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________________________________________________________________________________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
___________
Commission File Number: 000-27693
PCSupport.com, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada 98-0211769
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
3605 Gilmore Way, 3/rd/ Floor V5G 4X5
Burnaby, British Columbia, Canada (Zip Code)
(Address of principal executive offices)
Issuer's Telephone Number: (604)419-4490
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.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 past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [_]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and will not be contained, to the best of the
issuer's knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-KSB or any amendment to this Form 10-
KSB. [_]
Issuer's revenues for its most recent fiscal year: $29,482
The aggregate market value of the common stock held by non-affiliates of the
registrant as of June 30, 2000 was approximately $16,355,323, based upon the
closing sale price of $1.938 as reported by the Nasdaq Over-the-Counter Bulletin
Board on such date.
There were 10,477,662 shares of the Company's common stock outstanding on June
30, 2000.
Transitional Small Business Disclosure Format (check one): YES [_] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE: Portions of Registrant's Proxy Statement
for its 2000 Annual Meeting of Stockholders, to be filed with the Securities and
Exchange Commission within 120 days after the close of the Registrant's fiscal
year, are incorporated herein by reference in Part III of this Report.
________________________________________________________________________________
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Table of Contents
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PART I........................................................................................................................ 2
ITEM 1. DESCRIPTION OF BUSINESS....................................................................................... 2
ITEM 2. DESCRIPTION OF PROPERTY....................................................................................... 27
ITEM 3. LEGAL PROCEEDINGS............................................................................................. 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................................... 28
PART II....................................................................................................................... 28
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................................................... 28
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..................................................... 28
ITEM 7. FINANCIAL STATEMENTS.......................................................................................... 31
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......................... 31
PART III...................................................................................................................... 32
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT.................................................................................................. 32
ITEM 10. EXECUTIVE COMPENSATION........................................................................................ 32
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................ 32
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................................ 32
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.............................................................................. 32
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This annual report contains forward-looking statements within the meaning of the
federal securities laws. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe,",
"the Company believes, "management believes" and similar language. The forward-
looking statements are based on our current expectations and are subject to
certain risks, uncertainties and assumptions, including those set forth in the
discussion under "Description of Business," including the "Risk Factors"
described in that section, and "Management's Discussion and Analysis or Plan of
Operation." Our actual results may differ materially from results anticipated
in these forward-looking statements. We base our forward-looking statements on
information currently available to us, and we assume no obligation to update
them.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Business Development
We are a development stage corporation formed under the laws of the State
of Nevada on June 23, 1999 pursuant to the merger (the "Merger") of
PCSupport.com, Inc. ("PCS") and Reconnaissance Technologies Inc. ("RTI"). PCS
was the resulting entity from a prior merger of PCSupport.com, Inc. and Mex-
Trans Seafood Consulting, Inc. ("Mex-Trans"). Mex-Trans was incorporated in the
State of Texas on February 13, 1989 under the name "Mutual Produce, Inc." and
later changed its name to "Mex-Trans Seafood Consulting, Inc."
RTI was incorporated in British Columbia, Canada, on December 10, 1997 for
the purpose of engaging in the development and provision of notebook computer
support services to end users through the Internet. Prior to the Merger, PCS
(and its predecessor, Mex-Trans) did not have any active business and had only
nominal assets and liabilities and was seeking to acquire a new business. In
early 1999 RTI was seeking further capital to develop its business and to merge
with a public entity to provide liquidity for its shareholders. Management of
RTI and PCS began discussions for a merger of the two companies in March 1999.
In anticipation of the Merger, Mex-Trans merged on April 7, 1999 with PCS, a
Nevada corporation incorporated on that date solely for the purpose of
transferring the corporate jurisdiction of Mex-Trans to Nevada
RTI and PCS entered into a formal merger agreement on May 5, 1999, and the
following transactions were carried out to complete the Merger:
1. Each of RTI and PCS obtained shareholder approval for the Merger;
2. PCS underwent a reverse split of its common stock on a 15 old shares
for one new share basis;
3. RTI transferred its governing corporate jurisdiction from British
Columbia to Wyoming; and
4. RTI merged with PCS.
In the Merger, each shareholder of RTI received one share of our common
stock for each five shares of RTI held. Each shareholder of PCS received one
share of our common stock for each share of PCS held. Each holder of outstanding
warrants of RTI received one warrant of the Company for each five warrants of
RTI held. (See Item 5 - "Market for Common Equity and Related Stockholder
Matters" below for a description of outstanding warrants.)
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We have a wholly-owned subsidiary, Reconnaissance International Ltd., a
British Virgin Islands company, the only asset of which was a licensing
agreement with Storage Tek, which has expired, as described below under
"Products and Services - Online Data Backup." The subsidiary has no other
assets or liabilities.
Business of the Company
Principal Products and Services and their Markets
Market Overview
Personal computers ("PCs"), both desktop and laptop or notebook types,
suffer from a wide variety of technical problems that occasionally impair their
performance, causing lost productivity and frustration for end-users. For
example:
. PC hardware, software, drivers, and operating systems (and their
interaction) have become more complex, and this is causing an
increasing number of problems. As a result, computer crashes can
occur, resulting in lost data and unscheduled downtime.
. Software publishers continually issue bug fixes. End-users, however,
are typically not aware of, nor do they know how to find, bug fixes on
the Internet and install them on their PCs.
. Over time, PC hard drives become cluttered with temporary files,
missing drivers for applications and hardware peripherals. The
registry, which acts as the "table of contents" for the PC can also
become cluttered and disorganized. The hard drive becomes fragmented
from normal use. Consequently, over time, the PC performs more slowly,
and is subject to crashes. Often, the end-user is not aware that he or
she has a problem. In response, the Windows 95/98/2000/NT operating
systems provide a utility for users to de-fragment their hard drives.
. PCs are often subject to configuration problems, in which the various
software, hardware and operating systems cannot communicate with each
other.
. PCs are continuously vulnerable to the advent of new viruses which are
designed to impair their operation or destroy the user's data.
. Frequently, the dialer program that end-users invoke to access the
Internet using a dial-up connection becomes corrupted, preventing them
from logging on.
. When PCs crash or are lost through theft or physical damage,
frequently some or all of the end-user's data can be lost, which is a
catastrophic event for those end-users who depend upon their PCs for
their employment or home use. Important files on PCs in a large office
are often backed up to a central server. PCs in small to medium
enterprises ("SME") or small office / home office ("SOHO") must rely
on the end-users to use zip drives, tape drives or online backup
procedures to protect their data. Generally, only the important files
that the end-user selects are saved; not the entire contents of the
end-user's system. All of these systems rely on the end-user to
remember to select the correct files and to backup his or her data,
which is bothersome and, therefore, frequently not done. Until
recently, there was no good system to allow an end-user to
automatically backup his or her entire system. Consequently, there is
a risk among individual and corporate PC end-users of the
irretrievable loss of valuable data in the event of a crash or total
loss of the PC.
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With respect to the technical problems described above, until recently, the
end-user had only a few inefficient and costly options to obtain technical
support. End-users in a large corporation typically have skilled technicians
employed in a management information systems ("MIS") group to assist them, but
SME, SOHO and home end-users have to rely on themselves and volunteers. Hardware
manufacturers and software publishers (collectively, "vendors") provide access
to libraries of support information over the Internet, but these data bases are
typically voluminous and hard for the end-user to navigate. Alternatively, the
end-user can phone one of the many help desks operated by these vendors, but the
process is often time-consuming and frustrating for the end-user and very
expensive for the vendor or the end-user.
