<PAGE>
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1998
-----------------------------------------
/ / TRANSITION REPORT PURSUANT TO 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 0-23903
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TRANSFORMATION PROCESSING INC.
(Exact name of small business issuer as specified in its charter)
Nevada 95-4583945
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5500 Explorer Drive, Suite 2000, Mississauga, Ontario L4W 5C7
(Address of principal executive offices)
(905) 206-1366
(Issuer's telephone number)
2121 Argentia Road, Suite 200, Mississauga, Ontario L5N 2X4
--------------
(Former Name, Former Address and Former Fiscal Year, if changed Since Last
Report)
Indicate by check mark 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
---- -----
* The issuer became subject to the filing requirements on May 12, 1998.
As of June 30, 1998, the issuer had 15,298,505 shares of Common Stock,
par value $.001 per share, issued and outstanding.
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
Index to Financial Statements
-----------------------------
THREE MONTHS ENDED APRIL 30, 1998
AND FOR THE NINE MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Page
----
<S> <C>
Balance Sheet 1
Statement of Operations 2
Statement of Stockholders' Deficiency 3
Statement of Cash Flows 4
Notes to Financial Statements 5
Financial Data Schedule S-1
</TABLE>
<PAGE>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
April 30, 1998 July 31, 1997
- --------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 274,206 $ 16,431
Time deposits -- 23,368
Accounts receivable 216,904 3,674
Due from related parties 122,343 127,405
Prepaid expenses and other current assets 4,952 3,399
- -----------------------------------------------------------------------------------------------------
Total current assets 618,405 174,277
Property and Equipment, net of accumulated depreciation of $44,485 164,224 109,077
Software Marketing Rights, net 442,826 606,340
Deferred debt cost, net (Note 3) 171,549 4,684
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Total Assets $ 1,397,004 $ 894,378
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LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable $ 362,474 $ 25,904
Accrued expenses and other current liabilities 130,031 88,582
Convertible debt, net (Note 3) 782,098 --
Settlement liability 87,155 --
Current maturities of loan payable - bank 54,228 36,259
Notes payable - stockholders 43,506 85,793
- -----------------------------------------------------------------------------------------------------
Total current liabilities 1,459,492 236,538
Loan Payable - bank, net of current maturities 16,729 21,137
Notes Payable - Stockholders, net of current maturities -- 28,195
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Total liabilities 1,476,221 285,870
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Stockholders' Deficiency (Notes 1 and 2)
Common stock - $.001 par value; authorized 50,000,000 shares
issued and oustanding 15,298,505 shares 15,299 12,169
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Preferred stock - $.001 par value; authorized 5,000,000 shares
none issued
Additional paid-in capital 4,776,342 3,358,020
Deficit accumulated during the development stage (4,918,135) (2,784,536)
Cumulative foreign currency translation adjustments 47,277 22,855
- -----------------------------------------------------------------------------------------------------
Stockholders' Deficiency (79,217) 608,508
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Total Liabilities and Stockholders' Deficiency $ 1,397,004 $ 894,378
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- -----------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
1
<PAGE>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
Unaudited
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Period from Nine-month Three-month Three-month Cumulative amounts
April 1, 1996 Period ended Period ended Period ended from inception
(date of incorporation) April 30,1998 April 30,1997 April 30,1998
to April 30,1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 24,072 $ 415,345 $ - $ 260,324 $ 462,662
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Expenses
Cost of consulting services 10,078 141,899 2,312 80,794 153,170
Cost of software transformation services 172,895 304,536 18,230 277,967 497,265
Software development 131,683 329,806 119,605 119,886 548,018
General and administrative 533,969 1,565,388 177,868 295,517 2,439,813
Noncash consulting costs 1,536,341 1,536,341
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Total Expenses 2,384,966 2,341,630 318,015 774,164 5,174,607
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Loss from operations (2,360,894) (1,926,285) (318,015) (513,840) (4,711,945)
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Interest income (expense), net 1,974 (207,314) (20) (171,122) (206,190)
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Net loss $ (2,358,920) $ (2,133,599) $ (318,035) $ (684,962) $ (4,918,135)
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Net loss per common share $ (0.24) $ (0.15) $ (0.03) $ (0.05)
- -------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 9,697,753 14,187,071 9,697,753 14,187,071
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
2
<PAGE>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Nine month period ended April 30, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated Foreign
