SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
[X] Annual Report Under Section 13 or 15(d) of Securities Exchange Act of
1934
For the Fiscal Year ended September 30, 2000
[ ] Transition Report Under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
______________ to ___________________
Commission File Number 0-26839
SNAP2 CORPORATION
(f/k/a White Rock Enterprises, Ltd.)
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(Name of small business issuer in its charter)
NEVADA 88-0407246
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(State of Incorporation) (I.R.S. Employer Identification No.)
10641 JUSTIN DRIVE, URBANDALE, IOWA 50322
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(Address of Principal Executive Offices) (Zip Code)
(515) 331-0560
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(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
$0.001 par value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive
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proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ ]
State registrant's revenues for its most recent fiscal year: $737,054
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates: $6,383,000 as of December 1, 2000. The registrant's stock is
traded on the OTC Electronic Bulletin Board and the value of the registrant's
stock for this purpose has been based upon the average of the bid and ask price
on December 1, 2000.
State the number of shares outstanding of each of the issuer's classes of common
stock at the latest practicable date:
As of December 1, 2000, the registrant had 17,856,000 shares of common stock,
$.001 par value, issued and outstanding and 10,000 shares of convertible
preferred stock issued and outstanding which are convertible into 10,000,000
shares of common stock, $.001 par value, on February 28, 2002.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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2000 FORM 10-KSB -- TABLE OF CONTENTS
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PART I
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Item 1. Description of Business................................................1
Item 2. Description of Property................................................6
Item 3. Legal Proceedings......................................................6
Item 4. Submission of Matters to a Vote of Security Holders....................6
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...............7
Item 6. Management's Discussion and Analysis or Plan of Operation..............8
Item 7. Financial Statements...................................................11
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure....................................26
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act......................26
Item 10. Executive Compensation.................................................28
Item 11. Security Ownership of Certain Beneficial Owners and Management.........29
Item 12. Certain Relationships and Related Transactions.........................30
Item 13. Exhibits and Reports on Form 8-K.......................................30
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Cautionary Statement on Forward-Looking Statements.
The discussions in this Report on Form 10-KSB, including the discussions in Item
1 and Item 6, contain forward-looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about the Company's business, based on management's current beliefs
and assumptions made by management. Words such as "expects", "anticipates",
"intends", "believes", "plans", "seeks", "estimates" and similar expressions or
variations of these words are intended to identify such forward-looking
statements. Additionally, statements that refer to the Company's estimated or
anticipated future results, sales or marketing strategies, new product
development or performance or other non-historical facts are forward-looking and
reflect the Company's current perspective based on existing information. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict. Therefore,
actual results and outcomes may differ materially from what is expressed or
forecasted in any such forward-looking statements. Such risks and uncertainties
include those set forth below in Item 1 under "Risk Factors That May Affect
Future Results of Operations" as well as previous public filings with the
Securities and Exchange Commission. The discussion of the Company's financial
condition and results of operations included in Item 6 should also be read in
conjunction with the financial statements and related notes included in Item 7
of this annual report. The Company undertakes no obligation to update publicly
any forward-looking statements, whether as a result of new information, future
events or otherwise.
PART I
ITEM 1: DESCRIPTION OF BUSINESS
General. SNAP2 Corporation (f/k/a White Rock Enterprises, Ltd.) (the "Company")
is a software product developer and software service provider for in-flight
entertainment systems (IFE) for passenger aircraft and interactive set-top boxes
(STB) for interactive television. The Company was incorporated on October 8,
1998 under the laws of the State of Nevada originally for the purpose of
developing and marketing its only product, a boot dryer that dries both boots
and shoes for commercial and consumer use. Effective February 28, 2000 the
Company merged with ISES Corporation (an Iowa corporation originally
incorporated on May 14, 1997) ("ISES") with the Company being the survivor. In
connection with the merger, the Company disposed of its boot dryer product to
the original owner. The Company's name was subsequently changed to SNAP2
Corporation pursuant to Articles of Amendment filed July 12, 2000.
The resulting Company's activities to date have consisted of:
o Developing the Airsoft Travel Kit software product which includes
destination information, language training, games and airline
information for IFE systems.
o Licensing and installing the Airsoft Travel Kit Games on international
and domestic airlines with IFE equipped aircraft.
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o Providing interactive television set-top box manufacturers with
professional software design, programming and graphic design services.
o Research and development strategies to productize the intellectual
property assets of ISES (now the Company) for interactive television.
o Contracting with interactive television suppliers to support
promotional efforts of their related products.
o Expanding its engineering, sales and marketing staff to address the
STB and IFE markets.
o The Company is registered with the SEC as SNAP2 Corporation and is
traded on the over-the-counter bulletin board: OTCBB:SSNP.
The Company continues to develop software and service the STB and IFE industries
and to explore emerging markets for embedded software technologies. The Company
has engaged with companies creating embedded devices technologies such as
Internet appliances, personal digital assistants and wireless devices. The
Company feels that it can target these markets successfully with the
technologies and experience from the STB and IFE markets as well as the skill
sets it has acquired from its growth of embedded software programmers. The
Company will pursue additional product and service opportunities in these
markets.
Operations. The Company operates from its new headquarters located at 10641
Justin Drive, Des Moines, Iowa 50322. The Company was previously located at 2600
72nd Street and moved to its expanded facilities on May 23, 2000 to accommodate
its growth and development. In addition to its offices in Des Moines, the
Company also has a sales office in Austin, Texas and an affiliation with an
engineering and graphic design office in Toronto, Canada. The combined three
offices develop and market software products and services for IFE systems and
STB for interactive television created by the Company.
Products. The Company markets software applications for the IFE and interactive
television markets. Its Airsoft Travel Kit software targets IFE systems
manufactured by Rockwell Collins, Matsushita Avionics and Sony Trans Com. The
Travel Kit is comprised of digital information and entertainment software that
airline passengers can access from video displays at their passenger seats while
traveling. The complete Travel Kit consists of destination information, language
training and games and customized airline information. The package can be sold
as a complete package or as individual components. The Company has sold packages
of Travel Kit games to Air France, Delta Air Lines, Airtours and AOM French
airlines. The Company has licensed destination information and language training
from Lonely Planet Publishing based in Australia. Airsoft Travel Kit Games are
created, copyrighted, owned and licensed by the Company. The Company has also
licensed Tetris(R) game content from Blue Planet Software, San Francisco,
California for use in its In-Flight Tetris(TM) game for in-flight entertainment.
The game suite consists of 18 assorted board, card, arcade, children's games and
games of chance. The Company is porting these games to interactive television
STBs targeting interactive cable and telephone networks. The Company plans to
broaden its
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software product offering for both the interactive television market and IFE
markets. The Company's products are sold on a royalty based model that generates
revenue at the time of customer contract execution and provides annual revenues
for continued use of the software. IFE products have been sold to airlines and
to IFE equipment manufacturers. The Company intends to sell interactive
television software products to cable and telephone network operators and STB
manufacturers.
