revenue is recognized when there is persuasive evidence of an arrangement,
delivery has occurred or services have been rendered, the sales price is
determinable, and collectability is reasonably assured.
Amounts invoiced and collected in advance of being earned are recorded as
unearned income.
Advertising and Promotion
Advertising and promotion costs are expensed as incurred. For the years ended
December 31, 2003 and 2002, advertising and promotion costs aggregated $755,965
and $129,017 respectively.
Bad Debt Expense
The Company provides for estimated losses on accounts receivable, using the
allowance method, based on prior bad debt experience and a review of existing
receivables.
Comprehensive Income (Loss)
The Company has no items of other comprehensive income in any period presented.
As such, Net Income(loss) as presented in the statement of operations equals
comprehensive income (loss).
F-8
CORDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (cont'd)
Stock-Based Compensation
The Company accounts for employee stock options in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." During 2003, the Company recognized $216,838 of compensatory stock
expense related to employee stock options, as compared to $30,000 during 2002.
In 1996, SFAS No. 123, "Accounting for Stock-Based Compensation," prescribed
that the recognition of compensation be based on the fair value of options on
the grant date, and allowed companies to continue applying APB 25 if certain pro
forma disclosures are made assuming hypothetical fair value method application.
See Note 6 for pro forma disclosures required by SFAS No. 123 plus additional
information on the Company's stock options.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities using
enacted tax rates in effect for the years in which the differences are expected
to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
Reclassifications
Certain amounts in the 2002 consolidated financial statements have been
reclassified to conform with the current period presentation (see Note 3).
Earnings(loss)Per Share
Earnings (loss) per common share are calculated under the provisions of SFAS No.
128, "Earnings per Share." SFAS No. 128 requires the Company to report both
basic earnings per share, which is based on the weighted-average number of
common share outstanding, and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding plus all potential dilutive
common shares outstanding. Diluted earnings(loss) per share has not been
presented as the effect of the common stock purchase warrants outstanding, on
such calculation, would have been anti dilutive.
Weighted average number of shares outstanding were 5,796,581 and 5,603,952 for
2003 and 2002, respectively.
Recent Accounting Pronouncements
In May 2003, Statement of Financial Accounting Standards ("SFAS") No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," was issued effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). The adoption of SFAS No. 150
did not result in the reclassification of any financial instruments in the
Company's financial statements.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities," was issued effective for contracts entered
into or modified after June 20, 3003, with certain exceptions. This statement
amends and clarifies financial accounting and reporting for derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activity." The Company does not currently
engage in hedging activities and the adoption of this statement did not have any
effect on its financial statements.
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No.
46"). FIN No. 46 addresses consolidation by business enterprises of variable
interest entities that possess certain characteristics. The interpretation
requires that if a business enterprise has a controlling financial interest in a
variable interest entity, the assets, liabilities and results of operations of
the variable interest entity must be included in the consolidated financial
statements with those of the business enterprise. This interpretation applies
immediately to variable interest entities created after January 31, 2003 and to
variable interest entities in which an enterprise obtains an interest after that
date. In December 2003, the FASB issued FASB Interpretation No. 46R,
"Consolidation of Variable Interest Entities - an interpretation of ARB 51
(revised December 2003)" ("FIN No. 46R"), which includes significant amendments
to previously issued FIN No.46. Among other provisions, FIN No. 46R includes
revised transition dates for public entities. The Company is now required to
adopt the provisions of FIN No. 46R no later than the end of the first reporting
period that ends after March 15, 2004. The adoption of this interpretation is
not expected to have a material effect on the Company's financial statements or
results of operations.
F-9
CORDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (cont'd)
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment to FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods for transition to SFAS No. 123's
fair value method of accounting for stock-based compensation. As amended by SFAS
No. 148, SFAS No. 123 also requires additional disclosure regarding stock-based
compensation in annual and condensed interim financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This standard requires that costs associated
with exit or disposal activities be recognized when they are incurred rather
than at the date of commitment to an exit or disposal plan. SFAS No. 146 applies
to exit or disposal activities initiated by the Company after fiscal 2002.
In April 2002, the FASB issued SFAS No. 145, "Rescission of Statements No. 4,44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No.
