<PAGE>
As filed with the Securities and Exchange Commission on December 11, 1998
Registration No. 333_____
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
Under the Securities Act of 1933
TRANSFORMATION PROCESSING INC.
(Name of Small Business Issuer in its Charter)
Nevada 7372 (95-4583945)
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification
Number)
5500 Explorer Drive, Suite 2000
Mississauga, Ontario L4W 5C7
(905) 206-1366
- --------------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Paul G. Mighton
5500 Explorer Drive, Suite 2000
Mississauga, Ontario L4W 5C7
(905) 206-1366
- --------------------------------------------------------------------------------
(Address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
Copies to:
Elliot H. Lutzker, Esq.
Snow Becker Krauss P.C.
605 Third Avenue
New York, N.Y. 10158-0125
Telephone (212) 687-3860
Telecopier (212) 949-7052
<PAGE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
Proposed Proposed
Title of Class of Maximum Maximum Amount of
Securities to be Amount to be Offering Price Aggregate Registration
Registered(4) Registered Per Unit (1) Offering Price(1) Fee
- ----------------- ------------- -------------- ------------------ ------------
<S> <C> <C> <C> <C>
Common Stock,
$.001 par value 500,000 shs.(2)(3) $ .50 $ 250,000 $ 69.50
Common Stock,
$.001 par value 100,000 shs.(2)(4) $1.50 $ 150,000 $ 41.70
Common Stock,
$.001 par value 444,445 shs.(5) $ .22(6) $ 97,778 $ 27.18
Common Stock,
$.001 par value 9,070,439 shs.(2)(7) $ .38(8) $3,446,767 $ 958.20
Common Stock,
$.001 par value 2,083,333 shs.(2)(9) $ .38(8) $ 791,667 $ 220.08
Common Stock,
$.001 par value 277,778 shs.(2)(10) $ .38(8) $ 105,556 $ 29.34
Common Stock,
$.001 par value 60,000 shs.(2)(11) $1.50 $ 90,000 $ 25.02
ii
<PAGE>
Common Stock,
$.001 par value 241,228 shs.(2)(12) $ .456 $ 110,000 $ 30.58
Common Stock,
$.001 par value 50,200 shs.(2)(13) $1.99 $ 99,898 $ 27.77
Common Stock,
$.001 par value 68,306 shs.(2)(14) $1.464 $ 99,998 $ 27.80
Common Stock,
$.001 par value 87,720shs.(2)(15) $ .456 $ 40,000 $ 11.12
Common Stock,
$.001 par value 55,556 shs.(2)(16) $ .36 $ 20,000 $ 5.56
Common Stock,
$.001 par value 101,010 shs.(2)(17) $ .396 $ 40,000 $ 11.14
Common Stock,
$.001 par value 100,000 shs.(2)(18) $ .50(19) $ 50,000 $ 13.90
Total: 13,240,015 shs. $5,391,664 $1,498.89
======
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457, promulgated under the Securities Act of 1933, as
amended (the "Act").
(2) Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares as may become issuable as a result of
anti-dilution adjustments in accordance with the terms of the Warrants,
Debentures and Options.
(3) Issuable upon exercise of warrants issued on August 23, 1996 ("1996
Warrants") to purchasers of Units, currently exercisable at $.50 per share.
(4) Issuable upon exercise of warrants issued on June 27, 1997 ("1997
Warrants") to purchasers of Units, currently exercisable at $1.50 per
share.
(5) Shares of Common Stock subject to the Rescission Offer which were issued on
January 26, 1998 for $.22 per share.
(6) Calculated in accordance with Rule 457(j) under the Act.
(7) Includes 2,682,410 shares issued upon conversion of $2,500,000 aggregate
principal amount of the Registrant's 6% Convertible Debentures (the
"Debentures") due April-November, 2000, plus shares issued for conversion
of interest and 5,588,029 shares issuable at a conversion price of $0.24
upon conversion of the Debentures, plus 800,000 shares issuable upon
conversion of interest.
iii
<PAGE>
(8) Pursuant to Rule 457(c) under the Act, the registration fee has been
calculated based upon the $.38 per share closing price of the Common Stock
on December 9, 1998, as reported by the National Quotation Bureau.
(9) Issuable upon the closing and conversion of $500,000 of Debentures
(described in Note 7) yet to be issued. The registrant committed to
selling up to an aggregate of $3,000,00 of Debentures, of which to date,
$2,500,000 of Debentures have been purchased. See "Recent Sale of
Unregistered Securities".
(10) Issuable upon exercise of warrants which are issuable upon the closing of
$500,000 of Debentures yet to be issued. See notes 7 and 9 above and
"Recent Sale of Unregistered Securities".
(11) Issuable upon exercise of warrants issued on April 14, 1998 to purchasers
of Debentures, exercisable at $1.50 per share.
(12) Issuable upon exercise of warrants issued on April 14, 1998 to purchasers
of Debentures, exercisable at $.456 per share.
(13) Issuable upon exercise of warrants issued on May 21, 1998 to purchasers of
Debentures, exercisable at $1.99 per share.
(14) Issuable upon exercise of warrants issued on July 10, 1998 to purchasers of
Debentures, exercisable at $1.238 per share.
(15) Issuable upon exercise of warrants issued on September 22, 1998 to
purchasers of Debentures, exercisable at $.456 per share.
(16) Issuable upon exercise of warrants issued on October 6, 1998 to purchasers
of Debentures, exercisable at $.36 per share.
(17) Issuable upon exercise of warrants issued on November 18, 1998 to
purchasers of Debentures, exercisable at $.396 per share.
(18) Issuable upon exercise of options granted on March 26, 1998, at an exercise
price of $.50.
(19) Calculated in accordance with Rule 457 (h)(1) under the Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
iv
<PAGE>
The information in this Prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED DECEMBER 11, 1998
TRANSFORMATION PROCESSING INC.
13,240,015 Shares of Common Stock, $.001 par value,
-----------------------
We have been advised that 444,445 shares of Common Stock of
Transformation Processing Inc. which were sold on January 26, 1998 were sold
without having filed a registration statement which may have been required.
Accordingly, those people who purchased those shares may have the right to
rescind those purchases. Our liability, if any, under the Securities Act of
1933, as amended (the "Securities Act") for the sale of those shares, as well
as other shares sold within the last three years, may not be limited by this
rescission offer. We offer to each purchaser of those shares the right to
rescind this purchase upon the terms and conditions as set forth below. See
"The Rescission Offer." The rescission offer will expire on ________, 1999,
unless we extend it.
We do not make any recommendation about whether those purchasers should
accept or reject the rescission offer. Acceptance or rejection of this offer
may not terminate a purchaser's right to bring a civil action against the
Company for its prior failure to register the Common Stock, as the case may be,
under federal, applicable state securities and Canadian laws.
This Prospectus also registers up to 11,995,570 shares of Common Stock
of the Company that may be sold by certain selling stockholders named herein,
consisting of: (i) up to 500,000 shares issuable upon exercise of warrants
issued pursuant to a securities subscription agreement dated August 23, 1996
(the "1996 Warrants"); (ii) 2,682,410 shares issued upon the conversion of
$2,500,000 aggregate principal amount of 6% convertible debentures (the "1998
Debentures") sold in 1998 plus accrued interest, and an additional 5,588,029
shares issuable upon conversion of additional 1998 Debentures currently
outstanding plus 800,000 shares issuable upon conversion of interest due
thereon; (iii) up to 100,000 shares issuable upon exercise of warrants issued
pursuant to a securities subscription agreement dated June 27, 1997 (the
"1997 Warrants"); (iv) up to 664,020 shares issuable upon exercise of
warrants issued to the holders of the 1998 Debentures (the "1998 Warrants");
(v) 100,000 shares issuable upon exercise of options granted on March 26,
1998 (the "Options") and (vi) up to 2,083,333 shares issuable upon conversion
of $500,000 aggregate principal amount of 6% convertible debentures ("1999
Debentures") not yet issued and up to 277,778 shares issuable upon exercise
of warrants to be issued to the holders of the 1999 Debentures.
This stock may be offered from time to time by the holders of this Common
Stock through ordinary brokerage transactions in the over-the-counter market, in
negotiated transactions or
<PAGE>
otherwise, at market prices prevailing at the time of sale or at negotiated
prices. We will not receive any of the proceeds from the sale of Common Stock,
but we will receive proceeds from the exercise of the Warrants and Options.
The Common Stock is quoted on the Over-The-Counter Electronic Bulletin
Board ("OTCBB") under the symbol TPII. On December 9, 1998, the last reported
bid and asked prices per share of Common Stock on the OTCBB were $.34 and
$.38 per share, respectively.
THE DATE OF THIS PROSPECTUS IS ___________, 1998.
2
<PAGE>
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD ONLY BE
PURCHASED BY THOSE WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN RISKS OF AN
INVESTMENT IN THE COMMON STOCK.
------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS 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.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus. It is
not complete and may not contain all of the information that you should consider
before investing in the Common Stock. To understand this offering fully you
should read the entire prospectus carefully, including the risk factors and
financial statements.
THE COMPANY
Transformation Processing, Inc. 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. We have expanded our operations
from providing legacy code migration services to three lines of business;
client/server migration, year 2000 and groupware services. We are 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.
Transformation Processing, Inc. was formed in Ontario, Canada in 1996 by
Paul A. Mighton, Gary A. McCann and Vladimir Stepanoff. The purpose of the
company was to provide computer services to others using copyrighted software
technology developed by Mr. Stepanoff. All three individuals were equal owners
of the company. Later in 1996, Transformation Processing, Inc. was merged into
a Nevada corporation, Samuel Hamann Graphix, Inc. Under the merger, Messrs.
Mighton, McCann and Stepanoff obtained a majority of the shares of Samuel Hamann
Graphix, Inc. and Transformation Processing, Inc. became a wholly-owned
subsidiary of Samuel Hamann Graphix. Then, in 1997, Samuel Hamann Graphix
changed its name to Transformation Processing, Inc. and the subsidiary was
merged into it. See "Business."
Our executive offices are located at 5500 Explorer Drive, Suite 2000,
Mississauga, Ontario, Canada L4W 5C7; and its telephone number is (905)
206-1366.
THE OFFERING
COMMON STOCK OFFERED 13,240,015 shares
RISK FACTORS: This Offering involves a high
degree of risk. See "Risk
Factors."
OTCBB COMMON STOCK SYMBOL TPII
NUMBER OF SHARES OF COMMON STOCK OUT-
STANDING BEFORE THE OFFERING 17,960,915 Shares(1)
4
<PAGE>
NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING AFTER GIVING EFFECT
TO THE EXERCISE OF WARRANTS AND
THE CONVERSION OF DEBENTURES AS
PART OF THIS OFFERING(2) 25,612,964 Shares
USE OF PROCEEDS TPI will not receive any proceeds
from the sale of Common Stock in
the offering, but will receive
$949,898 from the exercise of all
Warrants and Options.
- ----------------
(1) As of December 10, 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
then the 17,960,915 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 reflected in this Prospectus
does not include these shares or any adjustment which might be necessary to
resolve this difference.