Services and Revenues. The Company is staffed with software engineers
experienced in software design and programming for emerging embedded computer
systems and digital graphic artists experienced in graphical user interfaces and
display for consumer electronic applications. The Company has provided
development services to airlines, IFE equipment manufacturers and digital STB
manufacturers to support product development, promotion and deployment. The
Company has established and maintained a services relationship with Motorola's
Multimedia Systems Division supplying graphic and user interface design,
software programming and integration services in support of Motorola's
Streamaster(TM) digital STB architecture. Motorola Multimedia Systems Division
is part of the Imaging and Entertainment Solutions group within the Motorola
Semiconductor Products Sector (SPS).
Through September 30, 2000, the Company's revenues were derived from license
fees and renewals of its Airsoft Travel Kit Games for the IFE market and
software and engineering services provided to interactive television equipment
manufacturers and technology providers. The Company's IFE revenues were
comprised of two types: (i) license fees from airlines for Airsoft Travel Kit
Game products previously sold; and (ii) OEM initial product sales to IFE
equipment manufacturers for Airsoft Travel Kit Game products. Air France,
Airtours International, Delta Air Lines, AOM French airlines and Rockwell
Collins are currently using the Company's software products on deployed IFE
equipped aircraft. The Company also receives engineering service fees from
interactive television STB manufacturer Motorola and technology provider Canal+
US Technologies.
The Company intends to derive the primary portion of its revenues through
Company software product sales. Revenue is collected on execution of the
software product license and is subject to renewal fees on each anniversary date
of the agreement thereafter. The Company plans to continue distributing products
directly to end users as well as to original equipment manufacturers (OEMs) who
bundle and resell the Company's products to end users. The Company intends to
continue deriving engineering service fee revenues from both end users and OEMs
as those activities represent an immediate revenue stream and presents the
Company with product licensing opportunities with the OEMs and their customers.
Expenses. Expenses consist primarily of payroll and related costs, third-party
consulting, other professional services, and travel. The majority of the
Company's products have been created and copyrighted by ISES (Company's
predecessor in interest pursuant to the merger which was effective February 28,
2000). The Company has licensed In-Flight Tetris(TM) from Blue Planet Software
and incurs licensing costs for each copy inventoried for or distributed to the
IFE market. The Company has also licensed travel information from Lonely Planet
Publishing and incurs licensing costs for copies distributed to the IFE market.
Research and Development. The Company's research and development expenses
include personnel costs, allocated facilities-related expenses and payments to
third-party consultants. The Company
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expects research and development expenses will increase in the future as
additional personnel are hired to support anticipated growth. During the years
ended September 30, 2000 and December 31, 1999 the Company estimates it expended
$605,000 and $425,000, respectively on research and development expense.
Employees. At September 30, 2000, the Company had 16 full time employees and no
part time employees.
Risk Factors That May Affect Future Results of Operations. In addition to the
other risk factors contained herein and within other filings with the Securities
and Exchange Commission, the Company believes the following additional risk
factors should be taken into consideration in evaluating its business:
o The Company Expects to Incur Operating and Net Losses. The Company has
a limited operating history, has incurred significant losses in the
past year and, at September 30, 2000, had an accumulated stockholders'
deficit of $102,609. To date, the Company has recognized growing
revenue, however, its ability to generate revenue is subject to
substantial uncertainty. The Company expects to incur significant
additional losses and continued negative cash flow from operations and
it may never become profitable. The Company expects to incur
significant sales and marketing, research and development and general
and administrative expenses. The Company will need to generate
significant revenues to achieve profitability and positive operating
cash flows. Even if profitability and positive operating cash flow are
achieved, the Company may not be able to achieve, sustain or increase
profitability or positive operating cash flow on a quarterly or annual
basis.
o The Company's Limited Operating History and the Emerging Market for
Interactive Television and In-Flight Entertainment Systems Make Its
Future Financial Results Unpredictable. The Company's business and
prospects depend on the development and market acceptance of
interactive television and the growth of aircraft in-flight
entertainment systems. The Company's future revenue prospects are
subject to a high degree of uncertainty. Currently, it derives
approximately 40% of its revenues from in-flight entertainment
software license fees and 60% from interactive television engineering
service fees. In the future, however, the Company intends to generate
revenue primarily from software license fees particularly in the
emerging market of interactive television while maintaining modest
growth in the in-flight entertainment market. The market for
interactive television software is new, unproven and subject to rapid
technology change. This market may never develop or may develop at a
slower rate than anticipated. In addition, the Company's success in
marketing the Company as a supplier of interactive television
application software is dependent upon developing and maintaining
relationships with industry-leading computer and consumer electronics
manufacturers, network operators and Internet content providers. There
is already competition in the market to provide interactive television
software. Companies such as Liberate, Intellocity, Microsoft, and AOL
have established a market presence and have significantly greater
financial, marketing
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and technical resources than the Company. These companies who offer
interactive television application software may capture a larger
portion of the market than the Company. Any failure to establish
relationships with interactive television equipment manufacturers and
network operators will have a material adverse effect on the Company's
business and prospects.
o The Company's Business is Dependent Upon the Successful Deployment of
Digital Set Top Boxes for Interactive Television and the In-Flight
Entertainment Systems Targeted by the Company. The Company's software
products target specific interactive television and in-flight
entertainment systems and the opportunity to generate revenue can be
directly related to the number and the timing of systems deployed. It
is the Company's intent to pursue and support the most popular system
platforms for these markets. If the targeted platforms fail to
establish significant and timely deployment in the market it will have
a material adverse effect on the Company's business and prospects.
o The Company Faces Competition from Companies with Significantly
Greater Financial, Marketing, and Technical Resources. The markets for
interactive television and in-flight entertainment systems are
competitive. Companies that offer competing software applications and
services for interactive television include Liberate, Intellocity,
Microsoft, AOL and others. These entities each have a larger customer
base, a greater number of applications, and greater brand recognition,
market presence and financial, marketing and distribution resources
than the Company. Other companies that offer competing software
applications and services for in-flight entertainment include
Nintendo, Infogrames, Tenzing, and Intergame some of which have a
larger customer base, a greater number of applications, and greater
brand recognition, market presence and financial, marketing and
distribution resources than the Company. As a result, the Company will
have difficulty increasing the number of design "wins" for its
products and services.
o The Company May Not Be Able to Respond to the Rapid Technological
Change in the Markets in Which It Competes. The Company currently
participates in markets which are subject to:
|X| rapid technology change;
|X| frequent product upgrades and enhancements;
|X| changing customer requirements for new products and features;
and
|X| multiple, competing and evolving industry standards.
The introduction of the software applications targeting interactive
television and in-flight entertainment containing new technologies and
the emergence of new industry standards could render the Company's
products less desirable or obsolete. In particular, the Company
expects that changes in the operating system environment including
client and server middleware will require it to rapidly evolve and
adapt its products to be competitive. As a result, the life cycle of
each release of the
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Company's products is difficult to estimate. To be competitive, the
Company will need to develop and release new products and upgrades
that respond to technological changes or evolving industry standards
on a timely and cost-effective basis. There can be no assurance that
the Company will successfully develop and market these types of
products and upgrades or that the Company's products will achieve
market acceptance. If the Company fails to produce technologically
competitive products in a timely and cost-effective manner, its
business and results of operations could suffer materially.
o Volatility of Stock Price. The market price of the Company's common
stock is likely to fluctuate in the future. The Company believes that
various factors, including quarterly fluctuations in results of
operations, announcements of new products or partners by the Company
or by its competitors, changes in interactive television and in-flight
entertainment markets in general, or general economic, political and
market conditions may significantly affect the market price of its
common stock.
