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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1998
Commission file number 0-23903
TRANSFORMATION PROCESSING INC.
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(Name of small business issuer in its charter)
Nevada 95-4583945
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5500 Explorer Drive, Suite 2000, Mississauga, Ontario L4W 5C7
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (905) 206-1366
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Shares,
$.001 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. /X/
The issuer's net sales for its most recent fiscal year were $877,198.
The aggregate market value of the 12,493,865 shares of voting stock held
by non-affiliates of the Registrant, as of November 11, 1998 when the closing
sale price was $.30 per share, was $3,748,160 (assuming solely for purposes
of this calculation that all directors, officers and greater than 5%
stockholders of the Registrant are "affiliates").
The number of shares outstanding of the issuer's common stock, par value
$.001 per share, as of November 11, 1998, was 18,100,915*. Documents
Incorporated by Reference: Not Applicable.
* See "Note 13" of the "Notes to the Financial Statements."
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Exhibit Index is located on page 34
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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
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
interest in TPI-Ontario. The Company then acquired the software marketing
rights and recorded them at the fair value of the shares of Common Stock and
notes issued to unrelated third parties, in order to obtain those 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 the 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 publically 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
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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.
This Form 10-KSB 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.
BUSINESS OF THE COMPANY
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 2010.
The Company believes that most corporate information still resides on
closed legacy
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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 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 lacking any
degree of certainty of achieving 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
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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.
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
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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.
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
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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, 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 toolsets to mainframe customers.
The Company has identified several such software tools and is assessing their
viability.
MARKETING AND SALES. The following factors will assist the Company 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
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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.
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. 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 the 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 three sales persons who are
employees and report to the Company's Director of 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
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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 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 toolset 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
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used to refine the assessment phase of a project plan.
Mobile Lab/2000-SM entails 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 network or established as an
independent group, using the customer's newly acquired or 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.
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
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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 position itself as a
provider of Year 2000 remediation services over the next 14 months so as to
take advantage of what the Company deems to be a significant opportunity to
attain accelerated growth, ordinarily 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. Year 2000 services will continue to be provided well past the
year 2000. 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.
MARKETING AND SALES. The Company intends to implement substantially the
same marketing and sales plan described under the caption "CLIENT/SERVER
MIGRATION SERVICES - MARKETING AND SALES" 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
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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 use 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 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.
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 for GROUPWARE SERVICES as is described under the
caption "CLIENT/SERVER MIGRATION SERVICES - MARKETING AND SALES". 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.
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BACKLOG
Since the Company is primarily a provider of services, it does not deem
purchase order backlog to be material to its operations.
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 provided by the Company, but rather 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
obsolescence 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
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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.
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 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 three 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. DESCRIPTION OF PROPERTY
The Company currently leases approximately 14,652 square feet of office
and production space (the "Leased Premises") in Mississauga, Ontario under a
lease expiring on October 30, 2000 at an annual rental of approximately
$144,000 which includes real estate taxes, utility and operating costs
allocable to the Leased Premises.
The Company leases approximately 5,477 square feet of office and production
space (the "Leased Premises") in Mississauga, Ontario which it has vacated and
is seeking to sublet. The lease expires 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 had the right to terminate the lease at any time after the 36th month
(October 1, 1999) of the original term by giving the landlord at least nine
months' prior written notice and paying the landlord approximately $18,000,
however, the Company vacated the Leased Premises prior to the end of 36 months.
ITEM 3: LEGAL PROCEEDINGS
The Company is not currently subject to any legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the OTCBB under the symbol "TPII".
The following table sets forth, the high and low bid prices of the Common Stock
for the periods shown as reported by the National Quotation Bureau. The bid
prices quoted on the OTCBB reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not represent actual transactions.
High Bid Low Bid
-------- -------
FISCAL YEAR ENDED JULY 31, 1997
First Quarter (August 21, 1996 to October 31, 1996) $4.78 2.63
Second Quarter (November 1, 1996 to January 31, 1997) 3.19 0.56
Third Quarter (February 1, 1997 to April 30, 1997) 1.06 0.63
Fourth Quarter (May 1, 1997 to July 31, 1997) 1.22 0.69
FISCAL YEAR ENDED JULY 31, 1998
First Quarter (August 1, 1997 to October 31, 1997) 0.75 0.30
Second Quarter (November 1, 1997 to January 31, 1998) 0.75 0.38
Third Quarter (February 1, 1998 to April 30, 1998) 2.19 0.28
Fourth Quarter (May 1, 1998 to July 31, 1998) 1.75 0.75
FISCAL YEAR ENDED JULY 31, 1999
First Quarter (August 1, 1998 to October 31, 1998) 0.78 0.22
Second Quarter (November 1, 1998 to November 11, 1998) 0.43 0.30
On October 29, 1998, there were approximately 144 holders of record of
Common Stock.
Since the Company's inception it has not paid any dividends on its Common
Stock and does not anticipate paying such dividends in the foreseeable future.
The Company intends to retain earnings, if any, to finance its operations.
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
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contained in this Form 10-KSB.
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.
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.
On the Closing Date, SHGI issued 1,888,000 shares of Common Stock to
certain consultants in consideration for certain services rendered in
connection with the reverse acquisition. 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
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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. These shares were issued in reliance on the exemption from
registration provided by Rule 504 of Regulation D under the Act.
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
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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 977,778 shares of Common Stock
to Thomson Kernaghan in consideration for gross proceeds of $225,000 ($.23 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 $99,629 ($.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
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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 Livingstone 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 Livingstone Asset Management
("Livingstone") was issued like warrants to purchase 12,000 shares at $1.50 and
48,245 shares at $.456. From May 14, 1998 through October 26, 1998, the
aggregate principal amount of $1,000,000 plus interest was converted into
1,935,223 shares of Common Stock as follows: Dominion and Canadian each
converted $275,000 plus interest of Debentures into 532,186 shares of Common
Stock, Fetu converted $250,000 plus interest into 483,806 shares of Common Stock
and Livingstone converted $200,000 plus interest into 387,045 shares of Common
Stock.
On May 21, 1998, the Registrant sold to Canadian 6% convertible debentures
due May 21, 2000 in the aggregate principal amount of $500,000. Warrants to
purchase 50,200 shares of Common Stock exercisable at the price of $1.99 through
May 21, 2000, were also issued to Canadian. The debentures and warrants were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act and Rule 506 of Regulation D. On October 27, 1998 and
October 29, 1998 an aggregate of $150,000 of debentures plus interest was
converted into 747,187 shares of Common Stock.
On July 10, 1998 the Registrant sold to each of Canadian and Advantage
(Bermuda) Fund 6% convertible debentures due July 9, 2000 in the amount of
$250,000 for an aggregate of $500,000. Warrants to purchase 34,153 shares of
Common Stock exercisable at the price of $1.464 through July 9, 2000, were also
issued to each of Canadian and Advantage (Bermuda) Fund. The debentures and
warrants were issued in reliance upon the exemption from registration provided
by Section 4(2) of the Act and Rule 506 of Regulation D.
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.
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ITEM 6. 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, 1998 and July 31, 1997
and the notes thereto all of which financial statements are included elsewhere
in this form 10-KSB.
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 July 31,
1997 (the "1997 Fiscal Period"). Operations actually commenced in October of
1996 when the Company moved into a permanent facility.
NET LOSSES
For the year ended July 31, 1998 ("Fiscal 1998"), the Company incurred a
net loss of $4,300,553. For the 1997 Fiscal Period the Company incurred a
net loss of $2,784,536. Cumulative losses from April 1, 1996 through July 31,
1998 (the "Development Period") were $7,085,089. 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 Fiscal 1998 and the 1997 Fiscal Period the Company's revenues were
$877,198 and $47,317, respectively. Cumulative revenue during the Development
Period was $924,515. During Fiscal 1998, 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 $96,492, or 11%, of gross
revenue during Fiscal 1998, as compared to $19,533, or 41%, for the 1997 Fiscal
Period.
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 Company has not offered each of its services for
a sufficient period of time to have such knowledge.
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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 which were expected to be expended
by users of information technology to remediate the problem, the Company
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. During Fiscal 1998,
approximately $385,967, or 44%, of the Company's revenues were derived from
Year 2000 services. 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 additional 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, marketing and sales
efforts.
For Fiscal 1998 and the 1997 Fiscal Period, cost of consulting services
accounted for $1,314,356 and $11,271, respectively. The cumulative cost of
consulting services for the Development Period accounted for $1,325,627, or 19%
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 has become more competitive as the result of channeling
human resources toward the Year 2000 problem, the Company has had to pay a
premium for skilled consultants and engineers. These consulting services have
been allocated to projects in which the Company has signed contracts.
Cost of software transformation services accounted for $1,107,208 and
$192,729 of total expenses for Fiscal 1998 and the 1997 Fiscal Period,
respectively. The cumulative cost of software transformation services for the
Development Period was $1,299,937 or 18% of total expenses. The Company added
approximately two people to this area during Fiscal 1998. Future growth will
depend on the volume of transformation services and year 2000 remediation
services being provided by the Company.
Software development costs accounted for $35,197 and $218,212 during Fiscal
1998 and the 1997 Fiscal Period, respectively. The cumulative amount of software
development costs incurred
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during the Development Period amounted to $253,409, or 4% of total expenses.