(2) This includes: (i) 500,000 shares issuable upon exercise of the 1996
Warrants; (ii) 5,588,029 shares issuable upon conversion of the 1998
Debentures plus 800,000 shares issuable upon conversion of interest thereon;
(iii) 100,000 shares issuable upon exercise of the 1997 Warrants; and (iv)
664,020 shares issuable upon exercise of Warrants issued to 1998 Debenture
holders.
THE RESCISSION OFFER
COMMON STOCK SUBJECT TO THE
RESCISSION OFFER 444,445
EXPIRATION DATE OF THE RESCISSION OFFER
Reason for the Rescission Offer
The shares of Common Stock sold on January 26, 1998 were issued without
having been registered under the Securities Act. The failure to register the
shares may have violated certain federal and state securities laws.
This Rescission Offer is not an admission that the Company did not comply
with applicable federal and state securities laws nor is it a waiver of any
applicable statute of limitation. See "Rescission Offer."
5
<PAGE>
SUMMARY OF FINANCIAL INFORMATION
The summary consolidated financial information set forth below is derived
from and should be read in conjunction with the Company's consolidated financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
PERIOD FROM APRIL 1, 1996 FISCAL YEAR PERIOD FROM
(DATE OF INCORPORATION) ENDED APRIL 1, 1996
TO JULY 31, 1997 JULY 31, 1998 TO JULY 31, 1998
---------------- ------------- ----------------
Revenues $47,317 $877,198 $924,515
Operating Loss (2,785,661) (3,450,668) (6,236,329)
Net Loss (2,784,536) (4,300,553) (7,085,089)
Net Loss per Share
Common Stock (.27) (.30) -
Shares of Common Stock
Used In Computing Net
Loss per Share 10,161,665 14,542,313 -
BALANCE SHEET DATA:
AS OF AS OF
JULY 31, 1997 JULY 31, 1998
------------- -------------
Working Capital Deficiency $ (62,261) $ (60,129)
Total Liabilities 285,870 1,699,649
Accumulated Deficit (2,784,536) (7,085,089)
Total Stockholders' Equity (Deficiency) 608,508 (836,034)
6
<PAGE>
RISK FACTORS
The securities being offered are speculative and involve a high degree of
risk. Accordingly, you should carefully consider the following factors, among
others, relating to an investment in the Company.
POSSIBLE VIOLATION OF SECURITIES LAWS; RESCISSION OFFER. As discussed
under "Certain Transactions," we completed a number of private placements
during 1997 and 1998 in which we raised a total of approximately $4.1 million
with a written commitment for an additional $500,000. The securities sold in
these placements did not have a registration statement on file with the SEC.
The federal securities laws require registration of securities unless an
appropriate exemption from the registration requirements of those laws is
available. If an exemption did not exist for the sale of securities in these
private placements, we may have violated the registration requirements. If
so, purchasers could seek rescission of their purchase and recover money paid
for the securities. We make no admission of any violation of federal
securities laws and no investor has sought rescission of any purchase.
However, we intend to make a rescission offer ("the Rescission Offer") to the
private placement investors by means of this Prospectus. Should purchasers
in the private placements accept the Rescission Offer, we would need to pay
those investors up to approximately $100,000 (plus interest and other costs).
If these purchasers do not accept the Rescission Offer, or if we are unable to
effectuate the Rescission Offer, these purchasers as well as others in the
private placements could institute a lawsuit against us alleging violations
of United States securities laws and we could be forced to pay to these
investors as well as other investors in the private placement up to
approximately $570,000 (plus interest and other costs).
ABSENCE OF HISTORICAL PROFITABILITY; FUTURE OPERATING RESULTS. We
selected July 31st as our fiscal year end date. As of July 31, 1998, we
have not had a year end profit. Since we will continue to have a high level
of operating expenses, and significantly higher costs of being a publicly
owned company, and will be required to make significant up-front expenditures
in connection with the proposed expansion of our operations, our future
profitability will depend upon corresponding increases in revenues from
operations which are not expected to occur before late 1999, if at all.
NEED FOR ADDITIONAL FINANCING. We will be required to seek additional
financing in order to continue our operations. We expect to seek additional
financing, including either debt or equity offerings, in the future.
LACK OF WRITTEN CONTRACTS WITH RESELLERS AND END USERS. We often provide
services to large organizations. In such circumstances, contracts with
resellers and end users sometimes change as the projects are underway. Certain
other strategic relationships which we have, are not pursuant to written
contracts and are subject to termination virtually at will. These factors can
adversely affect not only the business relationship, but also the success of a
project and our ultimate success.
PRODUCT MIX; PRICE CUTTING; PROFIT MARGINS. Technology, in particular
software, must continually be state-of-the-art. It may become necessary for us
to re-package, re-work and develop new facets to our software. In addition, we
may be forced to significantly adjust pricing in order
7
<PAGE>
to compete. These factors may combine to have a material adverse effect on the
Company's profit margins.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. Our success is dependent upon our
confidential and proprietary software technology and other proprietary rights.
We do not currently have any patents or pending patent applications and rely
mainly on a combination of: (i) trade secret, copyright and trademark laws; (ii)
nondisclosure, use restriction and other contractual restrictions and
agreements; and (iii) certain technical measures to protect our technology.
Because patent applications are not publicly disclosed until the relevant patent
is issued, applications may have been filed by third parties, which, if issued
as patents, could relate to our current services and products or as we may
modify them in the future to meet the market's requirements.
Our policy is to enter into confidentiality, technology ownership and/or
license agreements, as applicable, with our technical software programming
employees as well as with distributors and customers, and to limit access to and
distribution of our software, documentation and other proprietary information.
In addition, we do not license or release our source code, except in connection
with source code escrow arrangements and applicable source code use
restrictions. Trade secret, copyright and trademark laws provide limited
protection. There can be no assurance that these laws, together with the steps
we have taken to protect our proprietary rights, will be adequate to prevent
misappropriation of our technology or other proprietary rights. Also, such
protections do not preclude competitors from independently developing products
with functionality or features similar, substantially equivalent or superior to
our products and technologies. In addition, effective protection of copyrights,
trade secrets, trademarks, and other proprietary rights may be unavailable or
limited in certain foreign countries. There can be no assurance that licenses
for any intellectual property that might be required in connection with our
development of services or products, either to avoid infringement of a third
party's product, patent or other rights or to enhance our product offering,
would be available on commercially reasonable terms, if at all. Any failure by
or inability by us to protect our proprietary technology or to obtain
appropriate licenses could have a material adverse effect on our business,
operating results and financial condition. See "Business - Licensing and
Intellectual Property."
COMPETITION. The market in which we operate is competitive, rapidly
evolving and subject to continuous technological change. There can be no
assurance that we can maintain or enhance our competitive position against
current and future competitors. Significant factors, such as the emergence of
new products, fundamental changes in computing technology and data storage and
manipulation platforms and applications and aggressive pricing and marketing
strategies by our competitors, may affect our competitive position. Many of our
current and potential competitors have longer operating histories, greater name
recognition, larger installed customer bases and substantially greater
financial, technical and marketing resources than us. There can be no assurance
that our current and potential competitors will not develop software products
that may be or may be perceived to be more effective or responsive to
technological change than our current or future products or that our
technologies and products will not be rendered obsolete by such developments.
Increased competition could result in price reductions, reduced margins or loss
of market share, any
8
<PAGE>
of which could have a material adverse effect on our business, operating results
and financial condition. There can be no assurance that we will be able to
compete successfully against current and future competitors, or that competitive
pressures we face will not have a material adverse effect on our business,
operating results and financial condition. See "Business - Competition."
NO CASH DIVIDENDS ON COMMON STOCK. We have never declared or paid any
cash dividends on our shares of Common Stock. We intend to utilize our
earnings, if any, to expand our business . Accordingly, we have no intention
of declaring or paying cash dividends on our Common Stock for the foreseeable
future. See "Dividend Policy."
FORWARD-LOOKING STATEMENTS. All statements other than statements of
historical fact included in this Prospectus, including without limitation
statements under "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," regarding our
financial position, business strategy and the plans and objectives of our
management for future operations, are forward-looking statements. When used
in this Prospectus, words such as "anticipate," "believe," "estimate,"
"expect," "intend" and similar expressions, as they relate to our management,
identify forward-looking statements. Such forward-looking statements based on
the beliefs of our management, as well as assumptions made by and information
currently available to the our management. Actual results could differ
materially from those contemplated by the forward-looking statements as a
result of certain factors, such as those disclosed under "Risk Factors,"
including but not limited to, fluctuations in future operating results,
technological changes or difficulties, management of future growth, expansion
of international operations, the risk of errors or failures in our software
products, dependence on proprietary technology, competitive factors, risks
associated with potential acquisitions, the ability to recruit personnel, the
dependence on key personnel, control of us by our present stockholder,
absence of a public market and management's discretion in the application of
the offering proceeds. Such statements reflect our current views with
respect to future events and are subject to these and other risks,
uncertainties and assumptions relating to our operations, results of
operations, growth strategy and liquidity. All subsequent written and oral
forward-looking statements attributable to us or persons acting on its behalf
are expressly qualified in their entirety by this paragraph.
RISK OF ERRORS OR FAILURES IN SOFTWARE PRODUCTS. The nature of software is
inherently complex. Therefore there is a real possibility of errors, failures
or bugs in software. Our products may contain errors, failures or bugs. There
are a wide variety of computers and third party software that makes pre-testing
for errors, failures and bugs very difficult, time-consuming and expensive.
Errors, failures or bugs in our products could result in adverse publicity,
product returns, loss of or delay in market acceptance of our products or claims
by the customer or others against us.
RAPID TECHNOLOGICAL CHANGE; NEW VERSIONS AND NEW PRODUCTS. The software
markets in which we compete are characterized by rapid technological change,
frequent introductions of new products and product enhancements, changes in
customer demands and evolving industry standards. The introduction of products
embodying new technologies and the emergence of new industry standards and
practices can render existing products obsolete and unmarketable. For example,
our
9
<PAGE>
customers use a wide variety of hardware, software, database and networking
platforms and applications. As a result, to gain broad market acceptance, we
must continue to support and maintain our products on a variety of such
platforms and applications, and extend our product offerings to new
platforms, networks and applications. The development of new versions of
existing products that are compatible with different operating systems and
environments, the Internet, different database systems, and other
applications entails significant technical risk. Our future success will
depend on our ability to address the changing needs of our customers by
developing and introducing enhancements to our products and new products on a
timely basis that keep pace with technological developments, evolving
industry standards and practices. The success of our products may also
depend, in part, on our ability to introduce products which are compatible
with the Internet and the World Wide Web. If release dates of future product
enhancements or new products are delayed or if these products or enhancements
fail to achieve market acceptance when released, our business, operating
results and financial condition could be adversely affected.
DEPENDENCE UPON KEY PERSONNEL. Although we have an experienced and
professional executive team and technical staff in place, the loss of certain
members of management could have a material adverse effect on our business and
prospects. Our success is also dependent upon our ability to hire and retain
additional qualified technical, marketing and financial personnel.
