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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-SB/A
Amendment No. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12 (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
TRANSFORMATION PROCESSING INC.
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(Name of Small Business Issuer its charter)
NEVADA 95-4583945
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(State or other jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
5500 EXPLORER DRIVE, SUITE 2000
MISSISSAUGA, ONTARIO L4W 5C7
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(Address of principal executive offices) (Zip code)
Registrant's Telephone number, including area code (905) 206-1366
Securities to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAMES OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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NONE N/A
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Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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(Title of Class)
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ITEM 1. DESCRIPTION OF BUSINESS
(a) Business Development
In April 1996, Messrs. Paul G. Mighton, Gary G. McCann and Vladimir
Stepanoff (the "Founders") caused Transformation Processing Inc.
("TPI-Ontario") to be incorporated under the laws of the Province of Ontario,
Canada. The business purpose of TPI-Ontario was to provide computer related
services using computer software that incorporated software technology
previously developed by Mr. Stepanoff. In July 1996, Mr. Stepanoff assigned
his rights to a copyright covering that software technology to TPI-Ontario in
exchange for a one-third equity interest in TPI-Ontario. The Company recorded
software marketing rights at the fair value of the shares of Common Stock and
notes payable issued to unrelated third parties, in order to obtain certain
rights from these parties.
On August 20, 1996 (the "Closing Date") the Founders, as holders of
all of the outstanding common stock of TPI-Ontario, entered into an agreement
with Samuel Hamann Graphix, Inc., a Nevada corporation ("SHG-Nevada"), whereby
the Founders exchanged their shares of TPI-Ontario for an aggregate of
5,901,050 shares of common stock of SHG-Nevada. As a result of this
transaction, which was accounted for as a Reverse Acquisition (the "Reverse
Acquisition"), TPI-Ontario became a wholly-owned subsidiary of SHG-Nevada and
the Founders acquired control of SHG-Nevada. On the date of the Reverse
Acquisition, SHG-Nevada had not conducted any business operations.
SHG-Nevada was incorporated on August 7,1996 and had been formed for
the purpose of merging with and into Samuel Hamann Graphix, Inc.
("SHG-California"), a California corporation with publicly traded shares, with
SHG-Nevada as the surviving entity, in order to change the domicile of
SHG-California from California to Nevada (the "Merger"). On the Closing Date
the Founders were informed, and subsequent inquiry revealed, that although
SHG-California and SHG-Nevada had entered into an agreement and plan of merger,
dated August 14, 1996 (the "Merger Agreement"), the Merger Agreement stipulated
that the Merger would not be effective until approval of the Merger Agreement
by the parties and the filing of articles of merger with the Secretary of State
of the State of Nevada. While the Merger Agreement had apparently been
approved by both parties, the articles of merger had not been filed with the
State of Nevada nor had articles of merger been filed with the State of
California, as stipulated by California law. In order to effect the merger of
TPI-Ontario into SHG-Nevada, the Merger had to be completed by making the
required filings. Those filings were made in July 1997.
In March 1997, SHG-Nevada amended its articles of incorporation to
change its name to Transformation Processing Inc. ("TPI"). In February 1998,
TPI merged its wholly-owned subsidiary, TPI-Ontario, into TPI with TPI as the
surviving entity. In June 1998, TPI finalized the merger with SHG-California,
merging it into TPI with TPI as the surviving entity.
(b) Business of the Issuer
The Company is a development stage company. The Company's business
consists of providing computer-related services to corporate customers in Canada
and the United States. The
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Company currently groups the services it offers as follows: client/server
migration services, year 2000 ("Year 2000") remediation services and groupware
services.
This Form 10-SB Registration Statement contains certain forward-looking
statements that are subject to significant risks and uncertainties. There
are a number of important factors that could cause actual results to differ
materially from historical results and results anticipated by the forward
looking statements contained in the following discussion. Such factors and
risks include, but are not limited to, intense competition, price cutting and
profit margins, dependence on key personnel, the economic environment, the
ability to develop, market, support and acquire new computer-related services
and products and the ability of the Company to manage its growth.
CLIENT/SERVER MIGRATION SERVICES
The Company has developed software for the automatic migration of "legacy"
computer application source code and data used on past and current IBM
"mid-range" computers (often referred to as "minicomputers," as compared to
desktop or microcomputers) to a format compatible with a wide range of open
"client/server" computing systems from various manufacturers. A client/server
system is a network consisting of a "server" computer and one or more "client"
computers in which processing, data storage and accessibility to data bases are
shared among the individual computers comprising the network. The Company
provides transformation services, utilizing the Company's migration software,
and support services to end-users seeking to transform their closed proprietary
systems to open client/server systems.
BACKGROUND. Historically, the information technology ("IT") industry
has lacked consistent industry standards. Major vendors of computer hardware
and software products designed and sold proprietary products, which often were
not compatible with those offered by other vendors. This had the effect of
locking customers into a line of products offered by a single vendor controlled
by a small number of specialized employees, which made changing to a competitive
vendor, or the mixing and matching of products from a variety of vendors,
extremely difficult or impossible. Over time, the inability of most computer
manufacturers to provide all the software necessary to keep pace with the
evolution of technology led to the adoption of cross-industry standard software
and the advent of enterprise-wide "open" networks. These industry changes,
combined with the demand for more competitive and cost effective systems, have
caused a shift from the older proprietary systems (known as "legacy systems" in
IT terminology) to open, client/server systems. The Company believes that the
management of most large business organizations will migrate a substantial
portion of their existing application software to client/server systems, because
such systems are recognized as the best IT infrastructure for current business
realities and objectives. International Data Corporation, an IT industry
analyst, predicts that, in one form or another, 85% of application software will
be client/server enabled by the Year 2000.
The Company believes that most corporate information still resides on
closed legacy systems, consisting of a centralized "mainframe" or mid-range
computer and a group of remote "dumb" terminals (i.e., a keyboard and monitor,
having no local processing power, used to enter
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data into the central computer). Closed mainframe systems usually utilize MVS
operating systems developed by IBM and "external binary coded decimal
interchange code" computer languages to store and retrieve data. These types of
older computer languages do not comply with the American Standard Code for
Information Interchange ("ASCII," pronounced "Ask-Key"), a computer code which
is the international standard for client/server systems. As compared to the
newer open systems, legacy systems require a great deal of expertise to access,
do not facilitate information sharing, are slow to access and are increasingly
expensive to maintain. Users that decide to migrate to open client/server
systems are faced with the problem that a significant percentage (the Company
believes as much as 80%) of the proprietary code in existing application and
data files is incompatible with the new open systems. Large organizations
usually have many different types of computers utilizing many different
operating systems and languages and different sets of data bases and files. The
rapid deployment of client/server systems and desktop computers, which utilize
Windows NT-Registered Trademark-, Windows 95-Registered Trademark-, Windows
3.x-Registered Trademark-, Novell NetWare -Registered Trademark- and
OS/2-Registered Trademark- operating systems and languages, has created a
communications barrier between mainframe computers operating on MVS and
mid-range computers utilizing UNIX-Registered Trademark-, AS/400-Registered
Trademark- and DEC operating systems, on the one hand, and client/server
networks utilizing desktop computers, on the other. The Company believes that
the ability of users to access mainframe and mid-range computer data and files
has become a critical factor in an organization's daily operations. Different
computing systems (and operating systems) must be able to communicate with each
other.
A complete re-write of legacy code for a mainframe computing system
usually requires the transformation of millions of lines of code ("LOC"). A
single computer programmer is generally capable of rewriting about 10 LOC per
day, making this approach time-consuming, financially impracticable and
uncertain of delivering a high-quality product.
The Company believes that a large market has developed for software
services which will enable mainframe and midrange computers to seamlessly
connect to client/server systems. Existing applications and data that are
important to an organization's operations must be transformed to a format that
is compatible with the new open systems. Accordingly, there is a demand for
transformation services that will automatically migrate a user's critical
applications and data currently residing in legacy code, into code that is
compatible with the new open client/servers systems.
Traditional approaches to migration software have included "emulation"
(sometimes called "re-hosting") and "conversion." Emulation moves application
code and data to a new hardware system by simulating the original legacy
environment by hardware or software means. Under the emulation approach, data
is only accessible through legacy logic and, in essence, the new hardware simply
mimics the old hardware. The conversion method essentially converts one legacy
computer language to another (e.g. "RPG" to "COBOL") and runs in the same
fashion as the original system with few architectural improvements or new
benefits to the end-user. The Company believes that the emulation and
conversion methods have been generally found to be unsatisfactory in meeting
corporate objectives.
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SERVICES OFFERED. The Company offers transformation services which enable
companies to automatically migrate legacy application programs and data to any
open system environment, using technology which the Company believes to be
superior to that which is used in the emulation and conversion methods. The
Company's software disassembles existing application source code at the
operating system level, then automatically translates and reassembles the code
so as to be useable in an open system environment.
The Company's current migration software, the "TRANSFORM SERIES-TM-",
addresses the largest segment of the mid-range computer system market, the
IBM mid-range computer market (having an "installed-base" of over 500,000
installations) and includes TRANSFORM/3X-TM-, which addresses the IBM System
34 and System 36 market, and the TRANSFORM/400-TM-, which addresses the IBM
System 38 and IBM AS/400 market. Each of TPI's migration programs
encompasses a battery of automatic code translators which transform legacy
application source code into machine-independent code-components, except that
certain application software functions originally coded for particular
functions, such as telecommunications, graphics and office automation
functions, may require manual adjustment and/or redesign of the program.
Software that has been automatically transformed using the applicable
Transform Series program and any software required to be manually transformed
must be integrated to assure that the automatically converted software and
the manually transformed software will function as a whole (the "Transformed
Software"). The Transformed Software will only execute on a customer's
client/server system in conjunction with the Company's software function
support products, offered under the trademark ORB/400-TM- (also known as
"Deployment Products"). The Deployment Products consist of software that
permits Transformed Software to execute on the "server" computer ("Server
Software") and software that permits users of the "client" computers to
access Transformed Software available on the server computer ("Client
Software").
The Company typically provides transformation and support services
pursuant to a software conversion agreement. Such agreement provides that
the Company will use its migration software to automatically transform the
customer's legacy source code to a format that can be used by the customer's
client/server system and, if necessary, will manually transform ("rewrite")
any of the customer's legacy code that cannot be automatically transformed
using the migration software. The customer has the option to separately
perform manual transformation. If the customer elects this option, the
Company disclaims responsibility for the integration of the automatically
transformed software and the rewritten software.
The pricing of software conversion agreements is dependent on the number
of Lines of Code (LOC) to be converted. In the conversion process, there are
three fundamental components. First is project scoping or assessment,
secondly the translation phase and the final component is the testing and
implementation phase. The Company provides assessments to customers on a
fixed price basis. The assessment phase is priced according to the scope of
the environment. A typical system size would be in the area of 1,500,000 LOC
priced at $10,000 to $20,000. The Company has completed several assessments
priced in this range.
Price proposals have been issued to numerous companies on the
translation phase. This pricing is done on a price per LOC. The Company's
pricing in this phase of a project will range between $0.50 to $0.70
per line of code. Although the Company has not provided pricing to the market
as it relates to the testing phase, this area is typically priced
on a time and materials basis. The median gross amount payable under a
typical software conversion agreement for an IBM System 36 or AS/400 System
would be approximately $500,000. Sales to smaller sites will range from
$100,000 to $200,000 and larger agreements are expected to range
from $700,000 to $1 million range. There can be no assurance that the
Company will be able to price such agreements as anticipated.