ITEM 2: DESCRIPTION OF PROPERTY
The Company leases its facilities at its main office at 10641 Justin Drive,
Urbandale, Iowa and also has an office at 8006 Monona Avenue, Austin, Texas.
Management considers its current office space arrangements to be adequate for
its current needs and for its short-term growth objectives.
Main Office
The Company leases 4,800 square feet from Brad Johnson Investments, LC, pursuant
to a Lease dated 13th day of March, 2000. The Lease is for a period of five (5)
years and the initial base rent thereunder is $56,160 per year.
Austin, Texas Office
The Austin, Texas office is the residence of officer and director Mark Malinak,
for which the Company pays no rent.
ITEM 3: LEGAL PROCEEDINGS
The Company currently is not aware of any pending legal proceeding to which the
Company is a party or to which any of its property is subject, other than
routine litigation that is incidental to its business. The Company currently is
also not aware that any governmental authority is contemplating any legal
proceeding against the Company or any of its property.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of the Company, through
solicitation of proxies or otherwise, during the three months ended September
30, 2000. However, on June 14, 2000 pursuant to the applicable provisions of the
Nevada General Corporation Law, shareholders owning
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a majority of the shares of the Company entitled to vote on a matter consented
to the adoption of an amendment to the Company's Articles of Incorporation in
order to change the Company's name to "SNAP2 Corporation."
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is authorized to issue 50,000,000 shares of its $0.001 par value
common stock and 20,000,000 shares of its $0.001 par value preferred stock. As
of September 30, 2000, the Company had 17,856,000 issued and outstanding shares
of common stock and 10,000 issued and outstanding shares of preferred stock
which are automatically convertible into 10,000,000 shares of common stock on
February 28, 2002.
The Company's common stock is traded on the OTC Electronic Bulletin Board
sponsored by the National Association of Securities Dealers under the trading
symbol "SSNP." The Electronic Bulletin Board is a network of security dealers
who buy and sell stock. The dealers are connected by a computer network which
provides information on current "bids" and "asks" as well as volume information.
As of September 30, 2000 the Company had approximately 63 common stock
shareholders and one shareholder of its preferred stock and there has been only
a limited public market for the Company's common stock. The following table
shows, for the periods indicated, the high and low per share prices of common
stock, as reported on the OTC Electronic Bulletin Board. Such prices represent
prices between dealers, do not include retail mark-ups, mark downs or
conversions and may not represent actual transactions. No information is
provided for periods prior to the effective date of the merger of ISES with and
into the Company, which merger was effective February 28, 2000.
Period Ended High Low
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March 31, 2000 (one month) $5.625 $3.937
June 30, 2000 $4.50 $1.875
September 30, 2000 $3.875 $0.937
October 1, 2000 through November 30, 2000 $1.875 $0.60
On November 30, 2000, the closing bid and ask prices of the common stock as
reported on the OTC Electronic Bulletin Board were $0.65625 and $0.78125,
respectively.
The Company has never declared or paid cash dividends on its capital stock. It
is anticipated that the Company would retain its future earnings, if any, to
fund the operation and expansion of its business and management does not
anticipate paying any cash dividends in the foreseeable future.
In connection with the merger of ISES with and into the Company, the Acquisition
Agreement and Plan of Merger (previously filed as Exhibit 1.1 to the Company's
Current Report on Form 8-K filed
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March 1, 2000) provided for the issuance of (i) 10,000,000 shares of common
stock and (ii) 10,000 shares of convertible preferred stock which are
automatically convertible into 10,000,000 shares of common stock of the Company
two (2) years after the Closing Date of the Merger which was February 28, 2000.
An additional 2,200,000 shares of common stock were issued to various designees
of Investment Capital Corporation and Pursuit Capital, LLC in connection with
the merger, in exchange for the commitment of these entities to raise $2,000,000
to fund working capital needs and general corporate purposes, including, but not
limited to, expansion of sales and marketing efforts, research and development
activities, licensing of new technology and payment of additional legal and
accounting services occasioned by the merger of the Company and ISES. These
entities conducted a private placement of the Company's $.001 par value common
stock during the fiscal quarter ended March 31, 2000 and raised $760,000, in
consideration of which the Company issued an additional 760,000 shares of its
common stock. These entities are obligated to provide the Company with an
additional $2,000,000 in equity (without further issuance of equity securities
by the Company) of which $100,000 was received by the Company as of June 30,
2000 and an additional $470,610 was received through November 30, 2000 leaving a
balance of $1,429,390 to be provided by these entities. None of such shares of
common stock or preferred stock was or will be registered under the Securities
Act of 1933, as amended.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Item 6 should be read in conjunction with the discussion included in Item 1
above, "Description of Business" and the financial statements of the Company
included in Item 7 below.
Results of Operations
Since the inception of ISES Corporation (now the Company), it has been engaged
primarily in the business of developing and licensing software products and
providing engineering software and graphic design services. Accordingly,
historical results of operations are not indicative of and should not be relied
upon as an indicator of future performance.
All revenue and the majority of the costs and expenses disclosed in this report
were generated by ISES Corporation. The Company had no revenue prior to the
merger with ISES Corporation and minimal costs and expenses. As a result, the
consolidated comparative data represents the comparison of ISES revenue, costs
and expenses for a similar period in the previous year.
Years Ended September 30, 2000 and December 31, 1999
Revenues
Total revenues increased 3.5% to $737,054 for the year ended September 30, 2000,
compared to $712,286 for the year ended December 31, 1999. The increase was
related to an increase in product license revenues and license updates. Product
license fees represented approximately 40% of revenues versus 53% for
engineering service fees. During the year ended September 30, 2000,
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transactions with Motorola, Canal+ U.S. Technologies, Delta Airlines, Airtours
International, Rockwell Collins and AOM accounted for 43%, 12%, 7%, 10%, 2% and
2%, respectively of the Company's total revenues.
Costs and Expenses
Total costs increased 33% to $1,704,093 for the year ended September 30, 2000,
compared to $1,135,433 for the year ended December 31, 1999. The increase was
related to merger administrative costs, sales commission costs and added
software development costs needed to support increased business and anticipated
future growth. The Company believes that costs and expenses will continue to
increase as it attempts to expand operations (including product development) and
sales and marketing efforts.
Payroll and Related Benefits
Payroll and related benefits increased 52% to $938,877 for the year ended
September 30, 2000 from $618,653 for the year ended December 31, 1999 reflecting
research and development, marketing and administrative employee expansion in Des
Moines, Iowa and establishing a sales office in Austin, Texas.