CONTROL BY MANAGEMENT AND CURRENT SHAREHOLDERS. Prior to this Offering,
our officers owned approximately 4,607,050 of the Company's shares of Common
Stock, or 25.7% of the issued and outstanding shares of Common Stock.
Accordingly, our present Management should be able to control the Company, elect
all of our directors, increase the authorized capital, dissolve, merge or sell
all of the assets of the Company, and generally direct the affairs of the
Company following completion of this Offering.
POSSIBLE VOLATILITY OF COMMON STOCK PRICES. There is currently a limited
public market for our Common Stock. Although our securities trade on the OTCBB,
an investor would, in all likelihood, find it difficult to dispose of, or obtain
quotations for the price of the Common Shares. In addition, the market price
of our Common Stock may be significantly affected by various factors, including,
but not limited to, general economic conditions and conditions specific to the
computer software and computer related service industry, any future acquisitions
that we may make, and our financial condition. Moreover, the price of our
Common Stock may be affected by the significant number of shares of Common Stock
outstanding, and the shares underlying outstanding debentures, warrants and
options to purchase shares of our Common Stock.
SHARES ELIGIBLE FOR FUTURE SALES AND POTENTIAL FUTURE DILUTION.
Approximately 7,718,190 of the 17,960,915 (see page 5, note 1) shares of
Common Stock outstanding as of December 10, 1998 are "restricted securities"
which can only be sold by meeting certain requirements. Therefore, some of
these shares may be available for public sale. Moreover, there are 1,264,020
shares of Common Stock currently issuable upon exercise of warrants, 100,000
shares of Common Stock currently issuable upon exercise of options and
5,588,029 shares of Common Stock issuable upon conversion of debentures at a
conversion rate of $0.24 per share based upon a hypothetical 5 day
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average closing asked price of $.30. During the respective terms of such
securities the holders thereof may be able to purchase shares of Common Stock at
prices substantially below the then current market price of our Common Stock,
with a resultant dilution in the interests in the existing common stockholders.
We cannot predict the effect that sales made pursuant to this Prospectus or
otherwise may have on the then prevailing market price of our securities,
although sales of substantial amounts of shares by existing stockholders, or
even potential of such sales, may have an adverse effect on the trading price
and market for our securities.
In addition, the existence of this stock may effect our ability to raise
additional financings.
DISCLOSURE RELATING TO LOW-PRICED STOCKS. Our Common Stock is currently
traded on the Over-the-Counter Bulletin Board ("OTCBB"). This imposes certain
restrictions on any sale of our securities. Generally, a broker-dealer may not
arrange the sale of our Common Stock, unless it is an "established customer" and
an "accredited investor" (meaning, in general, institutions with more than $5
million in assets or individuals who either have a net worth of $1 million or an
annual income of at least $200,000 or $300,000 jointly with their spouse),
unless he has received a written consent to the purchase and has completed a
suitability evaluation. This could restrict stockholders' ability to sell these
shares.
In addition, our Common Stock is deemed "penny stock" under the federal
securities laws. This requires additional disclosures by any broker-dealer
making a sale in the stock. This could also restrict a stockholder's ability to
sell these shares.
YEAR 2000 PROBLEM. We are reviewing our internal computer programs and
systems to ensure that they will be Year 2000 compliant. We presently believe
that our computer systems will be Year 2000 compliant in a timely manner.
However, while the estimated cost of these efforts are not expected to be
material to our financial position or any year's results of operations, this can
not be assured. In addition, we cannot predict the effect of the Year 2000
problem on the vendors, customers and other entities with which we transact
business, or with whose products our products interact and there can be no
assurance that the effect of the Year 2000 problem on such entities will not
have a material adverse effect on our business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
For all of these reasons, and others set forth below, any purchase of these
securities involves a high degree of risk. You should carefully read and
consider all of the information in this document before making a decision to
purchase. Any purchaser of these securities should be in a position to lose his
investment without significant financial harm.
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THE RESCISSION OFFER
BACKGROUND
On January 26, 1998, the Company sold 444,445 shares of Common Stock
(the "Rescission Securities") to purchasers in a private offering (the
"Rescission Offerees"). The Rescission Securities were sold to the
Rescission Offerees in order to provide the Company with working capital.
The Rescission Securities, as well as other shares sold, were not registered
under the 1933 Act or the securities laws of any state, therefore, the
Rescission Offerees, as well as other purchasers may have the right under the
1933 Act and applicable state securities laws to rescind their purchases of
the Rescission Securities to the extent an exemption from registration was
not available. The Company estimates that if all Rescission Offerees accept
the Rescission Offer, the Company would pay approximately $100,000, exclusive
of interest, to repurchase all of the Rescission Securities. In the event
that all Rescission Offerees and/or other purchasers, tender their shares,
the Company will seek financing either through conducting a private placement
of securities or through some type of leveraged financing secured by the
Company's fixed assets. There can be no assurance that the Company will be
successful in conducting a private placement of its securities or that it
will obtain other financing.
LEGAL RIGHTS OF RESCISSION OFFEREES AND
CONSEQUENCES OF ACCEPTANCE OR NON-ACCEPTANCE.
Under federal and state securities laws, the sale of securities, such as
the Rescission Securities, must either be registered or exempt from
registration. Absent the availability of an exemption from registration, the
sale of securities in an unregistered transaction is a violation of federal
and state securities laws; the purchaser's remedy for this violation is to
bring an action against the seller for rescission within the period specified
under the applicable statute of limitations. If successful, a purchaser
would receive the price paid for the security plus interest at the statutory
rate less any distributions made with respect to the security or, if the
purchaser previously sold the security, the purchaser would receive the price
paid for the security plus interest at the statutory rate less the proceeds
received upon sale. Under federal law, an action for rescission must be
brought within one year of the issuance of the shares in violation of the
registration provisions, but in no event more than three years after the
shares were offered to investors. State statutes of limitation vary.
The Company is making the Rescission Offer in an attempt to insulate the
Company from future civil liability for rescission. Under many state statutes,
the Rescission Offer, if carried out in compliance with the applicable statutes,
extinguishes civil liability for rescission, regardless of whether the
Rescission Offer is accepted.
To the extent claims are not time-barred, the Company may not be able to
insulate itself from liability under federal securities laws because the SEC has
taken the position that liability under federal law is not avoided because a
potentially liable person makes a registered rescission offer. Rescission
Offerees should be aware, however, that because the Company, pursuant to the
Rescission Offer, is unconditionally offering to Rescission Offerees exactly
what they could receive in an action for rescission, under relevant case law
there is authority that suggests that Rescission
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Offerees may be estopped from bringing any future claim for rescission. The
Company expects to defend any future action for rescission on this basis.
Alternatively, there is some authority that holds that Rescission Offerees may
be deemed to have released the Company from future liability. In any event,
Rescission Offerees who subsequently bring a rescission action may be limited in
their recovery to no more than they would have received had they accepted the
Rescission Offer. Thus, a Rescission Offeree who accepts the Rescission Offer
may retain a federal cause of action but may not be entitled to additional
damages and, in the view of the SEC, a Rescission Offeree who does not accept
the Rescission Offer may retain a federal cause of action for rescission but any
action may be subject to the defenses described above. In addition, in making a
decision to accept or reject the Rescission Offer, Rescission Offerees should be
cognizant of the statute of limitations and the possibility that the Company may
claim that an exemption from registration was available with respect to a given
sale of Rescission Securities.
Rescission Offerees should also be aware that if they successfully allege
that a material misrepresentation or omission occurred in connection with the
sale of the Rescission Securities, they may have additional causes of action
with respect to the sale of the Rescission Securities under the antifraud
provisions of state and federal securities laws. If a material
misrepresentation of fact or omission of fact occurred in connection with the
sale of the Rescission Securities, causes of action for common law fraud may
also exist.
TAX CONSEQUENCES
The federal income tax consequences of accepting the Rescission Offer are
uncertain, and the consequences to each Rescission Offeree will depend, in part,
on the circumstances and status of the Rescission Offeree. Generally,
Rescission Offerees who transfer their Rescission Securities to the Company in
exchange for the price paid by the Rescission Offeree for the Rescission
Securities, plus interest at the statutory rate, less any distributions with
respect to the Rescission Securities, will realize gain equal to the excess of
(a) the aggregate amount paid by the Company to the Rescission Offeree for the
Rescission Securities, over (b) the price originally paid by the Rescission
Offeree for such securities. If the Rescission Offeree previously sold the
Rescission Securities, the Rescission Offeree who accepts the Rescission Offer
will realize gain in an amount equal to the aggregate amount paid by the Company
to the Rescission Offeree.
Any gain realized as a result of accepting the Rescission Offer must be
recognized. There is no direct authority, however, regarding the character of
the gain for federal income tax purposes. Nevertheless, under general federal
income tax principles, Rescission Offerees who hold their Rescission Securities
as a capital asset on the date of the exchange (or, in the case of a prior sale
of Rescission Securities, Rescission Offerees who held their Rescission
Securities as a capital asset on the date of the prior sale or exchange), should
be entitled to report gain recognized as a result of accepting the Rescission
Offer as a distribution in redemption of, or in exchange for, the Rescission
Securities, subject to the provisions and limitations of Section 302 of the
Internal Revenue Code of 1986, as amended.
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This discussion concerning certain federal income tax matters does not
address all potentially relevant federal income tax matters, or the consequences
to persons who, because of their circumstances or status are subject to special
federal income tax treatment. The discussion does not address state, local or
foreign tax issues, and is not intended as tax advice to any person.
Consequently, RESCISSION OFFEREES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF ACCEPTING THE RESCISSION OFFER,
INCLUDING TAX REPORTING REQUIREMENTS, THE APPLICATION AND EFFECT OF FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS, AND THE IMPLICATIONS OF ANY CHANGES IN
THE TAX LAWS.
RESCISSION OFFER
The Company hereby offers the Rescission Offerees the right to rescind
their purchases of the Rescission Securities. Rescission Offerees who accept
the Rescission Offer shall be entitled to exchange their Rescission Securities
for cash in the amount of the price paid, plus simple interest at the rate of 9%
per annum, from the date the Rescission Securities were purchased, less the
amount of any income or distributions in cash or kind, received on the
Rescission Securities. Rescission Offerees who accept the Rescission Offer but
disposed of their Rescission Securities at a price less than the original
purchase price paid to the Company are entitled to receive cash in the amount of
such difference, plus simple interest at the rate of 9% per annum on the
difference from the date of disposition.
The Rescission Offer will terminate at 5:00 p.m. local time, New York, New
York on _______________, 1999 (the "Rescission Expiration Date"). Accordingly,
Rescission Offerees will have twenty (20) business days to respond to the
Rescission Offer. Rescission Offerees who have not previously disposed of their
Rescission Securities may accept the Rescission Offer only by completing the
Rescission Agreement accompanying this Prospectus as Attachment A and returning
it to the Company by 5:00 p.m. on the Rescission Expiration Date, together with
the certificates and documents evidencing the Rescission Securities, as adjusted
to give effect to any distributions paid with respect to such Rescission
Securities, properly endorsed for transfer. Rescission Offerees who have
previously disposed of their Rescission Securities may accept the Rescission
Offer only by completing the Rescission Agreement accompanying this Prospectus
and returning it to the Company by 5:00 p.m. on the Rescission Expiration Date.