End-users can also purchase utilities from a local software retailer, such
as a disk maintenance package. Finally, the end-user can either bring his PC
into a depot repair facility or call a local PC service company to send a
technician to the end-user's place to repair the problem. Both of these latter
options are expensive, and can result in several days of lost productivity for
the end-user.
In sum, the traditional options for the solution of technical problems for
PCs have been inefficient and expensive, both for the PC end-user and the vendor
supplying the technology. The result has been a high level of dissatisfaction
among end-users with the reliability and ease of use of personal computers, and
increasing costs of support among vendors.
The growing popularity of the Internet provides new options to
significantly improve the levels of satisfaction among end-users and to lower
the costs of support for vendors. Starting in 1998, a number of companies began
to offer solutions to PC support problems over the Internet. As described below
under "Competitive Business Conditions and the Company's Competitive Position,"
several companies offered point solutions to a narrow range of problems,
including but not limited to the following:
. Online virus scans and download and update of virus solution
libraries.
. Knowledgebases of solutions to technical problems, many with natural-
language search engines to allow easier access to end-users.
. Email and online chat access to technicians.
. Online updates for drivers and software bug fixes.
. Technical forums where users can ask questions online and have them
answered by one or more technicians loosely affiliated with such
online technical forum.
. Remote diagnostic and repair technologies.
. Online backup for files which the user selects.
A support portal is a destination on the World Wide Web dedicated to
providing technical support services for PC end-users. In 1999 and 2000, the
first of the support portals were introduced, with us and several other
companies, including Techknow-how.com, McAfee.com, all.com, MyHelpDesk.com, and
Service911 among those launching support portals. The largest PC manufacturers,
including Dell, IBM, HP, Toshiba, Gateway and Micron introduced support portals
this year. In general, these support portals aggregate a number of point
solutions to solve a broad range of PC technical problems.
We have developed and implemented, and continue to improve upon, a suite of
services to address the technical needs of PC users described above.
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Market Segmentation
PC users can be segmented into three categories. Users in large
corporations typically have MIS departments from which to access technical help.
SME PC users have all of the same technical problems, yet generally do not have
an MIS department for support. The third segment, SOHO or individual users, are
often completely on their own. We are marketing to these three segments.
Currently, we are primarily marketing to businesses with technical support
obligations to their own clients and/or employees, and secondly to portals that
perceive that their offering of support is a loyalty building tool and
differentiates them from their competition. In the near term, we expect that
over 80% of our revenues will come from businesses with support obligations.
The revenue sources will include one-time fees from customized support center
development, subscription fees from the service packages and incidental support
services delivered through both private-label support centres powered by
PCSupport.com and our website.
Products and Services
We currently offer three services. The current primary service, the PC
Support Center, is a Web-based support portal for PCs which aggregates a number
of support technologies, including interactive online technical trouble-
shooting, software and driver updates, hard disk maintenance, a technical
support forum, and others. Online Data Backup combines an on-line backup
service for notebook and desktop computers with three methods of restoring data
in the event of a PC failure. Phoenix allows a notebook user to transfer a
full-image of all data, applications, preferences and settings to a new
notebook.
1. PC Support Center
We have developed the PC Support Center for all PC users to provide a
service which will react to technical problems and pro-actively maintain the
user's computer to prevent problems from occurring. The first version of the PC
Support Center was launched on our Web site, www.pcsupport.com, in October 1999.
The PC Support Center aggregates various technical solutions, such as updating
operating systems software, applications software and drivers, and disk
maintenance. Once a user visits the site and becomes a subscriber, the PC
Support Center will, at the subscriber's option, automatically scan the user's
computer at each visit to the site to maintain an up-to-date personal profile of
the user's hardware, peripherals, software applications and settings. The PC
Support Center software will, also at the user's option, diagnose and maintain
the hard drive and advise the user of software updates that are pertinent to the
user's configuration. Such updates will be performed at the user's request.
The PC Support Center also includes a technical support forum where subscribers
can ask and have answered technical support questions. Also, the PC Support
Center offers a PC user the ability to email a technical question to a skilled
technician and receive an answer within 24 hours or less.
In July 2000, we launched an eCommerce engine, introduced 24 x7 service (24
hours per day, seven days a week), segregated certain of our previously-free
services and introduced a premium service for which we charge subscribers. Such
services include Live Assist and Remote Repair, services in which the end-user
can engage a technician in an online chat session to solve technical problems
and provide advice, and with the user's permission, take control of the end-
user's PC and solve the problem online while the end-user watches. The premium
service package also includes four-hour turnaround on email requests for
service. Also, the PC Support Center hosts an Education Center from which the
end-user can access tutorials on PC issues.
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The PC Support Center provides subscribers with the opportunity to purchase
from third parties related support products and major software upgrades online.
The PC Support Center also offers the Backup Center, from which users can
download, install, and pay for the Company's Online Data Backup service
described below.
We intend to add new functions to the PC Support Center during the fiscal
year ending June 30, 2001, including a new virus detection and remediation
solution, telephone support, an electronic birth certificate, an Internet dialer
module and a user self-help capability. We also plan to further develop the
architecture of the PC Support Center to maintain a comprehensive data base of
support incidents and subscriber statistics to provide continuous feedback to
the online support process. We also plan for future versions of the PC Support
Center to regularly advise subscribers via email to return to the Company's Web
site to maintain their PCs. See below under "Plan of Operation - Research and
Development." These maintenance and upgrade services will simplify support for
the user because of regular reminders and automatic maintenance.
We offer the PC Support Center services to end users in two ways. Users
can become subscribers to the PC Support Center simply by registering on our Web
site. In July 2000, we launched our premium service package for which we charge
subscribers for additional premium services including Live Assist and Remote
Repair. In addition to offering the PC Support Center directly to consumers, we
also seek to enter into partnership agreements with companies which provide
technical support to end users. In this case, we develop a branded version of
the PC Support Center with the partner's logo, look and feel. The partner then
offers this version to its end users.
We expect to incur additional costs of approximately $2,000,000 over the
next year in order to develop and implement additional functions for the PC
Support Center, which are expected to include the enhancements described below
under "Plan of Operation - Research and Development."
It is our intent to market the PC Support Center to all three market
segments either directly through the PC Support Center to SOHO and consumers, or
through strategic partnerships with ISPs, internet portals, and hardware
manufacturers.
2. Online Data Backup
To provide online backup, in June 1998 our wholly-owned subsidiary entered
into a service supply agreement with StorageTek Canada Inc., a wholly owned
subsidiary of Storage Technology Corp. (collectively "StorageTek") of
Louisville, Colorado. In March 1999, StorageTek launched PowerBAK, a secure
online data service, to its U.S. and Canadian customer base. In 2000,
StorageTek spun out a new company, ManagedStorage International ("MSI"). In
July 2000, we negotiated a new service supply agreement with MSI. Under the
terms of the agreement, MSI has licensed us to sell run-time licenses of the
PowerBAK software under our own brand, Online Data Backup. Subscribers
automatically and transparently connect to MSI's data center online to backup
their hard drive. In addition, MSI has given us an opportunity to develop a
hardware replacement business tied to MSI's online backup service. MSI has
agreed not to enter the replacement business itself for the two-year term of our
contract.