145 generally requires that gains and losses on extinguishment of debt be
classified as income or loss from continuing operations rather than as
extraordinary items. The adoption of this interpretation in 2003 did not have a
material effect on the Company's financial statements or results of operations.
NOTE 2 - INVESTMENTS
Trading Securities
At December 31,2002, investments included common shares of eLEC
Communications Corp. ("eLEC"). All investments are classified as trading
securities and accordingly, stated at fair value, which is based on market
quotes. Adjustments to fair value of the equity securities are recorded as an
increase or decrease in investment income in the accompanying statements of
operations.
The cost of securities sold is based on the specific identification method. The
following is a reconciliation of loss on investments from continuing operations
during the years ended December 31, 2003 and 2002.
2003 2002
----- -----
Net change in unrealized (losses) $ - $ (12,400)
Realized gain(losses) 3,750 (63,308)
--------- ---------
Total $ 3,750 $ (75,708)
========= =========
During the years ended December 31, 2003 and 2002, the Company realized proceeds
of $6,550 and $9,457 respectively, from the sale of investments.
F-10
CORDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 3 - SALE OF BUSINESS SEGMENTS
Sale of RiderPoint, Inc., and its subsidiary, and Webquill Internet
Services,LLC:
On June 27, 2002, the Company sold for $1,000 in cash, (a) its common stock
equity interests in RiderPoint, Inc. and its subsidiary, RP Insurance Agency,
Inc., and (b) its entire membership interest in Webquill. RiderPoint had focused
on the development of technological systems, solutions and processes that would
allow it to become a nationwide distributor of insurance products through the
internet and traditional insurance agents. RP Insurance Agency, Inc. acted as an
insurance broker for individuals, purchasing property and liability insurance
for power sports vehicles. Webquill provided internet hosting services to
businesses and individuals. The Company recognized a gain of $337,793 on the
sale of these interests. As a result of the sale of these business segments, the
Company's net operating loss for Federal income tax reporting purposes decreased
by approximately $1,940,000.
The following is a summary of the sale transaction:
RiderPoint,
and subsidiary Webquill Total
-------------- -------- -----
Assets sold $(25,189) $(2,763) $(27,952)
Liabilities assumed by buyer 412,917 15,701 428,618
Cash payment received 500 500 1,000
Write-off of inter-company
receivables and payables (63,873) -0- (63,873)
-------- ------- --------
Gain on sale $324,355 $13,438 $337,793
======== ======= ========
The loss from operations of this discontinued business segment was $13,815 for
the year ended December 31, 2002.
Sale of ISG:
On March 3, 2003, Cordia sold its equity interests in ISG to West Lane Group,
Inc., a company owned by the then current management of ISG for a purchase price
of $750,000. The $750,000 was represented by a two-year promissory note bearing
interest at a rate of 6% per annum and secured by 700,000 shares of Cordia's
stock owned by West Lane. Cordia also entered into a licensing and services
agreement with ISG whereby ISG purchased an unlimited license to SUBRO AGS
software. Under the terms of the agreement, ISG paid Cordia $100,000 upon
execution of the agreement and agreed to pay $6,000 per month (including
interest) for a period of twenty five (25) months. (See Note 8)
The following is a summary of the sale transaction of ISG (unaudited):
Assets sold $ (872,726)
Liabilities assumed by buyer 1,615,335
Note received 750,000
Write-off of inter-company receivables and payables 61,697
---------
Gain on sale, before income taxes $1,554,306
==========
As a result of the sale of ISG, employee stock options to purchase 83,000 common
shares of the Company at $7.50 per share expired.
F-11
CORDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE 3 - SALE OF BUSINESS SEGMENTS (cont'd)
The accompanying consolidated balance sheet at December 31, 2002 includes the
following assets and liabilities of the discontinued business segments of ISG:
Current Assets
Cash $ 164,527
Accounts receivable, net 377,568
Investments 886
Prepaid expenses and other current assets 17,512
Loans receivable from affiliates 31,899
----------
Total current assets 592,392
----------
Property and equipment
Office equipment 218,015
Equipment - capital leases 58,567
Vehicles 16,743
Furniture and fixtures 98,376
----------
391,701
Less: Accumulated depreciation 138,506
----------
253,195
----------
Other assets
Security deposits 27,139
----------
Total assets $ 872,726
==========
Current Liabilities
Book overdraft $ 90,946
Accounts payable and accrued expenses 1,319,207
Obligation under capital lease, current portion 25,672
Unearned income 83,333
Loans payable to affiliates 9,744
Loans payable to parent and subsidiaries* 79,029*
----------
Total current liabilities 1,607,931
----------
Obligation under capital lease, less current potion 7,404
----------
Accumulated deficit (742,609)
----------
Total liabilities and accumulated deficit $ 872,726
==========
*Eliminated in consolidation.