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The Deployment Products are made available to a customer pursuant to the
software conversion agreement with such customer, provided the customer has
executed the Company's form of Deployment Product license agreement, which
licenses the customer to install one copy of the Server Software on its
server computer and to install a specified number of copies of the Client
Software on its client computers. A customer may install the Deployment
Products on more than one computer system provided it executes a separate
license agreement for each such computer system. Each license agreement
provides for the payment of a one-time license fee and annual maintenance fees.
Software support services, consisting of advice and assistance in the
use of the Transformed Software and the Deployment Products and the
correction of defects in the execution of such software, are available under
each software conversion agreement by telephone without additional charge
during the 90 days following delivery of the Transformed Software to the
customer. Thereafter, support services are provided without additional
charge so long as the annual maintenance fees under the applicable license
agreement are current. Otherwise, customers requesting support services are
charged TPI's applicable hourly rate for professional services.
The Company also offers other professional services in connection with a
customer's migration from a legacy system to a client/server system, including
consulting services to assist in the selection of the optimum client/server
environment and/or the implementation of a physical assets (computer hardware)
management system; education as to client/server systems; and network and
software skills training. These additional services are provided under the
Company's form of professional services agreement either at the Company's
applicable hourly rates for such services or a negotiated fee. Also, see
"GROUPWARE SERVICES" below.
BUSINESS STRATEGY. While the Company is offering its transformation and
support services directly to end-users, the Company believes that the largest
percentage of its revenues will be generated by providing transformation
services to IT vendors in the hardware, database and application software
sectors of the IT industry ("IT Vendors"). Such IT vendors have many strategic
partners who can enhance their revenue potential by utilizing the Company's
services to facilitate end-user migration to, and the installation of, their
products.
To implement this strategy, TPI plans to negotiate formal strategic
alliances with important IT Vendors having a vested interest in the migration
from IBM mid-range computer systems; to perform technology reviews with such IT
Vendors; participate in the first migration project with each such IT Vendor;
and gain access to, and acceptance from, strategic partners of such IT Vendors
by seeking to successfully complete each such project. There can be no
assurance that TPI will be able to successfully implement this strategy or that
the implementation of such strategy will generate significant revenues or
income.
As discussed above, TPI's current transformation services address the IBM
mid-range computing device marketplace. The Company expects this marketplace
to be large enough to sustain TPI's business objectives for many years to come.
However, to assure long-term growth,
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TPI will have to enter the transformation processing market for mainframe
computing systems. The offering of services to facilitate migration from
mainframe systems would increase TPI's market. Currently, TPI plans to enter
this market by identifying the best software migration toolsets developed by
third parties and seeking to obtain licenses to either use such software to
perform transformation services for mainframe customers and/or to customize and
remarket such tool-sets to mainframe customers. The Company has not yet
identified such software tools.
MARKETING AND SALES. The Company believes that the following factors will
assist it to implement its business strategy:
(a) customer demand to move toward client/server systems appears to
the Company to be strong and customer awareness of the Year 2000 problem has
focused attention on the need to address problems inherent in legacy systems
(see "YEAR 2000 REMEDIATION SERVICES," below);
(b) the Company believes, based on its knowledge of the industry,
that no competitor's migration software transforms legacy code to a
client/server format in as rapid, comprehensive and effective a method as the
Company's software;
(c) the Company believes that if it positions itself as a provider of
transformation services in the migration process and as a facilitator for
strategic partners to sell their own products, the Company will not be perceived
as a competitive threat to the major IT Vendors with whom the Company may desire
to negotiate strategic alliances; and
(d) the marketplace is easily identified and targeted in terms of
end-users.
Given these factors, TPI expects to generate revenues from services and software
licenses as the result of service agreements with end-users and strategic
alliances it expects to enter into with major IT Vendors.
TPI hopes to generate awareness of its services through the efforts of its
in-house sales force and outside sales representatives; implementation of its
referral program (described below); direct mail, especially to independent
software vendors; advertising in publications that are focused on TPI's market
(e.g., NEWS/400); targeted advertising, broadcasting and corporate/services
message delivery on the Internet.
The amount of time required to close a software conversion agreement for a
client/server migration project (from the time of submission of a proposal to
the prospective customer to execution of the contracts) varies depending on the
configuration of the customer's legacy system, the number of LOC to be
transformed and the target client/server system. Typically, a large project
takes longer to close than a smaller project. The Company anticipates that the
sales cycle for most of its client/server migration projects will be from three
to four months.
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The Company anticipates that the sizes and volumes of its software
conversion agreements will increase over time as initial projects are secured
and completed and can serve as reference sites to validate the performance and
functionality of the Company's services and software for prospective customers
(the "Referral Program"). The Company anticipates that its Referral Program
will result in shorter closing times for agreements and increased market
penetration. To date, the Company has entered into five software conversion
agreements, of which two have been completed and three are in the process of
being performed or are awaiting performance. There can be no assurance that the
Company will obtain any agreements through implementation of its Referral
Program. See "YEAR 2000 REMEDIATION SERVICES - MARKETING AND SALES" as to
Company's plan to use Year 2000 projects to cross-sell post-Year 2000
client/server migration projects.
The Company's sales force currently consists of four sales persons who are
employees and report to the Company's Vice-President-Sales. Such employees are
compensated on a salary plus commission basis. To augment its sales force, the
Company has entered into Referral Program agreements with MCW Business Systems
Ltd. ("MCW"), a company that provides sales representation services in Canada,
and Y2K Plus Inc. ("Y2K"), a company that provides sales representation services
in the United States. Under such agreements, MCW and Y2K personnel will
receive extensive training relating to TPI services. MCW and Y2K use an
"account management team" approach to the provision of hardware, software and
professional services and have committed to offering TPI services through
account executives located throughout Canada and the United States. The
Referral Program agreements provide that each of MCW and Y2K will be compensated
based on a percentage of the fees charged for referrals of new customers that
result in the execution of service agreements with such customers which are
fully performed by TPI.
YEAR 2000 REMEDIATION SERVICES
The Company offers Year 2000 remediation consulting and training services
to commercial and industrial end-users of mainframe and mid-range computing
systems. Currently, the Company is targeting manufacturing companies and
companies in the financial, insurance and healthcare industries.
BACKGROUND. Adding impetus to the demand for transformation services has
been the inability of many computer systems to properly interpret dates for the
Year 2000 and beyond. This is a pervasive, time-critical problem confronting
the computer user community as a whole. The essence of the problem is simple.
System components that store the year within a date as a two-digit number (a
standard even in client/server systems) are unable to properly process
transactions with dates beyond 1999. Many application programs that use
projected dates are failing at present, and without timely and apt management of
this problem, entire computer systems could be adversely affected.
Year 2000 remediation is, in essence, a mammoth project that has been
avoided or ignored for the past 20 years. A mid-range computer utilizes one to
two million LOC, while many mainframe computers utilize tens of millions of LOC.
If such code is to be utilized in the Year 2000
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and thereafter, it all must be scanned and date impacted LOC must be "repaired."
The Securities and Exchange Commission ("SEC") has estimated that the cost to
U.S. corporations to resolve the problem to be in excess of $600 billion. The
entry of TPI into the Year 2000 remediation services business was a natural
adjunct to its client/server migration software business.
SERVICES OFFERED. In March 1997, the Company decided to offer Year 2000
remediation services. The Company initially decided to offer "scan and repair"
services to companies requiring Year 2000 remediation services, as a
subcontractor to IT Vendors providing Year 2000 project management remediation
services. Such services were to be rendered commencing in September 1997 at a
scan and repair "factory" to be located at the Company's facility in
Mississauga, Ontario. The decision was also made not to develop a Year 2000
conversion tool set based on the Company's existing proprietary technology, but
to continuously search for, and seek to license, the best available Year 2000
software remediation tools. More recently, the Company has observed that while
there is no shortage of Year 2000 software conversion tools, there is a
significant demand for the application of state-of-the-art project management
methodologies that permit Year 2000 conversion projects to be performed in the
shortest possible time, in some cases at a fixed cost, and with the least
disruption to a customer's continuing operations. Accordingly, the Company
decided to offer a full range of services, based largely on the project
management methodology it employs in providing client/server transformation
services.
The Company now offers the following Year 2000 remediation services:
Rapid Assessment and Delivery for Year 2000-SM- ("RAD/2000"), which
involves the application of an accelerated project management methodology and
the best available software tools (as determined by the Company) to assess,
remediate, deliver and test Year 2000 compliant systems in 60 to 90 days cycles,
using small groups or "cells" of software professionals working in parallel on
desktop computers (rather than on the customer's mainframe or mid-range
computing system) to achieve assessment and remediation of the application
source code. This solution is "iterative" in that knowledge gained from each
phase of remediation, delivery and testing will be continuously used to refine
the assessment phase of a project plan.
Mobile Lab/2000-SM-, which involves the establishment at a customer's
premises, within a period of six weeks, for a fixed price, of a Year 2000
remediation facility specifically designed to meet the customer's Year 2000
requirements. The center can be connected to a customer's net work or
established as an independent group, using the customer's newly acquired
existing technology, and have the customer's staff support the project or have
the Company manage the project. The Company believes that the fixed cost of
this solution will be attractive to most customers because over the next two
years the demand for Year 2000 remediation services will far exceed the supply
and the price for such services will rise significantly as January 1, 2000 gets
closer. In addition, the Mobile/Lab 2000 solution does not require the removal
of application source code and data from the customer's premises.
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Boot Camp/2000-SM- is a five week training course offered by the Company,
that can be conducted at the Company's facility in Mississauga, Ontario or at a
customer's premises, for the purpose of training the customer's existing
IT personnel to support the customer's Year 2000 project. The course
involves four weeks of classroom training and one week of apprenticeship
training in the application of the Company's RAD/2000-SM- methodology and
licensed software tools to the customer's Year 2000 project. The Company
believes that this is the appropriate solution for customers that cannot recruit
a sufficient number of already qualified personnel to staff its Year 2000
project.
Mobile Lab/2000-SM- and Boot Camp/2000-SM- are based on the concept that,
wherever possible, existing technology and personnel should be deployed while
maintaining a reasonable cost structure.
The Company has entered into a strategic affiliation arrangement with
Allegiant Legacy Solutions, Inc. ("ALS") pursuant to which the Company
licenses, on a non-exclusive basis, the right to use and sublicense the use
of Adapt 2000-TM- software remediation tools developed by ALS. The term of
the license is one year and automatically renews upon payment and acceptance
of the annual renewal fee. The Company is authorized under its agreements
with ALS to use the Adapt 2000 software to perform Year 2000 remediation
services and to relicense the software to end-users at such license fees as
the Company may determine. If the Company utilizes Adapt 2000 to perform
Year 2000 remediation services it is obligated to process a minimum of two
million LOC per year for a three year period at each site at which it
performs remediation services and to make quarterly royalty payments to ALS
based on the number of LOC processed. If the Company sublicenses the Adapt
2000 software it is required to pay ALS 50% of the scheduled LOC fee and 50%
of ALS's listed one-time license fee of $12,900.
The Company has also entered into an informal strategic alliance with
Deevan Computer Services Inc. ("Deevan"), an IT consulting company that provides
asset management services to end-users, to offer hardware evaluation and
procurement services under the name Asset/2000-SM-. Deevan has informed the
Company that 60% of the computer hardware currently in use is not Year 2000
compliant and must be either replaced or repaired and that 10% of existing
hardware cannot be repaired. Deevan will offer Year 2000 computer hardware
evaluation, procurement and installation services in conjunction with the
software remediation services offered by the Company.