Online Data Backup is a full-service data protection program. Using MSI's
online backup technology, Online Data Backup allows users to backup their full
image - operating systems, applications, data, preferences and settings to a
secure data center. After connecting the PC user to a MSI data center, the
software examines every file on the user's system and compares them to the data
base of files in MSI's data center. Every user file that is either not already
stored in a MSI data center, or has changed since the last backup, is queued for
backup. In performing backup, new files, and the segments of files that have
changed, are sent online over the Internet, in compressed and encrypted form, to
the MSI data center, where the files or file segments are stored.
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Online Data Backup allows PC users to restore data either online or through
a CD, and also provides, for notebook users, hardware restoration in the event
that the entire notebook is unusable. To restore a small number of files or
directories online, the Online Data Backup software connects users to the MSI
data center online, where users enter a password. The software then restores
the file or files online to the user's hard drive.
If a PC user suffers a significant or total loss of data, the user may need
to restore his or her full image onto his or her hard drive. In such event, the
user contacts our help desk and requests a CD restoration. We then load the
user's full image onto a set of CDs which we then send by overnight courier to
the user. The user then follows a simple set of instructions to load the full
image from the CDs onto his or her hard drive.
If a notebook customer suffers a total failure or loss of use (including
theft), he calls our help desk. The user's full image is restored to a
temporary replacement notebook at our operations center. After we receive a
security deposit, the fully functional replacement notebook is shipped to the
user using an overnight courier company. This notebook is loaned to the user
for up to 10 business days while the original notebook is being repaired or
replaced by the user.
Online Data Backup currently comes in two different packages to suit
individual needs. We launched the Online Data Backup basic service, described
below, in the second calendar quarter of 1999 but have not yet generated
significant orders for this service.
Online Data Backup - Basic
This basic package includes only the backup software. It is applicable to
both desktop and notebook users. Users pay for the amount of data stored, as
follows:
Retail Prices
Backup Volume: Monthly: Annual
100 MB of data and system files $ 9.95 $ 95.95
Full Disk Image (Unlimited) $25.95 $199.95
The package includes free online data restoration for both desktop and
notebook PCs. Full image restoration is available from CD-ROM for desktop or
notebook users and from a replacement notebook for notebook users only, in
either case on a per-incident fee, as described above.
Online Data Backup - Premium
The Premium service, available only to notebook users, is available at an
introductory monthly rate of $44.95 and includes, in addition to the services
provided in the basic package, free hardware restoration with a loaned notebook,
regardless of the number of times a replacement notebook is loaned to the user,
within reason. We have not yet generated any revenues from this service.
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3. Phoenix Program
The need for increased hard drive space and faster microprocessors means
notebook users need to replace their machines frequently as the technology
improves. Upgrading to a new machine can be problematic. Users are required to
identify all of their data and programs. Common operating systems, such as
Windows 95, 98, 2000 and NT usually come installed in the new machine, but
software applications must be re-installed from disks or CDs. In addition, it
is becoming more common for software to be downloaded from the Internet. These
files are numerous and often unrecognizable to the average user. Finding and
transferring them from one machine to another is often troublesome and time-
consuming.
Given the complexities involved in upgrading, we believe many users delay
the upgrade to a new machine as long as possible. The Phoenix Program is
intended to alleviate the problems involved with upgrading to a new notebook.
With the Phoenix Program, the user purchases the new notebook and ships it to
us. Once the new notebook is delivered to us, and the user has completed a full
image backup using the Online Data Backup software, we load the user's full
image onto the new notebook, and deliver it to the user.
We launched the Phoenix service in the third calendar quarter of 1999 but
have not yet generated any orders for this service. The Phoenix service is
initially being provided at $299, FOB plant.
Distribution Methods of Products and Services
We intend to employ a distribution strategy that targets corporate users,
SME users, and SOHO users, with the goal of positioning ourselves as the leading
provider of online computer technical support services. We will market our
services both directly to SOHO and consumers and through branded support portals
to corporate, SME, and end users.
Direct to Consumer
Any PC Internet user can become a subscriber to the PC Support Center by
visiting the Center at www.pcsupport.com and registering. Through online
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searches, word-of-mouth, our own Web marketing efforts, and reviews in the
computer trade print and online journals, subscribers have registered from 169
countries as of September 1, 2000.
In addition, we have entered into agreements with several companies
operating Web sites for which online technical support is an important
additional service. We have agreed to build branded support portals for them
that include many of the services of the PC Support Center. The partners have
agreed to promote the branded site and PCsupport.com. We believe that these
agreements will increase the number of users of our support services.
In 2000, we entered into a strategic alliance with Alta Vista Company, one
of the largest portals on the Internet. AltaVista claims that over 50 million
unique visitors access its web site at www.altavista.com each month. Pursuant
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to the agreement, we built a branded support portal for AltaVista which we
launched in July 2000. The Alta Vista support portal includes certain of our
online technical support features. It is accessed from the popular Alta Vista
web site and carries secondary "powered by PCsupport.com" branding. AltaVista
has committed to promote the branded support portal and PCsupport.com throughout
its site.
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Business to Business
We also offer partnerships in the PC Support Center to companies such as PC
vendors, software vendors, ISPs and large corporations that by the nature of
their business are required to provide technical support to their users. Many
such companies are now paying significant sums to provide support to their users
by employing traditional methods such as telephone call centers and dedicated
MIS centers. We believe that the partners will benefit from better support to
their customers as follows:
i. Reduced Costs
Since many support problems will now be solved through the PC Support
Center, providers will significantly reduce their internal support costs.
ii. Improved Customer Relationships
By providing a customized, comprehensive, and easy-to-use site at which
users' computers can be easily maintained, and where many problems in using
applications can be more easily solved, fewer problems are likely to occur, and
will be more easily solved. Customers will become more productive in the use of
their computers. Customers will also become more likely to purchase additional
products and services from the vendor.
iii. Tech Support Center Becomes More Productive
The PC Support Center will reduce the involvement of trained technicians in
solving many problems, and reduce the time required to solve problems when their
help is required. The technicians will become more productive.
iv. Comprehensive Database of Customer Profiles for Marketing
Purposes The PC Support Center will continuously update a database on the
subscribers. This provides an opportunity to research market trends and future
product features.
Business to Business Partners
Our potential business to business partners include the following types of
companies:
Internet Service Providers
We have negotiated and are seeking to enter into additional agreements or
letters of intent with companies offering internet access to offer its PC
Support Center services through a branded support portal to their users. In
August 2000, we entered into an agreement with TELUS, Canada's second largest
telecommunications provider, to provide certain of our online support services
to TELUS subscribers, for which TELUS will pay us a fee per subscriber.
Extended Warranty Providers
We have negotiated and are seeking to enter into additional agreements or
letters of intent with companies offering extended warranties to PC purchasers
to offer our PC Support Center services. Some such extended warranties may be
sold through a branded support portal, and others at the point of sale. In May
2000, we entered into an agreement with the Walker Group, a company offering
extended warranty and affinity programs to retailers, manufacturers and
distributors, in which we agreed to bundle our eSupport solution into warranty
offers sold by the Walker Group through its
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distribution channels. PC purchasers who buy the bundled warranty package will
receive software that installs an icon onto the user's desktop and gives the
user access to online technical support.