Software Development and Consulting
Software development and consulting expenses increased 26% to $377,551 for the
year ended September 30, 2000 from $299,603 for the year ended December 31,
1999.
Other Expenses
Other expenses increased 79% to $387,665 for the year ended September 30, 2000
from $217,177 for the year ended December 31, 1999 reflecting associated costs
of the Company's growth.
Liquidity and Capital Resources
The Company requires working capital to fund its operations. The Company expects
to continue to experience losses from operations and negative cash flows for at
least the next nine (9) month period. Effective February 28, 2000 (the date of
filing of a Certificate of Merger with the Nevada Secretary of State), the
Company merged with ISES Corporation with the Company as the surviving
corporation. The merger was arranged for the Company by Investment Capital
Corporation and Pursuit Capital LLC, venture capital firms located in
Scottsdale, Arizona in accordance with understandings these entities reached
with ISES Corporation to raise capital in private transactions. According to
their agreement, these entities were to raise $2,000,000 to fund the Company's
post-merger research and development, marketing and overall expansion. Pursuant
to and in consideration of this arrangement and the identification of the
potential merger as an investment opportunity, the Company issued 2,200,000
shares of its $.001 par value per share common stock to these entities and/or
their designees. During the fiscal quarter ended March 31, 2000 these entities
conducted a private placement on behalf of the Company and raised $760,000, the
proceeds of which have been
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given to the Company. For these funds, the Company issued an additional 760,000
shares of its $.001 per share common stock. The current understanding of the
parties obligates these venture capital entities to provide additional funding
of $2,000,000 (without the issuance of any additional shares of stock by the
Company) on or before August 12, 2000 (i.e., six months after the merger became
effective) of which $100,000 was received by the Company as of June 30, 2000 and
an additional $470,610 was received by November 30, 2000. The balance owed by
Investment Capital Corporation and Pursuit Capital LLC to the Company as of
November 30, 2000 totaled $1,426,390.
The proceeds of the private placement and of the additional capital resources to
be provided by the venture capital firms are being and will be used for working
capital and general corporate purposes, including expansion of sales and
marketing efforts, increases in research and development activities, any
licensing and acquisition of new technologies and legal and accounting expense
incurred as a result of the merger and relating to the Company's ongoing
business.
Since incorporation, ISES (the Company's predecessor in interest pursuant to the
merger) has experienced various levels of losses and negative cash flow from
operations and notwithstanding the merger, expects to experience negative cash
flows in the foreseeable future. In addition, the Company may need to raise
additional capital and there can be no assurance the merged Company will be able
to obtain additional financing on favorable terms, if at all. If additional
capital cannot be obtained on acceptable terms, if and when needed, the Company
may not be able to further develop or enhance its products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements, any of which could have a material adverse effect on the Company's
business.
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ITEM 7: FINANCIAL STATEMENTS
Independent Auditors' Report
To the Stockholders
SNAP2 Corporation:
We have audited the accompanying balance sheet of SNAP2 Corporation (formerly
ISES Corporation, see note 1 to the financial statements) as of December 31,
1999, and the related statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SNAP2 Corporation, as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/S/ McGowen, Hurst, Clark & Smith, P.C.
April 25, 2000
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Independent Auditors' Report
The Board of Directors
SNAP2 Corporation:
We have audited the accompanying balance sheet of SNAP2 Corporation (a Nevada
Corporation) as of September 30, 2000, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SNAP2 Corporation as of
September 30, 2000, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has suffered significant losses in the last 21
months, and as a result has insufficient liquidity to pay its obligations as
they come due. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/S/ KPMG LLP
December 18, 2000
12
<PAGE>
SNAP2 CORPORATION
Balance Sheets
September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
1999
Assets 2000 (note 1)
-------- ---------
<S> <C> <C>
Current assets:
Cash $ 18,956 --
Accounts receivable (note 7) 127,279 138,917
--------- ---------
Total current assets 146,235 138,917
--------- ---------
Property and equipment:
Office furniture and equipment 49,952 14,681
Computer equipment 59,555 20,992
--------- ---------
Total property and equipment 109,507 35,673
Less accumulated depreciation (32,674) (19,704)
--------- ---------
Net property and equipment 76,833 15,969
Other assets 4,760 15,260
--------- ---------
Total assets $ 227,828 170,146
========= =========
</TABLE>
13
<PAGE>
SNAP2 CORPORATION
Balance Sheets
September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
1999
Liabilities and Stockholders' Equity (Deficit) 2000 (note 1)
----------- -----------
<S> <C> <C>
Current liabilities:
Checks disbursed in excess of amounts on deposit $ -- 685
Accounts payable 56,390 109,523
Deferred income 9,343 9,984
Accrued royalty 3,750 --
Accrued interest -- 9,786
Accrued payroll and related liabilities 36,339 105,754
Notes payable -- 175,000
Current portion of long-term debt (note 3) 21,445 --
----------- -----------
Total current liabilities 127,267 410,732
Long-term debt (note 3) 203,170 135,000
----------- -----------
Total liabilities 330,437 545,732
----------- -----------
Stockholders' equity (deficit) (note 4):
Common stock - $0.001 par value; 50,000,000 shares authorized;
17,856,000 shares issued and outstanding at September 30, 2000
and 10,000,000 shares issued or committed to be issued
at December 31, 1999 17,856 10,000
Convertible preferred stock - $0.0001 par value; 20,000,000
shares authorized; 10,000 shares issued and outstanding at
September 30, 2000 and 1999. Shares convert to common stock
at a ratio of 1,000 shares of common for each share of convertible
preferred stock on February 28, 2002 10 10
Additional paid in capital 1,188,858 (8,696)
Accumulated deficit (1,291,683) (376,900)
Unearned compensation (17,650) --
----------- -----------
Total stockholders' deficit (102,609) (375,586)
----------- -----------
Total liabilities and stockholders' deficit $ 227,828 170,146
=========== ===========
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
SNAP2 CORPORATION
Statements of Operations
Years ended September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
1999
2000 (note 1)
------------ -------------
<S> <C> <C>
Revenue (note 7):
License fees $ 294,751 162,680
Consulting 387,723 539,654
Maintenance 33,061 9,952
Other income 21,519 --
------------ -----------
Total revenue 737,054 712,286
------------ -----------
Expenses:
Payroll 839,550 585,353
Payroll taxes 59,227 33,300
Employee health insurance 40,100 --
Software development and consulting (note 6) 377,551 299,603
Administrative 191,064 79,877
Interest 19,914 15,553
Travel 110,029 91,115
Marketing 4,388 6,536
Miscellaneous 1,066 1,559
Equipment and office rent 46,734 16,620
Depreciation 14,470 5,917
------------ -----------
Total expenses 1,704,093 1,135,433
------------ -----------
Net loss $ (967,039) (423,147)
============ ===========
Net loss per share -
Basic and diluted $ (0.07) (0.04)
============ ===========
Weighted average shares and outstanding -
Basic and diluted 14,536,175 10,000,000
============ ===========
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
SNAP2 CORPORATION
Statements of Stockholders' Equity
Years ended September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
Additional Retained
Common Convertible Paid Earnings Unearned
Stock Preferred In Capital (Deficit) Compensation Total
-------- ---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1999 (note 1) $ 10,000 10 (8,696) 51,247 -- 52,561