Additional During the Currency Stock-
Common Stock Paid-in Development Translation holders'
Shares Amount Capital Stage Adjustments Deficiency
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1997 12,169,282 $ 12,169 $ 3,358,020 $ (2,784,536) $ 22,855 $ 608,508
- ----------------------------------------------------------------------------------------------------------------------------------
Issuance of common
stock for cash (Note 2) 3,129,223 $ 3,130 $ 970,108 $ 973,238
Recognition of beneficial
conversion feature of
convertible debt $ 348,214 $ 348,214
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Issuance of warrants
to purchase common stock $ 100,000 $ 100,000
Net loss $ (2,133,599) (2,133,599)
Cumulative foreign currency $ 24,422 24,422
translation adjustment
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at April 30, 1998 15,298,505 $ 15,299 $ 4,776,342 $ (4,918,135) $ 47,277 $ (79,217)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
3
<PAGE>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
Unaudited
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Period from Nine-month Three-month Three-month Cumulative
April 1, 1996 Period ended Period ended Period ended amounts
(date of incorporation April 30, 1998 April 30, 1997 April 30, 1998 from
to April 30, 1997 inception
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss from development stage operations ($2,358,920) ($2,133,599) ($ 318,620) ($ 684,962) ($4,918,135)
Adjustments to reconcile net loss from development stage
operations to net cash used in operating activities
Depreciation and amortization 147,093 173,522 50,987 60,698 371,005
Amortization of beneficial conversion feature of convertible debt 0 161,905 0 161,905 161,905
Issuance of options to purchase common stock for services 27,588 0 0 0 27,588
Issuance of common stock for services in reverse acquisition 1,549,056 0 0 0 1,549,056
Changes in operating assets and liabilities:
Increase in accounts receivable (39,492) (216,585) (15,897) (158,519) (216,904)
(Increase) decrease in time deposits (23,368) 23,736 0 0 0
(Increase) decrease in prepaid expenses and other current assets (5,395) (1,577) 475 (44,217) (5,003)
(Increase) decrease in other assets (5,797) 0 0 0 (5,797)
Increase in accounts payable 12,438 341,865 (37,336) 30,103 362,474
Increase in litigation liability settlement 0 88,526 0 88,526 88,526
Increase in accrued expenses and other current liabilities 0 42,101 0 (139,267) 42,101
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Net cash used in operating activities (696,797) (1,520,106) (320,391) (685,733) (2,543,184)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (117,807) (89,308) 0 0 (214,041)
Purchase of intangible assets (24,156) 0 0 0 (24,156)
Advances to related parties (105,036) 0 0 0 (129,621)
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Cash used in investing activities (246,999) (89,308) 0 0 (367,818)
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Cash flows from financing activities:
Debt issue costs 0 (85,000) 0 (85,000) (85,000)
Proceeds from loan - bank 73,158 50,978 73,158 0 124,136
Repayments of loan payable - bank (7,803) (30,059) (7,803) (18,055) (45,113)
Repayments of notes payable - stockholders 0 (67,810) 0 (16,359) (130,426)
Proceeds from issuance of common stock 1,118,636 1,003,045 374,460 0 2,328,154
Proceeds from issuance of convertible debenture 0 1,000,000 0 1,000,000 1,000,000
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Net cash provided by financing activities 1,183,991 1,871,154 439,815 880,586 3,191,751
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (19,361) (3,965) (6,543) (3,057) (6,543)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash 220,834 257,775 112,881 191,796 274,206
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Cash at beginning of period 0 16,431 107,953 82,410 0
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Cash at end of period $ 220,834 $ 274,206 $ 220,834 $ 274,206 $ 274,206
- -----------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow information
cash paid during the period for interest $ 0 $ 4,582 $ 0 $ 4,582 $ 4,582
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
4
<PAGE>
TRANSFORMATION PROCESSING INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(The information pertaining to the nine-month period ended April 30,
1998 and for the period from April 1,1996 (date of incorporation) to
April 30, 1997 are unaudited)
1. BASIS OF PRESENTATION, EVENTS, AND REVERSE ACQUISITION
The financial statements of Transformation Processing Inc., ("the
Company") included herein have been prepared pursuant to generally
accepted accounting principles and have not been examined by
independent public accountants. In the opinion of management all
adjustments which are of a normal recurring nature necessary to present
fairly the results of operation have been made. Pursuant to Securities
and Exchange Commission ("SEC") rules and regulations, certain
information and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from these statements unless
significant changes have taken place since the end of the most recent
fiscal year. The disclosure contained herein should be read in
conjunction with the financial statements and notes included in the
Company's audited financial statements for the period ended July 31,
1997. The results of operations for the nine-month period ended April
30, 1998 and the period ended April 30, 1997 are not necessarily
indicative of the results to be expected for the full year.