Software development costs decreased during Fiscal 1998 due to the Company's
shift in focus to the selling and reselling of completed products. 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 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 to
satisfy customer 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 $1,871,105 of expenses for
Fiscal 1998 compared to $874,425 for the 1997 Fiscal Period. The cumulative
amount of general and administrative expenses incurred during the Development
Period amounted to $2,745,530, or 38% 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. During Fiscal 1998, the
Company incurred 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.
During Fiscal 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.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its activities during the Development Period
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 was approximately
$1,300,000 at July 31, 1998, 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 July 31, 1998, the Company had a deficit accumulated during the
Development Period of $7,085,089, current assets of $589,930, total liabilities
of $1,699,649 and available cash of $150,687. During Fiscal 1998, the Company
issued convertible debentures with two private placement investors sponsored by
Thomson Kernaghan a registered broker dealer. The convertible debt will require
the issuance of common stock at date of conversion, not cash resources of the
Company. 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, 1998 and for the period then ended, have expressed substantial doubt as
to the Company's ability to continue as a going concern.
In addition, implementation of the Company's business plan requires 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 977,778 shares of Common Stock for $225,000 ($.23 a
share) and on January 26, 1998, an offering of 444,445 shares of Common Stock
for $99,629 ($.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 November 11, 1998 was $.30. The potential contingent
liability for such sales is $574,629, however, to the extent that the sale
price of the common Stock remains in excess of the offering prices set forth
above, there is no ascertainable liability to the Company.
-22-
<PAGE>
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.
ITEM 7. FINANCIAL STATEMENTS
The financial statements to be provided pursuant to this Item 7 begin
on page F-1 of this Report, following Part III hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, ages and respective positions of the Executive Officers and
Directors of the Company are as follows:
-23-
<PAGE>
Name Age Position
- ---- --- --------
Paul G. Mighton 45 Chairman of the Board of Directors and Chief
Executive Officer
Douglas Woolridge(1) 39 President and Chief Operating Officer
Gary G. McCann(2) 46 Executive President, Chief Financial
Officer, Secretary and Director
Vladimir Stepanoff 56 Vice President - Technology and Director
John G. McGee(3) 47 Vice President - Finance, Chief Financial
Officer and Director
- ---------------------
(1) Resigned in October 1998 as the Company's President and Chief Operating
Officer.
(2) Assumed the position of Chief Financial Officer in October 1998.
(3) Resigned in October 1998 as the Company's Vice President-Finance and Chief
Financial Officer and Director.
DIRECTORS AND EXECUTIVE OFFICERS
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
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 information technology
("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 Canadian company and a provider of data processing
services to health care organizations.
DOUGLAS WOOLRIDGE served as President and Chief Operating Officer of the
Company from September 1997 to October 1998. 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, as Chief Financial Officer since October 1998 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
-24-
<PAGE>
organization of TPI- Ontario. From July 1995 to February 1996, he served as
President and a director of the Canadian company 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 served as Vice President-Finance and Chief Financial Officer
of the Company from October 1996 until his resignation in October 1998 and a
director from July 1, 1998 until his resignation in October 1998. 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16 of the Exchange Act, the Company's Directors and
executive officers and beneficial owners of more than 10% of the Company's
common stock, par value $.001 ("Common Stock"), are required to file certain
reports, within specified time periods, indicating their holdings of and
transactions in the Common Stock and derivative securities. Based solely on a
review of such reports provided to the Company and written representations
from such persons regarding the necessity to file such reports, the Company
is not aware of any failures to file reports or report transactions in a
timely manner during the Company's fiscal year ended July 31, 1998.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the annual and long-term compensation for
the Company's Chief Executive Officer from August 7, 1996 (the date in which
TPI-Ontario merged into Samuel Hamann Graphix, Inc.) through the completion of
the fiscal year ended July 31, 1998. No other
-25-
<PAGE>
officer received reportable remuneration.
<TABLE>
<CAPTION>
Long Term Compensation
--------------------------------------
Annual Compensation Awards Payouts
----------------------------------- --------------------------- ---------
Long-Term
Other Restricted Securities Incentive All
Name of Individual Fiscal Annual Stock Underlying Plan Other
and Principal Position Year Salary($) Bonus($) Compensation($) Awards($) Options/SARs(#) Payouts($) Compensation($)
- ---------------------- ------ --------- -------- -------------- ---------- -------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul G. Mighton 1998 $110,000 -0- -0- -0- -0- -0- $ -
Chairman of the Board 1997 $ 79,264 -0- -0- -0- -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
-26-
<PAGE>
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 (prior to his resignation) that he will be paid an
annual salary of approximately $88,000.
Douglas Woolridge, the Company's President and Chief Operating Officer
(prior to his resignation), entered into an agreement with the Company pursuant
to which he received an annual salary of approximately $62,000.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Number of Percent of Total
Securities
Underlying Options/SARs Granted
Exercise
Name of Options/SARs to Employees or Base Expiration
Individual Granted In Fiscal Year Price($/Share) Date
- ---------- ------------ -------------- ------------- ----------
NONE
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Shares Options/SARs Options/SARs
Name of Acquired on Value at Fiscal Year End (#) at Fiscal Year End ($)
Individual Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---------------- ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
NONE
</TABLE>
1998 STOCK OPTION PLAN
The Company has established the 1998 Stock Option Plan (the "1998 Plan").
The 1998 Plan is intended to provide the employees and directors of the Company
with an added incentive to continue their services to the Company and to induce
them to exert their maximum efforts toward the Company's success. The 1998 Plan
provides for the grant of options to directors and employees (including
officers) of the Company to purchase up to an aggregate of twenty percent (20%)
of the number of shares of Common Stock in the capital of the Company issued and
outstanding from time to time less any shares of Common Stock reserved, set
aside and made available pursuant to the terms of the Company's employee share
purchase plan (the "Share Purchase Plan") and pursuant to any options for
services rendered to the Company. The number of shares of Common Stock subject
to options granted to any one person under the Plan, the Share Purchase Plan and
options for services rendered to the Company may not at any time exceed five
percent (5%) of the outstanding shares of Common Stock. The 1998 Plan is
currently administered by the Board of Directors. The Board determines, among
other things, the persons to be granted options under the
-27-
<PAGE>
1998 Plan, the number of shares subject to each option and the option price.
The 1998 Plan allows the Company to grant Non-Qualified Stock Options
("NQSOs") not intended to qualify under Section 422(b) of the Internal Revenue
Code of 1986, as amended (the "Code"). The exercise price of NQSO's may not be
less than the fair market value of the Common Stock on the date of grant.
Options may not have a term exceeding ten years. Options are not transferable,
except upon the death of the optionee.
Since the 1998 Plan's adoption, NQSO's to purchase 2,800,000 shares of
Common Stock were granted and 2,700,000 were canceled as of July 31, 1998.
On March 16, 1998, Paul G. Mighton was granted 900,000 options to purchase
900,000 shares of Common Stock exercisable at $.30 per share terminating on
March 15, 2008. All 900,000 options were canceled as of July 31, 1998.
On March 16, 1998, Gary McCann was granted 900,000 options to purchase
900,000 shares of Common Stock exercisable at $.30 per share terminating on
March 15, 2008. All 900,000 options were canceled as of July 31, 1998.
On March 16, 1998, John McGee was granted 900,000 options to purchase
900,000 shares of Common Stock exercisable at $.30 per share terminating on
March 15, 2008. All 900,000 options were canceled as of July 31, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 11, 1998, certain
information concerning those persons known to the Company, based on information
obtained from such persons, with respect to the beneficial ownership (as such
term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) of
shares of Common Stock, $.001 par value, of the Company by (i) each person known
by the Company to be the owner of more than 5% of the outstanding shares of
Common Stock, (ii) each director and executive officer of the Company and its
subsidiaries, (iii) each executive officer named in the Summary Compensation
Table and (iv) all directors and officers as a group:
Name and Address of Amount and Nature of
Beneficial Owner(1) Beneficial Ownership Percentage of Class (2)
- ------------------- -------------------- -----------------------
Joter Holdings 4,841,455(3) 26.7%
Diversified Technologies Ltd. 665,000(3) 3.7%
Vladimir Stepanoff 1,633,683(3) 9.0%
-28-
<PAGE>
Name and Address of Amount and Nature of
Beneficial Owner(1) Beneficial Ownership Percentage of Class (2)
- ------------------- -------------------- -----------------------
Paul G. Mighton 1,466,683(3) 8.1%
Gary G. McCann 1,526,684(3) 8.4%
John G. McGee 980,000(3) 5.4%
All Directors and Officers
as a Group (4 persons) 5,607,050(3) 31.0%
(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 November 11, 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. The address of each beneficial owner is in care of the
Company, Suite 2000, 5500 Explorer Drive, Mississauga, Ontario, Canada.
(2) Based on 18,100,915 shares of Common Stock outstanding at the close of
business on November 11, 1998. The Company's records and the records of its
transfer agent differ with respect to the number of outstanding shares of the
Company's Common Stock. According to the transfer agent, the number of shares
of Common Stock outstanding is approximately 603,000 shares greater than the
18,100,915 indicated by the Company's records. The Company believes that its
records are correct and is in the process of resolving this difference. The
number of shares outstanding used to calculate the above percentages does not
include these shares or any adjustment which might be necessary to resolve
this difference.