BUSINESS STRATEGY. The Company's strategy is to successfully position
itself as a provider of Year 2000 remediation services over the next 24
months so as to take advantage of what the Company deems to be a significant
opportunity to attain accelerated growth, which would be difficult to attain
under normal IT industry conditions. Over such period, the Company estimates
that revenues generated by Year 2000 remediation services will represent in
excess of 50% of gross revenues. There can be no assurance, however, that
the Company will be able to successfully implement this business strategy or,
if it is able to gain a share of the Year 2000 services market, that it will
realize the anticipated growth in revenues.
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MARKETING AND SALES. The Company intends to implement substantially the
same marketing and sales plan described under "CLIENT/SERVER MIGRATION
SERVICES - MARKETING AND SALES" above to access the market for Year 2000
remediation services, e.g., the Company will seek to utilize strategic
business relationships with IT Vendors and the implementation of its Referral
Program to access the market. The Company believes also, that to the extent
it is selected to perform major Year 2000 remediation projects and
successfully completes such projects, it will be in a preferred position to
be selected to perform post-Year 2000 client/server migration projects by the
same customers, by reason of knowledge of the computer systems and businesses
of such customers gained by the Company in performing such projects, and by
prospective customers, based on the Company's demonstrated ability to
successfully implement major conversion projects. However, there can be no
assurance that the Company will be selected to perform any major Year 2000
remediation projects or, if selected, that it will be able to successfully
implement such projects. Moreover, there can be no assurance that the
Company will be selected to perform any major post-Year 2000 projects.
GROUPWARE SERVICES
Groupware is a type of software designed to allow users on a client/server
network to use the same software and work on the same project at the same time.
Notes-Registered Trademark- ("Notes") is a groupware product of Lotus
Development Corporation, an IBM subsidiary ("Lotus"), that, among other
applications, allows users to work on the same document and exchange electronic
mail. Notes permits the integration of information from desktop computer
applications, relational databases, legacy systems and the World Wide Web.
Notes contains an application development environment, a document database and
sophisticated messaging system which permit the development of custom
applications for improving business processes in areas such as product
development, customer service, sales and account management.
The Company has entered a "business partner" agreement with Lotus, pursuant
to which the Company has been designated a "Consultant." As a Consultant, the
Company undertakes to promote the sale of Lotus products and is authorized to
provide business process or technology consulting and custom application
development services using Lotus technologies. As a business partner, the
Company is required, among other things, to be using Lotus products internally,
be connected to Lotus electronically via the Lotus Notes Network/Partner
Information Network and have a "certified Lotus professional" on staff. Lotus
provides the Company with software development tools, information, marketing
services and support .
The Company has also entered into a value-added reseller agreement with
IntellAgent Control Corporation ("ICC"), a provider of sales force automation
software, which has appointed the Company as a non-exclusive distributor in the
United States for such software, which runs on Lotus Notes. Such software
includes artificial intelligence-like features which enables the marketing and
sales personnel of an organization to obtain the latest data concerning a
customer or sales prospect stored in any database on the organization's
enterprise-wide computer system. The Company has acquired a license for such
software product from ICC and the right to grant
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sublicenses of the product, and provide custom application development and
support services with respect to such product to end-users.
Groupware services consist of consulting, analysis, custom application
software development and implementation of Notes software solutions and
specific application programs which operate in the Notes environment and the
training of customer personnel in the use of such software. In this
connection, the Company has entered into a professional services
subcontracting agreement with GE IT Solutions/Universal Data Consultants
("UDC") pursuant to which the Company has agreed to provide classroom
instruction and related professional services, as a subcontractor of UDC, to
end-users with whom UDC has prime groupware development contracts. The
services to be provided by the Company under a particular prime contract are
to be specified in a statement of work to be executed by UDC and the Company,
which statement of work will specify the amounts or rates of compensation for
the Company's performance of such services as well as other specific terms
and conditions applicable to the Company's performance of the services. Each
subcontracting agreement is terminable by either party on 30 days prior
written notice and UDC may terminate the services to be performed by the
Company at any time upon written notice to the Company. To date, the Company
has completed 14 subcontracts under the subcontract agreement and is in the
process of performing nine subcontracts.
Groupware services are rendered under the Company's form of professional
services agreement at fees based on time and materials estimated to be expended
by the Company in the performance of such services plus a reasonable profit.
BUSINESS STRATEGY. Since the Company's core business is to assist
customers to migrate to open client/server systems, the Company believes it
can enhance its ability to attract customers for its core business and
increase its revenues by assisting such customers with the development of
application software that can greatly enhance the use and productivity of
their client/server systems. The Company believes that the rights it has
obtained under its agreements with Lotus and ICC will enable it to implement
such strategy.
MARKETING AND SALES. The Company intends to implement substantially the
same marketing and sales plan described under "CLIENT/SERVER MIGRATION
SERVICES -- MARKETING AND SALES" above. TPI is currently developing a sales
strategy and partnering plan with ICC which the Company believes will
increase its Notes sales force automation software business. The Company
anticipates that sales referrals will come from both ICC, the Toronto offices
of Lotus and the implementation of its Referral Program. In addition, the
Company intends to sponsor information seminars to create interest and
generate sales leads.
BACKLOG
Since the Company is primarily a provider of services, it does not deem
purchase order backlog to be material to its operations.
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<PAGE>
COMPETITION
The market in which the Company competes is characterized by intense
competition. The Company faces competition from other providers of
computer-related services, most of which have significantly greater financial,
technological, marketing and personnel resources than the Company. In addition,
the Company believes that the significant size of the market for legacy code
transformation services and Year 2000 remediation services will lead to the
emergence of a number of additional competitors. The Company's competitors
include Keane Computer, IBM, Cap Gemini, Viasoft Solutions, LGS Group and many
others.
There are currently over one hundred companies providing Year 2000
remediation services in the United States and Canada. Most do not offer the
range of services which the Company offers but only one or two discrete
services. Moreover, there is a consensus in the IT industry that the demand for
Year 2000 remediation services is so great, and the available remediation
resources are so limited, that all of the necessary remediation cannot be
completed by January 1, 2000.
The markets for computer-related services are characterized by rapidly
changing technology and evolving industry standards, often resulting in the
obsolence of software and related services or short life cycles for software and
related services. While the Company is not currently aware of any competitor
offering client/server migration services that transforms legacy codes to a
format usable in client/server systems as rapidly and comprehensively as the
Company's software, the development of technologies that might adversely affect
the market for client/server systems or that permit the development of software
that outperforms the Company's software could have a material effect on the
Company's potential market share and revenues.
The Company believes that it competes on the basis of the value to its
markets of its proprietary software and project management methodology and its
comprehensive offering of computer-related services. Furthermore, the Company
is constantly seeking to acquire and develop new services and products and to
further develop and enhance its existing software. The Company's success will
depend on its continued ability to provide needed information technology and to
successfully market its services.
INTELLECTUAL PROPERTY
In July 1996, TPI-Ontario acquired the intellectual property rights for
"IBM midrange migration tools" software from Vladimir Stepanoff, Vice
President - Technology and a director of the Company. All enhancements of
such software are wholly owned by the Company.
Prior to April 1, 1996, the Company's date of incorporation, Mr.
Stepanoff entered into an agreement with Raconix Corporation ("Raconix")
pursuant to which he granted certain rights in such technology. To obtain
clear title to such technology, as of the Closing Date, the Company issued
455,000 shares of Common Stock to Jaford Holdings Ltd. and 100,000 shares of
Common Stock and a promissory note in the principal amount of $72,500 to
Innovations Ontario Corp. (which companies had liens on such marketing
rights) and 150,000 shares of Common Stock and a promissory note in the
principal amount of $116,000 to Ronald Content as successor in interest to
Raconix. See Notes 1 and 4 of the Notes to the Audited Financial Statements.
The Company does not have any patents or registered copyrights to
protect its proprietary technology. In addition, none of the trade or
service marks utilized by the Company are registered with any United States
or foreign trademark registry. The Company employs various methods to
protect its technology and the associated documentation including
confidentiality agreements with its employees and license agreements with its
customers and strategic partners. Such methods may not afford adequate
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<PAGE>
protection and there can be no assurance that others will not independently
develop such technology or software incorporating technology that significantly
out performs the Company's software.
EMPLOYEES
The Company has 30 employees, all of whom are full-time, of which five are
executive officers, four are engaged in marketing and sales, three are engaged
in administration and the balance are technical personnel engaged in providing
the Company's computer-related services. The Company considers its relations
with its employees to be satisfactory.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the Company's audited financial statements as of July 31, 1997 and for the
period from April 1, 1996 (date of incorporation) to July 31, 1997 (the "1997
Fiscal Period") and the notes thereto and the Company's unaudited financial
statements as of April 30, 1998 and for the nine month periods ended April
30, 1998 and 1997 and the notes thereto, all of which financial statements
are included elsewhere in this form 10-SB.
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
to April 30, 1997 ("the 1997 Interim Period"). Operations actually commenced
in October of 1996 when the Company moved into a permanent facility (see item
3, Description of Property).
NET LOSSES
For the 1997 Fiscal Period the Company incurred a net loss of
$2,784,536. 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 through April 30, 1998 (the "Development
Period") were $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, as it generates substantial revenues from the performance of its
service offerings.
REVENUE
For the 1997 Fiscal Period the Company's revenue was $47,317. Cumulative
revenue during the Development Period was $462,662. For the nine-month period
ended April 30, 1998 the Company's revenue was $415,345 as compared to
$24,072 for the same period ended April 30, 1997. The Company saw continuing
gains in the Groupware business and recording of its first Year 2000 revenue.
Conversion Services, the Company's core business accounted for $43,084 or 10%
of gross revenue for the nine-month period ended April 30, 1998, as compared
to $14,786 or 61% 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 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 ICC 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
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<PAGE>
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 are 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 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 1997 Fiscal Period, cost of consulting services accounted for
$11,271. For the nine-month periods ended April 30, 1998 and 1997, cost of
consulting services expenses were $141,899 and $10,078 respectively. The
cumulative cost of consulting services for the Development Period accounted
for $153,170 or 3% of total expenses. The Company anticipates managed growth
in this area as people are added to satisfy consulting services provided to
our customers. 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 transformation services accounted for $192,729 of total
expenses for the 1997 Fiscal Period. The cumulative cost of software
transformation services for the Development Period was $497,265 or 10% of
total expenses. For the nine-month periods ended April 30, 1998 and 1997,
software transformation 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 transformation services and year 2000
remediation services being provided by the Company.
Software development costs accounted for $218,212 during the 1997
Fiscal Period. For the nine months ended April 30, 1998 and 1997 software
development costs amounted to $329,806 and $131,683, respectively. The
cumulative amount of software development costs incurred during the
Development Period amounted to $548,018 or 11% of total expenses. The Company
intends to continue to incur software development costs to enable it to offer
client/server migration services, which targets a broad range of
client/server systems. The cost of software development is expected to
increase as the Company seeks to further develop and enhance its
client/server software. The
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<PAGE>
Company believes that development of translators to transform application
source code from any type of machine language to a format useable on any
client/server system will serve as the benchmark of the Company's ability to
respond effectively to end-user requirements.
The Company relates the variable cost of consulting services,
transformation services and software developments to revenues. The Company
believes that, as a percentage of revenues, these costs will vary due to the
nature of the project and the specific services required satisfying
customer's requirements. The Company anticipates that revenues based on a
mature service offering (e.g. client/server migration services) will yield a
higher profit margin, while Year 2000 remediation and groupware development
projects may require a higher degree of manpower and travel costs.
Transformation services and Year 2000 remediation services are based on the
number of LOC to be processed or repaired, while consulting and application
software development services are provided on time and materials basis to
assure profitability.