Hardware Vendors
We are negotiating with large personal computer manufacturers to bundle our
services with the sale of hardware. We intend to expand our sales activities to
offer Online Data Backup, Phoenix, and the PC Support Center to additional
hardware vendors. In June 2000 we entered into an agreement with Toshiba
America, Inc. in which we built a customized backup center for Toshiba and
Toshiba agreed to distribute a customized version of Online Data Backup on its
laptops. The Company expects Toshiba to begin to ship such software in late
Fall 2000.
Resellers
There are several large international resellers and systems integrators of
computer services whose market focus is large corporations. Each has long-
standing relationships with its current client base and are constantly looking
for new products and services. Our primary products of interest to resellers
are the PC Support Center and Online Data Backup.
In April 1999, we entered into a two-year agreement with one such systems
integrator, Unisys of Canada Inc. ("Unisys"), an international computer service
company. Pursuant to the terms of this agreement, Unisys is marketing the
Online Data Backup Suite under its own brand name to Unisys's corporate
customers. Unisys has agreed to pay us a fee equal to 75% of our suggested list
price for the Online Data Backup services, and has also agreed to use us
exclusively for the provision of such services. To date, Unisys has secured one
customer for us, representing approximately $1,000 per month in revenue for an
unspecified term. Under this agreement, Unisys is not obligated to secure any
particular number of customers or generate any revenues for us, on a best
efforts basis or otherwise, and it is therefore uncertain whether Unisys will
secure additional customers or revenues for us.
We intend to expand our marketing activities to include other large
international resellers. There can be no assurance that any further agreements
will be reached with any resellers.
Internet Vertical Portals
Internet vertical portals provide information online to a targeted
demographic audience. We have negotiated an agreement with two such portals,
PortableLife and Chalk.com, to provide our PC Support Center services to the
portals' subscribers. There can be no assurance that any additional agreements
will be reached with any other Internet portal.
Direct Sales
We have begun to develop a direct sales force to market our services
directly to a small number of companies in the United States and Canada. As of
September 1, 2000, five sales people had been hired and now have begun selling
directly to potential partners, supplemented by the efforts of our senior
management.
Web Promotion
Online Data Backup is available for purchase on the PC Support Center Web
page. We will also promote our services over the Web on other companies' Web
sites.
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Revenue Generation
We intend to earn revenues in any or all of the following ways:
i. Premium Services
In July, 2000, we launched a package of premium services as part of our PC
Support Center, including email assist, Live Assist, and Remote Repair, for
which we now charge subscribers an annual fee. We intend to bundle telephone
support, onsite dispatch and other premium services as they become available
into several different packages for which we will charge either a subscription
or a fee-per-incident. We will also sell tutorials and other educational
materials.
ii. Commissioning Fees
We may private-label the PC Support Center for our partners so that the
partners can offer our services under the partners' own brand names. We will
charge a commissioning fee for such customization.
iii. Bundling Fees
We will negotiate with our hardware vendor partners to include an icon
directing users to a web site at which our services may be accessed on the
desktops of all computers shipped. We will seek to earn a bundling fee from
each unit shipped.
iv. Subscription Fees
In lieu of a bundling fee, we may negotiate with our hardware vendor
partners and other original equipment manufacturer ("OEM") partners who
integrate PCs, Internet access and other related services with the PC Support
Center, a monthly fee for providing the PC Support Center to each end-user to
whom a PC is shipped.
v. Commissions
We will charge commissions on the purchase of related support products and
major software upgrades from third party vendors.
vi. Per-incident Fees
We may sell support services individually as an end user requests them and
charge an incident fee.
vii. Advertising
The PC Support Center may host advertisements from which we will earn fees.
viii. Sale of Summary Demographics
The PC Support Center will continuously update a data base documenting many
aspects of subscribers' computer usage characteristics and personal
demographics. We intend to earn revenue from the sale of summary demographic
data.
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ix. Subscriber Fees
For improving the level of customer satisfaction for these partners, and
lowering the costs of providing support to their users, we intend to charge the
partners a fee per user per month. In some cases, we may share revenue
generated from their users with the partners.
There can be no assurance that we will be able to negotiate agreements that
will generate sufficient revenue or profits for us. Failure to successfully
negotiate such agreements will have a material adverse impact on our business.
Technology Acquisitions
In addition to our own research and development, we seek to acquire
technology, software and products to enhance our products and services through
licensing agreements and purchases. Such acquisitions include the following:
Remote Diagnostics, Inc.
In July 2000, we received a worldwide, nonexclusive, irrevocable license
for software from Remote Diagnostics, Inc. that enables us to customize and
improve dial-ups and DSL connections of end-users to their ISPs and the
Internet. The license fee was 100,000 shares of our common stock, plus $100,000
in cash. We are obligated to issue warrants for up to an additional 266,666
shares of our common stock if we reach certain sales milestones.
MyHelpDesk, Inc.
On September 7, 2000 we agreed to acquire all of the assets and certain
liabilities of MyHelpDesk, Inc. a provider of live technical support, proactive
maintenance services, software updates, virus scans, online backup, email
support newsletters and an extensive knowledge-base of computer self-help
directories. MyHelpDesk, Inc. specializes in computer information aggregation
products and services. It has the world's largest directory of computer help and
productivity resources.
Under the terms of the agreement, we will acquire all of the assets and
certain limited liabilities of MyHelpDesk, Inc. in exchange for 1,500,000 shares
of our common stock. The acquisition is subject to customary closing conditions,
including satisfactory completion of due diligence and any required regulatory
approvals.
Tavisco Ltd.
On September 15, 2000, we acquired substantially all of the assets of
Tavisco Ltd., a producer of anti-virus services and products. The purchase
price for Tavisco Ltd's assets consisted of 200,000 shares of our common stock
(with up to 100,000 of these shares subject to cancellation under certain
circumstances) and a cash payment of $50,000. Tavisco Ltd. designs, develops
and provides state-of-the-art virus diagnostic products for computer service
professionals. Its products include virus scanners and cleaners, a full-
featured anti-virus protection system, and a rapid screening test that protects
against virus infections. We intend to develop an Internet version of Tavisco
Ltd.'s virus-scanning software to provide online scanning and virus removal.
Competitive Business Conditions and the Company's Competitive Position
We are a development stage company with no history of earnings. While we
believe that the aggregation of our services is unique, there are no substantial
barriers to entering into the field of PC
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support services, and we expect competition to intensify. Competitors may be
able to provide services similar to our services more efficiently, and many of
our potential competitors have substantially greater financial, marketing,
service, customer support and research and development resources than we do.
There can be no assurance that we will be able to develop a market for any of
our services against these competitors.
PC Support Center
There are many sellers of computer support and service components. We are
among the first to integrate several support technologies and implement a pro-
active service such as the PC Support Center, which is independent of any vendor
of PCs or software. The competitive landscape is changing rapidly. Our existing
competitors frequently revise and augment their offerings and we encounter new
competitors regularly. We expect the competitive picture to continue to change
rapidly for the foreseeable future. We are currently aware of the following
competition to the PC Support Center:
. Techknow-how.com recently launched an online support portal
competitive to ours. This competitor offers online chat, email
assist, technical support forum, software updates and other
services which compete directly with ours.
