x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Nevada

6 Thomas

74-2234246

(State or other jurisdiction of

Irvine, CA  92618

(IRS Employer Identification No.)

incorporation or organization)

(Address of principal executive offices) (Zip Code)

(949) 587-2700
(Registrant’s telephone number,
including area code)

(1)

Yes   x

No   o

(2)

Yes   x

No   o

Yes   o

No   x

Page

PART 1

FINANCIAL INFORMATION

Item 1:

Financial Statements

Consolidated Condensed Balance Sheets – June 30, 2003 (unaudited) and December 31, 2002

3

Consolidated Condensed Statements of Operations – Three months and Six months ended June 30, 2003 and 2002 (unaudited)

4

Consolidated Condensed Statements of Cash Flows – Six months ended June 30, 2003 and 2002 (unaudited)

5

Notes to Consolidated Condensed Financial Statements

6

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

15

Item 4:

Controls and Procedures

15

PART II

OTHER INFORMATION

Item 1:

Legal Proceedings

17

Item 2:

Changes In Securities and Use of Proceeds

17

Item 6:

Exhibits and Reports on Form 8-K

17

June 30,
2003

December 31,
2002

(Unaudited)

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$

94,820

$

261,623

Accounts receivable, net of allowance for doubtful accounts of $353,040 and $351,361 at June 30, 2003 and December 31, 2002, respectively

1,770,930

1,622,414

Inventories, net

532,538

512,595

Prepaid expenses, net

216,584

351,637

Advances to employees, current portion

27,805

46,497

Deferred tax asset

168,850

168,850

Total current assets

2,811,527

2,963,616

Property and equipment, net (Note 4)

283,595

329,985

Patents, net

390,244

426,829

Intangible assets, net

6,058,007

6,058,007

Deferred tax asset, noncurrent

1,076,279

1,376,279

Investment in affiliate

374,991

324,993

Other assets, net

156,492

169,975

TOTAL ASSETS

$

11,151,135

$

11,649,684

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Accounts payable

$

893,502

$

981,388

Accrued expenses

597,316

409,163

Line of credit (Note 5)

920,967

863,592

Notes payable, current (Note 6)

626,391

291,577

Total current liabilities

3,038,176

2,545,720

Notes payable, noncurrent (Note 6)

477,665

592,481

Total liabilities

3,515,841

3,138,201

COMMITMENTS AND CONTINGENCIES (Note 1, 5, 6 and 7)

STOCKHOLDERS’ EQUITY:

Preferred stock, $0.001 par value; 50,000,000 shares authorized; no shares issued or outstanding

—  

—  

Common stock, $0.001 par value; 150,000,000 shares authorized; 29,789,598 shares issued and outstanding in 2003 and 2002, respectively

29,789

29,789

Additional paid-in capital

15,387,562

15,387,562

Accumulated deficit

(7,782,057

)

(6,905,868

)

Total stockholders’ equity

7,635,294

8,511,483

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

11,151,135

$

11,649,684

Three Months Ended
June 30,

Six Months Ended
June 30,

2003

2002

2003

2002

NET REVENUES

$

2,033,852

$

2,487,312

$

4,221,913

$

5,373,237

COST OF GOODS SOLD

725,304

795,531

1,477,171

1,788,404

GROSS PROFIT

1,308,548

1,691,781

2,744,742

3,584,833

OPERATING EXPENSES:

Selling and marketing

958,057

982,722

1,814,660

2,007,866

General and administrative

629,276

673,131

1,370,585

1,431,538

Total operating expenses

1,587,333

1,655,853

3,185,245

3,439,404

OPERATING (LOSS) INCOME

(278,785

)

35,928

(440,503

)

145,429

OTHER INCOME (EXPENSE):

Interest expense

(90,422

)

(98,085

)

(204,105

)

(199,116

)

Interest income

18

41

37

1,524

Other income

35,358

55,270

68,382

108,871

Gain on sale of building

—  

983,401

—  

983,401

Total other (expense) income

(55,046

)

940,627

(135,686

)

894,680

(LOSS) INCOME BEFORE EXTRAORDINARY ITEM AND PROVISION FOR INCOME TAXES

(333,831

)

976,555

(576,189

)

1,040,109

EXTRAORDINARY ITEM – gain from forgiveness of debt, net of income taxes of $202,585 and $270,985 for the three and six month period ended June 30, 2002 (Note 1)

—  

311,552

—  

406,476

(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES

(333,831

)

1,288,107

(576,189

)

1,446,585

PROVISION FOR INCOME TAXES

300,000

389,400

300,000

416,000

NET (LOSS) INCOME

$

(633,831

)

$

898,707

$

(876,189

)

$

1,030,585

NET (LOSS) INCOME PER SHARE

Basic and Diluted:

(Loss) income per share before extraordinary item

$

(0.02

)

$

0.02

$

(0.03

)

$

0.02

Extraordinary item

—  

0.01

—  

0.01

Net (loss) income

$

(0.02

)

$

0.03

$

(0.03

)

$

0.03

WEIGHTED AVERAGE COMMON SHARES

Basic and Diluted:

29,789,598

29,789,598

29,789,598

29,789,598

Six Months Ended
June 30,

2003

2002

CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) income

$

(876,189

)

$

1,030,585

Adjustments to reconcile net (loss) income to net cash used in operating activities:

Gain from forgiveness of debt

—  

(677,461

)

Gain from sale of building

—  

(983,401

)

Sublease income from affiliate

(49,998

)

(49,998

)

Depreciation and amortization

92,154

150,316

Provision for doubtful accounts

1,679

—  

Deferred taxes

300,000

686,985

Reserve for inventory obsolescence

(2,345

)

2,838

Amortization of debt discount related to warrants issued to sub-debt creditors

65,170

—  

Changes in assets and liabilities:

Accounts receivable

(150,195

)

209,782

Inventories

(17,598

)

173,219

Prepaid expenses

135,053

(1,335

)

Other assets

13,483

1,677

Accounts payable

(87,886

)

(859,057

)

Accrued expenses

187,883

70,251

Net cash used in operating activities

(388,789

)

(245,599

)

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment

(9,179

)

(10,546

)

Employee advances

18,692

15,428