Distributions to S corporation -- -- -- (5,000) -- (5,000)
shareholders
Net loss -- -- -- (423,147) -- (423,147)
-------- ---------- ---------- ---------- ---------- ----------
Balance December 31, 1999 10,000 10 (8,696) (376,900) -- (375,586)
-------- ---------- ---------- ---------- ---------- ----------
Net loss of companies for three
months ended
December 31, 1999
duplicated to adjust to -- -- -- 52,256 -- 52,256
common fiscal year end
Issuance of common stock 7,856 -- 1,179,004 -- -- 1,186,860
Stock options issued to -- -- 18,550 -- (18,550) --
employees
below fair value
Amortization of unearned -- -- -- -- 900 900
compensation
Net loss -- -- -- (967,039) -- (967,039)
-------- ---------- ---------- ---------- ---------- ----------
Balance September 30, 2000 $ 17,856 10 1,188,858 (1,291,683) (17,650) (102,609)
======== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
SNAP2 CORPORATION
Statements of Cash Flows
Years ended September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
1999
2000 (note 1)
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (967,039) (423,147)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 15,370 5,917
Deferred income 4,375 9,984
Change in:
Accounts receivable (1,003) (79,375)
Accounts payable and accrued expenses (80,401) 204,531
----------- -----------
Net cash used by operating activities (1,028,698) (282,090)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (71,163) (11,098)
Increase in other assets (4,760) (15,260)
----------- -----------
Net cash used by investing activities (75,923) (26,358)
----------- -----------
Cash flows from financing activities:
Checks disbursed in excess of amounts on deposit -- 685
Proceeds from issuance of common stock 1,186,860 --
Distributions to shareholders -- (5,000)
Proceeds from notes payable and long-term debt 100,000 310,000
Repayment of notes payable and long-term debt (185,385) --
----------- -----------
Net cash provided by financing activities 1,101,475 305,685
----------- -----------
Net decrease in cash (3,146) (2,763)
Cash at beginning of year 22,102 2,763
----------- -----------
Cash at end of year $ 18,956 --
=========== ===========
Supplemental disclosures:
Cash paid for interest $ 20,076 5,767
=========== ===========
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
(1) Business and Organization
SNAP2 Corporation (the Company) formerly known as White Rock Enterprises,
Ltd. is a software product developer and software service provider for
in-flight entertainment systems (IFE) for passenger aircraft and
interactive set-top boxes (STB) for interactive television. The Company
markets and licenses its software worldwide.
Reverse Merger
Effective February 28, 2000, the Company merged with ISES Corporation
(ISES), with the Company as the surviving corporation. At the date of the
merger, the Company was a "shell company" as the Company had approximately
$1,000 in assets and no liabilities, had generated no revenues since
inception and had incurred total expenses of $6,100 since its inception on
October 8, 1998. The merger transaction has been accounted for as a reverse
merger. In such transaction, the operating enterprise (ISES) is determined
to be the acquiring enterprise for financial reporting purposes. The
historical financial statements of ISES are presented as the historical
financial statements of the combined enterprise. The equity of ISES is
presented as the equity of the combined enterprise, however, the capital
stock account of ISES is adjusted to reflect the par value of the
outstanding stock of the Company after giving effect to the number of
shares issued in merger. For periods prior to the merger, the equity of the
combined enterprise is the historical equity of ISES prior to the merger
retroactively restated to reflect the number of shares received in the
merger. The Company's year end is September 30 whereas ISES' year end was
December 31; therefore, the historical financial statements of ISES for the
year ended December 31, 1999 are presented for comparative purposes to the
Company's year ended September 30, 2000. The three month period from
October 1, 1999 through December 31, 1999 is included in both years.
Revenues, net loss, and basic and diluted earnings per share for that three
month period were $232,056, ($52,256), and ($0.003), respectively.
In connection with the merger, the Company issued 10,000,000 shares of
common stock and 10,000 shares of convertible preferred stock for 100% of
the outstanding shares of ISES. The convertible preferred stock
automatically converts to 10,000,000 shares of common stock on February 28,
2002. Also in connection with the merger, an additional 2,200,000 shares of
common stock were issued to others in exchange for locating investors and a
commitment to raise $2,000,000 to fund the Company's working capital needs
and for general corporate purposes. As the $2,000,000 is received,
additional paid in capital will be recorded.
Use of Estimates
The preparation of financial statements, in conformity with auditing
standards generally accepted in the United States of America, requires the
Company to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of
18
<PAGE>
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
contingent assets and liabilities, at the date of the financial statements,
and the reported amounts of revenues and expenses, during the reporting
period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment is stated at cost and is depreciated on
straight-line methods with estimated useful lives of 3 to 7 years.
Revenue Recognition
Software license fees are recognized as revenue upon contract signing and
shipment of the software master copy or download of software by the
customer. Consulting revenues are derived primarily from custom contract
engineering work and training and consulting services. Revenues from custom
contract engineering work are recognized using the percentage of completion
method. Revenues from training and consulting services are recognized as
the services are rendered. Maintenance revenues, excluding maintenance of
one year or less bundled with software license fees, are recognized ratably
over the term of the related agreements.
Fair Value of Financial Instruments
Fair value estimates, methods, and assumptions are set forth below:
Trade accounts receivable, accounts payable, and accrued expenses--The
carrying amount approximates the estimated fair value due to the
short-term nature of those instruments.
Long-term debt--Due to amounts being borrowed from a related party of
the Company's president and from an economic development agency of the
State of Iowa, the fair value of long-term debt was not reasonably
determinable.
Limitations--Fair value estimates are made as of a specific point in
time, based upon the relevant market information about the financial
instruments. Because no market exists for a majority of the Company's
financial instruments, fair value estimates are based on judgments
regarding current economic conditions and other factors. These
estimates are subjective in nature and involve uncertainties and
matters of judgments and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
19
<PAGE>
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (ABP No. 25) and related
interpretations. Under APB No. 25, compensation cost is measured as the
excess, if any, of the quoted market price of the Company's stock at the
date of grant over the exercise price of the option granted. Compensation
cost for stock options, if any, is recognized ratably over the vesting
period for those options granted to employees and directors. Compensation
cost for stock options issued other than to employees and directors, if
any, is recognized at the date of the grant. The Company provides
additional pro forma disclosures as required under SFAS No. 123,
"Accounting for Stock-Based Compensation" (see note 4).
Income Taxes
ISES originally elected to be treated as a S corporation for federal and
state income tax purposes. Effective February 28, 2000, due to the merger
of ISES into the Company, ISES revoked its S corporation status.
Accordingly, the stockholders of ISES included their proportionate share of
the Company's taxable loss in their personal tax returns for the period
from October 1, 1999 to February 28, 2000. The Company is organized as a C
Corporation.
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
are recognized in income in the period that includes the enactment date.