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. General and administrative expenses accounted for
$874,425 during the 1997 Fiscal Period and the cumulative amount of general
and administrative expenses incurred during the Development Period amounted
to $2,439,813 or 47% of total expenses. General and administrative expenses
consisted primarily of salaries and benefits, consulting fees, travel,
investor and public relations, office and equipment rents, professional
services, office and telephone expenses. The Company believes that it may
incur significant costs related to the registration of its Common Stock under
Section 12 of the Securities Exchange Act of 1934, as amended. Such status
may increase professional fees significantly and the cost of investor
relations may increase as reports and other investor information are required
to be filed with the SEC or otherwise made publicly available. The Company
anticipates that general and administrative expense (as percentage of total
costs and expenses) will decline as the Company's operations expand.
For the nine-month period ending April 30, 1998 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 full 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 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 full release from IBS
of any future claims.
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 is currently
approximately $70,957 and the loans bear interest at an annual rate equal to
2.5% over the bank prime rate of interest (the current Canadian Prime rate is
7.5%, therefore the Company is paying interest at the rate of 10%) in effect
from time to time. Repayment of the loans, together with interest thereon, is
secured by a lien on substantially all of the assets of the Company and the
Company's executive officers and directors guarantee repayment of the loans.
At April 30, 1998, the Company had a deficit accumulated during the
Development Period of ($4,918,135), current assets of $618,405, current
liabilities of $1,459,492 and available cash of $274,206. During the
three-month period ended April 30, 1998, the Company issued convertible
debentures with two private placement investors sponsored by Thomson
Kernaghan a registered
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<PAGE>
broker dealer. The convertible debt will require the issuance of common stock
at date of conversion, not cash resources of the Company. 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, the Company's
auditors, in their report on the Company's financial statements as of July
31, 1997 and for the sixteen month period then ended, have expressed
substantial doubt as to the Company's ability to continue as a going concern
if the Company is unsuccessful in obtaining additional financing.
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.
On October 23, 1997, TPI made an offering of 400,000 shares of Common
Stock for $200,000 ($.50 a share); on October 31, 1997, an offering of
100,000 Shares of Common Stock for $50,000 ($.50 a share); on December 10,
1997, an offering of 997,778 shares of Common Stock for $220,000 ($.22 a
share) and on January 26, 1998, an offering of 444,445 shares of Common Stock
for $100,000 ($.22 a share). The offerings were made in Canada pursuant to
the claim of exemption under Rule 504 under the Securities Act. These
offerings appear to exceed the limitation of said Rule of a maximum of $1
million in any one year period. TPI intends to file a registration statement
offering rescission to the purchasers of these offerings. The closing market
for TPI Common Stock on August 27, 1998 was $.56 1/4. The potential maximum
contingent liability for such sales is $570,000, however, to the extent that
the sale price of the Common Stock exceeds the Offering Prices set forth above,
there would be no ascertainable liability to the Company.
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.
SEASONALITY
The Company does not deem its revenues to be seasonal. Nevertheless
revenues may be affected by the budgeting practices of corporate end-users of
IT. Such companies tend to make IT expenditures early in their fiscal year,
when new budgets have been approved, or late in their fiscal year, to protect
previously budgeted expenditures. In addition, the performance of Year 2000
remediation services may reduce the amount of revenues the Company would
otherwise generate from the performance of client/server migration services
and affect the Company's ability to service such business. The Company
believes that the potential reduction of client/server migration revenues
will be more than offset by revenues generated by the performance of Year
2000 remediation services and the opportunity to cross-sell other services to
consumers of Year 2000 remediation services.
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<PAGE>
ITEM 3. DESCRIPTION OF PROPERTY
The Company leases approximately 5,477 square feet of office and
production space (the "Leased Premises") in Mississauga, Ontario under a
lease expiring on September 30, 2001 at an annual base rental of
approximately $23,000 plus additional rent equal to real estate taxes,
utility and operating costs allocable to the Leased Premises. The Company
has the option to extend the lease for an additional 60 month term upon
written notice to the landlord given at least six months' prior to the
expiration of the current term of lease at a rental equal to the greater of
the annual base rent for the original term and the market rent for the Leased
Premises prevailing at the time the option is exercised. The Company has the
right to terminate the lease at any time after the 36th month of the original
term by giving the landlord at least nine months' prior written notice and
paying the landlord approximately $18,000.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of February 20,
1998, with respect to the beneficial ownership of the Company's outstanding
Common Stock by (i) each person known by the Company to be the owner of the
more than 5% of such outstanding Common Stock; (ii) each director; (iii) the
executive officer named in the Summary Compensation Table (see Item 6,
"Executive Compensation"); and (iv) all directors and executive officers as a
group:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE
OF OF
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP PERCENTAGE OF CLASS (2)
- ---------------- --------------------- -------------------
<S> <C> <C>
Joter Holdings 4,936,050(3) 32.0
Diversified
Technologies Ltd. 965,000(3) 6.3
Vladimir Stepanoff 1,633,683(3) 10.6
Paul G. Mighton 1,633,683(3) 10.6
Gary G. McCann 1,633,684(3) 10.6
John G. McGee 1,000,000(3) 6.5
All directors and
executive officers
as a group (5 persons) 5,901,050(3) 38.3
</TABLE>
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<PAGE>
- --------------------
(1) Unless otherwise noted, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them. Each such person is deemed to be
the beneficial owner of shares of Common Stock held by such person (but not
held by any other person) on February 20, 1998, and any shares of Common Stock
which such person has the right to acquire pursuant to securities exercisable
or exchangeable for, or convertible into, Common Stock, within 60 days from
such date. At such date, none of such persons held any options, or warrants
to purchase Common Stock or securities exchangeable for or convertible into
Shares of Common Stock. The address of each beneficial owner is in care of
the Company, Suite 200, 2121 Argentia Road, Mississauga, Ontario, Canada.
(2) Based on 15,418,505 shares of Common Stock outstanding at the close of
business on February 20, 1998.
(3) Joter Holdings ("Joter") is a proprietorship, of which Gary G. McCann is
the proprietor. Joter holds the following shares of Common Stock as nominee
for Paul G. Mighton, Gary G. McCann, Vladimir Stepanoff and John G. McGee,
executive officers and directors of the Company: 1,392,433 shares, 1,392,434
shares, 1,392,433 shares, and 758,750 shares, respectively. The shareholders
of Diversified Technologies Ltd., a British Virgin Islands corporation
("DTL"), are Paul G. Mighton, Gary G. McCann, Vladimir Stepanoff and John G.
McGee. DTL holds the following shares of Common Stock as nominee for Messrs.
Mighton, McCann, Stepanoff and McGee: 241,250 shares, 241,250 shares, 241,250
shares and 241,250 shares, respectively.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below are the names of all directors and executive officers of
the Company along with certain information relating to the business experience
of each of the listed directors and officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- ------- ------------------------------
<S> <C> <C>
PAUL G. MIGHTON 45 CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
DOUGLAS WOOLRIDGE 39 PRESIDENT AND CHIEF OPERATING
OFFICER
GARY G. MCCANN 46 EXECUTIVE PRESIDENT, SECRETARY AND
A DIRECTOR
VLADIMIR STEPANOFF 56 VICE PRESIDENT - TECHNOLOGY AND A
DIRECTOR
JOHN G. MCGEE 47 VICE PRESIDENT - FINANCE AND CHIEF
FINANCIAL OFFICER
</TABLE>
PAUL G. MIGHTON served as Chairman of the Board of Directors and Chief
Executive Officer of TPI-Ontario from its date of incorporation in April 1996
until TPI-Ontario was merged into the Company in February 1998 and has served
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<PAGE>
in the same positions with the Company since August 1996. From February 1995
to June 1996, Mr. Mighton served as Executive Vice President and Chief
Operating Officer of Agensys Canada Limited ("ACL"), an IT company. From
April 1993 to February 1995, he served as a Vice President of Co-Operators
Data Services Canada Ltd., a provider of IT services, in its Systems Services
Division. From 1991 to April 1993, Mr. Mighton was National Director of the
Healthcare Systems Division of Information Systems Management Corporation, a
provider of data processing services to health care organizations.
DOUGLAS WOOLRIDGE has served as President and Chief Operating Officer of
the Company since September 1997. From July 1994 to July 1997, he served as
Chief Information Officer for The R-M Trust Company, a Canadian financial
services provider. From August 1992 to June 1994, Mr. Woolridge served as the
director of IE Consulting Inc., an independent management consulting firm
("IE"). From August 1989 to August 1992, he served as a consulting manager for
the IT consulting practice of IE.
GARY G. MCCANN has Served as Executive Vice President of the Company
since September 1997 and as a director since August 1996. From August 1996
to September 1997, he served as President and Chief Operating Officer of the
Company . From February 1996 to August 1996, Mr. McCann was involved in the
founding and organization of TPI- Ontario. From July 1995 to February 1996,
he served as President and a director of Mantis Information Technology Ltd.,
a privately held provider of IT consulting and support services. From
December, 1994 to April 1996, Mr. McCann Served as Vice President, Technology
and Business Development of ACL. From July 1991 to December 1994, Mr. McCann
served as a general manager of Sykes Enterprises Inc. of Canada, the
Toronto-based subsidiary of a United States company engaged in providing
computing systems integration services ("SEIC") and from July 1992 to
December 1994, he also served as a Vice President of Sykes Enterprises, Inc.,
the parent of SEIC. Mr. McCann holds a Bachelor of Commerce degree in finance
and accounting from the University of Windsor, Ontario, Canada.
VLADIMIR STEPANOFF has served as Vice President-Technology and a director
of the Company since August 1996 and held the same positions with TPI-Ontario
from April 1996 until it was merged into the Company in February 1998. From
April 1994 to August 1996, he served as President and director of Cyberplan
Inc., a Canadian-based company engaged in the development and licensing of
automatic transformation software. Mr. Stepanoff was the founder of Cyberplan,
Inc., which was the successor to Cyberplan Enrg., a firm of which Mr. Stepanoff
was the sole proprietor from 1984 to April 1994. Cyberplan Enrg. developed the
transformation software which Cyberplan Inc. continued to develop and license.
Mr. Stepanoff has a Bachelor of Science Degree (with Honors) in mathematics and
physics from the University of British Columbia.
JOHN G. MCGEE has served as Vice President-Finance and Chief Financial
Officer of the Company since October 1996. From May 1991 to October 1996, he
served as President and Chief Executive officer and was the principal
stockholder of Equitable Lease Corporation, an Ontario, Canada equipment leasing
company.
All directors hold office until the next annual meeting of stockholders of
the company and the election and qualification of their respective successors.
Directors currently receive no cash compensation for serving on the Board of
Directors. Officers are elected annually by the Board of Directors and serve at
the discretion of the Board.
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<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth all compensation for all services
rendered to the Company during the Company's fiscal year ended July 31, 1997
by the Company's Chief Executive Officer. No other executive officer of the
Company received annual salary and bonuses in excess of $100,000 during
Fiscal 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------
NAME AND OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ------------------ ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Paul G. Mighton,
Chairman of the Board 1997 $79,264 -0- -0-*
and Chief Executive
Officer
</TABLE>
* The cost to the Company of personal benefits, including premiums for life
insurance and any other perquisites, to such executive does not exceed 10% of
such executive's annual salary and bonus.
COMPENSATION OF DIRECTORS
No compensation is paid by the Company to any of its directors for services
in such capacity. Currently, all of the Company's directors are executive
officers of the Company.
EMPLOYMENT CONTRACTS
On January 1, 1997, the Company entered into employment agreements with
each of Messrs. Paul G. Mighton, Gary G. McCann, Vladimir Stepanoff and John G.