Any Rescission Offeree who fails to return a signed Rescission Agreement
or, if required, fails to tender the Rescission Securities by the Rescission
Offer Expiration Date shall be deemed to have rejected the Rescission Offer.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of the Rescission Agreement will be determined by the
Company, which determination will be final and binding. The Company reserves
the absolute right to reject any or all Rescission Agreements not properly
completed or if their acceptance, in the opinion of the counsel to the Company,
would be unlawful. The Company also reserves the right to waive any
irregularity in the Rescission
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Agreement. The Company's interpretation of the terms and conditions of the
Rescission Agreement (including the instructions in the Rescission Agreement)
shall be final and binding. The Company shall not be under any duty to give
notification of defects in connection with Rescission Agreements or incur any
liability for failure to give such information.
Upon the terms and subject to the conditions of the Rescission Offer,
payment of the purchase price and interest to Rescission Offerees who elect to
rescind will be made as soon as practicable after receipt by the Company of the
Rescission Agreement and the certificates and/or documents evidencing the
Rescission Securities.
Rescission Offerees who elect not to accept the Rescission Offer need not
submit a response to the Rescission Offer. Rescission Offerees who do not
respond to the Rescission Offer will continue to be the owners of the Rescission
Securities and will hold Rescission Securities subject to the restrictions which
were in effect at the time of their issuance.
USE OF PROCEEDS
The Company will not receive the proceeds from sales of Common Stock
offered hereby. However, the Company expects to use the proceeds from the
exercise of the Warrants and Options for working capital, to repurchase the
Recission Securities and other general corporate purposes.
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MARKET FOR COMMON STOCK AND
RELATED STOCKHOLDERS 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 December 9, 1998) 0.45 0.28
On December 10, 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.
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CAPITALIZATION
The following table sets forth the capitalization of the Company at July
31, 1998 and as adjusted to give effect to the exercise of Warrants and Options.
As
Long Term Debt: July 31,1998(1) Adjusted(2)
----------- -----------
Loan payable-bank, net of current maturities $ 1,049,590 1,049,590
----------- -----------
Stockholders' Equity (Deficiency):
Common Stock - $.001 par value;
authorized 50,000,000 shares; shares
issued and outstanding 16,186,628
at July 31, 1998 and 17,450,648,
as adjusted 16,187 17,451
Preferred Stock - $.001 par value;
authorized 5,000,000, none issued -- --
Additional paid-in capital 6,266,719 7,215,353
Deficit accumulated during the
development stage (7,085,089) (7,085,089)
Cumulative foreign currency
translation adjustments (33,851) (33,851)
----------- -----------
Total Stockholders' Equity (Deficiency) (836,034) 113,864
----------- -----------
Total Capitalization 213,556 1,163,454
(1) Does not include 1,264,020 shares issuable upon exercise of outstanding
Warrants, 5,588,029 shares issuable upon conversion of outstanding
Debentures, 800,000 shares issuable upon conversion of interest, 2,083,333
shares issuable upon the closing and conversion of $500,000 of Debentures
yet to be issued or 277,778 shares issuable upon exercise of warrants
issuable on the closing of $500,000 of Debentures.
(2) Gives effect to the issuance of 1,264,020 shares of Common Stock upon
exercise of the Warrants and 100,000 shares of Common Stock issuable upon
exercise of Options for proceeds of $949,898. The exercise price of the
Options is $.50. The exercise price of the Warrants range from $.36 to
$1.99. Does not include 5,588,029 shares issuable upon conversion of
Debentures, 800,000 shares issuable upon conversion of interest, 2,083,333
shares issuable upon the closing and conversion of $500,000 of
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Debentures yet to be issued or 277,778 shares issuable upon exercise of warrants
issuable on the closing of $500,000 of Debentures.
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DIVIDEND POLICY
The payment of dividends by the Company is within the discretion of its
Board of Directors and depends in part upon the Company's earnings, capital
requirements and financial condition. Since its inception, the Company 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
audited financial statements as of July 31, 1998 and for the period from April
1, 1996 (date of incorporation) to July 31, 1997 (the "1997 Fiscal Period") and
for the year ended July 31, 1998 ("Fiscal 1998") and the notes thereto, all of
which financial statements are included elsewhere in this Prospectus.
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 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, 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 revenue 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
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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.
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 operating 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.
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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 operating 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 during the Development Period amounted to $253,409,
or 4% of total operating 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 operating 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
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Holdings Limited ("Jaford") in relation to software marketing rights. The
Company elected to pay $259,500 in cash to settle the dispute. In turn, the
Company received full release from Jaford with no further exposure to the
Company. In the second instance, the Company negotiated an out of court
settlement with IBS Conversions, Inc. ("IBS") concerning an outstanding lawsuit
filed by IBS with the District Court of Illinois. The Settlement Agreement
called for the payment of approximately $90,000 to IBS over a period of six
months. In return, the Company received full release from IBS of any future
claims.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its activities 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
$1,400,000 at July 31, 1998. The bank 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, while the debentures bear interest at 6%. 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.
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On January 26, 1998, TPI made an offering of 444,445 shares of Common
Stock for $99,629 ($.22 a share). The offering was made in Canada pursuant to
the claim of exemption under Rule 504 under the Securities Act. The offering
appears to exceed the limitation of said Rule of a maximum of $1 million in
any one year period. The Company may have additional liability to other
purchasers of unregistered securities. The closing market for TPI Common
Stock on December 9, 1998 was $.38. The potential contingent liability for
such sales is approximately $100,000, however, to the extent that the sale
price of the Common Stock exceeds the offering prices set forth above, there
is no ascertainable liability to the Company.
The Company has no current arrangements with respect to, or sources of,
additional financing, and it is not contemplated that its existing stockholders
will provide any portion of the Company's future financing requirements. There
can be no assurance that any additional financing will be available to the
Company on acceptable terms, or at all. The inability of the Company to obtain
financing when needed will have a material adverse effect on the Company,
including possibly requiring the Company to significantly curtail or cease its
operations.
YEAR 2000 ISSUES
BACKGROUND. Some computers, software, and other equipment include programming
code in which calendar year data is abbreviated to only two digits. As a
result of this design decision, some of these systems could fail to operate or
fail to produce correct results if "00" is interpreted to mean 1900, rather than
2000. These problems are widely expected to increase in frequency and severity
as the year 2000 approaches, and are commonly referred to as the "Year 2000
Problem."
ASSESSMENT. The Year 2000 Problem could affect computers, software, and other
equipment used, operated, or maintained by the Company. Accordingly, the
Company is reviewing its internal computer programs and systems to ensure that
the programs and systems will be Year 2000 compliant. The Company presently
believes that its computer systems will be Year 2000 compliant in a timely
manner. However, while the estimated cost of these efforts are not expected to
be material to the Company's financial position or any year's results of
operations, there can be no assurance to this effect.
The Company has obtained certification of its processes to assess Year 2000
Problems from the Information Technology Association of Canada (ITAC). Because
the Company's business involves software development, the Company has not sought
further verification or validation by independent third parties of its
corrections of Year 2000 Problems. However, the Company's Year 2000 project
team is reviewing the Company's project plans and monitoring progress against
those plans.
SOFTWARE SOLD TO CONSUMERS. The Company believes that it has substantially
identified and resolved all potential Year 2000 Problems with any of the
software products, which it develops and markets. However, management also
believes that it is not possible to determine with complete certainty that all
Year 2000 Problems affecting the Company's software products have been
identified or corrected
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due to complexity of these products and the fact that these products interact
with other third party vendor products and operate on computer systems which are
not under the Company's control.
INTERNAL INFRASTRUCTURE. The Company believes that it has identified
substantially all of the major computers, software applications, and related
equipment used in connection with its internal operations that must be modified,
upgraded, or replaced to minimize the possibility of a material disruption to
its business. The Company has commenced the process of modifying, upgrading,
and replacing major systems that have been identified as adversely affected, and
expects to complete this process before the end of 1998.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, photocopiers, telephone switches, security systems, elevators, and
other common devices may be affected by the Year 2000 Problem. The Company is
currently assessing the potential effect of, and costs of remediating, the Year
2000 Problem on its office and facilities equipment.
The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems will
not have a material adverse effect on the Company's business or results of
operations. This estimate is being monitored and will be revised as additional
information becomes available.
SUPPLIERS. The Company has initiated communications with third party suppliers
of the major computers, software, and other equipment used, operated, or
maintained by the Company to identify and, to the extent possible, to resolve
issues involving the Year 2000 Problem. However, the Company has limited or no
control over the actions of these third party suppliers. Thus, while the
Company expects that it will be able to resolve any significant Year 2000
Problems with these systems, there can be no assurance that these suppliers will
resolve any or all Year 2000 Problems with these systems before the occurrence
of a material disruption to the business of the Company or any of its customers.
Any failure of these third parties to resolve Year 2000 problems with their
systems in a timely manner could have a material adverse effect on the Company's
business, financial condition, and results of operation.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. The Company expects to identify
and resolve all Year 2000 Problems that could materially adversely affect its
business operations. However, management believes that it is not possible to
determine with complete certainty that all Year 2000 Problems affecting the
Company have been identified or corrected. The number of devices that could be
affected and the interactions among these devices are simply too numerous. In
addition, one cannot accurately predict how many Year 2000 Problem-related
failures will occur or the severity, duration, or financial consequences of
these perhaps inevitable failures. As a result, management expects that the
Company could likely suffer the following consequences:
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1. a significant number of operational inconveniences and inefficiencies
for the Company and its clients that may divert management's time and
attention and financial and human resources from its ordinary business
activities; and
2. a lesser number of serious system failures that may require
significant efforts by the Company or its clients to prevent or
alleviate material business disruptions.
CONTINGENCY PLANS. The Company is currently developing contingency plans to be
implemented as part of its efforts to identify and correct Year 2000 Problems
affecting its internal systems. The Company expects to complete its contingency
plans by the end of 1998. Depending on the systems affected, these plans could
include accelerated replacement of affected equipment or software, short to
medium-term use of backup equipment and software, increased work hours for
Company personnel or use of contract personnel to correct on an accelerated
schedule any Year 2000 Problems that arise or to provide manual workarounds for
information systems, and similar approaches. If the Company is required to
implement any of these contingency plans, it could have a material adverse
effect on the Company's financial condition and results of operations.
Based on the activities described above, the Company does not believe that the
Year 2000 Problem will have a material adverse effect on the Company's business
or results of operations.
DISCLAIMER. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
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
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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.
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BUSINESS
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 recorded software marketing rights at the
fair value of the shares of Common Stock and notes issued to unrelated third
parties, in order to obtain certain rights from these parties.
On August 20, 1996 (the "Closing Date"), the Founders, as holders of all of
the outstanding Common Stock of TPI-Ontario, entered into an agreement with
Samuel Hamann Graphix, Inc., a Nevada corporation ("SHG-Nevada"), whereby the
Founders exchanged their shares of TPI-Ontario for an aggregate of 5,901,050
shares of 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 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.