. Service911 offers B2B eSupport services like telephone support,
email support, self-help, live chat support and dispatch (on
site) support. Through partners, the company offers free drivers,
video tutorials, product support (directory of support links) and
knowledge base. Service911 also recently launched what it calls
"Webskin" Technology, designed to integrate support portals into
a client's existing websites.
. All.com recently launched a support portal offering remote repair
capability based on technology licensed from Motive, which
directly competes with the remote repair features of our service.
To the best of our knowledge, however, all.com is not planning to
offer real time services such as our Live Assist.
. ePeople (formerly NoWonder.com) currently offers email support,
live chat, collaborative support (screen sharing) and self help
(searchable knowledgebase). ePeople recently announced the launch
of a data harvesting system to send user information to
technicians along with a support request. ePeople does not
currently utilize any remote repair solutions. The company is
trying to position itself as "The world's largest help desk", and
is entering the B2B space.
. MyHelpDesk.com offers live technical support, proactive
maintenance services, software updates, virus scans online
backup, email newsletters and an extensive knowledgebase. Other
companies that develop and maintain support knowledge bases
include ServiceWare and KnowledgeBroker. On September 7, 2000 we
agreed to buy all of the assets and certain limited liabilities
of MyHelpDesk.com. See "Technology Acquisitions," above.
. PC Pitstop.com offers users a number of detailed analyses of
their PCs' hardware, software and operating system. From this
information, PC Pitstop.com provides both automated solutions and
advice on setting the machine for optimal performance and fixing
problems that impede the machine's efficiency. All of PC Pit
Stop's offerings are free to visitors to their site.
. Other companies offer all or some of the following services:
technical support forum, expert advice, technical knowledge base,
and answers to frequently asked questions
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<PAGE>
(FAQs), including 32bit.com, about.com, computing.net, Ehow.com,
GoofyGuys.com, and VirtualDr.com.
. Macafee.com and Symantec (Norton Web Services) have launched
support portals, but such competitive portals are closely tied to
the software products marketed by those companies.
Partnerships are beginning to emerge among various competitors. Support.com
(NASD:SPRT), has launched a support portal that is allied with Excite@Home and
Sykes Enterprises, a major telephone call center. Sykes itself purchased
AnswerExpress, an online support knowledgebase, from Intel in 1999, possibly
signaling Sykes' intention to provide online support services which may compete
with us. Service911 has announced partnerships with McAfee.com and Support.com.
Competition also exists from firms that are selling individual features
that compete with one or more of the services of the PC Support Center. Support
software and services, which will likely be the most significant component of
the PC Support Center, are sold in conjunction with a number of companies
producing support software that feature extensive knowledge bases and remote
diagnoses and fixes. The prominent competitors in this group include Motive
Communications, Computer Support Technologies, and Support.com. Support.com also
provides the service technology infrastructure to allow other companies to build
their own support portal. Other firms include Aveo Inc., Full Circle Software,
and INFACT Technologies.
We also expect significant competition from utilities manufacturers and
distributors. The PC Support Center will include diagnostic, automatic upgrades
and driver updates, disk maintenance, and virus protection software, segments
which are already well-served in the computer services marketplace. Competitors
are found in established brands such as Macafee.com, Symantec's Norton Web,
ZDNet, and Catch*Up from Manageable Software (which was purchased by CNET in
1999).
Further competition will come from Internet sites offering free software
downloads. Websites such as SoftSeek, ZDNet, and Ziff-Davis continually obtain
and review the latest shareware, publish rankings, and provide free copies for
anyone to use. The technical support forum part of the PC Support Center will
encounter competition from companies providing online support tips such as
ExpertCity.com, Roadnews, Ojatex, TipWorld, Hardware Central, Experts Exchange,
and Newbie-U. There are many companies offering online helpdesks including
MyHelpDesk, Microsoft, PC Guide, PC Mechanic, and ePeople (formerly NoWonder).
Hardware and software vendors are also potential competitors. Notebook
computer manufacturers such as Dell, Compaq and IBM already bundle support
services with their product, as do other large firms in the industry such as
Intel and Microsoft. Computer manufacturers, including, Micron, Hewlett
Packard, Toshiba and Gateway, also have announced their intention to launch
support portals which could compete with us in the future.
Competitors that provide telephone support include Sykes Enterprises, and
several other companies offering traditional telephone support services.
ExpertCity recently added a free telephone support and a service resembling our
LiveAssist, and has a partnership with ZDNet, a prominent Web portal.
We believe that the PC Support Center's strongest competitors currently
include Techknow-how.com, all.com, McAfee.com, ePeople, Service911 and
Support.com, and the various partnerships that they may form.
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Online Backup Providers
There are approximately ten established online backup software
manufacturers who market their technology, using a variety of channels that
include direct sales, licensing to resellers, and bundling by OEMs and hardware
manufacturers. The most widely used software is from @Backup, Connected Corp
(Connected Online Backup), and Veritas. In 1999, Veritas completed the
acquisition of Telebackup. Telebackup had previously licensed its backup
software to MSI (which sublicenses it to us). Other on line backup competitors
include Atrieva (FileZonePlus), NovaStor (NovaNet-Web), Safeguard (Interactive
Backup), recently purchased by StorageTek and spunout to MSI, Previo (previously
Stac Technologies), Vytalnet (VytalVault), Sterling Software, and Divya
(BackOnline).
Several companies are using the Web to increase the volume of data readily
accessible by companies and individuals during working sessions. Xdrive offers
100MB of free storage and Freedrive, a partner of EMC (which competes with
StorageTek) offers 50 MB free storage. However, these services are described as
"virtual briefcases" and are not designed to provide full-image backups for data
recovery in the way that Online Data Backup is positioned. IMediaIT also
competes in this space.
Currently, only Telebackup, its acquiror, Veritas, its licensee, MSI (and
its sublicensee, PCSupport.com), Connected, and Safeguard can provide a full
image backup, but other competitors are expected to introduce this important
feature in the future. We believe that there are currently no other service
providers who offer tiered service packages or temporary laptop replacement
programs such as our Online Data Backup.
Most of the service providers have targeted individuals and SOHO end users.
Only a few possess the scalability and storage space required for accommodating
large corporate customers or offering enterprise-wide solutions. Some of the
software manufacturers (e.g. Connected and Previo) produce intranet based
versions that include dedicated servers and client licenses.
Current industry standards on the service side are a monthly fee ranging
from $7 to $20 for online backup and restoration, and the opportunity to order a
CD for a per-incident fee of about $25 to $40 when there is a need to restore
larger volumes of data. Generally speaking, online backup is offered as a stand
alone service, with no other value-added features. Certain hardware vendors
(e.g., Compaq) and OEMs (e.g., Sykes' AnswerExpress) also offer online backup as
part of a suite of services for computer users. We believe that competition
will accelerate and that prices and margins for online backup services will
decrease rapidly over the next 18 months.