On August 20, 1996, Samuel Hamann Graphix, Inc. acquired all of the
outstanding common stock of Transformation Processing Inc. ("Ontario"),
a Canadian corporation. For accounting purposes the acquisition has
been treated as a recapitalization of Ontario with Ontario as the
acquirer (reverse acquisition). Samuel Hamann Graphix, Inc. changed its
name to Transformation Processing Inc. (the "Company"). In February
1998, Ontario merged into the Company. The accompanying financial
statements reflect this merger as if it had occurred on July 31, 1997.
Loss per share is based on the weighted-average number of shares of
common stock outstanding during the periods.
The Company's functional currency is the Canadian Dollar. Balance sheet
accounts are translated into U.S. dollars using current exchange rates
in effect at the balance sheet date and revenue and expense accounts
are translated using an average exchange rate for the period. The gains
and losses resulting from translation are included in stockholders
equity.
2. STOCKHOLDERS' EQUITY
The company issued shares of common stock for cash net of expenses, as
follows:
<TABLE>
<CAPTION>
Common Stock
Additional Stockholders'
Paid-in Capital Equity
Shares Amount
<S> <C> <C> <C> <C>
August 28, 1997 (1) 198,000 $ 198 $ 88,496 $ 88,694
September 4, 1997 589,000 589 121,450 122,039
September 26, 1997 400,000 400 195,779 196,179
October 23, 1997 400,000 400 199,600 200,000
October 31, 1997 100,000 100 49,900 50,000
December 10, 1997 997,778 998 215,327 216,326
January 26, 1998 444,445 445 99,556 100,000
---------- ---------- ---------- ----------
3,129,223 $ 3,130 $ 970,108 $ 973,238
</TABLE>
(1) Represents shares issued in connection with conversion of
convertible subordinated debenture.
5
<PAGE>
3. EQUITY TRANSACTIONS and SUBSEQUENT EVENTS
On April 14, 1998 the Company issued for total consideration of
$1,000,000 6% Convertible Debentures. Of the $1,000,000 Convertible
Debentures, $550,000 are convertible into common stock at 70% (seventy
percent) of the five day average bid price immediately preceding the
date of conversion. $450,000 of the debentures are convertible into
common stock at 80% (eighty percent) of the five day average closing
ask price immediately preceding the date of conversion. In addition,
the Company granted warrants to purchase 241,228 shares of common stock
at a purchase price of $0.46 per share and warrants to purchase 60,000
shares of common stock at a purchase price of $1.50 per share.
The amount attributable to the beneficial conversion feature relating
to the issuance of the convertible debenture is being amortized over
the minimum period the debentures are convertible, thirty days. The
Company incurred a charge to operations related to the recognition of
the beneficial conversion feature of the convertible debt (interest
expense) of $161,920 for the period ended April 30, 1998 and, will
incur an additional charge of $186,294 for the period ending July 31,
1998. The deferred charges of $186,294 are reflected on the balance
sheet as a reduction to the carrying value of the convertible debt. In
addition, the Company incurred debt issue costs of approximately
$185,000 in relation to the April 14, 1998 convertible debentures,
which will be amortized using the straight-line method over the term of
the conversion period, two years. These charges include legal fees of
approximately $12,000, placement fees of $73,000 and $100,000
attributable to the warrants issued to the debenture holders.