The Company is a development stage company. The Company's business
consists of providing computer-related services to corporate customers in Canada
and the United States. The Company currently groups the services it offers as
follows: client/server migration services, year 2000 ("Year 2000") remediation
services and groupware services.
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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 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
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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 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-,
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which addresses the IBM System 34 and System 36 market, and the
TRANSFORM/400-TM-, which addresses the IBM System 38 and IBM AS/400 market.
Each of TPI's migration programs encompasses a battery of automatic code
translators which transform legacy application source code into
machine-independent code-components, except that certain application software
functions originally coded for particular functions, such as
telecommunications, graphics and office automation functions, may require manual
adjustment and/or redesign of the program. Software that has been automatically
transformed using the applicable Transform Series program and any software
required to be manually transformed must be integrated to assure that the
automatically converted software and the manually transformed software will
function as a whole (the "Transformed Software"). The Transformed Software will
only execute on a customer's client/server system in conjunction with the
Company's software function support products, offered under the trademark
ORB/400-TM (also known as "Deployment Products"). The Deployment Products
consist of software that permits Transformed Software to execute on the "server"
computer ("Server Software") and software that permits users of the "client"
computers to access Transformed Software available on the server computer
("Client Software").
The Company typically provides transformation and support services
pursuant to a software conversion agreement. Such agreement provides that the
Company will use its migration software to automatically transform the
customer's legacy source code to a format that can be used by the customer's
client/server system and, if necessary, will manually transform ("rewrite") any
of the customer's legacy code that cannot be automatically transformed using the
migration software. The customer has the option to separately perform manual
transformation. If the customer elects this option, the Company disclaims
responsibility for the integration of the automatically transformed software and
the rewritten software.
The pricing of software conversion agreements is dependent on the number of
Lines of Code ("LOC") to be converted. In the conversion process, there are
three fundamental components. First is project scoping or assessment, secondly
the translation phase and the final component is the testing and implementation
phase. The Company provides assessments to customers on a fixed price basis. The
assessment phase is priced according to the scope of the environment. A typical
system size would be in the area of 1,500,000 LOC priced at $10,000 to $20,000.
The Company has completed several assessments priced in this range.
Price proposals have been issued to numerous companies on the translation
phase. This pricing is done on a price per LOC. The Company's pricing in this
phase of a project will range between $0.50 to $0.70 per line of code. Although
the Company has not provided pricing to the market as it relates to the testing
phase, this area is typically priced on a time and materials basis. The median
gross amount payable under a typical software conversion agreement for an IBM
System 36 or AS/400 System would be approximately $500,000. Sales to smaller
sites will range from $100,000 to $200,000 and larger agreements are expected to
range from $700,000 to $1 million range. There can be no assurance that the
Company will be able to price such agreements as anticipated.
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The Deployment Products are made available to a customer pursuant to the
software conversion agreement with such customer, provided the customer has
executed the Company's form of Deployment Product license agreement, which
licenses the customer to install one copy of the Server Software on its server
computer and to install a specified number of copies of the Client Software on
its client computers. A customer may install the Deployment Products on more
than one computer system provided it executes a separate license agreement for
each such computer system. Each license agreement provides for the payment of a
one-time license fee and annual maintenance fees.
Software support services, consisting of advice and assistance in the use
of the Transformed Software and the Deployment Products and the correction of
defects in the execution of such software, are available under each software
conversion agreement by telephone without additional charge during the 90 days
following delivery of the Transformed Software to the customer. Thereafter,
support services are provided without additional charge so long as the annual
maintenance fees under the applicable license agreement are current. Otherwise,
customers requesting support services are charged TPI's applicable hourly rate
for professional services.
The Company also offers other professional services in connection with a
customer's migration from a legacy system to a client/server system, including
consulting services to assist in the selection of the optimum client/server
environment and/or the implementation of a physical assets (computer
hardware)management system; education as to client/server systems; and network
and software skills training. These additional services are provided under the
Company's form of professional services agreement either at the Company's
applicable hourly rates for such services or a negotiated fee. Also, see
"GROUPWARE SERVICES" below.
BUSINESS STRATEGY. While the Company is offering its transformation and
support services directly to end-users, the Company believes that the largest
percentage of its revenues will be generated by providing transformation
services to IT vendors in the hardware, database and application software
sectors of the IT industry ("IT Vendors"). Such IT Vendors have many strategic
partners who can enhance their revenue potential by utilizing the Company's
services to facilitate end-user migration to, and the installation of, their
products.
To implement this strategy, TPI plans to negotiate formal strategic
alliances with important IT Vendors having a vested interest in the migration
from IBM mid-range computer systems; to perform technology reviews with such IT
Vendors; participate in the first migration project with each such IT
Vendor; and gain access to, and acceptance from, strategic partners of such IT
Vendors by seeking to successfully complete each such project. There can be no
assurance that TPI will be able to successfully implement this strategy or that
the implementation of such strategy will generate significant revenues or
income.
As discussed above, TPI's current transformation services address the IBM
mid-range computing device marketplace. The Company expects this marketplace
to be large enough to sustain TPI's business objectives for many years to come.
However, to assure long-term growth,
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TPI will have to enter the transformation processing market for mainframe
computing systems. The offering of services to facilitate migration from
mainframe systems would increase TPI's market. Currently, TPI plans to enter
this market by identifying the best software migration toolsets developed by
third parties and seeking to obtain licenses to either use such software to
perform transformation services for mainframe customers and/or to customize and
remarket such 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 major IT Vendors.
TPI hopes to generate awareness of its services through the efforts of its
in-house sales force and outside sales representatives; implementation of its
referral program (described below); direct mail, especially to independent
software vendors; advertising in publications that are focused on TPI's market
(e.g., NEWS/400); targeted advertising, broadcasting and corporate/services
message delivery on the Internet.
The amount of time required to close a software conversion agreement for a
client/server migration project (from the time of submission of a proposal to
the prospective customer to execution of the contracts) varies depending on the
configuration of the customer's legacy system, the number of LOC to be
transformed and the target client/server system. Typically, a large project
takes longer to close than a smaller project. The Company anticipates that the
sales cycle for most of its client/server migration projects will be from three
to four months.
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The Company anticipates that the sizes and volumes of its software
conversion agreements will increase over time as initial projects are secured
and completed and can serve as reference sites to validate the performance and
functionality of the Company's services and software for prospective customers
(the "Referral Program"). The Company anticipates that its Referral Program will
result in shorter closing times for agreements and increased market
penetration. 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 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
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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 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
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purpose of training the customer's existing IT personnel to support the
customer's Year 2000 project. The course involves four weeks of classroom
training and one week of apprenticeship training in the application of the
Company's RAD/2000-SM- methodology and licensed software tools to the customer's
Year 2000 project. The Company believes that this is the appropriate solution
for customers that cannot recruit a sufficient number of already qualified
personnel to staff its Year 2000 project.
Mobile Lab/2000-SM and Boot Camp/2000-SM- are based on the concept that,
wherever possible, existing technology and personnel should be deployed while
maintaining a reasonable cost structure.
The Company has entered into a strategic affiliation arrangement with
Allegiant Legacy Solutions, Inc. ("ALS") pursuant to which the Company licenses,
on a non-exclusive basis, the right to use and sublicense the use of Adapt
2000-TM- software remediation tools developed by ALS. The term of the license
is one year and automatically renews upon payment and acceptance of the annual
renewal fee. The Company is authorized under its agreements with ALS to use the
Adapt 2000 software to perform Year 2000 remediation services and to relicense
the software to end-users at such license fees as the Company may determine. If
the Company utilizes Adapt 2000 to perform Year 2000 remediation services it is
obligated to process a minimum of two million LOC per year for a three year
period at each site at which it performs remediation services and to make
quarterly royalty payments to ALS based on the number of LOC processed. If the
Company sublicenses the Adapt 2000 software it is required to pay ALS 50% of the
scheduled LOC fee and 50% of ALS's listed one-time license fee of $12,900.
The Company has also entered into an informal strategic alliance with
Deevan Computer Services Inc. ("Deevan"), an IT consulting company that provides
asset management services to end-users, to offer hardware evaluation and
procurement services under the name Asset/2000-SM-. Deevan has informed the
Company that 60% of the computer hardware currently in use is not Year 2000
compliant and must be either replaced or repaired and that 10% of existing
hardware cannot be repaired. Deevan will offer Year 2000 computer hardware
evaluation, procurement and installation services in conjunction with the
software remediation services offered by the Company.
BUSINESS STRATEGY. The Company's strategy is to 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.
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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 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
36
<PAGE>
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.
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.
37
<PAGE>
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 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
38
<PAGE>
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.
FACILITIES
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.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS. The names, ages and respective positions
of the Executive Officers and Directors of the Company are as follows:
Name Age Position
- ---- --- --------
Paul G. Mighton 45 Chairman of the Board of Directors and Chief
Executive Officer
Gary G. McCann 46 Executive President, Chief Financial Officer,
Secretary and Director
Vladimir Stepanoff 56 Vice President - Technology and Director
39
<PAGE>
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.
GARY G. MCCANN has served as Executive Vice President of the Company since
September 1997, 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,
McCann was involved in the founding and organization of TPI- Ontario. From
July 1995 to February 1996, he served as President and a director of 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.
All directors hold office until the next annual meeting of stockholders of
the Company and the election and qualification of their respective successors.
Directors currently receive no cash compensation for serving on the Board of
Directors. Officers are elected annually by the Board of Directors and serve at
the discretion of the Board.
40
<PAGE>
EXECUTIVE COMPENSATION
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 officer received reportable
remuneration.
SUMMARY COMPENSATION TABLE
<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, and Vladimir Stepanoff, 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
41
<PAGE>
termination of employment and from disclosing confidential information of the
Company while employed by the Company and thereafter.
Mr. Mighton's employment agreement provides that he will be paid an annual
salary of approximately $110,000; Mr. McCann's employment agreement provides
that he will be paid in annual salary of approximately $95,000; and Mr.
Stepanoff's employment agreement provides that he will be paid an annual salary
of approximately $66,000.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Percent
Number of of Total
Securities Options/SARs
Underlying Granted Exercise Market Price
Name of Options/SARs to Employees or Base on Expiration
Individual Granted In Fiscal Year Price($/Share) Day of Grant 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
<PAGE>
Directors. The Board determines, among other things, the persons to be granted
options under the 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 ( the former Chief Financial Officer) 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.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides for indemnification of
directors in conformity with Section 78.7502 of the Nevada Corporation Law, as
amended (the "NCL"), which authorizes the Company to indemnify any director
under certain prescribed circumstances and subject to certain limitations
against certain costs and expenses, including attorneys' fees actually and
reasonably incurred in connection with any action, suit or proceeding, whether
civil, criminal, administrative or investigative, to which such person is a
party by reason of being a director of the Company if it is determined that such
person acted in accordance with the applicable standard of conduct set forth in
such statutory provisions.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
43
<PAGE>
CERTAIN 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 Holdings ("Joter")
and Diversified Technologies Ltd.("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, and Vladimir Stepanoff
and John McGee, a former executive officer and director. See "Security Ownership
of Certain Beneficial Owners and Management."