McGee, the Company's executive officers. Such agreements do not provide for a
fixed period of employment and provide that an employee's employment may be
terminated at any time, without notice, for "cause" (as defined in each
agreement), or at any time, upon at least 30 days prior notice, the Company or
the employee may terminate such employment, and, without notice upon
payment of six months base salary and certain other amounts to the employee, the
Company may terminate such employee's employment. The agreements provide for
participation in employee benefit programs, vacation and reimbursement of
expenses, including for use of the employee's vehicle. Each of the agreements
contains provisions prohibiting the employee from competing with the Company for
a period of six months following termination of employment and from disclosing
confidential information of the Company while employed by the Company and
thereafter.
Mr. Mighton's employment agreement provides that he will be paid an annual
salary of approximately $110,000; Mr. McCann's employment agreement provides
that he will be paid in annual salary of approximately $95,000; Mr. Stepanoff's
employment agreement provides that he will be paid an annual salary of
approximately $66,000; and Mr. McGee's employment agreement that he will be paid
an annual salary of approximately $88,000.
Douglas Woolridge, the Company's President and Chief Operating Officer, has
entered into an agreement with the Company pursuant to which he currently
receives an annual salary of approximately $62,000.
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<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In consideration for the transfer to the Company of the ownership
interest in certain technology and certain services provided to the Company,
the Company issued 4,936,050 and 965,000 shares of Common Stock to Joter and
DTC(1), respectively, which hold such shares as nominees for the benefit of
the following executive officers and directors of the Company: Paul Mighton,
Gary G. McCann, Vladimir Stepanoff and John McGee. See Item 4, "Security
Ownership of Certain Beneficial Owners and Management."
From August 1, 1996 through July 11, 1997, the Company made advances to
Messrs. Paul G. Mighton, Gary G. McCann and Vladimir Stepanoff, executive
officers, directors and principal stockholders of the Company aggregating
$115,227. On July 31, 1997, Messrs. Mighton, McCann and Stepanoff executed
demand promissory notes payable to the Company in the respective principal
amounts of $61,452, $37,829 and $15,946, representing the aggregate amounts
borrowed by such persons from the Company. The notes bear interest at the
annual rate of 4%.
The Company has paid for the account of Mantis Information Technology
Ltd ("Mantis"), a corporation of which Gary G. McCann is the sole
stockholder, certain obligations for consulting services incurred by Mantis
and has rendered invoices to Mantis in the aggregate amount of approximately
$12,000 for funds advanced. As of the date hereof, such invoices remain
outstanding.
Messrs. Mighton, McCann, Stepanoff and McGee have personally guaranteed
the payment to a bank of certain purchase money equipment loans made to the
Company by such bank. The outstanding principal balance of the loans is
currently approximately $80,000. The loans bear interest at 2.5% over the
bank's prime rate in effect from time to time (currently 4.25% per annum).
See Item 2, "Management's Discussion and Analysis or Plan of Operations --
Liquidity and Capital Resources."
- -----------
(1) Such shares were issued in exchange for shares of TPI-Ontario
on August 20, 1996.
The officers of the Company have executed employment agreement with the
Company. See Item 6, "Executive Compensation--Employment Contracts."
ITEM 8. DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 50,000,000 shares of common stock,
par value $0.001 per share (the "Common Stock"), and 5,000,000 shares of
preferred stock, par value $0.001 per share (the "Preferred Stock"). As of
February 20, 1998, there were 15,418,505 shares of Common Stock outstanding
held by approximately 200 holders of record. No shares of Preferred Stock
are issued or outstanding.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by stockholders. There are
no preemptive, subscription, conversion or redemption rights pertaining to
the Common Stock. All of the outstanding shares of Common Stock are duly and
validly issued, fully paid and non-assessable. Holders of shares of Common
Stock are entitled to receive dividends when, as and if declared by the Board
of Directors from funds legally available therefor and to share ratably in
the assets of the Company available upon liquidation, dissolution or winding
up, subject to any superior rights of the holders of Preferred Stock, if
issued.
22
<PAGE>
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of the
shares of Preferred Stock in one or more series, with each series to have such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without any action by the stockholders, to issue shares of Preferred Stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of the Common Stock. In
addition, the issuance of shares of Preferred Stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Although the Company does not currently
intend to issue any shares of Preferred Stock, there can be no assurance that
the Company will not do so in the future.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
The Company's Common Stock has been traded in the over-the-counter market
and quoted on the Over-the-Counter Electronic Bulletin Board ("OTCBB") under
the symbol "TPII" since August 21, 1996. The following table sets forth the
high and low bid prices of the Common Stock as reported by the OTCBB for the
periods indicated. The prices indicate inter-dealer quotations, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
BID PRICES
----------
PERIOD LOW HIGH
------ -- ----
<S> <C> <C>
FISCAL 1997
-----------
First Quarter
(August 21, 1996 to October 31, 1996) $2.63 $4.78
Second Quarter
(November 1, 1996 to January 31, 1997) 0.56 3.19
Third Quarter
(February 1, 1997 to April 30, 1997) 0.63 1.06
Fourth Quarter
(May 1, 1997 to July 31, 1997) 0.69 1.22
FISCAL 1998
-----------
First Quarter
(August 1, 1997 to October 31, 1997) 0.30 0.75
Second Quarter
(November 1, 1997 to January 31, 1998) 0.38 0.75
</TABLE>
As of February 20, 1998, there were approximately 200 holders of record of
the Common Stock. The Company reasonably believes that there are approximately
an additional 300 beneficial holders of its Common Stock.
23
<PAGE>
The Company has never paid any cash dividends on its Common Stock and has
no present intention to do so. The Company intends to retain all earnings for
use in its business.
ITEM 2. LEGAL PROCEEDINGS
On December 23, 1997, IBS Conversions, Inc., an Illinois corporation
("IBSC"), commenced an action against the Company in the United States
District Court for the Northern District of Illinois, Eastern Division
(Docket No. 97C8892), seeking to permanently enjoin the Company from using
and disclosing certain information and software alleged to be trade secrets
of IBSC and seeking to recover compensatory damages of at least $290,000 and
punitive damages and attorneys' fees in amounts to be determined by the
court. The complaint alleges, among other things, that: (a) IBSC entered into
a "North American Strategic Affiliation Agreement" with the Company in or
about February 1997, pursuant to which IBSC granted a license to the Company
to use certain software development tools and a related project management
methodology in connection with the Company's plan to offer Year 2000
remediation services; (b) in consideration for such license, the Company
agreed to pay IBSC the sum of $100,000 per year for a period of three years;
and (c) the Company breached such agreement and misappropriated the software
development tools and methodology, which IBSC deems to be trade secrets, by
failing to make such payments to IBSC; failing to use its best efforts to
market IBSC products; and marketing the products of competitors of IBSC.
The Company has moved to dismiss one of the causes of action set forth in
the complaint and has denied the other material allegations of the complaint.
The court has not yet rendered a decision on the Company's motion.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
NOT APPLICABLE
Item 4. RECENT SALES OF UNREGISTERED SECURITIES
The following discussion includes certain information as to transactions
which occurred prior to the current Management's assumption of control of the
Registrant on the Closing Date and is based on information which Management
believes to be reasonably accurate, but not all of which does it have direct
knowledge. Notwithstanding the above, TPI is responsible for the information
contained in this registration statement.
On August 20, 1996, the Closing Date, in satisfaction of gross proceeds of
$155,000 received by, and certain services rendered, to TPI-Ontario, in the
period April 11 to July 25, 1996, the Registrant issued 160,000 shares of
Common Stock to 15 investors (155,000 shares were issued for $1.00 per share
and 5,000 shares were issued in exchange for consulting services and a
technical review of TPI-Ontario's conversion software). TPI-Ontario
received such gross proceeds pursuant to a private offering prior to the
Closing Date. The 160,000 shares of Common Stock were issued in reliance on
the exemption from registration provided by Rule 504 of Regulation D
promulgated under the Act.
On the Closing Date, Samuel Hamann Graphix Inc. ("SHGI") issued
4,936,050 shares of Common Stock to Joter and 965,000 shares of Common Stock
to DTL, in exchange for common shares of TPI-Ontario, which common shares
were issued as of April 1, 1996. Joter and DTL, which are controlled by
Messrs. Mighton, McCann and Stepanoff, executive officers and directors of
the Registrant, acquired the common shares of TPI-Ontario in consideration
for certain rights in technology transferred to, and certain services
rendered to, TPI-Ontario prior to the Closing Date, which shares, for
accounting purposes are deemed to have been issued in exchange for nominal
consideration as "founder's shares". Such shares were issued to management in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended (the "Act").
Prior to the Closing Date, SHGI issued 740,469 shares of Common Stock,
which remain outstanding. The Registrant has no records concerning the
transactions in which such shares were issued or the consideration received
by the Company in respect of such issuances, nor does the Company know how
many holders of such securities presently exist.
Prior to the Closing Date (from August 9 through August 19, 1996), SHGI
issued, pursuant to a private offering, an aggregate of 1,465,000 shares of
Common Stock in consideration for gross proceeds of $14,654 received by SHGI
from investors. These transactions were not disclosed to current management
of the Registrant prior to or on the Closing Date. Present management is not
aware of the exemption relied on for the issuance of such shares; however,
Samuel Hamann Graphix Inc. filed a Form D dated August 16, 1996 claiming
exemption under Rule 504. Management believes that SHGI relied on Rule 504 of
Regulation D under the Act in issuing such securities.
24
<PAGE>
On the Closing Date, SHGI issued 1,888,000 shares of Common Stock to
15 individuals in consideration for certain services rendered in
connection with the Reverse Acquisition including banking services, marketing,
investor relations and transfer agent services. Current management of the
Registrant is uncertain of the exemption relied on for the issuance of such
shares, but believes prior management relied on the exemption from registration
provided by Section 4(2) of the Act.
On the Closing Date, SHGI issued 455,000 shares of Common Stock to
Jaford Holdings Ltd., 100,000 shares of Common Stock to Innovations Ontario
Corp. and 150,000 shares of Common Stock to Ronald Content, in consideration
for the release by such companies and individual of certain claims with
respect to marketing rights as to the technology previously transferred to
the Registrant by Vladimir Stepanoff, an executive officer and director of
the Registrant. Prior to the incorporation of TPI-Ontario, Mr. Stepanoff had
granted marketing rights with respect to such technology to Raconix, of which
Mr. Content was the sole shareholder. Ronald Content is a sophisticated
investor, who was involved in the operations of the Registrant and received
the shares for investment. The shares were issued in reliance on the exemption
from registration provided by Section 4(2) of the Act. See Item 1,
"Description of Business -- Intellectual Property."
On November 25, 1996, the Registrant issued options to purchase 15,000
shares of Common Stock at an exercise price of $1.99 expiring on November 27,
1997, to a public relations firm, in consideration for certain services. The
options were issued in reliance on the exemption from registration provided
by Section 4(2) of the Act. The holder of the option, as the Registrant's
public relations firm, was fully familiar with the Registrant's operations
and is a sophisticated investor.
On August 23, 1996, Registrant issued 500,000 units to Mayfair Advisory
Group Limited in consideration for gross proceeds of $500,000. Each unit
consisted of one share of Common Stock and a Common Stock purchase warrant
(the "Warrants"). When issued, the Warrants had a per share exercise price
of $1.00, were exercisable for a period of two years, commencing 30 days
after the closing of the offering, and were redeemable on 20 days prior
written notice at a redemption price of $.005 per Warrant. Pursuant to an
amendment to the terms of the Warrants dated August 26, 1998, the warrants
will not be exercisable until a registration statement has become effective
covering the Common Stock issuable upon the exercise thereof; the term of
such warrants has been extended through six months following the effective
date of such registration statement, and the exercise price has been reduced
to $.80 per share of Common Stock, subject to certain adjustments in the
event the market for the Company's Common Stock is less than $.80 at the time
of the exercise, but in no event shall the exercise price be reduced below
$.50 per share. The Common Stock and the Warrants were issued in reliance on
the exemption from registration provided by Rule 504 of Regulation D under
the Act.