6
<PAGE>
On May 21, 1998, the Company issued for cash, two $250,000 6%
Convertible Debentures totaling $500,000. These debentures are
convertible to common stock at 80% (eighty percent) of the five day
average closing ask price immediately proceeding the date of
conversion. In addition, the Company granted warrants to purchase
50,200 shares of common stock at a purchase price of $1.99 per share.
In addition, the Company incurred debt issue costs of approximately
$22,000 in relation to the May 21,1998 convertible debentures, which
will be amortized using the straight-line method over the term of the
conversion period, two years. These charges include legal fees of
approximately $2,000 and, placement fees of $20,000. The Company will
recognize a charge to operations for the beneficial conversion feature.
On July 10, 1998, the Company issued for cash, two $250,000 6%
Convertible Debentures totaling $500,000. These debentures are
convertible into common stock at 80% (eighty percent) of the five day
average closing ask price immediately proceeding the date of
conversion. In addition, the Company granted warrants to purchase
68,306 shares of common stock at a purchase price of $1.46 per share.
In addition, the Company incurred debt issue costs of approximately
$21,000 in relation to the July 10, 1998 convertible debentures, which
will be amortized using the straight-line method over the term of the
conversion period, two years. These charges include legal fees of
approximately $1,000 and, placement fees of $20,000. The Company will
recognize a charge to operations for the beneficial conversion feature.
On October 23, 1997 the Company made an offering of 400,000 shares of
common stock for $200,000; on October 31, 1997, an offering of 100,000
shares of common stock for $50,000; on December 10, 1997, an offering
of 997,778 shares of common stock for $220,000; on January 26, 1998, an
offering of 444,445 shares of common stock for $100,000. These
offerings were made pursuant to the claim of exemption under Rule 504
under the Securities Act of 1934. These offerings appear to exceed the
limitation of Rule 504 of a maximum of $1 million in any one period.
The Company intends to file a registration statement offering
rescission to the purchasers of these offerings.
4. COMMITMENTS
The Company entered into an agreement with Martin E. Janis & Company
("Janis") to provide the Company with public and investor relations
services. Under the terms of the agreement, the Company will grant
Janis 150,000 common shares of the Company as compensation for services
that had not been provided as of April 30, 1998. The common stock will
be restricted under Rule 144 of the Securities Act.
7
<PAGE>
5. SETTLEMENT LIABILITY
The Company reached an out of court settlement with IBS Conversions,
Inc. ("IBS") concerning an outstanding lawsuit filed by IBS with the
district court of Illinois. The Settlement Agreement called for the
payment of approximately $90,000 to IBS over a period of six months. In
return, the Company received the full release of IBS. The Company
agreed to pay $30,000 on June 26, 1998 and, $12,000 on the 26th day of
each consecutive month until fully paid.
Item 2. Management's Discussion and Analysis of Financial Condition or Plan
of Operations.
The following discussion and analysis should be read in conjunction with the
Company's third quarter ended unaudited financial statements and notes thereto
dated April 30, 1998 and 1997 and cumulative results from April 1, 1996 (date of
incorporation), to April 30, 1998. The period ended April 30, 1997 includes the
results of operation of the Company for the period from April 1, 1996 (date of
incorporation) to April 30, 1997.
FINANCIAL CONDITION
Results of operations for the period from April 1, 1996 (date of incorporation)
to July 31, 1996 were not material. Accordingly, the Company has recorded
audited results of operations for the sixteen-month period from April 1, 1996 to
July 31, 1997 (the "1997 fiscal period"), and unaudited results the period
August 1, 1997 to April 30, 1998 (the "nine-month interim period"). The
following is a discussion of the material changes in financial condition from
the year ended July 31, 1997 and the nine-month period ended April 30, 1998.
Current assets for the period ended April 30, 1998 were $618,405 as compared to
$174,277 for the year ended July 31, 1997. The Company reported a cash position
at April 30, 1998 of $274,206 as compared to $16,431 for the year ended July 31,
1997. The basis for this increase is the timing of the issuance of convertible
debentures for cash. Accounts receivable totaled $216,904 for the period ended
April 30, 1998 as compared to $3,674 for the period ended July 31, 1997. The
increase in accounts receivable is the result of the Company's increase in sales
revenues and reflection of a normal billing cycle.