From August 1, 1996 through July 11, 1997, the Company made advances to
Messrs. Paul G. Mighton, Gary G. McCann and Vladimir Stepanoff, executive
officers, directors and principal stockholders of the Company aggregating
$115,227. On July 31, 1997, Messrs. Mighton, McCann and Stepanoff executed
demand promissory notes payable to the Company in the respective principal
amounts of $61,452, $37,829 and $15,946, representing the aggregate amounts
borrowed by such persons from the Company. The notes bear interest at the
annual rate of 4%. The advances made to Messrs. Mighton and McCann were
subsequently written off by the Company and were accounted for as officers'
compensation.
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 was approximately
$52,800 as of November 10, 1998. 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."
44
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 10, 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)
- ----------------------------- -------------------- -----------------------
Diversified Technologies Ltd. 1,553,962 (3) 8.7%
Vladimir Stepanoff 1,633,683 9.1%
Paul G. Mighton 1,466,683 (3) 8.2%
Gary G. McCann 1,506,684 (3) 8.4%
John G. McGee 957,350 5.3%
Canadian Advantage Limited
Partnership(4) 4,730,701 (5) 22.1%(6)
Fetu Holdings(4) 1,948,953 (7) 10.0%(6)
Dominion Capital(4) 998,609 (8) 5.4%(6)
All Directors and Officers
as a Group (3 persons) 4,607,050 (3) 25.7%
(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 December 10, 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 17,960,915 shares of Common Stock outstanding at the close of
business on December 10, 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
45
<PAGE>
transfer agent, the number of shares of Common Stock outstanding is
approximately 603,000 shares greater that the 17,960,915 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) The shareholders of Diversified Technologies Ltd., a British Virgin
Islands corporation ("DTL"), are Paul G. Mighton and Gary G. McCann. DTL
holds 766,683 shares for Mr. Mighton and 766,684 for Mr. McCann.
(4) The address of the beneficial owner is c/o Thomson Kernaghan & Co.,
Ltd., 365 Bay Street, Toronto, Ontario M5H 2V2
(5) Includes (a) 1,279,373 shares issued upon prior conversion (with
interest converted into Common Stock) of the 1998 Debentures in the principal
amount of $425,000 and 3,244,996 shares issuable upon conversion (including
additional shares to be issued upon conversion of interest into Common Stock)
of an additional $675,000 of the 1998 Debentures at a conversion rate of
$0.24 per share and (b) up to 206,332 shares issuable upon exercise of
warrants issued in connection with the 1998 Debentures.
(6) Pursuant to the terms of the 1998 Debentures, the Securityholder is
restricted from converting an amount of 1998 Debentures which would result in
the Securityholder owning more than 4.9% of the outstanding Common Stock of
the Company.
(7) Includes (a) 483,806 shares issued upon prior conversion (with interest
converted into Common Stock) of the 1998 Debentures in the principal amount
of $250,000 and 1,262,978 issuable upon conversion (including additional
shares to be issued upon conversion of interest into Common Stock) of an
additional $275,000 of the 1998 Debentures at a current conversion rate of
$0.24 per share and (b) up to 202,169 shares issuable upon exercise of
warrants issued in connection with the 1998 Debentures.
(8) Includes (a) 532,186 shares issued upon prior conversion (with interest
converted into Common Stock) of the 1998 Debentures in the principal amount
of $275,000 and 344,444 shares issuable upon conversion (including additional
shares to be issued upon conversion of interest into Common Stock) of an
additional $75,000 of the 1998 Debentures at a conversion rate of $0.24 per
share and (b) up to 121,979 shares issuable upon exercise of warrants issued
in connection with the 1998 Debentures.
SELLING SECURITYHOLDERS
The following table sets forth, with respect to each Selling
Securityholder, based upon information available to the Company as of
December 10, 1998, the number of shares of Common Stock beneficially owned,
the number of shares of Common Stock to be sold, and the number and
percentage of outstanding shares of Common Stock beneficially owned before
and after the sale of the shares offered hereby. None of the Selling
Securityholders has been an affiliate of the Company during the preceding
three years, and none of whom own beneficially 1% of the outstanding stock of
the Company on the date hereafter. Although there can be no assurance that
the Selling Securityholders will sell any or all of the shares of Common
Stock, the following table assumes that each of the Selling Securityholders
will sell all of the shares of Common Stock offered by this Prospectus.
46
<PAGE>
Percentage of
Common
Stock Owned
Securities Owned Securities Before
Name of Beneficial Owners Prior to Offering(1) to Be Sold(2) Offering(3)
- ------------------------- -------------------- ------------- -----------
Shares Warrants Shares
------ -------- ------
Advantage (Bermuda) Fund 1,535,611 73,295 1,608,906(4) 8.2%(13)
Canadian Advantage
Limited Partnership 4,524,369 206,332 4,730,701(5) 22.1%(13)
Dominion Capital 876,630 121,979 998,609(6) 5.4%(13)
Fetu Holdings 1,746,784 202,169 1,948,953(7) 10.0%(13)
Livingstone Asset
Management 387,045 60,245 447,290(8) 2.5%(13)
Thomson Kernaghan &
Co., Ltd. 2,083,333 277,778 2,361,111(9) *
SHA Security Holdings
Anstalt -0- 500,000 500,000(9) 2.7%
Pinetree Capital Corp. -0- 100,000 100,000(10) *
Martin Foest 50,000(11) -0- 50,000(12) *
Marex Computers Training
& Consulting Inc. 50,000(11) -0- 50,000(12) *
- -----------------
* less than 1% of the total number of shares issued and outstanding.
(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. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days from the effective date of this Prospectus upon the exercise of
warrants or other convertible securities. Unless otherwise noted, each
Selling Securityholder's beneficial ownership is determined by assuming
that debentures, warrants or options that are held by such person (but not
those held by any other person) and which
47
<PAGE>
are exercisable or convertible within 60 days from the date hereof have
been exercised or converted.
(2) Includes all shares issuable upon exercise of options or warrants and/or
conversion of debentures, set forth under "Securities Owned Prior to
Offering."
(3) Based on 17,960,915 shares of Common Stock outstanding as of December 10,
1998. See "Note 13" of the "Notes to the Financial Statements". Assumes
that all shares of Common Stock issued are sold as part of this Offering.
(4) Includes (a) 1,535,611 shares issuable upon conversion (with interest
converted into Common Stock) of the 1998 Debentures in the aggregate
principal amount of $325,000 at a conversion rate of $0.24 per share and
(b) up to 73,295 shares issuable upon exercise of warrants issued in
connection with the 1998 Debentures.
(5) Includes (a) 1,279,373 shares issued upon prior conversion (with interest
converted into Common Stock) of the 1998 Debentures in the principal amount
of $425,000 and 3,244,996 shares issuable upon conversion (including
additional shares to be issued upon conversion of interest into Common
Stock) of an additional $675,000 of the 1998 Debentures at a conversion
rate of $0.24 per share and (b) up to 206,332 shares issuable upon exercise
of warrants issued in connection with the 1998 Debentures.
(6) Includes (a) 532,186 shares issued upon prior conversion (with interest
converted into Common Stock) of the 1998 Debentures in the principal
amount of $275,000 and 344,444 shares issuable upon conversion
(including additional shares to be issued upon conversion of interest
into Common Stock) of an additional $75,000 of the 1998 Debentures at a
conversion rate of $0.24 per share and (b) up to 121,979 shares issuable
upon exercise of warrants issued in connection with the 1998 Debentures.
(7) Includes (a) 483,806 shares issued upon prior conversion (with interest
converted into Common Stock) of the 1998 Debentures in the principal
amount of $250,000 and 1,262,978 shares issuable upon conversion
(including additional shares to be issued upon conversion of interest
into Common Stock) of an additional $275,000 of the 1998 Debentures at
a conversion rate of $0.24 per share and (b) up to 202,169 shares
issuable upon exercise of warrants issued in connection with the 1998
Debentures.
(8) Includes (a) up to 387,045 shares issued upon prior conversion (with
interest converted into Common Stock) of the 1998 Debentures in the
principal amount of $200,000 and (b) up to 60,245 shares issuable upon
exercise of warrants issued in connection with the 1998 Debentures.
(9) Includes 2,083,333 shares issuable upon the closing and conversion of
$500,000 of 1999 Debentures yet to be issued but for which the Company has
contracted to sell, and 277,778 shares issuable upon exercise of warrants
issuable on the purchase of $500,000 in 1999 Debentures.
(10) Includes up to 500,000 shares issuable upon exercise of the 1996 Warrants.
48
<PAGE>
(11) Includes up to 100,000 shares issuable upon exercise of the 1997
Warrants.
(12) Includes up to 50,000 shares issuable upon exercise of Options granted
on March 26, 1998 at an exercise price of $.50.
(13) Pursuant to the terms of the 1998 Debentures, the Securityholder is
restricted from converting an amount of 1998 Debentures which would
result in the Securityholder owning more than 4.9% of the outstanding
Common Stock of the Company.
PLAN OF DISTRIBUTION
The shares of Common Stock, and shares of Common Stock issuable upon
exercise of the Warrants and Options (collectively, the"Securities") offered
hereby are being offered by the Selling Securityholders and/or their
transferees, assignees, pledgees or other successors for their own account
and not for the account of the Company. The Selling Securityholders may
continue to sell the Securities directly to purchasers or, alternatively, may
offer the Securities from time to time through other agents, brokers, dealers
or underwriters, who may receive compensation in the form of concessions or
commissions from the Selling Securityholders. Sales of the Securities may be
made in one or more transactions on OTCBB, in privately negotiated
transactions or otherwise, and such sales may be made at the market price
prevailing at the time of sale, a price related to such prevailing market
price or a negotiated price. Sales of Securities are subject to the
prospectus delivery and other requirements of the Securities Act.
Under the Exchange Act and the regulations thereunder, any person
engaged in a distribution of the Common Stock of the Company offered by this
Prospectus may not simultaneously engage in market-making activities with
respect to the Common Stock of the Company during the applicable "cooling off"
period (nine business days) prior to the commencement of such distribution. In
addition, and without limiting the foregoing, the Selling Securityholders will
be subject to applicable provisions of the Exchange Act and the regulations
thereunder, including, without limitation, Rule 102 of Regulation M, which
provisions may limit the timing of purchases and sales of the Securities by the
Selling Securityholders. To the extent required, the Company will use its best
efforts to file, during any period in which offers or sales are being made, one
or more amendments or supplements to this Prospectus or a new registration
statement with respect to the Common Stock and Common Stock underlying the
Warrants and Options to describe any material information with respect to the
plan of distribution not previously disclosed in this Prospectus, including the
name or names of any additional underwriters, dealers or agents, if any, the
purchase price paid by the underwriter for Securities purchased from a Selling
Securityholder, and any discounts, commissions or concessions allowed or
reallowed or paid to dealers.