(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, and Vladimir Stepanoff, executive officers
and directors of the Company and John G. McGee, a former executive officer and
director of the Company: 1,325,433 shares, 1,385,434 shares, 1,392,433 shares,
and 738,155 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: 141,250 shares, 141,250 shares, 241,250 shares and 141,250 shares,
respectively.
ITEM 12. 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
DTL (Such shares were issued in exchange for shares of TPI-Ontario on August
20, 1996), 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 "Security
Ownership of Certain Beneficial Owners and Management."
-29-
<PAGE>
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 advances made to Messrs. Mighton and McCann were
subsequently written off by the Company and were accounted for as income.
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 $52,800. The loans bear interest at 2.5% over the
bank's prime rate in effect from time to time (currently 7.5% per annum). See
"Management's Discussion and Analysis or Plan of Operations -- Liquidity and
Capital Resources."
The officers of the Company have executed employment agreement with the
Company. See "Executive Compensation--Employment Contracts."
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
3.1 Articles of Incorporation of Samuel Hamann Graphix, Inc. (Nevada)
as amended.(1)
3.2 Articles of Merger between Samuel Hamann Graphix, Inc. (Nevada)
and Samuel Hamann Graphix, Inc. (California).(1)
3.3 By-laws of Transformation Processing Inc. (Nevada).(1)
3.4 Articles of Merger between of TPI (Ontario) and TPI (Nevada).(1)
10.1 Employment Agreement between TPI and Gary McCann dated January
1,1997.(1)
10.2 Employment Agreement between TPI and John McGee dated January 1,
1997.(1)
10.3 Employment Agreement between TPI and Paul G. Mighton dated
January 1,1997.(1)
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<PAGE>
10.4 Employment Agreement between TPI and Vladimir Stepanoff dated
January 1, 1997.(1)
10.5 Letter Agreement dated September 29, 1997 as amended January 6,
1998 between Douglas Woolridge and TPI.(1)
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.(1)
10.7 Form of Software Conversion Agreement.(1)
10.8 Form of Professional Services Agreement.(1)
10.9 Form of Deployment Products License Agreement.(1)
10.10 Form of Software License Agreement.(1)
10.11 Business Development Agreement between Lotus Development
Corporation and TPI.(1)
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.(1)
10.13 Referral Program Agreement dated November 18, 1997 between Y2K
Plus and TPI.(1)
10.14 Referral Program Agreement dated November 12, 1997 between MCW
Business Systems Ltd. and TPI.(1)
10.15 Teaming Agreement dated April 21, 1997 between SHL Systemhouse
Inc. and TPI.(1)
10.16 Software License Agreement, Value Added Reseller Agreement and
addendum dated April 23, 1997 between IntellAgent Control
Corporation and TPI.(1)
10.17 Professional Services Subcontract Agreement dated May 15, 1997
between GE IT Solutions/Universal Data Consultants and TPI.(1)
10.18 Settlement Agreement and Release, among Ronald A. Content,
Raconix Corporation, Raconix Europe Limited and TPI each dated
June 16, 1997.(1)
10.19 Demand Promissory Notes dated July 31, 1997, payable to TPI made
by Gary G. McCann, Paul Mighton and Vladimir Stepanoff.(1)
10.20 Customer Agreements and Small Business Loan Registrations,
between the Bank of Nova Scotia and TPI pertaining to purchase
money bank loans.(1)
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..(1)
10.22 Program Product License Agreement, dated October 21, 1997,
between Allegient Legacy Solutions, Inc. and TPI.(1)
*10.23 The Company's 1998 Stock Option Plan.
*10.24 Real Estate Sublease Agreement dated June 29, 1998, between TPI
and Origin Technology In Business Inc.
*21.1 Subsidiaries of the Registrant.
*27 Financial Data Schedule.
(1) Incorporated by reference from the Form 10-SB filed by the company on March
12, 1998
-31-
<PAGE>
and amended on August 31, 1998 and October 22, 1998.
* Filed herewith.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the last quarter of the fiscal
year ended July 31, 1998.
-32-
<PAGE>
TRANSFORMATION PROCESSING INC.
(a development stage company)
FINANCIAL STATEMENTS
JULY 31, 1998
<PAGE>
TRANSFORMATION PROCESSING INC.
(a development stage company)
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Independent Auditor's Report F - 2
Financial Statements:
Balance Sheet F - 3
Statement of Operations F - 4
Statement of Stockholders' Equity (Deficiency) F - 5
Statement of Cash Flows F - 6
Notes to Financial Statements F - 7 - F-16
</TABLE>
F-1
<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, 1998, and the related statements of
operations, stockholders' equity (deficiency), and cash flows for the period
from April 1, 1996 (date of incorporation) to July 31, 1997, the year ended July
31, 1998, and cumulative amounts from inception to July 31, 1998. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Transformation Processing Inc.
as of July 31, 1998, and the results of its operations and its cash flows for
the period from April 1, 1996 (date of incorporation) to July 31, 1997, the year
ended July 31, 1998, and cumulative amounts from inception to July 31, 1998, 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 11 to the
financial statements, the Company has had limited operations 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 11. 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 18, 1998, except for the last paragraph of Note 8,
as to which the date is October 31, 1998
F-2
<PAGE>
TRANSFORMATION PROCESSING INC.
(a development stage company)
BALANCE SHEET
- --------------------------------------------------------------------------------
July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash $ 150,687
Accounts receivable, net of allowance for doubtful accounts of $33,000 419,933
Due from related parties 14,595
Prepaid expenses and other current assets 4,715
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 589,930
Property and Equipment, net 182,894
Deferred Debt Cost, net 57,022
Other Assets 33,769
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $ 863,615
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accounts payable $ 350,890
Accrued expenses and other current liabilities 230,201
Current maturities of long-term debt 43,165
Note payable - stockholder 25,803
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 650,059
Long-term Debt, net of current maturities 1,049,590
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,699,649
- ----------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Deficiency:
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 16,186,628 shares 16,187
Additional paid-in capital 6,266,719
Deficit accumulated during the development stage (7,085,089)
Cumulative foreign currency translation adjustments (33,851)
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' deficiency (836,034)
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Deficiency $ 863,615
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</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 OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
April 1, 1996 Cumulative
(date of incorporation) Year ended amounts
to July 31, 1997 July 31, 1998 from inception
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue - consulting services $ 47,317 $ 877,198 $ 924,515
- --------------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of consulting services 11,271 1,314,356 1,325,627
Cost of software transformation services 192,729 1,107,208 1,299,937
Software development 218,212 35,197 253,409
General and administrative 874,425 1,871,105 2,745,530
Noncash consulting costs 1,536,341 - 1,536,341
- --------------------------------------------------------------------------------------------------------------------------------
2,832,978 4,327,866 7,160,844
- --------------------------------------------------------------------------------------------------------------------------------
Loss from operations (2,785,661) (3,450,668) (6,236,329)
Interest income (expense), net of interest income
of $9,749 in 1998 1,125 (849,885) (848,760)
- --------------------------------------------------------------------------------------------------------------------------------
Net loss $(2,784,536) $(4,300,553) $(7,085,089)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Basic net loss per common share $ (.27) $ (.30) -
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Weighted-average number of common shares
outstanding 10,161,665 14,542,313 -
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</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 STOCKHOLDERS' EQUITY (DEFICIENCY)
- --------------------------------------------------------------------------------
Period from April 1, 1996 (date of incorporation) to July 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated Foreign Stock-
Additional During the Currency holders'
Common Stock Paid-in Development Translation Equity
Shares Amount Capital Stage Adjustments (Deficiency)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders 5,901,050 $ 5,901 $ (5,901) - - -
Issuance of common
stock for cash 1,469,363 1,469 1,215,657 - - $ 1,217,126
Options to purchase
common stock issued
for services - - 27,362 - - 27,362
Issuance of common
stock in reverse acquisition 2,205,869 2,206 13,484 - - 15,690
Issuance of common
stock for services in
reverse acquisition 1,888,000 1,888 1,534,453 - - 1,536,341
Issuance of common
stock for intangible asset 705,000 705 572,965 - - 573,670
Net loss - - - $(2,784,536) - (2,784,536)
Cumulative foreign currency
translation adjustments - - - - $ 22,855 22,855
- ----------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1997 12,169,282 12,169 3,358,020 (2,784,536) 22,855 608,508
Issuance of common stock
for cash 3,109,223 3,110 1,003,336 - - 1,006,446
Issuance of common stock
upon conversion of convertible
debentures 908,123 908 706,387 - - 707,295
Recognition of beneficial
conversion feature of
convertible debentures - - 650,026 - - 650,026
Warrants to purchase common
stock issued with convertible
debentures - - 527,000 - - 527,000
Net loss - - - (4,300,553) - (4,300,553)
Cumulative foreign currency
translation adjustments - - - - (56,706) (56,706)
Options to purchase common
stock issued for services - - 21,950 - - 21,950
- ----------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1998 16,186,628 $16,187 $6,266,719 $(7,085,089) $(33,851) $ (836,034)
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
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)
STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
April 1, 1996 Cumulative
(date of incorporation) Year ended amounts
to July 31, 1997 July 31, 1998 from inception
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss from development stage operations $(2,784,536) $(4,300,553) $(7,085,089)
Adjustments to reconcile net loss from development
stage operations to net cash used in operating activities:
Depreciation and amortization 197,483 617,451 814,934
Issuance of options and warrants to purchase common
stock for services 27,588 181,317 208,905
Issuance of common stock for services in reverse
acquisition 1,549,056 - 1,549,056
Recognition of beneficial conversion feature - 631,281 631,281
Provision for doubtful accounts - 34,325 34,325
Write-off of amounts due from related parties - 96,020 96,020
Amortization of discounts - 187,793 187,793
Interest expense converted to stock - 7,085 7,085
Changes in operating assets and liabilities:
Increase in accounts receivable (3,705) (462,787) (466,492)
Increase (decrease) in time deposits (23,561) 22,600 (961)
Increase in prepaid expenses and other current assets (3,426) (4,639) (8,065)
Increase in deferred debt costs - (60,263) (60,263)
Increase in other assets (4,723) (26,411) (31,134)
Increase in accounts payable 26,116 347,053 373,169
Increase in accrued expenses and other current
liabilities 89,317 159,228 248,545
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (930,391) (2,570,500) (3,500,891)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (124,733) (122,601) (247,334)
Purchase of intangible assets (24,156) - (24,156)
Advances to related parties (129,621) - (129,621)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (278,510) (122,601) (401,111)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from loan payable - bank 73,158 50,160 123,318
Repayments of loan payable - bank (15,054) (49,312) (64,366)
Repayment of note payable - stockholder (74,924) (83,300) (158,224)
Net proceeds from issuance of common stock 1,240,109 987,484 2,227,593
Net proceeds from issuance of convertible debentures - 1,903,688 1,903,688
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,223,289 2,808,720 4,032,009
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 2,043 18,637 20,680
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash 16,431 134,256 150,687
Cash at beginning of period - 16,431 -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 16,431 $ 150,687 $ 150,687
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,419 $ 58,264 $ 60,683
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental schedule of noncash financing activity:
Conversion of long-term debt to common stock - $ 707,295 -
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes and independent auditor's report
should be read in conjunction with the financial statements
F-6
<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). 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 periods
ended July 31, 1997 and 1998, all operations of
the Company were conducted in Canada. At July 31,
1998, 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) was
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. At each
balance sheet date, the Company evaluates the
period of amortization of intangible assets. The
factors used in evaluating the period of
amortization include: (i) current operating
results; (ii) projected future operating results;
and (iii) any other material factors that affect
the continuity of the business. The Company has
elected to write off the unamortized balance of
the intangible asset (software marketing rights)
because future cash flows generated from this
asset cannot be determined at this time. The
impairment loss of approximately $372,000 is
included in the cost of transformation services in
the accompanying statement of operations for the
year ended July 31, 1998.