The other material change to the asset side of the Company's Balance Sheet is
the recording of $171,549 of Deferred debt costs, net, there were no Deferred
debt costs recorded for the period ended July 31, 1997. These Deferred debt
costs relate to the issuance of convertible debentures by the Company. The
costs are amortized over the minimum term of 90 (ninety) days relating to
the exercise of warrants, up to a maximum of 2 (two) years for the
amortization of deferred debt costs.
8
<PAGE>
The Company has recorded material changes to Accounts payable and Accrued
expenses. Accounts payable for the period ended April 30, 1998 were $362,474 as
compared to $25,904 for the period ended July 31, 1997, Accrued expenses were
$130,031 for the period ended April 30, 1998 as compared to $88,582 for the
period ended July 31, 1997. These increases are due to the expansion of the
business and the requirement to acquire human resources, equipment and other
resources to position the Company to deliver its service offerings.
The Company issued convertible debentures for cash in the quarter ended April
30, 1998. The Company recorded Convertible debt totaling $782,098 for the
period. The debt is convertible into shares of the Company and, will not
require the outlay of cash in coming periods. Details on the convertible
debentures are outlined in the Notes to the Financial Statements.
The Company recorded Settlement liability of $87,155 for the quarter ended April
30, 1998 with no recorded liability for the period ended July 31, 1997. These
charges emanated from the settlement of an outstanding legal dispute with IBS
Conversions, Inc.
Additional paid-in capital for the period ended April 30, 1998 was $4,776,342 as
compared to $3,358,020 for the year ended July 31, 1997. The increase in paid-in
capital for the period was the result of the issuance of common stock for cash
in the amount of $970,108 and, the beneficial conversion feature related to the
issuance of convertible debentures totaling $348,214.
Deficit accumulated during the development stage totaled $(4,918,135) as
compared to $(2,784,536) for the year ended July 31, 1997. The discussion of
losses incurred for the periods are outlined under Results of Operations below.
RESULTS OF OPERATIONS
Results of Operations for the period April 1, 1996 (date of incorporation) to
July 31, 1996 were not material. Accordingly, the Company has reported results
of operations for the 16 month period from April 1, 1996 (date of
incorporation) to April 30, 1997 (the "1997 Interim Period"). Operations
actually commenced in October 1996 when the Company moved into a permanent
facility.
NET LOSSES
For the quarters ended April 30, 1998 and 1997, the Company incurred net losses
of $684,962 and $318,035, respectively. For the nine-month period ended April
30, 1998 and 1997, the Company incurred net losses of $2,133,599 and $2,358,920,
respectively. Cumulative losses from April 1, 1996 to April 30, 1998, the
Development period, totaled $4,918,135. Explanations of these results are set
forth below. The Company expects to continue to incur operating losses until
such time, if ever, it may generate adequate revenues
9
<PAGE>
from its service offerings.
REVENUE
For the quarter ended April 30, 1998 the Company recorded revenue of
$260,324. The Company had no revenue for the quarter ended April 30, 1997.
For the nine-month period ended April 30, 1998 the Company recorded revenue
of $415,345 as compared to $24,072 for the same period ended April 30, 1997.
The Company recognized continuing gains in the Groupware business area and
recording of its first Year 2000 revenue. Conversion Services, the Company's
core business, accounted for $43,084 of gross revenue for the nine-month
period ended April 30, 1998, as compared to $14,786 for the same period in
1997. The Company expects activity in the Year 2000 area to increase for the
fiscal year ending July 31, 1998. There can be no assurance, however, that
the Company's expectations will be realized.
The Company expects to generate revenue from (a) the performance of (i)
transformation services for end-users of IBM midrange computing systems and
application software development services related to client/server migration;
(ii) Year 2000 consulting, analysis, remediation and training services; and
(iii) groupware services, consisting primarily of the performance of application
software development services relating to Lotus Notes and ICC products and
related instructional services; and (b) the licensing of the Company's
proprietary software and third party proprietary software products. The Company
is not able to project the amount or proportion of revenue expected to be
received from each of the foregoing activities as the Company has not offered
each of its services for a sufficient period of time to have such knowledge.