Earnings Per Share
Basic EPS is computed using the weighted average number of actual common
shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of actual common shares plus the
potential dilution that would occur from the conversion of convertible
preferred stock and the exercise of stock options. Due to the net loss
incurred for the years ended September 30, 2000 and December 31, 1999, the
effect of convertible preferred stock and stock options is not included in
the calculation of diluted earnings per share because the effect is
anti-dilutive.
20
<PAGE>
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
(2) Going-Concern Matters
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course
of business. However, the Company does not have significant cash or other
assets, nor does it have an established source of revenues sufficient to
cover its operating costs to allow it to continue as a going concern. The
financial statements do not include any adjustments that might result if
the Company is unable to continue its operations.
Management of the Company indicates that it has entered into and is
currently negotiating additional contracts for its products and services.
The Company is also exploring the licensing or sale of its intellectual
property and existing contracts to raise additional capital.
(3) Long-term debt
On June 20, 1999, the Company entered into a promissory note with a related
party of the Company's president whereby $135,000 was borrowed by the
Company. The note bears an interest rate of 9% per annum on the unpaid
principal balance. Under the terms of the note, principal payments of
$10,385 along with interest are due in quarterly installments beginning
July 1, 2001. The Company prepaid $10,385 of principal. The remaining
maturities of this note are $10,385, 2001; $41,538, 2002: $41,538, 2003;
and $31,154, 2004.
On August 17, 1999 the Company entered an agreement with the Iowa
Department of Economic Development (IDED) whereby the Company would receive
$100,000 of financial assistance under the Community Economic Betterment
Account (CEBA). Under the terms of the agreement, the Company pays an
annual royalty equal to 1.5% of the prior year total gross revenues to IDED
in semi-annual payments each June 1 and December 1, until a repayment
amount of $200,000 has been reached. The first scheduled semi-annual
payment is June 1, 2001 and is $5,530.
The Company has a $200,000 line of credit with a bank bearing interest at
the bank's commercial base rate. Funds advanced are secured by the
Company's accounts receivable and property and equipment. The line of
credit matures November 10, 2001. There were no borrowings outstanding at
September 30, 2000.
(4) Stock Options
On February 1, 1999 and March 4, 1998 the president of the Company granted
options to purchase 7,805,025 and 6,191,800, respectively, shares of common
stock of the Company
21
<PAGE>
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
owned by him, (adjusted for the February 28, 2000 merger) to employees of
the Company and consultants to the Company for $0.10 and $0.05 per share,
respectively. These options were issued at fair value at the date of
granted and were accounted for as if such options were issued directly by
the Company. The options vest three years from the date of grant.
The Company's Board of Directors adopted the Stock Option Plan (the Plan)
effective March 15, 2000. Under the Plan options may be granted to
employees, officers, consultants, directors and advisors to purchase up to
an aggregate of 1,000,000 shares of the Company's common stock. Options
granted under the Plan may be options that are intended to qualify as
incentive stock options and options that are not intended to so qualify. If
incentive stock options are granted to a person possessing more than ten
percent of the combined voting power or value of all classes of stock of
the Company, the exercise price shall not be less than 110% of the
Company's common stock fair market value on the date of grant. Under the
Plan, the term of options may not exceed ten years unless an incentive
stock option is granted to a stockholder who owns more than ten percent of
the combined voting power of the Company, then the term may not exceed five
years. The Board of Directors determines the exercise price, vesting period
of options at the date of grant and other conditions as specified in the
Plan.
The Company applies the provisions of APB No. 25 and related
interpretations in accounting for stock options and related compensation
expense, if any, under the Plan. Compensation expense of $900 was
recognized for stock options issued below fair value to employees to
purchase 105,000 shares of the Company's common stock during the year ended
September 30, 2000.
Had the Company determined compensation cost based on the fair value at the
grant date for stock options including options granted by the Company's
president under SFAS 123, the Company's net loss and net loss per share
would have been as indicated below:
2000 1999
----------- ----------
Net loss - as reported $ (967,039) (423,147)
Net loss - pro forma (1,102,754) (515,332)
Basic loss per share - as reported (0.07) (0.04)
Basic loss per share - pro forma (0.08) (0.05)
Diluted loss per share - as reported (0.07) (0.04)
Diluted loss per share - pro forma (0.08) (0.05)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option valuation model with the following weighted
average assumptions used for grants during fiscal 2000: risk-free interest
rate of 6.5%, dividend yield of 0.0%, expected
22
<PAGE>
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
volatility of 110%, and expected lives of 5 years. The fair values of the
option grants in fiscal 2000 were $1.64 to $2.02 per share. As the Company
was a nonpublic entity until February 28, 2000, it is permitted under SFAS
123 to use the "minimum value" method to value stock options granted prior
to February 28, 2000. Under the "minimum value" method expected volatility
is effectively zero. The weighted average fair value of stock options
granted by the Company's president for the years ended December 31, 1999
and 1998 were $0.03 and $0.01, respectively. The effects of applying SFAS
123 may not be representative of the effects on reported net earnings
(loss) for future years.
The stock option activity under the Plan during the year ended September
30, 2000 is summarized as follows:
Weighted-
Year average
ended exercise
2000 price
--------- ---------
Beginning Balance $ -- --
Granted 470,000 2.44
Exercised -- --
Canceled (75,000) 2.88
--------- ---------
Ending Balance $ 395,000 2.36
========= =========
Options exercisable at period end $ --
=========
At September 30, 2000, 605,000 stock options were available for grant.
The options outstanding under the Plan as of September 30, 2000 have the
following attributes:
Option statistics $2.03 $2.50 $3.00
by price rages: to $2.49 to $2.99 and over
---------- -------- --------
Options outstanding 280,000 75,000 40,000
Weighted-average price $ 2.14 2.63 3.38
Weighted-average remaining life 9.7 yrs 9.7 yrs 9.5 yrs
Number exercisable -- -- --
23
<PAGE>
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
(5) Income Taxes
Prior to February 28, 2000 the Company was an S corporation for income tax
purposes and the tax profits or losses passed through to the shareholders.
On a proforma basis as if the Company had been taxed as a C corporation for
the year ended December 31, 1999 there would have been no income taxes or
benefits since the Company had a net operating loss and the benefit of such
carryforward would not have been recognized.
The income tax expense for 2000, differs from the "expected" tax expense
computed by applying the United States federal income tax rate of 34% to
the loss before income taxes, as follows:
2000
----------
Computed "expected" tax benefit for the period
February 28, 2000 through September 30, 2000,
the C corporation period $ (264,114)
Increase (decrease) in "expected" tax expense
resulting from:
Net operating loss carryforward
not recognized 266,000
Other, net (1,886)
----------
Income tax benefit $ --
==========
At September 30, 2000 the only temporary difference that gave rise to a
significant portion of deferred income tax assets was a net operating loss
carryforward. The net operating loss of approximately $788,000 expires in
2020. A valuation allowance has been established for $268,000. The
valuation allowance at September 30, 2000 increased $266,000.