F-12
CORDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2003 and 2002
NOTE 3 - SALE OF BUSINESS SEGMENTS (cont'd)
The following is a summary of the revenues and loss from operations of the
discontinued business segments:
Year Ended December 31,
---------------------------------
2003 2002
---------- ---------
Revenues:
Subrogation Service Revenue,net $ 631,361 $2,837,346
Claims Administration income 197,667 2,597,467
Other - 1,254
---------- -----------
Total Revenues $ 829,028 $5,436,067
========== ===========
Loss before income taxes $(140,726) $ (340,448)
========== ===========
The 2002 statement of operations was reclassified to show the results of
operations for the RiderPoint and ISG business segments as discontinued.
License Agreement
On March 3, 2003, Cordia entered into a licensing agreement with ISG whereby ISG
purchased an unlimited license to certain software owned by Cordia. The license
agreement provides for ISG to pay Cordia $100,000 on execution of the license
agreement, plus $6,000 per month (including interest) for a period of
twenty-five months. Cordia shall provide software updates and maintenance as
necessary, during this twenty-five month period. (See Note 8)
NOTE 4 - RELATED PARTY TRANSACTIONS
During 2003 and 2002 respectively, the Company paid $15,000 & $21,000 to eLEC
for office rent.
The Company periodically borrows funds from shareholders and affiliates of
shareholders. The loans bear interest at a rate of 12% per annum and are payable
on demand. Interest expense resulting from related party loans totaled $673 and
$1,645 during the years ended December 31, 2003 and 2002, respectively.
F-13
CORDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 5 - STOCKHOLDERS' EQUITY
During June 2002, Cordia approved a 5-for-1 reverse split of its common stock
with no change in its par value of $.001. All references in the consolidated
financial statements and in the notes to consolidated financial statements with
respect to the number of common shares and per share amounts have been restated
to reflect the stock split.
On May 23, 2003, Cordia's shareholders voted to amend the 2001 Equity Incentive
Plan (the "Plan") by authorizing an additional 1,000,000 shares. The total
number of shares of Cordia's common stock authorized for issuance under the Plan
is 6,000,000, subject to adjustment for events such as stock dividends and stock
splits.
The Plan is administered by a committee of the board of directors having full
and final authority and discretion to determine when and to whom awards should
be granted. The committee will also determine the terms, conditions and
restrictions applicable to each award. Transactions under the Plan are
summarized as follows:
Stock Options Exercise Price
----------- ----------------
Balance, January 1, 2002 379,000 $ 2.50 to 15.00
Granted with immediate vesting 150,000 2.00 to 2.50
Exercised and forfeited (383,000) 2.00 to 15.00
-----------
Balance December 31, 2002 146,000
-----------
Granted with 5 year vesting 915,000 .60
Exercised -
Expired (133,000) .60 to 7.50
-----------
Balance, December 31, 2003 928,000
===========
In electing to follow APB 25 for expense recognition purposes, the Company is
obliged to provide the expanded disclosures required under FAS No. 123 for
stock-based compensation granted in 1996 and thereafter. The fair value of the
employee stock options granted during 2003 and 2002 was approximately, $266,000
and $102,000, respectively, based on the Black-Scholes option valuation model.
For purposes of pro forma disclosures, stock-based compensation is recognized
over the vesting period as vesting requirements are fulfilled.
The following table compares 2002 and 2003 results as reported to the results
had the Company adopted the expense recognition provisions of FAS No. 123:
As reported Pro Forma
----------- ---------
2003
----
Net loss $ 583,805 $ 380,797
Income per share $ .10 $ .07
2002
----
Net loss ($1,157,384) ($1,141,934)
Loss per share $ .21 $ .20
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for 2003: expected volatility of 328%; risk-free rate of 1.8%; and
expected life of 2 1/2 years.
The effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts as future amounts are likely to be affected by the
number of grants awarded and since additional awards are generally expected to
be made at varying prices.