During the autumn of 1996, the Company positioned itself to market
transformation services utilizing the Company's client/server migration
software, targeting the IBM mid-range computer market. In this connection, the
Company planned to enhance its client/server migration software in the 1997
Fiscal Period. Such plan received less attention during such period as the
Company directed its attention to the opportunity presented by the demand for
the Year 2000 remediation services. Because of the scope of the Year 2000
problem and the significant dollar volumes expected to be expended by users of
information technology to remediate the problem, the Company has shifted its
marketing and sales efforts to promoting Year 2000 remediation services. The
Company has negotiated relationships with a vendor of Year 2000 software
conversion tools and a company providing computer hardware assessment services
to support these efforts. By April 1997, the Company was offering Year 2000
remediation services. The Company has entered into agreements with Canadian and
United States sales representation companies to implement the Company's
marketing and sales strategies. Currently, the Company is bidding on Year 2000
remediation projects ranging in size from $100,000 to $1,000,000. There can be
no assurance that the Company will enter into any firm contracts with respect to
any of such projects.
EXPENSES
The Company is in the development stage and since April 1, 1996 has incurred
costs relating
10
<PAGE>
to the start up of operations, such as the costs of raising capital,
establishing a facility, recruiting personnel, acquiring and installing
furniture and equipment, acquiring development and accounting software,
developing its client/server migration software and marketing and sales efforts.
For the quarters ended April 30, 1998, April 30, 1997, cost of consulting
services accounted for $80,794 and $2,312, respectively. For the nine-month
periods ended April 30, 1998 and 1997, cost of consulting services expenses
were $141,899 and $10,078, respectively. Cumulatively, the cost of consulting
services accounted for $153,170. The Company anticipates managed growth in
this area as people are added to satisfy consulting services provided by the
Company. As the employment market becomes more competitive as the result of
channeling human resources toward the Year 2000 problem, the Company expects
to pay a premium for skilled consultants and engineers. These consulting
services will be allocated to projects in which the Company has signed
contracts.
Cost of software translation services accounted for $277,967 of total expenses
for the quarter ended April 30, 1998. Comparatively, the Company spent $18,230
for the same quarter ended April 30, 1997 and, has spent $497,265 cumulatively
in the development stage. For the nine-month periods ended April 30, 1998 and
1997, software translation services expenses were $304,536 and $172,895
respectively. The Company anticipates adding people to this area by the fiscal
year ending July 31, 1998, but, only if contracts are in hand. This growth will
depend on the volume of conversion services and year 2000 scan and repair
services provided to our customers.
Software development accounted for $119,886 of total expenses for the quarter
ended April 30, 1998. Comparatively, the Company spent $119,605 for the same
quarter in 1997 and, has spent $548,018 cumulatively in the development stage.
The increases in costs of product development are expected to continue as the
Company expands its product offerings.
General and administrative expense accounted for $295,517 of expenses for the
quarter ended April 30, 1998. Comparatively, the Company spent $177,868 for the
same quarter in 1997 and, has spent $2,439,813 cumulatively in the development
stage. General and administrative expense accounted for $1,565,388 of expenses
for the nine-month period ended April 30, 1998 compared to $533,969 for the
nine-month period in 1997. The Company's general and administrative expenses
consisted primarily of salaries, rent, consulting fees, advertising and legal
costs associated with running a publicly traded company.
For the quarter ending April 30, 1997 the Company incurred two unusual
expenses. The first was the settlement of an outstanding issue regarding the
distribution of additional shares of the Company to Jaford Holdings Limited
("Jaford") in relation to software marketing rights. The Company elected to
pay $259,500 in cash to settle the dispute. In turn, the Company received a
general release from Jaford with no further exposure to the Company. In the
second instance, the Company negotiated an out of court settlement with IBS
Conversions, Inc. ("IBS") concerning an outstanding lawsuit filed by IBS with
the District Court of
11
<PAGE>
Illinois. The Settlement Agreement called for the payment of $90,000 to IBS over
a period of six months. In return, the Company received the full release of IBS.