On January 27, 1997, Registrant issued 208,333 shares of Common Stock to
Olive Investments, in consideration for gross proceeds of $150,000. These
shares were issued in reliance on the exemption from registration provided by
Rule 504 of Regulation D under the Act.
On March 6, 1997, Registrant issued 501,030 shares of Common Stock to
Thomson Kernaghan & Co., Ltd. ("Thomson Kernaghan") in consideration for
gross proceeds of $375,000 (approximately $.75 per share). These shares were
issued in reliance on the exemption from registration provided by Rule 504 of
Regulation D under the Act.
25
<PAGE>
On June 27, 1997, Registrant issued 100,000 units to Pinetree Capital
Corp. ("Pinetree") in consideration for gross proceeds of $70,000. The units
were issued to Pinetree pursuant to a Subscription Agreement by and between
TPI and Pinetree (the "Subscription Agreement") by which Pinetree subscribed
for a minimum of 700,000 units and a maximum of 1,000,000 units. The
Subscription Agreement was later amended to lower the minimum to 100,000
units. Pinetree purchased the foregoing securities for its own account. Each
unit consisted of one share of Common Stock and a common stock purchase
warrant expiring two years from the date of issuance, and exercisable at
$1.00 per share during the first year and $1.50 per share during the second
year. These securities were issued in reliance on the exemption from
registration provided by Rule 506 of Regulation D under the Act.
On August 1, 1997, Registrant sold to Thomson Kernaghan an 8%
convertible subordinated debenture due July 31, 1998 in the principal amount
of $108,750 the "Debenture" for a gross purchase price of $108,750. The
Debenture was converted, on August 28, 1997, into 198,000 shares of Common
Stock at the conversion rate of $0.55 per share. The Debenture was issued in
reliance on the exemption from registration provided by Rule 504 of
Regulation D, under the Act and the shares of Common Stock issued on
conversion of the Debenture were issued in reliance on the exemption from
registration provided by Section 3(a)(9) of the Act.
On September 4, 1997, Registrant issued 589,000 shares of Common Stock
to Thomson Kernaghan in consideration for gross proceeds of $125,000 ($.21 a
share). These shares were issued in reliance on the exemption from
registration provided by Rule 504 of Regulation D under the Act.
On September 26, 1997, Registrant issued 400,000 shares of Common Stock
to Thomson Kernaghan in consideration for gross proceeds of $200,000 ($.50 a
share). These shares were issued in reliance on the exemption from
registration provided by Rule 504 of Regulation D under the Act.
On October 23, 1997, Registrant issued 400,000 shares of Common Stock to
Thomson Kernaghan in consideration for gross proceeds of $200,000 ($.50 a
share). These shares were issued in reliance on the exemption from
registration provided by Rule 504 of Regulation D under the Act.
On October 31, 1997, Registrant issued 100,000 shares of Common Stock to
Thomson Kernaghan in consideration for gross proceeds of $50,000 ($.50 a
share). These shares were issued in reliance on the exemption from
registration provided by Rule 504 of Regulation D under the Act.
On December 10, 1997, Registrant issued 997,778 shares of Common Stock
to Thomson Kernaghan in consideration for gross proceeds of $220,000 ($.22 a
share). These shares were issued in reliance on the exemption from
registration provided by Rule 504 of Regulation D under the Act.
On January 26, 1998, Registrant issued 444,445 shares of Common Stock to
Thomson Kernaghan in consideration for gross proceeds of $100,000 ($.22 a
share). These shares were issued in reliance on the exemption from
registration provided by Rule 504 of Regulation D under the Act.
On April 14, 1998, the Registrant 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
$1,000,000 (of which $550,000 had a conversion rate of 70% of the 5-day
average closing bid price and $450,000 had a conversion rate of 80% of the
5-day average closing asked price) 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
Sections 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 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's By-Laws provide for indemnification of officers and directors
to the fullest extent permitted by Nevada law. In addition, under the Company's
Articles of Incorporation, no director or officer is to be personally liable to
the Company or its stockholders for damages for breach of fiduciary duty as a
director or officer, except for damages for breach of fiduciary duty resulting
from (a) acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law, or (b) the illegal payment of certain dividends and
certain stock redemptions or repurchases.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors and officers of the Company pursuant to the foregoing
provisions or otherwise, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
26
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
PERIOD FROM APRIL 1, 1996
(DATE OF INCORPORATION)
TO
JULY 31, 1997
------------------------
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . . . . . . . . F-1
FINANCIAL STATEMENTS:
BALANCE SHEET AS OF JULY 31, 1997 . . . . . . . . . . . . . . . . . F-2
Statement of Operations for the period from
April 1, 1996 (date of incorporation) to July 31, 1997 . . . . F-3
Statement of Stockholders' Equity for the period from
April 1, 1996 (date of incorporation) to July 31, 1997 . . . . F-4
Statement of Cash Flows for the period from
April 1, 1996 (date of incorporation) to July 31, 1997 . . . . F-5
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F-6
FOR THE NINE MONTHS ENDED APRIL 30, 1998
(UNAUDITED)
-----------------------------------
Financial Statements:
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . F-12
Statement of Stockholders' Deficiency . . . . . . . . . . . . . . . F-13
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . F-14
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F-15
</TABLE>
27
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Transformation Processing Inc.
We have audited the accompanying balance sheet of Transformation Processing Inc.
(a development stage company) as of July 31, 1997, and the related statements of
operations, stockholders' equity, and cash flows for the period from April 1,
1996 (date of incorporation) to July 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 financial statements referred to above present fairly, in
all material respects, the financial position of Transformation Processing Inc.
as of July 31, 1997, and the results of its operations and its cash flows for
the period from April 1, 1996 (date of incorporation) to July 31, 1997 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company has had limited operations, has a working
capital deficiency and has a deficit accumulated during the development stage
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 10. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
September 4, 1997, except for the second paragraph of
Note 11, as to which the date is September 26, 1997,
the last two paragraphs of Note 7, as to which the date
is November 18, 1997, the first paragraph of Note 1,
as to which the date is February 19, 1998, and the last
paragraph of Note 11, as to which the date is August 25, 1998
F-1
<PAGE>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
=====================================================================================================
JULY 31, 1997
- -----------------------------------------------------------------------------------------------------
ASSETS (Note 3)
<S> <C>
Current Assets:
Cash $ 16,431
Time deposits (Note 1) 23,368
Accounts receivable 3,674
Due from related parties (Note 4) 127,405
Prepaid expenses and other current assets 3,399
- -----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 174,277
Property and Equipment, net (Notes 1 and 2) 109,077
Software Marketing Rights, net (Notes 1 and 4) 606,340
Other Assets 4,684
=====================================================================================================
TOTAL ASSETS $ 894,378
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 25,904
Accrued expenses and other current liabilities 88,582
Current maturities of loan payable - bank (Note 3) 36,259
Current maturities of notes payable - stockholders (Note 5) 85,793
- -----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 236,538
Loan Payable - bank, net of current maturities (Note 3) 21,137
Notes Payable - stockholders, net of current maturities (Note 5) 28,195
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 285,870
- -----------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 6 and 11)
Stockholders' Equity (Notes 1, 7, 8 and 11):
Preferred stock - $.001 par value; authorized 5,000,000 shares, none issued
Common stock - $.001 par value; authorized 50,000,000 shares,
issued and outstanding 12,169,282 shares 12,169
Additional paid-in capital 3,358,020
Deficit accumulated during the development stage (2,784,536)
Cumulative foreign currency translation adjustments (Note 1) 22,855
- -----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 608,508
=====================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 894,378
=====================================================================================================
</TABLE>
The accompanying notes and independent
auditor's report should be read in
conjunction with the financial statements
F-2
<PAGE>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
===============================================================================================
PERIOD FROM APRIL 1, 1996 (DATE OF INCORPORATION) TO JULY 31, 1997
- -----------------------------------------------------------------------------------------------
<S> <C>
Revenue - consulting services (Note 1) $ 47,317
- -----------------------------------------------------------------------------------------------
Costs and expenses:
Cost of consulting services 11,271
Cost of software transformation services (Note 1) 192,729
Software development 218,212
General and administrative 874,425
Noncash consulting costs (Notes 1 and 7) 1,536,341
- -----------------------------------------------------------------------------------------------
2,832,978
- -----------------------------------------------------------------------------------------------
Loss from operations (2,785,661)
Interest income, net of interest expense of $2,419 1,125
===============================================================================================
Net loss $ (2,784,536)
===============================================================================================
Net loss per common share (Note 1) $ (.27)
===============================================================================================
Weighted average number of common shares outstanding (Note 1) $ 10,161,665
===============================================================================================
</TABLE>
The accompanying notes and independent
auditor's report should be read in
conjunction with the financial statements
F-3
<PAGE>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
======================================================================================================================
PERIOD FROM APRIL 1, 1996 (DATE OF INCORPORATION) TO JULY 31, 1997
- ----------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED FOREIGN
ADDITIONAL DURING THE CURRENCY STOCK-
COMMON STOCK PAID-IN DEVELOPMENT TRANSLATION HOLDERS'
SHARES AMOUNT CAPITAL STAGE ADJUSTMENTS EQUITY
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common
stock to founders (Note 7) 5,901,050 $ 5,901 $ (5,901) - - -
Issuance of common
stock for cash (Note 7) 1,469,363 1,469 1,215,657 - - $1,217,126
Issuance of options to
purchase common
stock issued for services
(Note 8) - - 27,362 - - 27,362
Issuance of common
stock in Reverse Acquisition
(Notes 1 and 7) 2,205,869 2,206 13,484 - - 15,690
Issuance of common
stock for services in
Reverse Acquisition
(Notes 1 and 7) 1,888,000 1,888 1,534,453 - - 1,536,341
Issuance of common
stock for intangible asset
(Notes 1 and 4) 705,000 705 572,965 - - 573,670
Net loss - - - $(2,784,536) - (2,784,536)
Cumulative foreign currency
translation adjustments
(Note 1) - - - - $22,855 22,855
- ----------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1997 12,169,282 $12,169 $3,358,020 $(2,784,536) $22,855 $ 608,508
======================================================================================================================
</TABLE>
The accompanying notes and independent
auditor's report should be read in
conjunction with the financial statements
F-4
<PAGE>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
=================================================================================================
PERIOD FROM APRIL 1, 1996 (DATE OF INCORPORATION) TO JULY 31, 1997
- -------------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net loss from development stage operations $(2,784,536)
Adjustments to reconcile net loss from development stage operations
to net cash used in operating activities:
Depreciation and amortization 197,483
Issuance of options to purchase common stock for services 27,588
Issuance of common stock for services in Reverse Acquisition 1,549,056
Changes in operating assets and liabilities:
Increase in accounts receivable (3,705)
Increase in time deposits (23,561)
Increase in prepaid expenses and other current assets (3,426)
Increase in other assets (4,723)
Increase in accounts payable 26,116
Increase in accrued expenses and other current liabilities 89,317
- ------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (930,391)
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (124,733)
Purchase of intangible assets (24,156)
Advances to related parties (129,621)
- ------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (278,510)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from loan payable - bank 73,158
Repayments of loan payable - bank (15,054)
Repayment of notes payable - stockholders (74,924)
Net proceeds from issuance of common stock 1,240,109
- ------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,223,289
- ------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 2,043
- ------------------------------------------------------------------------------------------------
Net increase in cash and cash at end of period $ 16,431
================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 2,419
================================================================================================
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITY:
The Company issued 705,000 shares of common stock (valued at $573,670) and
promissory notes in exchange for an intangible asset.