F-7
<PAGE>
TRANSFORMATION PROCESSING INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Costs associated with the issuance of the 6%
convertible debentures are being amortized on the
straight-line method over the term of the
debentures. Upon conversion, debt issue costs will
be charged to operations. For the year ended July
31, 1998, debt issue costs of $61,396 have been
charged to operations and included in interest
expense in the accompanying statement of
operations.
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.
Basic loss per share is based on the
weighted-average number of shares of common stock
outstanding during the periods. Fully diluted per
share amounts are not presented because the effect
would be antidilutive. The prior-year loss per
share was unaffected by the adoption of Statement
of Financial Accounting Standards ("SFAS") No.
128, Earnings Per Share.
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' deficiency.
Due to the nature of the Company, the
convertibility feature, interest rates and
repayment terms, the estimated fair value of the
Company's long-term debt approximates its carrying
amount.
2. PROPERTY AND Property and equipment, at cost, consists of the
EQUIPMENT: following:
<TABLE>
<CAPTION>
Estimated
Useful Life
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 21,267 5 years
Computer equipment 154,435 5 years
Furniture and fixtures 55,735 7 years
- ------------------------------------------------------------------------------------------------------
231,437
Less accumulated depreciation 48,543
- ------------------------------------------------------------------------------------------------------
$182,894
</TABLE>
F-8
<PAGE>
TRANSFORMATION PROCESSING INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
3. ACCRUED Accrued expenses and other current liabilities
EXPENSES AND consist of the following:
OTHER CURRENT Accrued professional fees $ 85,793
LIABILITIES: Settlement liability 33,082
Other (all amounts are less than 5% of current liabilities) 111,326
- ----------------------------------------------------------------------------------------------------------------------
$230,201
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
4. LONG-TERM DEBT: Long-term debt consists of the following:
Installment loans $ 53,086
6% convertible debentures 1,039,669
- ----------------------------------------------------------------------------------------------------------------------
1,092,755
Less current portion 43,165
- ----------------------------------------------------------------------------------------------------------------------
Long-term portion $1,049,590
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The effect of foreign currency translation
adjustments on the Company's long-term debt is
included in cumulative foreign currency
translation adjustments in stockholders' equity
(deficiency) in the accompanying financial
statements.
The Company is obligated under two installment
loans with a bank payable in monthly installments
aggregating $4,750 plus interest through February
1, 1999 and December 31, 1999. The loans bear
interest at the bank's prime rate (7.25% at July
31, 1998) plus 2.5%. The loans are collateralized
by substantially all of the Company's assets.
On April 14, 1998, the Company issued two $500,000
6% convertible debentures totaling $1,000,000 for
cash, due April 14, 2000. Of the $1,000,000
convertible debentures, $550,000 are convertible
into common stock at 70% of the five-day average
closing bid price immediately preceding the date
of conversion and $450,000 of the debentures are
convertible into common stock at 80% of the
five-day average closing ask price immediately
preceding the date of conversion. In May 1998,
$300,000 of 6% convertible debentures were
converted into 266,092 shares of common stock and
in July 1998 $400,000 of 6% convertible debentures
were converted into 642,031 shares of common
stock. In connection with the issuance of
debentures, the Company issued warrants to
purchase 301,228 shares of common stock. The fair
value of $251,000 allocated to the warrants is
being amortized over the term of the debentures.
For the year ended July 31, 1998, amortization of
$181,297 has been charged to operations and
included in interest expense in the accompanying
statement of operations. The unamortized portion
is shown as a reduction in the carrying value of
the debentures as of July 31, 1998.
F-9
<PAGE>
TRANSFORMATION PROCESSING INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On May 21, 1998, the Company issued two $250,000
6% convertible debentures totaling $500,000 for
cash, due May 21, 2000. These debentures are
convertible into common stock at 80% of the
five-day average closing ask price immediately
preceding the date of conversion. In connection
with the issuance of debentures, the Company
issued warrants to purchase 50,200 shares of
common stock. The fair value of $52,500
allocated to the warrants is being amortized
over the term of the debentures. For the year
ended July 31, 1998, amortization of $5,311
has been charged to operations and included in
interest expense in the accompanying statement
of operations. The unamortized portion is
shown as a reduction in the carrying value of
the debentures as of July 31, 1998.
On July 10, 1998, the Company issued two
$250,000 6% convertible debentures totaling
$500,000 for cash, due July 10, 2000. These
debentures are convertible into common stock at
80% of the five-day average closing ask price
immediately preceding the date of conversion.
In connection with the issuance of debentures,
the Company issued warrants to purchase 68,306
shares of common stock. The fair value of
$58,500 allocated to the warrants is being
amortized over the term of the debentures. For
the year ended July 31, 1998, amortization of
$1,183 has been charged to operations and
included in interest expense in the
accompanying statement of operations. The
unamortized portion is shown as a reduction in
the carrying value of the debentures as of July
31, 1998.
On the date of issuance of each convertible
debenture, including the convertible debenture
issued and converted in August 1997, the
Company allocated a portion of the proceeds to
the beneficial conversion feature of the
debenture which represented the intrinsic value
of that feature. That amount is calculated as
the difference between the conversion price and
the fair value of the common stock into which
the debentures are convertible, multiplied by
the number of shares into which the debentures
are convertible. The amount attributable to the
beneficial conversion feature, aggregating
$650,026, is included in interest expense in
the accompanying statement of operations as the
debentures became convertible into common stock
on issuance.
Each debenture provides the holder with certain
registration rights that require the Company to
register the common shares underlying each
convertible debenture within 90 days following the
closing date of the issuance. As of July 31, 1998,
the Company was not in compliance with this
requirement. If the common shares are not
registered, the Company shall pay the debenture
holders damages in the amount of 2% of the amount
of outstanding debentures every 30 days. The
amount of damages accrued and charged to
operations at July 31, 1998 was estimated to be
$6,000.
The fair value of each warrant is estimated on the
date of issuance using the Black-Scholes
option-pricing model with the following
weighted-average assumptions used for the year
ended July 31, 1998: expected volatility of
1.93%; risk-free interest rate of 5.6%; and
expected lives of two years.
F-10
<PAGE>
TRANSFORMATION PROCESSING INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Aggregate maturities of long-term debt are as
follows:
<TABLE>
<CAPTION>
Year ending July 31,
<S> <C> <C>
1999 $ 43,165
2000 1,049,590
- --------------------------------------------------------------------------------
$1,092,755
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
5. RELATED PARTY Amounts due from related parties represent
TRANSACTIONS: advances made to an officer. This loan was
noninterest-bearing through July 31, 1997 but
bears interest at 4% per annum subsequent to July
31, 1997.