F-14
CORDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 6 - INCOME TAXES
The tax effect of the temporary differences that give rise to deferred tax
assets and liabilities as of December 31, 2003 and 2002 was as follows:
2003 2002
---- ----
Deferred income tax assets:
Accounts payable and accrued expenses $ 565,512 $ 527,683
Unearned income 72,705 33,333
Investments - 26,365
Net operating loss carryover 920,000 1,119,082
Less: Valuation allowance (1,240,619) (1,506,430)
----------- -----------
317,598 200,033
----------- -----------
Deferred income tax liabilities:
Accounts receivable 240,336 151,026
Prepaid expenses and other current assets 77,262 33,202
Accumulated depreciation - 15,805
----------- -----------
317,598 200,033
----------- -----------
Net deferred income tax liability $ - $ -
=========== ===========
The consolidated financial statements have been presented on the accrual method
of accounting. For income tax reporting purposes, the Company is on the cash
method. Accordingly, for income tax purposes, certain revenues and related
assets are recognized when received rather than when earned, and certain
expenses are recognized when paid rather than when the obligation is incurred.
Cordia and its subsidiaries have incurred losses since inception that have
generated net operating loss carryforwards aggregating approximately $3,500,000
at December 31, 2003 for federal and state income tax purposes. These
carryforwards are available to offset future taxable income and expire at
various dates through 2022 for income tax purposes. These losses are subject to
limitation on future years' utilization. The Company experienced a decrease in
its net operating loss carryforward during 2003 due to the sale of ISG of
approximately $141,000, offsetting the net operating loss carryforward increase
during 2002 as a result of current year net operating losses.
In consideration of the uncertainty about the Company's ability to realize the
benefit of their deferred tax assets, the accompanying financial statements
reflect a valuation allowance of $1,240,619 and $1,506,430 at December 31, 2003
and 2002, respectively, to fully offset the deferred tax benefit amount.
A reconciliation of the difference between the expected income tax rate using
the statutory federal tax rate and the Company's effective tax rate was as
follows:
2003 2002
---- ----
U.S. Federal income tax statutory rate 34.0% 34.0%
Investments - (7.2)
NOL of discontinued business segments (5.8) (44.6)
Consulting fees expense 26.2 30.4
Change in valuation allowance, net 27.3 9.5
Other, net (81.7) (22.1)
------- -------
Effective tax rate -% -%
======= ========
F-15
CORDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 7 - COMMITMENTS
Operating Leases
The Company is committed for annual rentals under non-cancelable operating
leases for its office space. Future minimum rental commitments under these
leases for years subsequent to December 31, 2003 are as follows:
Year Ending
December 31:
------------
2004 $ 59,640
2005 59,640
2006 62,480
2007 65,320
2008 65,320
---------
Total $312,400
=========
Rent and other occupancy charges included in operating expenses was $74,761
and $36,078 for the years ended December 31, 2003 and 2002, respectively.
NOTE 8 - SUBSEQUENT EVENTS
(a) Mutual Release and Satisfaction of Promissory Note and License Agreement
On February 6, 2004, Cordia entered into a Mutual Release and Satisfaction of
Promissory Note and License Agreement whereby Cordia has agreed to release West
Lane of its payment obligations under the promissory note and licensing
agreement in exchange for the return of 1,412,500 shares of Cordia's Common
Stock, a fifteen (15) month option to purchase 100,000 shares at a price of
forty cents ($0.40) and the release of Cordia's service obligations under the
License Agreement. In addition to Cordia's release of West Lane, Cordia will
transfer all ownership interest to the technology and source code of SUBRO AGS
software to West Lane. Upon transfer of the shares to Cordia, Cordia's
outstanding shares will be reduced to 4,431,211.
(b) Employee Benefit Plan
Cordia has a defined contribution (SIMPLE SRA) plan covering all eligible
employees. Cordia will match 50% of the first 6% of the eligible employee's
contribution to the plan. Participating employees shall become vested in
employer contributions after 3 years of service. If a participating employee is
terminated or resigns before the 3 year vesting period employer contributions
shall be forfeited. The plan became effective January 1, 2004 and employee and
employer contributions shall commence April 16, 2004. Accordingly, to date there
have been no employer or employee contributions to the plan.
F-16