(6) Related Party
ISES Canada, a Canadian Company with common ownership through the Company's
president, provides software development and consulting services to the
Company. Fees paid or accrued to ISES Canada totaled $322,802 and $299,603
for the years ended September 30, 2000 and December 31, 1999, respectively.
24
<PAGE>
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
(7) Business and Credit Concentration
For the year ended September 30, 2000 the Company had three customers who
accounted for approximately 66% of total sales. Included in trade accounts
receivable at September 30, 2000 was $99,163 due from these customers.
(8) Leases
The Company leases an office facility under an operating lease. For the
year ended September 30, 2000, rent expense was approximately $42,000.
At September 30, 2000, the Company's future minimum Lease obligations are
approximately:
Year ending
September 30,
-------------
2001 $63,000
2002 58,500
2003 60,000
2004 61,000
2005 39,000
--------
$281,500
========
25
<PAGE>
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company is the resulting corporation of a merger between White Rock
Enterprises, Ltd. (the Company, n/k/a SNAP2 Corporation) and ISES Corporation,
an Iowa corporation which was effective on February 28, 2000. Prior to that time
the Company was a "shell" corporation and ISES Corporation was an operating
company. The Company was the surviving corporation of the merger. ISES
Corporation (as a predecessor to the Company) has not had any change in its
accountants during the last three years or any disagreement with its accountants
during that period which are the type required to be disclosed under this Item.
However, on December 15, 2000, the Board of Directors of SNAP2 Corporation (the
"Company") approved the hiring of KPMG LLP (KPMG) as the Company's independent
accountants for the audit of the financial statements of the Company for the
year ended September 30, 2000. The Company's previous accountant (prior to the
merger) was Barry L. Friedman, P.C., Las Vegas, Nevada, ("Friedman").
The audit report of Friedman on the financial statements of the Company for the
period ended September 30, 1999 did not contain an adverse opinion or disclaimer
of opinion, nor was the report qualified or modified as to uncertainty, audit
scope, or accounting principles, except as to an uncertainty regarding the
Company's ability to continue as a going concern due to recurring losses and the
absence of sources of revenue.
To the knowledge of management, during the audit of the period ended September
30, 1999 , there were no disagreements with Friedman on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
The change in the Company's accountants was previously reported on the Company's
Current Report on Form 8-K filed with the SEC on December 20, 2000.
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSON; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Officers.
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
Dean R.("Rick") Grewell III 42 President, CEO and Director
Steven L. Johnson 40 Vice President of Marking and Director
Antony Hoffman 39 Vice President of Research and
Development and Director
Mark Malinak 39 Vice President of Sales and Director
</TABLE>
26
<PAGE>
<TABLE>
<S> <C>
Dean Davis 26 Director
Mike Hennel 41 Director
</TABLE>
The terms of each director of the Company will expire in January 2001 or at such
time as their successors shall have been elected and qualified.
Rick Grewell has been the President, CEO and a Director of the Company since the
merger with ISES Corporation. Prior to merger Mr. Grewell was President and CEO
of ISES Corporation since September 7, 1996. Prior to that time Mr. Grewell was
employed by Microware Systems Corporation, in Clive, Iowa ("Microware") for
approximately 12 years.
Steven Johnson has been a Vice President and Director of the Company since its
merger with ISES Corporation. Prior to the merger Mr. Johnson was Vice President
of Marketing of ISES Corporation since February 1, 1999. Mr. Johnson was
previously employed by Microware for approximately 11 years.
Antony Hoffman has been a Vice President and Director of the Company since its
merger with ISES Corporation. Prior to the merger Mr. Hoffman was Vice president
of Marketing of ISES Corporation since February 1, 1999. Mr. Hoffman was
previously employed at Microware for approximately 13 years.
Mark Malinak has been a Vice President and Director of the Company since its
merger with ISES Corporation. Prior to the merger Mr. Malinak was Vice President
of Sales of ISES Corporation since February 1, 1999. Prior to joining the
Company, Mr. Malinak had been employed at Microware for approximately 4 years
and at Sun Microsystems, Palo Alto, California for 2 years.
Dean Davis has been a Vice President and Director of the Company since its
merger with ISES Corporation. Prior to the merger Mr. Davis had been a graphics
artist with ISES Corporation since February 6, 1998.
Mike Hennel has been a Director of the Company since June 14, 2000. Mr. Hennel
is President and CEO of Silvon Software, a position he has held since 1987.
The number of directors for the Company is currently set at six. The Bylaws
permit the Board of Directors to establish the number of directors at not less
than one (1) nor more than fifteen (15). Each of Company's directors is elected
to a one year term and until his or her successor is elected. Directors need not
be shareholders of the Company or residents of any particular jurisdiction.
The officers of the Company are to be elected annually by the board of directors
at its annual meeting, and hold office until the next annual meeting of the
board of directors and until their successors are chosen. Officers may also be
removed by the board of directors at any time, with or without cause. Officers
need not be a director or a shareholder of the Company.
27
<PAGE>
No executive officer or director of the Company has been the subject of any
order, judgment, or decree of any court of competent jurisdiction, or of any
regulatory agency enjoining him from acting as an investment advisor,
underwriter, broker or dealer in the securities industry, or as an affiliated
person, director or employee of an investment company, bank, savings and loan
association, or insurance company or from engaging in or continuing any conduct
or practice in connection with any such activity or in connection with the
purchase or sale of any securities nor has any such person been the subject of
any order of a state authority barring or suspending for more than sixty (60)
days, the right of such a person to be engaged in such activities or to be
associated with such activities.
No executive officer or director of the Company has been convicted in any
criminal proceeding (excluding traffic violations) or is the subject of a
criminal proceeding which is currently pending.
No executive officer or director of the Company is the subject of any pending
legal proceedings.
Section 16(a) Beneficial Ownership Reporting Compliance
Directors and officers Steven L. Johnson and Antony Hoffman filed form 3s on
December 14, 2000 to disclose options given to them in February 1999 with
respect to an aggregate (as adjusted for stock splits and shares issued pursuant
to the merger) of 1,734,450 shares each of Company common stock currently owned
by Director and President Dean R. Grewell III. Mr. Grewell's related Form 4
disclosing these options was also filed on December 14, 2000.
ITEM 10: EXECUTIVE COMPENSATION
Summary Compensation Table
The following summary compensation table shows the compensation paid by the
Company to its chief executive officer and each of its executive officers whose
salary and bonus for the year ended September 30, 2000 exceeded one hundred
thousand dollars ($100,000).
Summary Compensation Table
Name and Fiscal Year Salary Bonus
Position Ended 9/30 ------ -----
-------- ----
Dean R. Grewell, III 2000 $138,866 $0
President and CEO 1999 $120,090 $0
1998 $0 $0
Mark Malinak
Vice President Sales 2000 $125,000 $122,887 (1)
1999 $115,385 $0
1998 $0 $0
(1) Sales Commission income.
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Director Compensation
The Company at this time only reimburses travel and communication expenses for
board meetings. The Company believes in the future outside directors will be
compensated with money and stock options. There is no plan currently in place.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information on the ownership of the Company's
equity securities by each of the Company's directors and executive officers and
each person known by the Company to be the beneficial owner of more than five
percent (5%) of the Company's voting securities.