49
<PAGE>
DESCRIPTION OF SECURITIES
The following summary descriptions of the Company's securities are
qualified in their entirety by reference to the Company's Certificate of
Incorporation and By-Laws, copies of which are available upon request of the
Company.
The Company is authorized to issue 50,000,000 shares of common stock,
par value $0.001 per share (the "Common Stock"), and 5,000,000 shares of
preferred stock, par value $0.001 per share (the "Preferred Stock"). As of
December 10, 1998, there were 17,960,915 shares of Common Stock outstanding
held by approximately 144 holders of record. No shares of Preferred Stock are
issued or outstanding.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by stockholders. There are
no preemptive, subscription, conversion or redemption rights pertaining to
the Common Stock. All of the outstanding shares of Common Stock are duly and
validly issued, fully paid and non-assessable. Holders of shares of Common
Stock are entitled to receive dividends when, as and if declared by the
Board of Directors from funds legally available therefor and to share ratably
in the assets of the Company available upon liquidation, dissolution or
winding up, subject to any superior rights of the holders of Preferred
Stock, if issued.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of the
shares of Preferred Stock in one or more series, with each series to have such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without any action by the stockholders, to issue shares of Preferred Stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of the Common Stock. In
addition, the issuance of shares of Preferred Stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Although the Company does not currently
intend to issue any shares of Preferred Stock, there can be no assurance that
the Company will not do so in the future.
DIVIDEND POLICY
The payment of dividends by the Company is within the discretion of its
Board of Directors and depends in part upon the Company's earnings, capital
requirements and financial condition. Since its inception, the Company 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.
50
<PAGE>
REPORTS TO STOCKHOLDERS
The Company became a reporting company on May 11, 1998 and will be
distributing to its stockholders annual reports containing financial statements
audited and reported upon by its independent certified public accountants after
the end of each fiscal year, and will make available such other periodic reports
as the Company may deem to be appropriate or as may be required by law or by the
rules or regulations of any stock exchange on which the Company's Common Stock
is listed. The Company's fiscal year end is July 31.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon by
Snow Becker Krauss P.C., 605 Third Avenue, New York, New York 10158.
EXPERTS
The financial statements of Transformation Processing Inc. as of July
31, 1998 and for the period from April 1, 1996 (date of incorporation) to July
31, 1997, the year ended July 31, 1998 and the cumulative amounts from inception
to July 31, 1998 which are included in this Prospectus have been included herein
and in the Registration Statement in reliance upon the report of Goldstein Golub
Kessler LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form SB-2 under the Securities Act of
1933, as amended (the "Act"), with respect to the securities offered hereby.
This Prospectus does not contain all information set forth in the Registration
Statement, part of which has been omitted in accordance with the rules and
regulations of the Commission. For further information about the Company and
the securities offered hereby, reference is made to the Registration Statement,
copies of which are available for inspection from the Commission, including the
exhibits filed as a part thereof and otherwise incorporated therein. Statements
made in this Prospectus as to the contents of any document referred to are not
necessarily complete, and in each instance reference is made to such exhibit for
a more complete description and each such statement is qualified in its entirety
by such reference.
The Company is subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Commission.
Such reports, proxies and other information can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington D.C. 20549 and the Regional Offices of the Commission
at 7 World Trade Center, Suite 1300, New York, New York 10048, and Citicorp
Center, 500 West
51
<PAGE>
Madison, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained at prescribed rates by writing to the Securities and Exchange
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
YEAR ENDED
July 31, 1998
------------------------
PAGE
----
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
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>
======================================= =======================================
NO DEALER, SALESMAN OR ANY OTHER PERSON
HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY 13,240,015
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF SHARES OF COMMON STOCK
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON TRANSFORMATION PROCESSING INC.
AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN
THE SECURITIES OFFERED BY THIS
PROSPECTUS, OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY
SECURITY, BY ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCES, IMPLY THAT
THE INFORMATION IN THIS PROSPECTUS IS
CORRECT AS OF BY ANY TIME SUBSEQUENT
TO THE DATE OF THIS PROSPECTUS.
----------
TABLE OF CONTENTS
PAGE
Prospectus Summary................. 4 ___________, 1998
Summary Financial Information...... 6
Risk Factors....................... 7
Use of Proceeds.................... 15
Market for Common Equity
and Related Shareholders Matters. 16
Capitalization..................... 17
Dividend Policy.................... 19
Management's Discussion and
Analysis Of Financial Condition
and Results of Operations....... 19
Business........................... 27
Management......................... 39
Indemnification of Directors
and Officers...................... 43
Certain Transactions............... 44
Security Ownership of Certain
Beneficial Owners and Management. 45
Selling Securityholders............ 46
Plan of Distribution............... 49
Description of Securities.......... 50
Legal Matters...................... 51
Experts............................ 51
Available Information.............. 51
Index to Financial Statements...... F-1
======================================= =======================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. OTHER EXPENSES OF ISSUANCE OF DISTRIBUTION
The expenses payable by the Registrant in connection with this offering
are estimated as follows:
SEC Filing Fee $ 1,498.89
Printing and Engraving $ 5,000.00
Mailing & Solicitation $0.00
Legal Fees and Expenses $25,000.00
State Securities Qualification Fees
and Expenses $0.00
Accounting Fees and Expenses $15,000.00
Miscellaneous $ 3,501.11
TOTAL $50,000.00
==========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following discussion includes certain information as to transactions
which occurred prior to the current Management's assumption of control of the
Registrant on the Closing Date and is based on information which Management
believes to be reasonably accurate, but not all of which does it have direct
knowledge. Notwithstanding the above, TPI is responsible for the information
contained in this registration statement.
On August 20, 1996, the Closing Date, in satisfaction of gross proceeds
of $155,000 received by, and certain services rendered, to TPI-Ontario, in the
period April 11 to July 25, 1996, the Registrant issued 160,000 shares of
Common Stock to 15 investors (155,000 shares were issued for $1.00 per share
and 5,000 shares were issued in exchange for consulting services and a technical
review of TPI-Ontario's conversion software). TPI-Ontario received such gross
proceeds pursuant to a private offering prior to the Closing Date. The 160,000
shares of Common Stock were issued
II-1
<PAGE>
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 740,869 shares of Common Stock,
which remain outstanding. The Registrant has no records concerning the
transactions in which such shares were issued or the consideration received by
the Company in respect of such issuances, nor does the Company know how many
holders of such securities presently exist.
Prior to the Closing Date (from August 9 through August 19, 1996), SHGI
issued, pursuant to a private offering, an aggregate of 1,465,000 shares of
Common Stock in consideration for gross proceeds of $14,654 received by SHGI
from investors. These transactions were not disclosed to current management of
the Registrant prior to or on the Closing Date. Present management is not aware
of the exemption relied on for the issuance of such shares; however, Samuel
Hamann Graphix Inc. filed a Form D dated August 16, 1996 claiming exemption
under Rule 504. Management believes that SHGI relied on Rule 504 of Regulation
D under the Act in issuing such securities.
On the Closing Date, SHGI issued 1,888,000 shares of Common Stock to 15
individuals in consideration for certain services rendered in connection with
the reverse acquisition including banking services, marketing, investor
relations and transfer agent services. Current management of the Registrant is
uncertain of the exemption relied on for the issuance of such shares, but
believes prior management relied on the exemption from registration provided by
Section 4(2) of the Act.
On the Closing Date, SHGI issued 455,000 shares of Common Stock to
Jaford Holdings Ltd., 100,000 shares of Common Stock to Innovations Ontario
Corp. and 150,000 shares of Common Stock to Ronald Content, in consideration
for the release by such companies and individual of certain claims with respect
to marketing rights as to the technology previously transferred to the
Registrant by Vladimir Stepanoff, an executive officer and director of the
Registrant. Prior to the incorporation of TPI-Ontario, Mr. Stepanoff had
granted marketing rights with respect to such technology to Raconix, of which
Mr. Content was the sole shareholder. Ronald Content is a sophisticated
investor, who was involved in the operations of the Registrant and received the
shares for investment. The shares were issued in reliance on the exemption from
registration provided by Section 4(2) of the Act. See "Description of Business
- -- Intellectual Property."
II-2
<PAGE>
On November 25, 1996, the Registrant issued options to purchase 15,000
shares of Common Stock at an exercise price of $1.99 expiring on November 27,
1997, to a public relations firm, in consideration for certain services. The
options were issued in reliance on the exemption from registration provided by
Section 4(2) of the Act. The holder of the option, as the Registrant's public
relations firm, was fully familiar with the Registrant's operations and is a
sophisticated investor.
On August 23, 1996, Registrant issued 500,000 units to Mayfair Advisory
Group Limited in consideration for gross proceeds of $500,000. Each unit
consisted of one share of Common Stock and a Common Stock purchase warrant (the
"Warrants"). When issued, the Warrants had a per share exercise price of
$1.00, were exercisable for a period of two years, commencing 30 days after the
closing of the offering, and were redeemable on 20 days prior written notice at
a redemption price of $.005 per Warrant. Pursuant to an amendment to the terms
of the Warrants dated August 26, 1998, the Warrants will not be exercisable
until a registration statement has become effective covering the Common Stock
issuable upon the exercise thereof; the term of such Warrants has been extended
through six months following the effective date of such registration statement,
and the exercise price has been reduced to $.80 per share of Common Stock,
subject to certain adjustments in the event the market for the Company's Common
Stock is less than $.80 at the time of the exercise, but in no event shall the
exercise price be reduced below $.50 per share. The Common Stock and the
Warrants were issued in reliance on the exemption from registration provided by
Rule 504 of Regulation D under the Act.
On January 27, 1997, Registrant issued 208,333 shares of Common Stock
to Olive Investments, in consideration for gross proceeds of $150,000. These
shares were issued in reliance on the exemption from registration provided by
Rule 504 of Regulation D under the Act.
On March 6, 1997, Registrant issued 501,030 shares of Common Stock to
Thomson Kernaghan & Co., Ltd. ("Thomson Kernaghan") in consideration for gross
proceeds of $375,000 (approximately $.75 per share). These shares were issued in
reliance on the exemption from registration provided by Rule 504 of Regulation
D under the Act.
On June 27, 1997, Registrant issued 100,000 units to Pinetree Capital
Corp. ("Pinetree") in consideration for gross proceeds of $70,000. The units
were issued to Pinetree pursuant to a Subscription Agreement by and between TPI
and Pinetree (the "Subscription Agreement") by which Pinetree subscribed for a
minimum of 700,000 units and a maximum of 1,000,000 units. The Subscription
Agreement was later amended to lower the minimum to 100,000 units. Pinetree
purchased the foregoing securities for its own account. Each unit consisted of
one share of Common Stock and a common stock purchase warrant expiring two
years from the date of issuance, and exercisable at $1.00 per share during the
first year and $1.50 per share during the second year. These securities were
issued in reliance on the exemption from registration provided by Rule 506 of
Regulation D under the Act.