Hardware Replacement
We believe that at present there are no competitors who offer a service to
replace broken notebooks with another notebook loaded with the user's full
image. Computer repair companies, such as Inacom, can provide a replacement
notebook while the user's notebook is being repaired, but such replacement
notebook will not be loaded with the customer's image. Similarly, the hardware
manufacturers themselves offer warranty programs in which a broken notebook can
be replaced, but such replacement will not be loaded with the customer's image.
Phoenix
We believe that the Phoenix service is unique. The extended warranties
offered by hardware vendors can be considered as partial competitors, but even
though they may reload common applications before shipping the unit back to the
customer, they are not able to reconstruct personal settings and configurations
or data files. Regular backup is still the responsibility of the user.
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<PAGE>
Repair services such as Inacom can repair and quickly return the notebook
to its owner, but cannot install the user's data and personal settings.
Notebook replacement has to be done in conjunction with online backup in order
for the recovery of a full image. Accordingly, the Phoenix program carries a
distinct advantage over depot and manufacturer repair services.
The chief source of competition for the Phoenix program comes from large
corporations that set up in-house solutions through network-based backups and by
carrying an inventory of spare laptops. Such corporations can replace a
notebook quickly with a standard set of applications, but generally are unable
to reconstruct personal settings and configurations or data files.
Sources of Materials
The only significant materials which we require to carry on our operations
other than servers, internet access equipment, telephone lines and the like are
compact disks (also known as CD's) and notebook computers for our hardware
replacement and Phoenix programs. CD's are readily available from a variety of
competing distributors. We will initially lease notebook computers, which are
also available from a variety of sources.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements,
or Labor Contracts
We do not hold any patents or trademarks. We are in the process of
applying for certain trademarks, including "pcsupport.com," but there can be no
assurance that any such applications will be granted. We currently hold the
following domain names: PCSUPPORT.com, GLOBALREPLACE.com, PCREPLACE.com,
PDASUPPORT.com, PCSUPPORTCENTER.com, PCSUPPORTCENTER.net, PCRESTORE.com and
RECON-TECH.com. We are also applying for certain similar domain names in
jurisdictions outside North America. Domain names are obtained by applying to
Network Solutions, Inc., or one of a small number of other companies competing
to register domain names, and paying a fee to register each unique domain name.
While we have registered the foregoing domain names, there can be no assurance
that we will be able to maintain these names in the future, or register further
domain names, should we so require. The loss of the domain names could result
in confusion for our customers, and a resultant loss of goodwill. In
particular, the loss of the domain name PCSUPPORT.COM would have a material
adverse impact on our business.
There can be no assurance that third parties will not bring claims of
copyright, patent or trademark infringement against us or claim that certain of
our products, technology, processes or features violate the patent rights or
other intellectual property rights of others. There can be no assurance that
third parties will not claim that we have misappropriated their creative ideas
or formats or otherwise infringed upon their proprietary rights. Any claims of
infringement, with or without merit, could be time consuming to defend, result
in costly litigation, divert management attention, or require us to enter into
costly royalty or licensing arrangements to enable us to use important
technologies or methods, any of which could have a material adverse effect on
our business, financial condition or operating results.
Regulation
We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulation applicable to businesses
generally. However, due to the increasing popularity and use of the Internet,
it is possible that a number of laws and regulations may be adopted with respect
to the Internet or covering issues such as user privacy, pricing, content,
copyrights, distribution and characteristics and quality of products and
services. Such new regulations would
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require us to expend significant resources to understand and comply with such
regulations, which may have a material adverse impact on our business.
We do not believe that current regulations governing the Internet and
computer service industry will have a material effect on our current operations.
However, various federal and state agencies may propose new legislation that may
adversely affect our business, financial condition and results of operations.
Research and Development
From inception until June 30, 1998, for the year ended June 30, 1999, and
for the year ended June 30, 2000, we and our predecessor, RTI, expended
approximately $2,814, $17,646, and $923,259 respectively, on the development of
our services. We expect to significantly increase research and development
expenditures during the fiscal year ending June 30, 2001.
Employees and Contractors
As of September 1, 2000, we had 57 full-time employees and one part-time
contractor employed as follows:
<TABLE>
<CAPTION>
Part-Time
Employees Contractors
--------- -----------
<S> <C> <C>
Administration 9 1
Research and Development 21 -
Marketing and Sales 11 -
Client Services 3 -
Technical Support 13 -
</TABLE>
We also purchase technical support to staff our email assist, live assist
and remote repair services provided through the PC Support Center from
Firstring, Inc., a Delaware corporation with offices and technicians in India.
Risk Factors
Our operations are subject to a number of risks, including those described
below. If any of the following risks actually occur, our business, financial
condition or operating results and the trading price or value of our securities
could be materially adversely affected.
Limited Operating History
Our limited operating history makes it difficult to evaluate our current
business and prospects or to accurately predict our future revenue or results of
operations. Our revenue and income potential are unproven, and our business
model is constantly evolving. Because the Internet is constantly changing, we
may need to modify our business model to adapt to these changes. Companies in
early stages of development, particularly companies in new and rapidly evolving
Internet industry segments, are generally more vulnerable to risks,
uncertainties, expenses and difficulties than more established companies.
New and Unproven Business Model
Our model for conducting business and generating revenue is new and
unproven. Our success will depend primarily on our ability to generate revenue
from multiple sources, including:
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. Subscriptions for services
. Sale of our own related products through our Web site
. Commissions on the sale of third parties' related products
through our Web site
. Advertising
. Customization fees
. Sale of summary demographic information
As the market for our services is new and evolving, it is difficult to
predict the size of the market, its future rate of growth, if any, or the level
of prices the market will pay for our services. To date, only a very limited
number of persons have subscribed to the PC Support Center on a paying basis. We
have received only one small revenue contract from a corporation. We are not
certain that our business model will be successful or that we can generate
revenue growth or be profitable. There can be no assurance that any increase in
marketing and sales efforts will result in a larger market or increase in market
acceptance for our services. We may sell service contracts to provide warranty
services or bundle our services for a fixed fee based on only limited historical
experience as to the level of expenditures we will need to incur to satisfy our
contractual obligations. If markets for our services develop more slowly than
expected or become saturated with competitors, or our services do not achieve or
sustain market acceptance, or we are unable to set prices for our services that
are sufficient to cover our costs and generate a profit, we will be unlikely to
be able to successfully operate our business.
History of Operating Losses and Anticipated Losses and Negative Cash
Flow for the Foreseeable Future
To date, we have incurred operating losses and negative cash flow from
operating activities. We expect to significantly increase our expenditures for
sales and marketing, content development, and technology and infrastructure
development to enhance our business from current levels and we anticipate that
our operating losses and negative cash flow will continue for the foreseeable
future. With increased on-going operating expenses, we will need to generate
significant revenue to achieve profitability. Consequently, it is possible that
we may never achieve profitability, and even if we do achieve profitability, we
may not sustain or increase profitability on a quarterly or annual basis in the
future. If we do not achieve or sustain profitability in the future, we may be
unable to continue our operations. The auditors' report with respect to our
financial statements for the fiscal year ended June 30, 2000 includes an
additional explanatory paragraph on these conditions that raise substantial
doubt about our ability to continue as a going concern. The financial statements
do not include any adjustment that might result from the outcome of these
uncertainties.