The Company acquired the software marketing rights
in exchange for 705,000 shares of common stock and
notes payable. The rights were valued at the fair
value of the shares of common stock ($.81 per
common share) and notes payable at the date of
issue. See Note 1 of notes to the financial
statements for impairment loss.
6. NOTE PAYABLE - Note payable - stockholder consists of a
STOCKHOLDER: noninterest-bearing note payable in monthly
installments of $5,639 through December 1, 1998.
7. COMMITMENTS The Company is obligated under noncancelable
AND operating leases for office space expiring
CONTINGENCIES: at various times through September 30, 2001.
Approximate minimum future payments under
these leases are payable as follows:
<TABLE>
<CAPTION>
Year ending July 31,
<S> <C> <C>
1999 $166,000
2000 166,000
2001 57,000
2002 3,000
- --------------------------------------------------------------------------------
$392,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The leases are subject to escalation for the
Company's proportionate share of increases in real
estate taxes and other operating expenses. Rent
expense for the period ended July 31, 1997 and the
year ended July 31, 1998 amounted to $37,522 and
$33,378, respectively.
The Company entered into an agreement with an
entity whereby the entity will provide the Company
with public and investor relations services. Under
the terms of the agreement, the Company will issue
150,000 shares of common stock of the Company as
compensation for services. At July 31, 1998, those
services had not yet been provided.
F-11
<PAGE>
TRANSFORMATION PROCESSING INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. STOCKHOLDERS' The Company is authorized to issue 5,000,000
EQUITY shares of preferred stock with rights and
(DEFICIENCY): preferences to be determined by the Company's
board of directors. As of July 31, 1998, no shares
of preferred stock have 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
- -----------------------------------------------------------------------------------------
Period ended
July 31, 1997 1,469,363 1,469 1,215,657 1,217,126
- -----------------------------------------------------------------------------------------
August 28, 1997 198,000 198 108,105 108,303
September 4, 1997 589,000 589 123,481 124,070
September 26, 1997 400,000 400 199,044 199,444
October 23, 1997 400,000 400 199,600 200,000
October 31, 1997 100,000 100 49,900 50,000
December 10, 1997 977,778 978 224,022 225,000
January 26, 1998 444,445 445 99,184 99,629
- -----------------------------------------------------------------------------------------
Year ended
July 31, 1998 3,109,223 3,110 1,003,336 1,006,446
- -----------------------------------------------------------------------------------------
4,578,586 $4,579 $2,218,993 $2,223,572
=========================================================================================
</TABLE>
On April 1, 1996, the Company issued
5,901,050 shares of common stock to its
founders for certain technology and
services, which were valued at a nominal
amount.
On August 20, 1996, the Company issued
2,205,869 shares of common stock to the
stockholders of Samuel Hamann Graphix,
Inc. in a transaction accounted for as a
reverse acquisition.
As part of the reverse acquisition the
Company issued 1,888,000 shares of
common stock to certain consultants for
services. These shares have been valued
at the fair value at the date of
issuance ($.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 conducting an
audit of issued and outstanding shares
of common stock. The Company is auditing
records received from prior management
F-12
<PAGE>
TRANSFORMATION PROCESSING INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 and had
outstanding stop transfer instructions as of
October 31, 1998 concerning approximately
1,055,000 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
remain in effect until the holders of the shares
of common stock are able to satisfy the Company's
concerns and/or demonstrate that the current
holders are holders in due course at which time
the stop orders are lifted on an individual basis.
9. STOCK OPTIONS AND The Company has outstanding warrants
STOCK WARRANTS: permitting the holders to purchase
shares of its common stock at prices
ranging from $.46 to $1.99 per share.
The warrants have varying expiration
dates to July 10, 2000. Warrants to
purchase 1,019,734 common shares were
outstanding at July 31, 1998. During the
year ended July 31, 1998, warrants to
purchase 419,734 common shares were
issued at prices ranging from $.46 to
$1.99 per share. In addition, during the
year ended July 31, 1998, warrants to
purchase 500,000 shares of common stock,
which were to expire, were extended. The
extended warrants provide for exercise
prices ranging from $.50 to $.80 per
share. The warrants were determined to
have a fair market value of
approximately $165,000, which was
charged to operations during the year
ended July 31, 1998.
During the year ended July 31, 1998, the Company
adopted an incentive stock option plan under which
options to purchase shares of common stock may be
granted to certain key employees. The exercise
price is based on the fair market value of such
shares as determined by the board of directors at
the date of the grant of such options. At July 31,
1998, options to purchase 100,000 shares of common
stock at an exercise price of $.50 per share are
outstanding and are exercisable through March 25,
2008.
F-13
<PAGE>
TRANSFORMATION PROCESSING INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of the status of the Company's options as of July 31, 1998 is
presented below:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Shares Price
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Granted 100,000 $.50
Canceled - -
Exercised - -
- --------------------------------------------------------------------------------------------
Outstanding at end of year 100,000 $.50
============================================================================================
Options exercisable at year-end 100,000 $.50
============================================================================================
Weighted-average fair value of options
granted during the year $.44 -
============================================================================================
</TABLE>
The following table summarizes information about fixed stock
options outstanding at July 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------- -------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.50 100,000 9.8 $.50 100,000 $.50
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has elected to apply
Accounting Principles Board Opinion No.
25 and related interpretations in
accounting for its stock options and has
adopted the disclosure-only provisions
of SFAS No. 123. Had the Company elected
to recognize compensation cost based on
the fair value of the options granted at
the grant date as prescribed by SFAS No.
123, the Company's net loss and loss per
common share would have been as follows:
<TABLE>
<CAPTION>
<S> <C>
Net loss - as reported $(4,300,553)
======================================================================================================================
Net loss - pro forma $(4,321,869)
======================================================================================================================
Loss per share - as reported $ (.30)
======================================================================================================================
Loss per share - pro forma $ (.30)
======================================================================================================================
</TABLE>
F-14
<PAGE>
TRANSFORMATION PROCESSING INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In March 1998, the Company issued options to three
employees to purchase 2,700,000 shares of common
stock at an exercise price of $.30 per share.
Those options were canceled as of July 31, 1998
and their fair value is not included in the pro
forma net loss and net loss per share information
presented above.
The fair value of each option grant is estimated
on the date of grant using the Black-Scholes
option-pricing model with the following
weighted-average assumptions used for the year
ended July 31, 1998: expected volatility of 1.93%;
risk-free interest rate of 5.7%; expected lives of
10 years; and no payment of dividends expected.
10. 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 $2,000,000. In recognition
of the uncertainty regarding the
ultimate amount of income tax benefits
to be derived, the Company has recorded
a valuation allowance of $2,000,000 at
July 31, 1998.
The Company has a net operating loss carryforward
of approximately $4,000,000 available to offset
taxable income through the year 2013.
11. GOING CONCERN: The Company is in the development
stage, has a limited operating history, has not
generated significant revenue from its planned
principal operations through July 31, 1998, has a
working capital deficiency and has a deficit
accumulated during the development stage at July
31, 1998.
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, 1999, 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, 1999 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.
12. SUBSEQUENT EVENTS: In August 1998, $50,000 of 6%
convertible debentures, due April 14, 2000, were
converted into 108,898 shares of common stock.
In September 1998, $125,000 of 6% convertible
debentures, due April 14, 2000, were converted
into 324,148 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 977,778 shares of common stock for
$225,000; and on January 26, 1998, an offering of
444,445 shares of common stock for $99,629. These
offerings were made
F-15
<PAGE>
TRANSFORMATION PROCESSING INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 $1,000,000 in any one-year period.
The Company intends to file a
registration statement offering
rescission to the purchasers of these
offerings.
13. ADDITIONAL INFORMATION: The Company's records and the records of its
transfer agent differ with respect to the
number of outstanding shares of the Company's
common stock. According to the transfer agent,
the number of shares of common stock
outstanding is approximately 603,000 shares
greater than the 16,186,628 indicated by the
Company's records. The Company believes that
its records are correct and is in the process
of resolving this difference. The number of
shares outstanding reflected in the Company's
financial statements does not include these
shares or any adjustment which might be
necessary to resolve this difference.
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: November 12, 1998 TRANSFORMATION PROCESSING INC.
By: /s/Gary G. McCann By: /s/ Paul G. Mighton
---------------------- ----------------------
Gary G. McCann Paul G. Mighton,
Chief Financial Officer and Chief Executive Officer
Accounting Officer
In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
/s/ Paul G. Mighton Chairman of the Board of Directors November 12, 1998
- - -------------------- and Chief Executive Officer
Paul G. Mighton (Principal Executive Officer)
/s/ Gary G. McCann Executive President, Chief Financial November 12, 1998
- --------------------- Officer, Secretary And Director
Gary G. McCann (Principal Financial Officer)
/s/ Vladimir Stepanoff Vice President-Technology November 12, 1998
- ---------------------- And Director
Vladimir Stepanoff
<PAGE>
EXHIBIT INDEX
Exhibit No. Name
- ----------- ----
10.23 1998 Stock Option Plan.
10.24 Real Estate Sublease Agreement dated June 29, 1998,
between TPI and Origin Technology In Business Inc.
21.1 Subsidiaries of the Registrant.
27 Financial Data Schedule
<PAGE>
Exhibit 10.23
TPI STOCK OPTION PLAN
1998
Transformation Processing Inc. (the "Company") hereby establishes a
directors', senior officers' and key employees' stock option plan (the "Plan")
for the senior officers, directors and key employees of the Company and its
affiliates.