Security Ownership Table
<TABLE>
<CAPTION>
Name and Address of Number of Percentage
Beneficial Owner Shares(1) Ownership(1)
---------------- --------- -----------
<S> <C> <C>
Dean R. Grewell, III
1032 54th, West Des Moines, Iowa 50266 4,653,175(2)(3) 16.70%(2)(3)
Steven L. Johnson 1,734,450(3)(4) 6.23%(3)
1620 NW 120th Street, Clive, Iowa 50325
Antony F. Hoffman 1,734,450(3)(4) 6.23%(3)
10113 NW 80th Lane, Grimes, Iowa 50111
Mark Malinak 1,734,450(5) 6.23%(3)
8006 Monona Avenue, Austin, Texas 78717
Dean Davis 1,547,950(5) 5.51%(3)
86 Markham Street, Toronto, Ontario Canada M6J 2G5
Mike Hennel -0- 0%
900 Oakmont, Westmont, Illinois 60559
All executive officers and directors as Group (6 persons) 11,404,475 40.94%
</TABLE>
(1) Ownership totals and percentages are computed based on the actual number of
shares of Company common stock issued and outstanding (17,856,000) plus
10,000,000 additional shares to be issued on February 28, 2002 in exchange
for 10,000 shares of the Company's $.001 par value preferred stock
currently held of record by Mr. Grewell. The totals and percentages do not
include options for 395,000 shares of common stock granted to non-executive
employees of the Company under the Company's Incentive Stock Plan, none of
which were exercisable at September 30, 2000. The totals and percentages
also include options granted by Mr. Grewell in
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February of 1999 and March of 1998 the final agreements with respect to
which, have not yet been executed.
(2) Includes 10,000,000 shares of common stock to be issued on February 28,
2002 in exchange for 10,000 shares of preferred stock held of record by Mr.
Grewell.
(3) Assumes exercise of all options granted by Mr. Grewell (12,064,425 shares
total), which subject to vesting, the exercise date of which is
immediately, February 2, 2000 or March 4, 1999 depending on the option
agreement.
(4) Subject to vesting, call option exercisable February 2, 2000 and expires
March 4, 2008.
(5) Messrs. Malinak and Davis were granted options as of February 1999 and
March 1998 for 1,734,450 shares (as adjusted) and 1,547,950 shares (as
adjusted), respectively, but final agreements are not executed and the
options are therefor subject to cancellation.
Other than Alex Resh, an employee of the Company who has options from Mr.
Grewell with respect to 1,734,450 shares of common stock (6.23% of the Company,
if exercised), management of the Company is not aware of any person or entity
beneficially owning in excess of five percent (5%) of the Company's common
stock.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
With the exception of (i) a loan to the Company from Dean R. Grewell, Jr.
(father of Dean R. Grewell III) and (ii) payments for services rendered by ISES
Canada, as described in Note 3 and Note 6, respectively, to the Company's
audited financial statements included in Item 7 above, the Company has not been
a party to any transaction during the last two years, or proposed transaction,
of the type required to be disclosed under this Item. The transactions to which
this Item applies are transactions involving the Company and in which any of the
following types of persons had or is to have a direct or indirect material
interest:
o any director or officer of the Company,
o any nominee for election as a director of the Company,
o any beneficial owner of more than 5% of the Company's common stock, or
o any member of the immediate family of any person referred to above.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following are the exhibits to this annual report.
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<PAGE>
Exhibit No. Description of Exhibit
2.1 Acquisition Agreement and Plan of Merger (Incorporated
by reference to Exhibit 1.1 to the Company's Current
Report on Form 8-K filed March 1, 2000)
*3.1 Articles of Incorporation, as amended
*3.2 Bylaws, as amended
10.1 Consulting Agreement dated February 25, 1999 between
ISES Corporation and Trivia Mania (Incorporated by
reference to the Company's 10QSB for the period ended
March 31, 2000)
10.2 Copyright and Trademark License and Distribution
Agreement dated September 30, 1999 between The Tetris
Company, L.L.C. and ISES Corporation (Incorporated by
reference to the Company's 10QSB for the period ended
March 31, 2000)
10.3 License Agreement and Software Development Agreement
dated as of November 2, 1999 and November 22, 1999,
respectively, between CANAL+ and ISES Corporation
(Incorporated by reference to the Company's 10QSB for
the period ended March 31, 2000)
10.4 Investment Capital Corporation - Letter agreement
regarding Merger of White Rock Enterprises Ltd. and
ISES Corporation (Incorporated by reference to the
Company's 10QSB for the period ended March 31, 2000)
10.5 Investment Capital Corporation - Memo regarding
proposed new capital structure of White Rock
Enterprises, Ltd. reflecting the merger (Incorporated
by reference to the Company's 10QSB for the period
ended March 31, 2000)
10.6 In-Flight Entertainment Software License Agreement
dated March 31, 1999 between Airtours International
Airways, Limited and ISES Corporation (Incorporated by
reference to the Company's 10QSB for the period ended
March 31, 2000)
10.7 Content License Agreement dated November 15, 1999
between Lonely Planet Publications Pty. Ltd. and ISES
Corporation (Incorporated by reference to the
Company's 10QSB for the period ended March 31, 2000)
10.8 License and Distribution Agreement dated October 1,
1999 pursuant to which ISES Corporation appoints
Licensee-Rockwell Collins, Inc. and End User-Air
France (Incorporated by reference to the Company's
10QSB for the period ended March 31, 2000)
10.9 Software Development Agreement dated December 4, 1998
between Motorola, Inc. and International Systems
Entertainment Software, Inc. (Incorporated by
reference to the Company's 10QSB for the period ended
March 31, 2000)
10.10 ISES Statement of Work for Motorola Application User
Interfaces (Exhibit C) dated June 25, 1999
(Incorporated by reference to the Company's 10QSB for
the period ended March 31, 2000)
*10.12 First Amendment to SNAP2 Corporation Stock Option Plan
(Amending Stock Option Plan previously filed as
Exhibit 10.12 to the Company's 10QSB for the period
ended June 30, 2000)
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10.13 In-Flight Entertainment Software License Agreement for
Delta Air Lines, Inc. dated as of April 26, 2000
(Incorporated by reference to the Company's 10QSB for
the period ended June 30, 2000)
10.14 ISES Statement of Work for the Motorola Streamaster
User Interface Stallone V1.1 dated as of April 28,
2000 (Incorporated by reference to the Company's 10QSB
for the period ended June 30, 2000)
10.15 In-Flight Entertainment Software License Agreement by
AOM dated as of April 27, 2000 (Incorporated by
reference to the Company's 10QSB for the period ended
June 30, 2000)
*27.1 Financial Data Schedule
*Filed herewith
(b) Report on Form 8-K
A report on 8-K describing a change in the Company's independent auditors
was filed on December 20, 2000.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SNAP2 CORPORATION
Date: December 29, 2000 By: /s/ Dean R. Grewell
-----------------------------
Dean R. Grewell, III, President
33