Need for Additional Capital
Between February and April 2000, we raised aggregate gross proceeds of
$6,878,625 from the sale of common stock, $188,404 from the exercise of
previously issued warrants, and $1,000,000 from the issuance of convertible debt
that was converted entirely into equity in May 2000. However, our current
financial commitments and business plan will require working capital in excess
of our cash reserves, which we believe are sufficient to sustain our operations
at their current levels until at least November 30, 2000.
We anticipate funding our additional working capital requirements through
the proceeds from a private placement of our common stock, together with
anticipated revenues generated from customers. Although the investment banking
firm which we have engaged has agreed to use its best efforts to secure
additional financing for us in the form of an institutional private placement of
at least $4,000,000 of our equity securities (which we believe will be
sufficient to provide us with the working capital necessary for us to proceed
with our current business plan through at least March 31, 2001), we do not
currently have any commitment from any third party to provide this or any other
additional financing. We may be unable to obtain financing on reasonable terms
or at all. Furthermore, if we raise additional working capital through equity,
our shareholders will experience dilution. If we are unable to secure additional
financing when needed and our revenues are inadequate
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to provide the necessary working capital, we may be required to slow down or
suspend our growth or reduce the scope of our then current level of business
operations, any of which would have a material adverse effect on our business.
Our Web Site Will Need to Be Continually Enhanced
Due to the constantly evolving nature of the Internet and related
technologies, we must continuously monitor changes in PC support technologies
and Internet-based support offerings with the goal of adding additional
functionality in new releases of the PC Support Center. Our Web site will have
to be updated and enhanced on a timely basis in order for us to compete
effectively. There can be no assurance that we will have access to the working
capital, technology, or skilled personnel and outside contractors necessary in
order to deliver these updates and enhancements to the market on a timely basis.
Our Agreements with Alta Vista Demand Large Payments and the Ability
to Expand Rapidly
We have entered into an agreement with Alta Vista Company to allow us to
advertise our services on Alta Vista's Web site for a one-year term. We have
also agreed to create a co-branded Web site to provide our services to Alta
Vista's customers for a two-year term. These agreements require that we make
significant payments to Alta Vista during our current and next fiscal years. In
addition, we may be required to expand rapidly in order to adequately service
the additional users we may attract as a result of these agreements. There can
be no assurance that we will be able to secure adequate capital to both satisfy
our obligations to Alta Vista and take the other steps necessary to proceed with
our current business plan. Further, there can be no assurance that we will be
able to effectively expand our operations in response to possible increases in
demand. Finally, there can also be no assurance that our agreements with Alta
Vista will produce significant revenues or any revenues at all.
Reliance on Agreement with MSI
At present, the backup portion of our operations are dependent upon MSI
("MSI") which has recently been spun out from Storage Technologies Inc., an
unrelated third party. As a result, MSI now provides us with the online backup
portion of our operations through access to MSI's existing operations and
facilities. Previously, MSI agreed not to compete with us or to supply any
direct competitor of ours during the term of our service supply agreement. In
July 2000, we entered into a new two-year agreement with MSI pursuant to which
MSI will continue to provide us with the online backup portion of our operations
through access to MSI's existing operations and facilities, and MSI has
covenanted not to compete with our hardware replacement business. In addition,
MSI has agreed to promote us as a strategic partner. MSI is a newly formed
company which has inherited the online backup business from StorageTek. It is
uncertain what effects, if any, MSI's inexperience and StorageTek's current
financial difficulties and restructuring plans (which are discussed in
StorageTek's filings with the Securities and Exchange Commission) will have on
our business.
Dependence on Other Outside Agents and Distributors
Our success will also depend, to a significant extent, upon our ability to
develop strategic alliances and a timely and multi-channel distribution system
based on independent third parties and distributors. Furthermore, the initial
market penetration for our products and services will depend heavily on the
sales agents of third parties and the quality of their relationships with their
current and future customers. There can be no assurance that such alliances
will develop or that they will prove successful over the course of our future
operations.
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Control of Rapid Growth
We expect to significantly expand operations to address potential growth in
our customer bases, the breadth of our service offerings, and other
opportunities. We expect that this expansion will strain our management,
operations, systems and financial resources. To manage our recent growth and
any future growth of our operations and personnel, we must improve and
effectively utilize our existing operational, management, marketing and
financial systems and successfully recruit, hire, train and manage personnel and
maintain close coordination among our technical, finance, marketing, sales and
production staffs. We will need to hire additional personnel in all areas
during the current fiscal year. In addition, we may also need to increase the
capacity of our software, hardware and telecommunications systems on short
notice, and will need to manage an increasing number of complex relationships
with users, strategic partners, advertisers and other third parties. The
failure to manage this growth could disrupt our operations and ultimately
prevent us from generating the revenue we expect.
We have not yet deployed our services on a mass basis, and have not yet
tested our ability to provide our services on a mass basis. There can be no
assurance that the software platforms upon which our services operate will be
able to handle the volume of information necessary to meet our operating
requirements. The failure of those software platforms to handle the necessary
volume of information would seriously affect our business.
Dependence On Key Personnel and Need For Additional Personnel
Our future success depends to a significant extent on the continued
services of senior management, including Michael McLean, Steven Macbeth, David
Rowat, Bruce McDonald and Bruna Martinuzzi. In addition, we believe that it is
necessary to hire additional senior management employees with sales and
marketing experience in order to proceed with our current business plan.
We have employment contracts with Messrs. McLean, Macbeth, Rowat and
McDonald but these contracts do not require any of them to remain with us for
any particular period of time. The loss of any of these senior managers would
likely have an adverse effect on our business. Competition for personnel
throughout the industry is intense and we may be unable to retain our current
key employees or attract, integrate or retain other highly qualified employees
in the future. If we do not succeed in attracting new personnel or retaining
and motivating our current personnel, our business could be materially adversely
affected.
The Market is Highly Competitive and We May Not Be Able to Compete
Successfully Against Our Current and Future Competitors
The market for PC support services through the Internet is a new and highly
competitive market which is subject to rapid change. We expect competition in
the market to increase because there are few barriers to entry. We face
competitive pressures from numerous actual and potential competitors.
Competition in the PC support business is likely to increase significantly
as new companies enter the market and current competitors expand their services.
Many of our current and potential competitors have substantial competitive
advantages, including:
. significantly greater financial, technical and marketing resources
. relationships with strong partners
. longer operating histories
. greater brand name recognition
. larger existing customer bases
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We also face significant competition from numerous competitors in the
online data backup business.
Our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and devote greater resources
to develop, promote and sell their products or services. Services offered by
existing and potential competitors may be perceived by users or advertisers as
being superior to ours. In addition, increased competition could result in
reduced subscriber fees, advertising rates and margins and loss of market share,
any of which could harm our business.
Brand Recognition
To attract users we must develop a brand identity and increase public
awareness of our Web site and the services we offer. To increase brand
awareness, traffic and revenue, we intend, to the extent we have adequate
financial and other resources to do so, to substantially increase our
advertising and promotional efforts. Our marketing activities may, however, not
result in increased revenue and, even if they do, any increased revenue may not
offset the expenses incurred in building brand recognition. Moreover, despite
these efforts we may be unable to increase public awareness of our brands, which
would have an adverse effect on our business.