1. PURPOSE OF THE PLAN
The purpose of the Plan is to develop the interest of certain key
employees` senior officers and directors of the Company and its affiliates in
the growth and development of the Company and its affiliates by providing them
with the opportunity through the granting of share options, to require an
increased proprietary interest in the Company.
2. IMPLEMENTATION
The Plan will be implemented in accordance with the terms hereof and will
be structured to comply with the rules of The Securities Act (Ontario).
3. ADMINISTRATION
The Plan will be administered by the board of directors of the Company (the
"Board") or, in the Board's discretion, by a compensation committee (the
"Committee") appointed by the Board and consisting of not less than two (2)
members of the Board. Subject to the provisions of the Plan, the Board or the
Committee is authorized, in its sole discretion to make such determinations
under and such interpretations of and take such steps and actions in connection
with the proper administration of the Plan and such rules and regulations
concerning the granting of the connection with the proper administration of the
Plan and such rules and regulations concerning the granting of the options
pursuant to the Plan as it may deem necessary or advisable. No member of the
Board or of the Committee will be liable for any action or determination taken
or made in good faith with respect to the Plan or any options granted under it.
Any determination approved by a majority of the Board or of the Committee will
be deemed to be a determination of that matter by the Board or the Committee, as
the case may be. Members of the Board or the Committee may be granted options
under than Plan.
4. NUMBER OF SHARES DEDICATED TO THE PLAN
Common Shares in the capital of the Company (the "Shares") shall be
reserved, set aside and made available to the Board or Committee for the
granting of options to eligible senior officers, directors and key employees of
the Company and its affiliates up to an aggregate of twenty percent (20%) of the
number of Common Shares in the capital of the Company issued and outstanding
from time to time less any Shares reserved, set aside and made available
pursuant to the terms of the Company's employee share purchase plan (the "Share
Purchase Plan") and pursuant to any options for services rendered to the
Company. All options granted under the Plan will conform to all applicable
provisions prescribed by the Plan and to such specific terms and conditions as
may be determined by the Board or the committee at the time of making each
grant. Shares reserved for issuance for which an option is granted under the
Plan but not exercised prior to the termination of such option, whether through
surrender, termination, lapse or otherwise, shall be available for options
thereafter granted by the Board or the Committee under the Plan. All Common
Shares issued pursuant to the exercise of the options granted under the Plan
will be issued as fully paid and non-assessable shares.
<PAGE>
5. ELIGIBILITY
The person who will be eligible to be granted options pursuant to the Plan
(Participants") will be such senior officers, directors and part-time or
full-time salaried employees of the Company or its affiliates as the Board or
Committee shall determine are in key positions (including officers, whether or
not they are directors) in the Company or its affiliates. In determining
options to be granted to Participants under the Plan, the Board or Committee
will give due consideration to the Value of each such employee's, officer's or
director's present and potential contribution to the Company's success or to the
success of any affiliate of the Company.
6. GRANTING OF OPTIONS
Subject to the provisions herein set forth and after review of
recommendations from time to time by management for the granting of options, the
Board or Committee shall, in its sole discretion, select the participants to
whom share options under the Plan shall be granted (the "Optionee"), fix the
number of Common Shares to be optioned to each, the dates on which such options
shall be granted and the terms and conditions, within the limits prescribed in
paragraph 7, attaching to each option.
7. TERMS AND CONDITIONS OF THE OPTIONS
The terms and conditions of each option granted under the Plan shall be set
forth in an Option Agreement between the Company and Optionee. Such Option
Agreement shall include the following terms and conditions:
(a) NUMBER OF COMMON SHARES - The Board or the Committee shall, in its
sole discretion, fix the aggregate number of Common Shares, which are
the subject of the option.
(b) OPTION PRICE - The Board or the Committee shall fix the option price
per Common Share which shall not be less than the market price per
Common Share at the time of the grant less the maximum discount then
permitted to be given by applicable law or by the rules and
regulations of the OTC - BB and any other stock exchange upon which
the Common Shares may be listed.
For the purposes of this subparagraph 7(b), "market price per Common
Share" at the time of grant means the closing price in US dollars on
the OTC - BB (or if not then traded on such exchange, the closing
market price on the over-the-counter market in Toronto) of the Common
Shares one trading day prior to the date the option is granted by the
Board or the Committee and if there be no sale on such trading day,
then the average of the closing bid and ask prices on such trading day
provided that if the Common Shares are not then traded on any public
market the Board in its sole discretion shall determine "market price
per Common Share" at the time of grant.
(c) PAYMENT - The full purchase price for the Common Shares purchased
under the option shall be paid for in cash upon the exercise thereof.
An Optionee who is not already a shareholder shall have none of the
rights of a shareholder of the Company until Common Shares issuable
pursuant to this option are issued to him/her.
(d) TERM OF OPTION - The Board or the Committee shall fix the term of the
option which shall not be for less than one (1) and not more than ten
(10) years from the date the option is granted subject always to
subparagraphs (e), (f) and (g) of this paragraph 7.
<PAGE>
(e) DEATH OF OPTIONEE - In the event of the death of the Optionee while in
the employment of the Company or an affiliate of the company prior to
the end of the term of the option, the Optionee's legal representative
may exercise the option to the extent that the Optionee was entitled
to do so at the date of his death at any time up to and including, but
not after, a date two (2) years following the date of death of the
Optionee, or prior to the close of business on the day of the expiry
of the term of the option, whichever is earlier.
(f) RESIGNATION OR DISCAHRGE FOR CAUSE OF OPTIONEE - In the event of the
resignation of the Optionee as an employee of the Company or an
affiliate of the Company, or the discharge for "cause" of the Optionee
as an employee of the Company or an affiliate of the Company during
the duration of the option, the option shall in all respects cease and
terminate. For the purposes of the Plan, the determination by the
Company that the Optionee was discharged for "cause" shall be binding
on the Optionee.
(g) OTHER TERMINATION OF OPTIONEE - In the event of the termination of
employment of the Optionee with the Company or an affiliate of the
Company, other than as referred to in paragraphs (g) and (f) above,
the Optionee may exercise the option to the extent that he was
entitled to do so at the time of such termination of employment, at
any time up to and including, but not after, the effective date of
such termination of employment or prior to the close of business on
the day of the expiry of the term of the option, whichever is earlier.
(h) NON-TRANSFERABILITY OF OPTION - The options granted under the Plan may
not be assigned, encumbered or otherwise disposed of by the Optionee.
(i) EXERCISE OF OPTION - Subject to the provisions of the Plan, an option
granted under the Plan shall be exercised from time to time by the
Optionee, or in the event of death, by his legal representatives by
giving notice in writing addressed to the Company at its registered
office, to the attention of the Chief Financial Officer, specifying
the number of optioned shares in respect of which such notice is being
given, together with payment by cash or certified cheque in full of
the purchase price for the shares being purchased.
8. ADJUSTMENTS IN EVENT OF CHANGE IN STRUCTURE OF CAPITAL
Appropriate adjustments in the number of Common Shares optioned and in the
option price per Common Share, relating to options granted or to be granted,
shall be made by the Board or the Company resulting, subsequent to the approval
of the Plan by the shareholders of the Company, if required, from any
subdivisions, consolidations or reclassifications of the Shares of the Company,
or other relevant changes in the capital structure of the Company, or the
payment of stock dividends by the Company.
9. AMENDMENT OR DISCONTINUANCE OF PLAN
The Board may amend the Plan at any time or discontinue the Plan at any
time; provided, however, that no such amendment may increase the maximum number
of Common shares that may be optioned under the Plan, change the manner of
determining the option price, extend the term of option beyond ten (10) years
from the granting of any option, extend the period during which options may be
granted or, without the prior written consent of the Optionee, alter or impair
any option previously granted to an Optionee under the Plan
<PAGE>
10. LIMIT TO OPTION
The number of Common Shares subject to options granted to any one person
under the Plan, the Share Purchase Plan and options for services rendered to the
Company may not at any time exceed five percent (5%) of the outstanding Shares.
11. MISCELLANEOUS
I. NO RIGHTS AS A SHAREHOLDER
Nothing contained in the Plan nor in any option granted hereunder
shall be deemed to give any Optionee any interest or title in or to any
Shares of the Company or any rights as a shareholder of the Company or any
other legal or equitable right against the Company whatsoever other than as
set forth in the Plan and pursuant to the exercise of any option
II. EMPLOYMENT
Nothing contained in the Plan shall confer upon any Participant any
right with respect to employment or continuance of employment with the
Company or any affiliate, or interfere in any way with the right of the
Company or any affiliate to terminate such employment at any time.
Participation in the Plan by a Participant is voluntary.
III. RECORD KEEPING
The Company shall maintain a register in which shall be recorded:
(i) the name and address of each Participant; and
(ii) the number of options granted to a Participant and the number of
options outstanding.
IV. NECESSARY APPROVAL
The Plan shall be effective only by the approval of the Board of
Directors of the Company. The obligation of the Company to sell and
deliver Common Shares in accordance with the Plan is subject to the
approval of any governmental authority having jurisdiction or any stock
exchanges on which the Common Shares are listed for trading which may be
required in connection with the authorization, issuance or sale of such
Common Shares by the Company. If any Common Shares cannot be issued to any
Participant for any reason including, without limitation, the failure to
obtain such approval, then the obligation of the Company to issue such
Common Shares shall terminate and any Participant's contribution or option
price paid to the Company shall be returned to the Participant.