The Company incurred a charge of $1,536,341 for the fiscal period ending April
30, 1997 to record an expense related to shares issued to consultants involved
in the reverse acquisition of Samuel Hamann Graphix. The charge recognized the
fair value of the shares however, did not represent a cash outlay.
Cost of Consulting Services, Conversion Services and Product Development
The Company's variable costs of software consulting, translation services and
development are in a direct relation to the volume of sales. As a percentage of
revenue, these costs will vary depending on the nature of the sale and the
product mix required to satisfy customer needs. Sales based on mature product
will yield a higher margin while specific project type environments may call for
a higher degree of manpower and travel costs.
The Company will continue product development of the core software product to
enable the Company to broaden its impact on many vendor environments. The
development of translators to translate application code from any type of
machine language to virtually any target platform will serve as the benchmark of
the Company to respond effectively to end user requirements. The key to this
objective is a responsive, knowledgeable development team.
General and administrative
General and administrative costs consist of management and administrative staff,
professional services, office and occupancy costs. Significant costs are
attributed to the Company becoming a public company. This status will increase
audit and legal costs significantly. In relation to the Company becoming a
public company, the cost of corporate relations will also increase as quarterly
reports and other investor information is required. The Company anticipates that
its General and Administrative costs (as a percentage of costs) will decline as
the Company's operations expand.
Liquidity and Capital Resources
The Company has funded its activities through April 30, 1998, primarily from the
net proceeds of private placements of its securities and, to a lesser extent,
from cash flow from operations and the proceeds of two bank loans. The
outstanding principal balance of the loans are approximately $70,957 and the
loans bear interest at an annual rate equal to 2.5% over the bank prime rate of
interest in effect from time to time. Repayment of the loans, together with
interest thereon, is secured by a lien on substantially all of the fixed assets
of the Company and the personal guarantees of the Company's executive officers
and directors.
At April 30, 1998, the Company had a deficit accumulated during the development
stage of ($4,918,135), current assets of $618,405 and current liabilities of
$1,459,492. During the
12
<PAGE>
three-month period ended April 30, 1998, the Company entered into a convertible
debenture with two private placement investors sponsored by Thomson Kernaghan a
registered broker dealer. The convertible debt will require the issuance of
common stock at date of conversion, not cash resources of the Company.
Otherwise, the Company did not incur any additional long-term debt. The Company
has funded its activities to April 30, 1998 primarily through private placements
of securities and the issuance of convertible debentures. The Company will
continue to raise capital through these vehicles to fund operating activities
and other capital requirements. Failure to obtain such equity capital could have
a material adverse impact on the Company's ability to expand its operations.
There can be no assurance that equity capital will be available to the Company
on acceptable terms or at all.
In addition, implementation of the Company's business plan subsequent to the
Company's year end will require capital resources substantially greater than
those currently available to the Company. The Company may determine, depending
on the opportunities available to it, to seek additional debt or equity
financing to fund the cost of continuing expansion. To the extent that the
Company finances expansion through the issuance of additional equity securities,
any such issuance would result in dilution of the interests of the Company's
stockholders. Additionally, to the extent that the Company incurs indebtedness
or issues debt securities to finance expansion activities, it will be subject to
all of the risks associated with incurring substantial indebtedness, including
the risks that interest rates may fluctuate and cash flow may be insufficient to
pay the principal of, and interest on, any such indebtedness.
The Company has no current arrangements with respect to, or sources of,
additional financing, and it is not contemplated that its existing stockholders
will provide any portion of the Company's future financing requirements. There
can be no assurance that any additional financing will be available to the
Company on acceptable terms, or at all. The inability of the Company to obtain
financing when needed will have a material adverse effect on the Company,
including possibly requiring the Company to significantly curtail or cease its
operations.
Inflation
The Company believes that the impact of inflation and changing prices on its
operations since commencement of operations has been negligible.