===============================================================================
The accompanying notes and independent
auditor's report should be read in
conjunction with the financial statements
F-5
<PAGE>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. PRINCIPAL BUSINESS On August 20, 1996, Samuel Hamann Graphix, Inc.
ACTIVITY AND acquired all of the outstanding common stock of
SIGNIFICANT Transformation Processing Inc. ("Ontario"), a
ACCOUNTING Canadian corporation. For accounting purposes the
POLICIES: acquisition has been treated as a recapitalization
of Ontario with Ontario as the acquirer (Reverse
Acquisition) (see Note 7). Samuel Hamann
Graphix, Inc. changed its name to Transformation
Processing Inc. (the "Company"). On
February 19, 1998, Ontario merged into the
Company. The accompanying financial statements
reflect this merger as if it had occurred on
July 31, 1997.
The Company is an information technology
company that develops and markets software and
services that enable companies worldwide to
automatically migrate their application
programs and data from legacy systems to open
systems and client/server environments. The
Company has expanded its operations from
providing legacy code migration services to
three lines of business: client/server
migration, year 2000, and groupware services.
The Company is targeting customers located
throughout Canada and the United States. For
the period ended July 31, 1997, all operations
of the Company were conducted in Canada. At
July 31, 1997, all of the Company's assets are
located in Canada.
The statement of operations includes the results
of operations of the Company for the 16-month
period from April 1, 1996 to July 31, 1997. The
results of operations for the period from April 1,
1996 to July 31, 1996 were not material.
Revenue from fixed-price contracts is recognized
ratably over the period of performance in
accordance with the American Institute of
Certified Public Accountants' Statement of
Position 91-1, SOFTWARE REVENUE RECOGNITION.
Revenue from customer training, technical support
and other services is recognized as the service is
performed. The Company provides technical support
at no charge for the first 90 days and, under
certain circumstances, at no charge if certain
other fees are current. Revenue from the sale of
deployment product licenses is recognized after
installation of the product.
Property and equipment is recorded at cost.
Depreciation is provided for by the straight-line
method over the estimated useful lives of the
related assets.
The cost of software marketing rights of
approximately $780,000 (which includes
approximately $207,000 of notes payable plus
approximately $573,000 in common stock issued)
included in the accompanying balance sheet is
being amortized by the straight-line method over
four years. Amortization expense charged to
operations in the period ended July 31, 1997 and
included in cost of software transformation
services in the accompanying statement of
operations was approximately $180,000.
The preparation of financial statements in
conformity with generally accepted accounting
principles requires the use of estimates by
management affecting reported amounts of assets
and liabilities and revenue and expenses and the
disclosure of contingent assets and liabilities.
Actual results could differ from these estimates.
Loss per share is based on the weighted-average
number of shares of common stock outstanding
during the year.
F-6
<PAGE>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
===============================================================================
Management does not believe that any recently
issued, but not yet effective, accounting
standards if currently adopted would have a
material effect on the accompanying financial
statements.
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.
The Company is required to maintain, as a
compensating balance, an amount equal to the
amount available to the Company under a standby
letter of credit which expires September 30, 1997.
The estimated fair value of the Company's loan
from the bank approximates its carrying amount due
principally to its short-term maturity. It is not
practicable to estimate the fair value of the
Company's loans from stockholders due to the
Company's inability to estimate interest rates
without incurring excessive costs.
2. PROPERTY AND EQUIPMENT: Property and equipment, at cost, consists of the
following:
<TABLE>
<CAPTION>
Estimated
Useful Life
---------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 18,098 5 years
Computer equipment 66,258 5 years
Furniture and fixtures 40,833 7 years
---------------------------------------------------------------------
125,189
Less accumulated depreciation 16,112
---------------------------------------------------------------------
$109,077
=====================================================================
</TABLE>
3. LOAN PAYABLE - BANK: The Company is obligated under an installment loan
with a bank payable in monthly installments of
$3,021 plus interest through February 1, 1999.
The loan bears interest at the bank's prime rate
(4.75% at July 31, 1997) plus 2.5%. The loan is
collateralized by substantially all of the
Company's assets.
Future maturities of the loan payable are as
follows:
<TABLE>
<CAPTION>
Year ending July 31,
1998 $36,259
1999 21,137
-------------------------------------------------------------------
<S> <C>
57,396
Less current maturities 36,259
-------------------------------------------------------------------
$21,137
===================================================================
</TABLE>
F-7
<PAGE>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
===============================================================================
4. RELATED PARTY Amounts due from officers of approximately
TRANSACTIONS: $115,000 represent advances made to the officers.
These loans which were noninterest-bearing
through July 31, 1997, but bear interest at 4%
per annum subsequent to July 31, 1997, are
payable on demand.
Amounts due from an affiliate of approximately
$12,000 represent advances made to a company that
has a stockholder who is a stockholder and officer
of the Company.
The Company acquired the software marketing
rights in exchange for 705,000 shares of common
stock and notes payable. The rights have been
valued at the fair value of the shares of
common stock ($.81 per common share) and
notes payable at the date of issue.
5. NOTES PAYABLE - Notes payable - stockholders consist of the
STOCKHOLDERS: following:
<TABLE>
<CAPTION>
<S> <C>
Note payable - noninterest-bearing, payable in
monthly installments of $5,639 through
December 1, 1998. $ 95,863
Note payable - noninterest-bearing, due on demand. 18,125
-------------------------------------------------------------------
113,988
Less current maturities 85,793
-------------------------------------------------------------------
$ 28,195
===================================================================
</TABLE>
Future maturities of notes payable are as follows:
<TABLE>
<CAPTION>
Year ending July 31,
<S> <C>
1998 $ 85,793
1999 28,195
-------------------------------------------------------------------
$ 113,988
===================================================================
</TABLE>
6. COMMITMENTS AND The Company is obligated under a noncancellable
CONTINGENCIES: operating lease for office space expiring
September 30, 2001. Approximate minimum future
payments under this lease are
payable as follows:
<TABLE>
<CAPTION>
Year ending July 31,
<S> <C>
1998 $23,000
1999 23,000
2000 23,000
2001 23,000
2002 4,000
------------------------------------------------------------------
$96,000
==================================================================
</TABLE>
F-8
<PAGE>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
===============================================================================
The lease is subject to escalation for the
Company's proportionate share of increases in real
estate taxes and other operating expenses. The
lease has an option to renew for five years at a
base rent, as defined. Rent expense for the period
ended July 31, 1997 amounted to $37,522.
The Company's lease commitment is guaranteed with
a standby letter of credit which expires September
30, 1997.
The Company is involved in litigation whereby
it is alleged that the Company breached a license
agreement by failing to pay sums due under the
license agreement. The Plaintiff seeks
compensatory damages of at least $290,000 and
punitive damages in an unspecified amount. The
Company has moved to dismiss one of the causes
of action in the complaint and has denied the
other material allegations of the complaint.
The financial statements do not include any
adjustments that may result from the outcome of
this litigation.
7. STOCKHOLDERS' EQUITY: The Company is authorized to issue 5,000,000
shares of preferred stock, with rights and
preferences to be determined by the Company's
board of directors. As of July 31, 1997, no
shares of preferred stock had been issued.
The Company issued shares of common stock for cash
as follows:
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Stockholders'
Shares Amount Capital Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
April 20, 1996 160,000 $ 160 $ 136,196 $ 136,356
August 23, 1996 500,000 500 493,155 493,655
January 27, 1997 208,333 208 147,998 148,206
March 6, 1997 219,780 220 123,039 123,259
March 6, 1997 281,250 281 246,237 246,518
June 27, 1997 100,000 100 69,032 69,132
----------------------------------------------------------------------------------------
1,469,363 $1,469 $1,215,657 $1,217,126
========================================================================================
</TABLE>
On April 1, 1996, the Company issued 5,901,050
shares of common stock to its founders for
certain technology and services, which were
valued at a nominal amount.
On August 20, 1996, the Company issued 2,205,869
shares of common stock to the stockholders of
Samuel Hamann Graphix, Inc. in a transaction
accounted for as a Reverse Acquisition (see Note
1).
As part of the Reverse Acquisition (see Note 1)
the Company issued 1,888,000 shares of common
stock to certain consultants for services. These
shares have been valued at the fair value at the
date of issuance ($.81 per common share).
Accordingly, the Company recorded a charge to
operations at the time of issuance of $1,536,341.
Certain share issuances prior to the Reverse
Acquisition were made by Samuel Hamann Graphix,
Inc. and the details of consideration for the
issuances were not known by the Company. The
Company has addressed the situation by initiating
an audit of issued and outstanding shares of
common stock. The Company is auditing records
received from prior management reflecting shares
issued, transferred or sold, apparently without
fair consideration to the Company.
The Company issued stop transfer instructions as
of November 18, 1997 concerning approximately
1,844,000 shares of common stock. These shares are
part of the 1,888,000 shares of common stock
issued to the consultants discussed in the
preceding paragraph. The stop order transfers will
remain until the holders of the shares of common
stock are able to satisfy the Company's concerns.
F-9
<PAGE>
8. STOCK OPTIONS AND At July 31, 1997, options to purchase 15,000
STOCK WARRANTS: shares of common stock at an exercise price of
$1.99 per share are outstanding and are
exercisable through November 27, 1997. The Company
valued these options at $1.88 per option. The
Company recorded a charge to operations of
approximately $27,500 at the time of issuance.
At July 31, 1997, warrants to purchase 600,000
shares of common stock at prices ranging from
$1.00 to $1.50 per share are outstanding and
exercisable. The warrants expire at various dates
through June 23, 1999.
9. INCOME TAXES: The Company recorded a deferred income tax asset
for the tax effect of net operating loss
carryforwards and the temporary difference between
the carrying amount and tax bases of certain
intangible assets, aggregating approximately
$562,000. In recognition of the uncertainty
regarding the ultimate amount of income tax
benefits to be derived, the Company has recorded a
valuation allowance of $562,000 at July 31, 1997.
The Company has a net operating loss carryforward
of approximately $1,103,000 available to offset
taxable income through the year 2012.
10. GOING CONCERN: The Company is in the development stage, has a
limited operating history, has not generated
significant revenue through July 31, 1997, has a
working capital deficiency and has a deficit
accumulated during the development stage at
July 31, 1997.
The Company's financial statements have been
prepared on the assumption that the Company will
continue as a going concern. Management believes
that the development, marketing and initial sales
of certain of its technologies will occur before
July 31, 1998, thus generating working capital.
The Company is also considering other financing
alternatives which will allow the Company to
continue as a going concern. If there is no or
insufficient revenue from the commercial
applications of the Company's technologies during
the year ending July 31, 1998 or additional
financing cannot be obtained, there is substantial
doubt about the Company's ability to continue as a
going concern. The financial statements do not
include any adjustments that might result from the
outcome of this uncertainty.
11. SUBSEQUENT EVENTS: On August 1, 1997, the Company issued a $108,750
8% convertible subordinated debenture. The
debenture was converted into 198,000 shares of
common stock in August 1997. At the date of the
issuance of the debenture the value of the
underlying common shares was approximately
$160,000. Accordingly, the Company recorded a
charge to operations at the time of issuance of
the debenture of approximately $52,000.
On September 4, 1997 and September 26, 1997, the
Company received proceeds of $325,000 related to
the issuance of 989,000 shares of common stock.