V. ADMINISTRATION OF THE PLAN
The Board or the Committee is authorized to interpret the Plan from
time to time and to adopt, amend and rescind rules and regulations for
carrying out such Plan. The interpretation and construction of any
provision of the Plan by the Board shall be final and conclusive.
Administration of the Plan shall be the responsibility of the appropriate
officers of the Company and all costs in respect thereof shall be paid by
the Company.
<PAGE>
VI. INCOME TAXES
As a condition of and prior to participation in the Plan, a
Participant shall authorized the Company in written form to withhold from
any remuneration otherwise payable to such Participant any amounts required
by any taxing authority to be withheld for taxes of any kind as a
consequence of such participation in the Plan.
VII. NO REPRESENTATION OR WARRANTY
The Company makes no representation or warranty as to the future
market value of any Common Shares issued in accordance with the provisions
of the Plan.
VIII. INTERPRETATION
The Plan will be governed by and construed in accordance with the laws
of the Province of Ontario.
IX. COMPLIANCE WITH APPLICABLE LAW, ETC.
If any provision of the Plan or any agreement entered into pursuant to
the Plan contravenes any law or any order, policy, by-law or regulation of
any regulatory body or stock exchange having authority over the Company or
the Plan, then such provision shall be deemed to be amended to the extent
required to bring such provision into compliance therewith.
X. EVIDENCE OF OPTIONS
Each option granted under the Plan shall be embodied in a written
option agreement substantially in the form of the option agreement annexed
as Schedule "A" between the Company and the Optionee which shall give
effect to the provisions of the Plan.
<PAGE>
Exhibit 10.24
SUBLEASE
THIS SUBLEASE made as of the 29th day of June, 1998.
BETWEEN:
ORIGIN TECHNOLOGY IN BUSINESS INC. (hereinafter call the "Sub-Landlord")
OF THE FIRST PART;
TRANSFORMATION PROCESSING INC. (hereinafter called the "Sub-Tenant")
OF THE SECOND PART
WHEREAS ORIGIN Technology in Business Inc. (the "Sub-Landlord") has entered into
a lease dated August 30, 1993, as amended by agreements dated October 20, 1993,
October 15, 1995 and November 1, 1995 with 5500 Explorer Ltd. (the "Landlord")
for premises on the 2nd Floor of the building at 5500 Explorer Drive,
Mississauga , Ontario (the "Building"), a copy of the lease and amending
agreements thereof(the "Head Lease") are attached hereto as Schedule "A",
AND WHEREAS THE Sub-Landlord has agreed with the Sub-Tenant to grant a Sublease
to the Sub-Tenant of those premises (the "Leased Premises") as hereafter set out
on the terms stated;
NOW THEREFORE this agreement witnesseth that in consideration of the respective
covenants, conditions, warranties and agreements hereinafter contained and for
good and valuable consideration (the receipt and sufficiency of which are hereby
acknowledged by the parties hereto), the Parties hereto covenant and agree as
follows:
LEASED PREMISES
The Leased Premises consist of the second floor of the Building, being an area
comprising approximately of 14,652 square feet of rentable area as illustrated
on the floor plan outlined on Schedule "B" and attached hereto which Leased
Premises the Sub-Landlord hereby leases to the Sub-Tenant The Sub-Tenant
acknowledges that it accepts the Leased Premises on an "as is" basis.
TERM
The Term of the Sub-Lease shall be for a period of two (2) years and four (4)
months (less one day), commencing July 1, 1998 (the "Commencement Date") and
terminating on October 30, 2000 (the "Termination Date"), which period is
hereinafter referred to as the "Term". This Sub-Lease will terminate immediately
on the Termination Date. There are no rights granted for any extension, and no
overholding rights to Sub-Tenant under this Sub-Lease, notwithstanding anything
to the contrary pursuant to the Head Lease.
<PAGE>
GROSS RENT
The Sub-Tenant shall pay to the Sub-Landlord in and for each year of the
Sub-Lease, Gross Rent of two hundred and nineteen thousand, seven hundred and
eighty Dollars ($219,780.00) per annum being a rate of $15.00 per square foot
per annum, plus Goods and Services Taxes and any other Sales Taxes (hereinafter
defined) of the rentable area set out in paragraph 1 above; payable by equal
monthly installments of $18,315.00 plus Goods and Services Taxes in advance on
the first day of each month of the term. The above amounts are subject to
increase by reason of the Realty Tax Adjustment.
"Realty Tax Adjustment" means the amount of increase for Realty and Business
taxes (collectively "Realty Taxes") relating to the Leased Premises as charged
to the Sub-Landlord from the Head Landlord in excess of the estimated per square
foot 1998 annual rate of $3.77. Such amounts in excess thereof are due to
Sub-Landlord should the Realty Taxes during the Term exceed this rate. Any
amount paid to Head Landlord by Sub-Landlord in excess of the $3.77 rate will be
due to Sub-Landlord, when Sub-Landlord pays such amount(s) to Head Landlord.
"Sales Taxes" means all goods and services taxes, sales taxes, value added
taxes, business transfer taxes, and any other taxes imposed on the Sub-Landlord
with respect to rent or any other charges payable by the Sub-Tenant to the
Sub-Landlord under this Sub-Lease. The Sub-Tenant will furthermore pay to the
Sub-Landlord all Sales Taxes. The Sub-Tenant will reimburse the Sub-Landlord
for all Sales Taxes at the full rate applicable from time to time, without
reference to any tax credits available to the Sub-Landlord. The amount of Sales
Taxes payable by the Sub-Tenant will be calculated by the Sub-Landlord in
accordance with the applicable legislation and will be paid to the Sub-Landlord
at the same time as the amounts in respect of which it is required to be paid
are paid. The amounts payable by the Sub-Tenant as Sales Taxes will be deemed
not to be rent, but the Sub-Landlord has all of the same rights in respect of
Sales Taxes as it has in respect of rent under this Sub-Lease.
Nothing in this Sub-Lease will suspend or delay the payment of any rent at the
time it is due and payable. The Sub-Tenant waives any rights it may have
(whether granted by applicable landlord and tenant legislation, and amendments
thereto, or otherwise) to claim any setoff of all or part of any debt of the
Sub-Landlord to the Sub-Tenant against rent. The Sub-Landlord may, at its
option, apply sums received against any amounts payable under this Sub-Lease in
any manner the Sub-Landlord chooses.
"Interest Rate" means the rate of interest equal to five (5) percent above
prime, being the prime rate of interest charged by The Bank of Nova Scotia at
the time of any rent being in arrears, and any such rent in arrears will bear
interest at the Interest Rate.
All amounts payable by the Sub-Tenant under this Sub-Lease are deemed to be
rent, except as otherwise expressly provided in this Sub-Lease. Every reference
in this Sub-Lease to "rent" is a reference to rent, and all other amounts
payable by the Sub-Tenant under this Sub-Lease, except
<PAGE>
as otherwise expressly provided in this Sub-Lease. Any payment required to be
made under this Sub-Lease will be made in lawful money of Canada to the
Sub-Landlord at the address set out or such other address as may be provided
pursuant to Section.
DEPOSIT AND RENT FREE PERIOD
The Sub-Landlord acknowledges the receipt of first and last month's rent of
thirty thousand one hundred and ninety four Dollars and ten cents ($39,194.10)
paid to LNR Corporation (in trust) (the said amount includes Goods & Services
Taxes). The first and last month's rental amounts will be subject to possible
increase under the Realty Taxes Adjustment. Notwithstanding the foregoing, the
Sub-Tenant shall be entitled to occupy the Leased Premises from the date of
execution of the Sub-Lease by both parties until July 31, 1998 on a rent free
basis, provided all other terms of this Sub-Lease are otherwise followed.
Additionally, on August 1, 1998, and amount equal to the monthly rent (including
GST) of $19,597.05 will be paid in advance, payable to LNR Corporation, in
trust, on account of the July 1999 monthly installment.
HEAD LEASE
The Sub-Tenant confirms that it has received and reviewed a copy of the Head
Lease. The Sub-Tenant agrees to be bound by all of the obligations of the Head
Lease, as if it were the tenant under the Head Lease, and to perform all of the
obligations of the Sub-Landlord as tenant under the Head Lease except for the
payment of rent and additional rent therein. The Sub-Landlord has all the
rights and remedies of the Head Landlord under the Head Lease in the manner and
on the terms under the Head lease, in the event of default by Sub-Tenant, and
can enforce those rights and remedies against the Sub-Tenant, as if the
Sub-Landlord were the landlord named in the Head Lease, and the Sub-Tenant were
the tenant named in the Head Lease, the necessary changes being made.
Accordingly, all landlord rights, in the event of default by Sub-Tenant,
including without limitation, the rights and terms at Article XI (Remedies of
Landlord on Tenant's Default) and Article XII (Events Terminating Lease) under
the Head Lease shall be available to Sub-Landlord and those provisions and terms
shall apply herein.