PART II- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(c) On April 14, 1998, the Company sold 6% Convertible Debentures, due April,
2000, in the aggregate principal amount of $1,000,000 and issued warrants to
purchase 301,228 shares of Common Stock for gross proceeds of
13
<PAGE>
$1,000,000 as follows: Canadian Advantage LP ($275,000); Dominion Capital Fund
($275,000); Fetu Holdings ($250,000); and Livingston Asset Management
($200,000). Each of the above claim the status as accredited investors as
organizations described in section 501(c)(3) of the Internal Revenue Code,
corporation, Massachusetts or similar business trust, or partnership, not formed
for the specific purpose of acquiring the securities purchased, with total
assets in excess of $5,000,000. Each purchased its debentures and warrants for
investment. Canadian Advantage LP ("Canadian") was issued warrants to purchase
16,500 shares of Common Stock at $1.50 per share through April 14, 2000 and
warrants to purchase 66,338 shares of Common Stock at $.456 per share through
April 14, 2000; Dominion Capital Fund ("Dominion") was issued a like number of
identical warrants; Fetu Holdings ("Fetu") was issued like warrants to purchase
15,000 shares at $1.50 and 60,307 shares at $.456, and Livingston Asset
Management ("Livingston") was issued like warrants to purchase 12,000 shares at
$1.50 and 48,245 shares at $.456. On May 14, 1998, an aggregate of $125,000 of
Debentures, plus interest, were converted into 111,270 shares of Common Stock as
follows: Dominion and Canadian each converted $34,375 in principal plus interest
into 30,599 shares of Common Stock, Fetu converted $31,250 in principal plus
interest into 27,818 shares of Common Stock and Livingston converted $25,000 in
principal plus interest into 22,254 shares of Common Stock. On May 15, 1998, an
aggregate of $175,000 of Debentures plus interest were converted into 154,822
shares of Common Stock as follows: Dominion and Canadian each converted $48,125
in principal plus interest into 42,576 shares of Common Stock, Fetu converted
$43,750 in principal plus interest into 38,706 shares of Common Stock and
Livingston converted $35,000 in principal plus interest into 30,964 shares of
Common Stock. On July 8, 1998, an aggregate of $300,000 of such Debentures were
converted into 468,567 shares of common stock as follows: Dominion and Canadian
each converted $82,500 of principal plus interest into 128,856 shares of Common
Stock, Fetu converted $75,000 of principal plus interest into 117,142 shares of
Common Stock and Livingston converted $60,000 plus interest into 93,713 shares
of Common Stock.
The Debentures, the warrants and the Common Stock issued on conversion of the
Debentures were issued in reliance upon the exemption set forth in Section 4
(2) of the Act and Rule 506 thereunder. Such securities were purchased for
investment and not with a view to the public distribution thereof. The common
stock issued upon conversion of the Debentures were further issued in reliance
on Section 3 (a) (9) of the Act. In both the issuance of the Debentures and the
Common Stock the certificates representing such securities bear a legend
preventing resale in the absence of registration with the Commission or an
exemption therefrom.
Item 6. Exhibits and Reports on Form 8-K
/a/ Financial Data Schedule
/b/ Reports on Form 8-K.
No Reports on Form 8-K were filed by the Company during the three-month
period ended April 30, 1998.
14
<PAGE>
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TRANSFORMATION PROCESSING INC.
Date September 8, 1998 /s/ John McGee
- -------------------- -----------------------------------
John McGee, Chief Financial Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS FILED AS A PART OF THE REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED APRIL 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH REPORT ON FORM 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> APR-30-1998
<CASH> 274,206
<SECURITIES> 0
<RECEIVABLES> 339,247
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 618,405
<PP&E> 966,777
<DEPRECIATION> 359,727
<TOTAL-ASSETS> 1,397,004
<CURRENT-LIABILITIES> 1,459,492
<BONDS> 16,729
0
0
<COMMON> 15,299
<OTHER-SE> (94,516)
<TOTAL-LIABILITY-AND-EQUITY> 1,397,004
<SALES> 0
<TOTAL-REVENUES> 415,345
<CGS> 0
<TOTAL-COSTS> 2,341,630
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (207,314)
<INCOME-PRETAX> (2,133,599)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,133,599)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,133,599)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