On August 1, 1997, Registrant sold to Thomson Kernaghan an 8%
convertible subordinated debenture due July 31, 1998 in the principal amount of
$108,750 (the "Debenture") for a gross purchase price of $108,750. The
Debenture was converted, on August 28, 1997, into 198,000 shares of Common
Stock at the conversion rate of $0.55 per share. The Debenture was issued in
II-3
<PAGE>
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 agreed to sell up to an aggregate of
$3,000,000 of 6% Convertible Debentures and sold 6% Convertible Debentures, due
April, 2000, in the aggregate principal amount of $1,000,000 and issued warrants
to purchase 301,228 shares of Common Stock for gross proceeds of $1,000,000 (of
which $550,000 had a conversion rate of 70% of the 5-day average closing bid
price and $450,000 had a conversion rate of 80% of the 5-day average closing
asked price) as follows: Canadian Advantage LP ($275,000); Dominion Capital
Fund ($275,000); Fetu Holdings ($250,000); and 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
II-4
<PAGE>
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. On October 27-29,
1998, the aggregate principal amount of $150,000 plus interest was converted
into 747,187 shares of Common Stock. 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 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 an aggregate of
68,306 shares of Common Stock exercisable at the price of $1.464 through July 9,
2000, were also issued to Canadian (34,153) and Advantage (Bermuda) Fund
(34,153). 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.
On September 22, 1998 the Registrant sold to Fetu Holdings 6%
convertible debentures due September 22, 2000 in the aggregate principal amount
of $200,000. Warrants to purchase 87,720 shares of Common Stock exercisable at
the price of $.432 through September 22, 2000, were also issued. 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.
On October 6, 1998, the Registrant sold 6% Convertible Debentures, due
October 6, 2000, in the aggregate principal amount of $100,000 and issued
warrants to purchase 55,556 shares of Common Stock for gross proceeds of
$100,000 to: Canadian Advantage LP ($25,000); Dominion Capital Fund ($25,000);
Fetu Holdings ($25,000); and Advantage Bermuda Fund ($25,000). Each of the above
were also issued warrants to purchase 13,020 shares of Common Stock at $.384
per share through October 6, 2000.
On November 18, 1998, the Registrant sold 6% Convertible Debentures, due
November 18, 2000, in the aggregate principal amount of $200,000 and issued
warrants to purchase 101,010 shares of Common Stock for gross proceeds of
$200,000 to: Canadian Advantage LP ($50,000); Dominion Capital Fund ($50,000);
Fetu Holdings ($50,000); and Advantage Bermuda Fund ($50,000). Each of the above
were also issued warrants to purchase 26,881 shares of Common Stock at $.372
per share through November 18, 2000.
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
II-5
<PAGE>
the Common Stock the certificates representing such securities bear a legend
preventing resale in the absence of registration with the Commission or an
exemption therefrom.
ITEM 27. EXHIBITS
(a) EXHIBITS
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)
*5.1 Opinion of Snow Becker Krauss P.C.
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)
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)
II-6
<PAGE>
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.(2)
10.24 Real Estate Sublease Agreement dated June 29, 1998, between TPI
and Origin Technology In Business Inc.(2)
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of Goldstein Golub Kessler LLP.
*99.1 Form of Rescission Agreement.
(1) Incorporated by reference from the Form 10-SB filed by the company on
March 12, 1998 and amended on August 31, 1998 and October 22, 1998.
(4) Incorporated by reference from the Form 10-KSB filed by the company on
November 13, 1998.
* Filed herewith.
- ----------------------------
ITEM 28. UNDERTAKINGS
(a) RULE 415 OFFERING
The Registrant hereby undertakes:
(1) To file, during any period in which if offers or sells
securities, a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information set
forth in the registrant statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on
the plan of distribution.
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<PAGE>
(2) For determining any liability under the Securities Act, treat
each post-effective amendment as a new registration statement relating to the
securities offered, and the offering of such securities at that time to be the
initial bona fide offering thereof.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(e) REQUEST FOR ACCELERATION OF EFFECTIVE DATE
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of the expenses
incurred or paid by a director, officer, or controlling person of the small
business issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(f) RULE 430A OFFERING
For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration statement as of the
time the Commission declared it effective.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Mississauga, Dominion of Ontario, on December 11, 1998
TRANSFORMATION PROCESSING INC.
By: /s/ Paul G. Mighton By: /s/ Gary G. McCann
------------------------------- -------------------------------
Paul G. Mighton Gary G. McCann
Chairman of the Board Chief Financial Officer &
Accounting Officer
POWER OF ATTORNEY
Each of the undersigned hereby authorizes Paul G. Mighton or Gary G.
McCann as his attorney-in-fact to execute in the name of each such person and to
file such amendments (including post-effective amendments) to this registration
statement as the Registrant deems appropriate and appoints such person as
attorney-in-fact to sign on his behalf individually and in each capacity stated
below and to file all amendments, exhibits, supplements and post-effective
amendments to this registration statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on December 11,
1998 in the capacities indicated.
/s/ Paul G. Mighton Chief Executive Officer
- ------------------------------- and Director
Paul G. Mighton
/s/ Gary G. McCann Chief Financial Officer, Executive
- ------------------------------- President, Secretary and Director
Gary G. McCann
/s/ Vladimir Stepanoff Vice President of
- ------------------------------- Technology and Director
Vladimir Stepanoff
II-9
<PAGE>
EXHIBIT INDEX
Exhibit No. Name
5.1 Opinion of Snow Becker Krauss P.C.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Goldstein Golub Kessler LLP.
99.1 Form of Rescission Agreement.
<PAGE>
Exhibit 5.1
Snow Becker Krauss P.C.
605 Third Avenue
New York, New York 10158-0125
December 10, 1998
Transformation Processing Inc.
5500 Explorer drive, Suite 2000
Mississauga, Ontario L4W 5C7
Ladies and Gentlemen:
You have requested our opinion with respect to the offer and sale by the
Selling Securityholders of Transformation Processing Inc., a Nevada corporation
(the "Company"), pursuant to a Registration Statement (the "Registration
Statement") on Form SB-2 under the Securities Act of 1933, as amended (the
"Act"), of up to 13,240,015 shares (the "Shares") of Common Stock, par value
$.001 per share, of the Company.
We have examined original, or copies certified or otherwise identified
to our satisfaction, of such documents and corporate and public records as we
deem necessary as a basis for the opinion hereinafter expressed. With respect
to such examination, we have assumed the genuineness of all signatures appearing
on all documents presented to us as originals, and the conformity to the
originals of all documents presented to us as conformed or reproduced copies.
Where factual matters relevant to such opinion were not independently
established, we have relied upon certificates of executive officers and
responsible employees and agents of the Company.
Based on the foregoing, it is our opinion that 13,240,015 of the Shares
included in the Registration Statement have been legally issued and duly
authorized and are fully paid and nonassessable; that the 10,113,160 shares
underlying warrants, options and convertible securities referred to in the
Registration Statement have been duly authorized and when paid for and issued as
contemplated by such warrants, options and convertible securities, will be duly
and validly issued and fully paid and nonassessable.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement, and to the use of our name as your counsel in connection
with the Registration Statement and in the Prospectus forming a part thereof.
In giving this consent, we do not thereby concede that we come within the
categories of persons whose consent is required by the Act or the General Rules
and Regulations promulgated thereunder.
Very truly yours,
/s/ SNOW BECKER KRAUSS P.C.
---------------------------
SNOW BECKER KRAUSS P.C.
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF TRANSFORMATION PROCESSING INC.
NAME STATE OF INCORPORATION
---- ----------------------
None
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
To the Board Of Directors
Transformation Processing Inc.
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form SB-2 of our report dated September 18, 1998,
except for the last paragraph of Note 8, as to which the date is October 31,
1998, on the financial statements of Transformation Processing Inc. as of
July 31, 1998 and for the period from April 1, 1996 (date of incorporation)
to July 31, 1998, the year ended July 31, 1998, and cumulative amounts from
inception to July 31, 1998, which appear in such Prospectus. We also consent
to the reference to our firm under the caption "Experts" in such Prospectus.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
December 10, 1998
<PAGE>
Exhibit 99.1
ATTACHMENT A
NOTICE OF RESCISSION
TRANSFORMATION PROCESSING INC.
Request for Rescission
or
Affirmation of Subscription and Release
THE RESCISSION OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK, NEW YORK
TIME, ______________________,1999.
Please complete and sign this document and return it to Transformation
Processing Inc. at the address set forth below, on or before 5:00 P.M., New York
City time, on _______________, 1999, the expiration date of the Rescission
Offer. Please indicate your election by INITIALLING Box A or Box B, as
appropriate.
Transformation Processing Inc.
5500 Explorer Drive, Suite 2000
Mississauga, Ontario L4W 5C7
Gentlemen:
The undersigned hereby acknowledges having received and carefully read the
rescission offer (the "Rescission Offer") described in the prospectus dated
___________, 1998 by Transformation Processing Inc. (the "Company") to
repurchase the Rescission Securities hereinafter identified which were
previously acquired by the undersigned from the Company (the "Securities").
1
<PAGE>
As indicated below, the undersigned hereby (i) elects to accept the
Rescission Offer and requests that the Company repurchase the Rescission
Securities in accordance with the terms of the Rescission Offer or (ii) affirms
the undersigned's subscription for all of such securities.
/ / A. Request for Rescission
1. The undersigned hereby irrevocably elects to accept the Company's
offer to repurchase all of the Securities and to pay the undersigned an amount
equal to the consideration which the undersigned paid to the Company for the
Rescission Securities together with simple interest at the rate of 9% per annum.
2. The undersigned hereby encloses the certificates identified below,
representing all of the Rescission Securities that the undersigned acquired from
the Company. All certificates representing shares of the Company's Common Stock
must be duly endorsed for transfer or accompanied by an assignment separate from
the applicable stock certificate. The enclosed represents all, and not less
than all, of the Rescission Securities that the undersigned acquired from the
Company. The undersigned hereby represents that the undersigned is conveying
all interests in the Rescission Securities free and clear of all liens and
encumbrances of any kind, and that no such interest has been previously or
concurrently transferred in any manner to any other person or entity.
Certificate No. ____ for ____ shares of Common Stock
/ / B. Affirmation of Subscription.
The undersigned hereby affirms the undersigned's subscription or
subscriptions to purchase all Securities of the Company, and elects NOT to
accept the Company's offer to repurchase such Rescission Securities.
THE UNDERSIGNED:
______________________________________
Print name of the undersigned and, (a)
if Rescission Securities are held by a
partnership, corporation, trust or
entity, the name and capacity of the
individual signing on its behalf, and
(b) if Rescission Securities are held as
joint tenants or as community property,
name(s) of co-purchaser(s).
2
<PAGE>
Dated: _______, 1999 ________________________________________
Signature
________________________________________
Tax I.D./Soc. Sec. No.
Dated: _______, 1999 ________________________________________
Signature
________________________________________
Second Tax I.D./Soc. Sec. No.
Residence Address:
Street Address: ________________________________________
City, State and Zip Code: ________________________________________
Mailing Address (if different from residence):
Street Address: ________________________________________
City, State and Zip Code: ________________________________________
3