The Sub-Tenant will not do or cause or permit to be done anything which causes
the Head Lease or the rights of the Sub-Landlord as tenant under the Head Lease
to be endangered or terminated, or which causes the Sub-Landlord to be in
default under the Head Lease, or liable for any damage, claim or penalty under
the Head Lease.
The Sub-Tenant has no rights in any options to renew, or any similar rights or
options granted by the Head Landlord to the Sub-Landlord under the Head Lease.
The Sub-Tenant will sign an agreement in favour of the Head Landlord containing
the terms of this Section, should the Sub-Landlord request same.
I. Any installations or alterations are for Sub-Tenant's expense, and require
the prior written consent of the Sub-Landlord and Head Landlord pursuant to
the terms and conditions under the Head Lease.
II. Any directory signage in the Building Directory and corridor wall adjacent
to the elevators in the Building Lobby, shall be at the Sub-Tenant's
expense and subject to the standards, terms and conditions of the Head
Lease.
<PAGE>
USE OF PREMISES
It is agreed and understood that the Leased Premises shall be used as office
lawful business of office undertaking, and that this use or any other proposed
use of the Leased Premises shall be a use that is consistent with and in
accordance to the terms and conditions required by the Head Lease under Section
3.2 therof.
COVENANTS BY THE SUB-TENANT
The Sub-Tenant further covenants with the Sub-Landlord as follows:
To pay the Gross Rent and other amounts reserved under this Sub-Lease, unless
expressly to the contrary under this Sub-Lease, to perform and observe all
obligations, on the part of the Sub-Landlord under the provisions of the Head
Lease (including, without limitation, those provisions relating to
Sections3.2(c), (d), (e), (f), (g), 3.3, 3.4, 3.5, 3.6, 3.7, 4.1(tenant's
repairs), 5.3(i), 9.3 (tenant's insurance), and obligations on termination under
Articles XI and XII), other than the covenant to pay rent and additional rent
thereunder to the Head Landlord, and to keep the Sub-Landlord indemnified
against all actions, expenses, claims and demands in respect of such covenants
except as aforesaid. With respect to Sub-Landlord's rights, the Head Landlord
may be permitted by Sub-Landlord to exercise same, should circumstances warrant
including the rights to enter and examine the Lease Premises as provided under
the Head Lease; and to keep the Leased Premises clean and in good tenantable
repair at its expense, all in accordance with the provisions of the Head Lease;
not to mortgage, charge or otherwise encumber its interest in the Sub-Lease; and
to maintain and enforce during the term at its expense the tenants insurance
required under the Head Lease.
ASSIGNMENT AND SUBLETTING
The Sub-Tenant may sublet the Leased Premises or assign the Sub-Lease subject to
the Head Lease, at any time or times with the Sub-Landlord's written consent,
which consent shall not be unreasonably withheld. The provisions under the Head
Lease shall apply mutatis mutandis, with the Sub-Tenant following and being
subject to the terms contained therein.
COVENANTS OF THE SUB-LANDLORD
The Sub-Landlord covenants with the Sub-Tenant to maintain the Head Lease in
good standing by paying the rent and additional rent (including Realty Taxes)
under the Head Lease, during the term of this Sub-Lease, subject always to the
covenants of the Sub-Tenant. Any other costs incurred by Sub-Tenant in
connection with the occupation, use and carrying on business within the Lease
Premises are for Sub-Tenant's account and expense.
INDEMNITY AND RELEASE
The Sub-Tenant will indemnify and save harmless the Sub-Landlord, its officers,
directors and employees, against and from all losses, liabilities and damages,
fines, suits, claims, demands,
<PAGE>
costs and actions of every kind, whether sustained directly or indirectly, which
the Sub-Landlord, its officers, directors, employees, or any of them, are liable
for or suffer by reason of or in connection with any breach by the Sub-Tenant of
this Sub-Lease or the Head Lease, or by reason of any injury, death, damage or
accident suffered by any person or persons or any property by reason of or in
connection with the occupation or use of the Sub-Leased Premises, including,
without limitation, any act, omission, neglect or default on the part of the
Sub-Tenant or any of its agents, employees or other person or persons for whom
the Sub-Tenant is in law responsible. This agreement to indemnify and save
harmless will survive the expiration of the Term or the earlier termination of
this Sub-Lease.
The Sub-Landlord, its officers, directors and employees, will not be liable for,
and the Sub-Tenant releases the Sub-Landlord, its officers, directors and
employees from, all losses, liabilities, damages, fines, suits, claims, demands,
costs and actions of every kind in respect of: (a) any death or injury to the
Sub-Tenant or others arising out of or in connection with any occurrence in,
upon, at or relating to the Sub-Leased Premises; (b) any loss or damage to any
property of the Sub-Tenant from any cause whatsosever; (c) any loss or damage to
any property on the Sub-Leased Premises from any cause whatsoever; (d) any loss
or damage caused by anything done or not done by any person or persons on the
Sub-Leased Premises; or (e) any injury, loss or damage to the Sub-Tenant or
others arising out of the security services in force or the lack of security
services in or about the Sub-Leased Premises from time to time.
Under no circumstances will the Sub-Landlord, its officers, directors or
employees, be liable for indirect or consequential damage, or damages for
personal discomfort or illness.
DAMAGE AND DESTRUCTION
The provisions of the Head Lease with respect to damage and destruction apply to
this Sub-Lease, the necessary changes being made, except that the obligations of
the Head Landlord remain the obligation of the Head landlord, and the
obligations of the Sub-Landlord as tenant become the obligations of the
Sub-Tenant. The Sub-Landlord has no obligation to repair or reconstruct with
respect to damage and destruction of the Sub-Leased Premises. Any of the
Sub-Landlord's rights to terminate set out in the Head Lease remain with the
Sub-Landlord, and cannot be exercised by the Sub-Tenant.
WARRANTY OF THE SUB-LANDLORD
The sub-Landlord hereby represents and warrants that to its knowledge is in good
standing under the Head Lease and that it is not in default of any covenant or
obligation on its part to be performed thereunder or for which it has received
notice of default. The Sub-Landlord further represents and warrants that to its
knowledge the Landlord is not in default of any obligation under the Head Lease
and that it has not issued any notice of such default to the Landlord.
ENTIRE AGREEMENT
This Sub-Lease Agreement and the Schedules annexed hereto and forming part
hereof, contain
<PAGE>
all the representations, warranties, covenants, agreements, conditions and
understandings between the Parties concerning the Leased Premises and the office
of the Sub-Landlord and may not be changed or varied verbally, but only by an
agreement in writing and signed by both Parties.
GOVERNING LAW
This Agreement shall be construed and enforced in accordance with, and the
respective rights of the Parties shall be governed by, the laws applicable in
the Province of Ontario.
CONDITION PRECEDENT
This Sub-Lease is subject to the acceptance and approval of the Head Landlord
pursuant to the terms and conditions of the Head Lease. Acknowledgment of such
acceptance shall be the receipt by the Sub-Landlord of an executed Consent to
Sub-Lease of the Landlord.
TIME OF ESSENCE
Time shall be of the essence.
NOTICE
Any notice to be given under this Sub-Lease or under the terms and conditions of
the Head Lease shall be provided in writing to each party at the address set out
below, as modified by written notice of party changing such notice.
TRANSFORMATION PROCESSING INC. 5500 Explorer Dr. Ste.2000
"Sub-Tenant" Mississauga, ON L4W 5C7
ORIGIN TECHNOLOGY IN BUSINESS INC. 10 Carlson Court Ste.800
"Sub-Landlord" Etobicoke ON M9W 6L2
TELECOPYING
All parties agree that this Sub-Lease may be transmitted by Telecopying Device
and that the reproduction of signatures by way of this Telecopying Device will
be treated as though such reproductions were executed originals and each party
undertakes to provide the other with a copy of the Offer bearing original
signatures within a reasonable time after acceptance.
<PAGE>
IN WITNESS WHEREOF THE Parties hereto have executed this Sub-Lease as of
TRANSFORMATION PROCESSING INC.
/s/ Lisa Denis Per: /s/ Gary G. McCann July 8, 1998
- ---------------------- ----------------------- -----------------
Witness Authorized Official Date C/S
I have authority to bind the corporation.
ORIGIN TECHNOLOGY IN BUSINESS INC.
Tanya V. Per: Rob Moll July 17, 1998
- ---------------------- ----------------------- -----------------
Witness Authorized Official Date C/S
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF TRANSFORMATION PROCESSING INC.
Name State of Incorporation
---- ----------------------
None
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet and Statement of Operations filed as a part of the report on Form 10-KSB
for the year ended July 31, 1998 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 150,687
<SECURITIES> 0
<RECEIVABLES> 467,528
<ALLOWANCES> 33,000
<INVENTORY> 0
<CURRENT-ASSETS> 589,930
<PP&E> 182,894
<DEPRECIATION> 48,543
<TOTAL-ASSETS> 863,615
<CURRENT-LIABILITIES> 650,059
<BONDS> 1,049,590
0
0
<COMMON> 16,187
<OTHER-SE> (852,221)
<TOTAL-LIABILITY-AND-EQUITY> 863,615
<SALES> 0
<TOTAL-REVENUES> 877,198
<CGS> 0
<TOTAL-COSTS> 4,327,866
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 33,000
<INTEREST-EXPENSE> 849,885
<INCOME-PRETAX> (4,300,553)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,300,553)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,300,553)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.27)
</TABLE>