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 year period. The Company intends to file a
registration statement offering rescission to
the purchasers of these offerings.
F-10
<PAGE>
TRANSFORMATION PROCESSING INC.
(a DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
Unaudited
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
April 30, 1998
- -------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current Assets:
Cash $ 274,206
Accounts receivable 216,904
Due from related parties 122,343
Prepaid expenses and other current assets 4,952
- -------------------------------------------------------------------------------------------------------
Total current assets 618,405
Property and Equipment, net of
accumulated depreciation of $44,435 164,224
Software Marketing Rights, net 442,826
Deferred debt cost, net (Note 3) 171,549
- -------------------------------------------------------------------------------------------------------
Total Assets $ 1,397,004
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable $ 362,474
Accrued expenses and other current liabilities 130,031
Convertible debt, net (Note 3) 782,098
Settlement liability 87,155
Current maturities of loan payable - bank 54,228
Notes payable - stockholders 43,506
- -------------------------------------------------------------------------------------------------------
Total current liabilities 1,459,492
Loan Payable - bank, net of current maturities 16,729
- -------------------------------------------------------------------------------------------------------
Total liabilities 1,476,221
- -------------------------------------------------------------------------------------------------------
Stockholders' Deficiency (Notes 1, 2 and 3)
Preferred stock - $.001 par value; authorized 5,000,000 shares
none issued
Common stock - $.001 par value; authorized 50,000,000 shares
issued and outstanding 15,298,505 shares 15,299
Additional paid-in capital 4,776,342
Deficit accumulated during the development stage (4,918,135)
Cumulative foreign currency translation adjustments 47,277
- -------------------------------------------------------------------------------------------------------
Stockholders' Deficiency (79,217)
- -------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 1,397,004
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
F-11
<PAGE>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
Unaudited
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Period from Nine-month
April 1, 1996 Period ended Cumulative amounts
(date of incorporation) April 30,1998 from inception
to April 30,1997
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Revenue $ 24,072 $ 415,345 $ 462,662
- --------------------------------------------------------------------------------------------------------------------------------
Expenses
Cost of consulting services 10,078 141,899 153,170
Cost of software transformation services 172,895 304,536 497,265
Software development 131,683 329,806 548,018
General and administrative 533,969 1,565,388 2,439,813
Noncash consulting costs 1,536,341 1,536,341
- --------------------------------------------------------------------------------------------------------------------------------
Total Expenses 2,384,966 2,341,630 5,174,607
- --------------------------------------------------------------------------------------------------------------------------------
Loss from operations (2,360,894) (1,926,285) (4,711,945)
Interest income (expense), net 1,974 (207,314) (206,190)
- --------------------------------------------------------------------------------------------------------------------------------
Net loss $ (2,358,920) $ (2,133,599) $ (4,918,135)
- --------------------------------------------------------------------------------------------------------------------------------
Net loss per common share $ (0.24) $ (0.15)
- --------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 9,697,753 14,187,071
- --------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
F-12
<PAGE>
<TABLE>
<CAPTION>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIENCY
- ------------------------------------------------------------------------------------------------------------------------------------
Nine month period ended April 30, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated
Additional During the
Common Stock Paid-in Development
Shares Amount Capital Stage
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at July 31, 1997 12,169,282 $ 12,169 $ 3,358,020 $ (2,784,536)
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of common
stock for cash (Note 2) 3,129,223 $ 3,130 $ 970,108
Recognition of beneficial
conversion feature of
convertible debt $ 348,214
Issuance of warrants
to purchase common stock $ 100,000
Net loss $ (2,133,599)
Cumulative foreign currency
translation adjustment
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at April 30, 1998 15,298,505 $ 15,299 $ 4,776,342 $ (4,918,135)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------
--------------------------------------
Foreign Stock-
Currency holders'
Translation Equity
Adjustments (Deficiency)
- -----------------------------------------------------------------------------
<S> <C> <C>
Balance at July 31, 1997 $ 22,855 $ 608,508
- --------------------------------------------------------------------------
Issuance of common
stock for cash (Note 2) $ 973,238
Recognition of beneficial
conversion feature of
convertible debt $ 348,214
Issuance of warrants
to purchase common stock $ 100,000
Net loss (2,133,599)
Cumulative foreign currency $ 24,422 24,422
translation adjustment
- --------------------------------------------------------------------------
Balance at April 30, 1998 $ 47,277 $(79,217)
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
See notes to financial statements
F-13
<PAGE>
TRANSFORMATION PROCESSING INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
Unaudited
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Period from Nine-month
April 1, 1996 Period ended
(date of incorporation) April 30, 1998
to April 30, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss from development stage operations $ (2,358,920) $ (2,133,599)
Adjustments to reconcile net loss from development stage operations
to net cash used in operating activities
Depreciation and amortization 147,093 173,522
Amortization of beneficial conversion feature of convertible debt 0 161,905
Issuance of options to purchase common stock for services 27,588 0
Issuance of common stock for services in Reverse Acquisition 1,549,056 0
Changes in operating assets and liabilities:
Increase in accounts receivable (39,492) (216,585)
(Increase) decrease in time deposits (23,368) 23,736
(Increase) decrease in prepaid expenses and other current assets (5,395) (1,577)
(Increase) decrease in other assets (5,797) 0
Increase in accounts payable 12,438 341,865
Increase in settlement liability 0 88,526
Decrease in due to related party 0 0
Increase in accrued expenses and other current liabilities 0 42,101
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (696,797) (1,520,106)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (117,807) (89,308)
Purchase of intangible assets (24,156) 0
Advances to related parties (105,036) 0
- -----------------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (246,999) (89,308)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Debt issue costs 0 (85,000)
Proceeds from loan - bank 73,158 50,978
Repayments of loan payable - bank (7,803) (30,059)
Repayments of notes payable - stockholders 0 (67,810)
Proceeds from issuance of common stock 1,118,636 1,003,045
Proceeds from issuance of convertible debenture 0 1,000,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,183,991 1,871,154
- -----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (19,361) (3,965)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash 220,834 257,775
Cash at beginning of period 0 16,431
- -----------------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 220,834 $ 274,206
===================================================================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 0 $ 4,582
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------
Cumulative
amounts
from inception
- ---------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net loss from development stage operations $(4,918,135)
Adjustments to reconcile net loss from development stage operations
to net cash used in operating activities
Depreciation and amortization 368,944
Amortization of beneficial conversion feature of convertible debt 161,905
Issuance of options to purchase common stock for services 27,195
Issuance of common stock for services in Reverse Acquisition 1,527,017
Changes in operating assets and liabilities:
Increase in accounts receivable (223,543)
(Increase) decrease in time deposits 0
(Increase) decrease in prepaid expenses and other current asset (5,104)
(Increase) decrease in other assets 0
Increase in accounts payable 373,568
Increase in settlement liability 89,823
Decrease in due to related party 0
Increase in accrued expenses and other current liabilities 134,010
- ---------------------------------------------------------------------------------------------
Net cash used in operating activities (2,464,318)
- ---------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (214,041)
Purchase of intangible assets (24,156)
Advances to related parties (129,621)
- ---------------------------------------------------------------------------------------------
Cash used in investing activities (367,818)
- ---------------------------------------------------------------------------------------------
Cash flows from financing activities:
Debt issue costs (85,000)
Proceeds from loan - bank 124,136
Repayments of loan payable - bank (45,113)
Repayments of notes payable - stockholders (142,734)
Proceeds from issuance of common stock 2,243,154
Proceeds from issuance of convertible debenture 1,000,000
- ---------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,094,443
- ---------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 11,899
- ---------------------------------------------------------------------------------------------
Net increase in cash 274,206
Cash at beginning of period
- ---------------------------------------------------------------------------------------------
Cash at end of period $ 274,206
=============================================================================================
Supplemental Disclosure of Cash Flow Information:
cash paid during the period for interest $ 7,001
- ---------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
F-14
<PAGE>
TRANSFORMATION PROCESSING INC.
NOTES TO FINANCIAL STATEMENTS
(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.
2. STOCKHOLDERS' EQUITY
The company issued shares of common stock for cash, net of expenses,
as follows:
<TABLE>
<CAPTION>
Common Stock Additional Paid-in Capital Stockholders' 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
</TABLE>
F-15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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.
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 to 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 to 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.
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 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 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
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<PAGE>
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 year 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.
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 of each consecutive month until
fully paid.
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SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRANSFORMATION PROCESSING INC.
------------------------------
(Registrant)
Date: October 22, 1998 By: /s/ Paul G. Mighton
-------------------------------------
Paul G. Mighton, Chief Executive Officer
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
EXHIBITS
*3.1 Articles of Incorporation of Samuel Hamann Graphix, Inc. (Nevada) as
amended.
*3.2 Articles of Merger between Samuel Hamann Graphix, Inc. (Nevada) and
Samuel Hamann Graphix, Inc. (California).
*3.3 By-laws of Transformation Processing Inc. (Nevada).
*3.4 Articles of Merger between of TPI (Ontario) and TPI (Nevada).
*10.1 Employment Agreement between TPI and Gary McCann dated January 1,
1997.
*10.2 Employment Agreement between TPI and John McGee dated January 1, 1997.
*10.3 Employment Agreement between TPI and Paul G. Mighton dated January 1,
1997.
* Previously filed with Amendment No. 1 on August 28, 1998.
<PAGE>
*10.4 Employment Agreement between TPI and Vladimir Stepanoff dated
January 1, 1997.
*10.5 Letter Agreement dated September 29, 1997 as amended January 6,
1998 between Douglas Woolridge and TPI.
*10.6 Real Estate Lease Agreement dated October 1, 1996 between TPI and Royal
Trust Corporation of Canada, and Landlord's release of Security
Interest.
*10.7 Form of Software Conversion Agreement.
*10.8 Form of Professional Services Agreement.
*10.9 Form of Deployment Products License Agreement.
*10.10 Form of Software License Agreement.
*10.11 Business Partner Agreement between Lotus Development Corporation
and TPI.
*10.12 Bill of Sale and Assignment of Copyright, dated July 17, 1996 between
CyberPlan Enrg. and TPI as amended as of March 10, 1998.
*10.13 Referral Program Agreement dated November 18, 1997 between Y2K Plus
and TPI.
*10.14 Referral Program Agreement dated November 1, 1997 between MCW
Business Systems Ltd. and TPI.
*10.15 Teaming Agreement dated April 21, 1997 between SHL Systemhouse Inc.
and TPI.
*10.16 Software License Agreement, Value Added Reseller Agreement and
addendum dated April 23, 1997 between IntellAgent Control Corporation
and TPI.
*10.17 Professional Services Subcontract Agreement dated May 15, 1997 between
GE IT Solutions/Universal Data Consultants and TPI.
*10.18 Settlement Agreement and Release, among Ronald A. Content, Raconix
Corporation, Raconix Europe Limited and TPI each dated June 16, 1997.
*10.19 Demand Promissory Notes dated July 31, 1997, payable to TPI made by
Gary G. McCann, Paul Mighton and Vladimir Stepanoff.
*10.20 Customer Agreements and Small Business Loan Registrations, between
the Bank of Nova Scotia and TPI pertaining to purchase money bank
loans and Financing Change Statement and Verification Statement.
*10.21 Guarantees of Bank loans, dated January 30, 1997 and November 27,
1997 by Gary G. McCann, Paul Mighton, Vladimir Stepanoff and John
McGee in favor of the Bank of Nova Scotia.
*10.22 Program Product License Agreement, dated October 21, 1997, between
Allegient Legacy Solutions, Inc. and TPI.
*21.1 Subsidiaries of the Registrant.
* Previously filed with Amendment No. 1 on August 28, 1998.