Reliance on Technology Partners
Many of the online support technologies used on the PC Support Center are
licensed from unrelated third parties or have been acquired from third parties,
and we anticipate that we will need to gain access in the future to additional
technologies through licenses or acquisitions. We are highly reliant on the
technologies that we license or have acquired. There can be no assurance that
our licensors will take the necessary steps to assure that these technologies
will keep pace with technological changes. There also can be no assurance that
our licensors will continue to grant us licenses in the future. We also may
encounter unanticipated difficulties in integrating the technologies that we
license or the technologies, personnel or operations that we acquire with our
existing technologies or operations. The loss of the right to use one or more
of these technologies or our inability to successfully integrate these
technologies with our existing technologies may have a material adverse effect
on our business.
Technological Change
The market for Internet products and services is characterized by rapid
change, evolving industry standards and frequent introductions of new
technological developments. These new standards and developments could make our
existing or future products or services obsolete. In addition, personal
computers, operating systems software, and applications software are constantly
improving. Computer manufacturers and software developers may develop more
robust technologies for their products which could render our services obsolete
or reduce the demand for our services below the level required to profitably
support them.
The technical features of MSI's PowerBAK online backup software, the
development of which we do not control, will in large part determine the speed
and accuracy, and hence marketability, of our online backup service. There can
be no assurance that current competitors or new market entrants will not succeed
in developing and introducing new or enhanced backup systems having technologies
and features superior to, or more effective than, any technologies which have
been or are being developed by us, or MSI, rendering our backup service obsolete
or less marketable. There can be no assurance that MSI, and hence we, will be
able to keep pace with technological developments, or that our products will not
become obsolete. Technological obsolescence of the existing PowerBak
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technology remains a possibility, which would have a material adverse affect on
our online backup service business.
Our keeping pace with the introduction of new standards and technological
developments could result in significant additional costs or prove difficult or
impossible. The failure to keep pace with these changes and to continue to
enhance and improve the responsiveness, functionality and features of our
services could harm our ability to attract and retain users. Among other
things, we may need to enhance our existing services or license or develop new
services or technologies, which may not be available to us on attractive terms
or at all.
Intellectual Property Protection
We may be unable to acquire or maintain Web domain names in the United
States and other countries in which we may conduct business. We currently hold
various relevant domain names, including PCSUPPORT.com, GLOBALREPLACE.com,
PCREPLACE.com, PDASUPPORT.com, PCSUPPORTCENTER.com, PCSUPPORTCENTER.net,
PCRESTORE.com, and RECON-TECH.com. The acquisition and maintenance of domain
names generally is regulated by governmental agencies and their designees and is
subject to change. The relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear.
Therefore, we could be unable to prevent third parties from acquiring or using
domain names that infringe or otherwise decrease the value of our brand names
and other proprietary rights.
Also, third parties may assert trademark, copyright, patent and other types
of infringement or unfair competition claims against us. If forced to defend
against any such claims, whether they are with or without merit or are
determined in our favor, then we may face costly litigation, diversion of
technical and management personnel, or product shipment delays. As a result of
such a dispute, we may have to develop non-infringing technology or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may be unavailable on terms acceptable to us, or at all. If there is a
successful claim of product infringement against us and we are unable to develop
non-infringing technology or license the infringed or similar technology on a
timely basis, it could harm business.
Our success may depend in part on MSI's ability to obtain and enforce
intellectual property protection for their back-up technology in the United
States, Canada and other countries. In addition, we rely on other third parties
to provide services enabling our operations. We could become subject to
infringement actions by third parties based upon the use of intellectual
property provided by third-party providers. It is also possible that we could
become subject to infringement actions based upon the content licensed from
third parties. Any such claims or disputes could subject us to costly
litigation and the diversion of our financial resources and technical and
management personnel.
Further, if efforts to enforce our intellectual property rights are
unsuccessful or if claims by third parties against us are successful, we may be
required to pay financial damages or alter our business practices.
We rely on confidentiality, non-disclosure and non-competition arrangements
with our employees, representatives and other entities engaged in joint product
or business development with us, and expect to continue to enter into such
agreements with such persons. There can be no assurance that these agreements
will provide meaningful protection. There can be no assurance that other
companies will not acquire and use information which we consider to be
proprietary.
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<PAGE>
System Disruptions
Our ability to attract and retain subscribers depends on the performance,
reliability and availability of our services and network infrastructure. We may
experience periodic service interruptions caused by temporary problems in our
own systems or software or in the systems or software of third parties upon whom
we rely to provide service or support. The maintenance and operation of our
back-up service is dependent upon MSI. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins, denial of service attacks and similar
events could damage these systems and interrupt our services. Computer viruses,
electronic break-ins or other similar disruptive events also could disrupt our
services. System disruptions could result in the unavailability or slower
response times of our Web site, which would lower the quality of our customers'
experience. Service disruptions could adversely affect our revenue and, if they
were prolonged, would seriously harm our business and reputation. We do not
carry business interruption insurance to compensate for losses that may occur as
a result of these interruptions. In addition, under our service supply
agreement with MSI, MSI is not liable for any consequential damage or loss it
may cause to our business due to the failure of any of MSI's systems, and,
accordingly, we will be unable to seek reimbursement from MSI for any such
damage or loss. In addition, our customers will be dependent on Internet
service providers and other Web site operators for access to our Web site.
These providers and operators have experienced significant outages in the past,
and could experience outages, delays and other difficulties due to system
failures unrelated to our systems. Moreover, the Internet network
infrastructure may not be able to support continued growth. Any of these
problems could adversely affect our business.
Failure of Online Security Measures
Our relationship with our customers would be adversely affected if the
security measures that we use to protect their personal information are
ineffective. We cannot predict whether events or developments will result in a
compromise or breach of the technology we use to protect a customer's personal
information.
The infrastructure relating to our services is vulnerable to unauthorized
access, physical or electronic computer break-ins, computer viruses and other
disruptive problems. Internet service providers have experienced, and may
continue to experience, interruptions in service as a result of the accidental
or intentional actions of Internet users, current and former employees and
others. Anyone who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our operations.
Security breaches relating to our activities or the activities of third-party
contractors that involve the storage and transmission of proprietary information
could damage our reputation and our relationships with our subscribers and
strategic partners. We could be liable to our subscribers for the damages
caused by such breaches or it could incur substantial costs as a result of
defending claims for those damages. We may need to expend significant capital
and other resources to protect against such security breaches or to address
problems caused by such breaches. Security measures that we take may not prevent
disruptions or security breaches.
Development and Maintenance of the Internet and the Availability of
Increased Bandwidth to Users
The success of our business will rely on the continued improvement of the
Internet as a convenient means of consumer interaction and commerce. Our
business will depend on the ability of our customers to use our Web site without
significant delays or aggravation that may be associated with decreased
availability of Internet bandwidth and access to our Web site. This will depend
upon the maintenance of a reliable network with the necessary speed, data
capacity and security, as well as timely development of complementary products,
such as high speed modems, for providing reliable
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Internet access and services. The failure of the Internet to achieve these goals
may reduce our ability to generate significant revenue.
Our penetration of a broader consumer market will depend, in part, on
continued proliferation of high speed Internet access. The Internet has
experienced, and is likely to continue to experience, significant growth in the
numbers of users and amount of traffic. As the Internet continues to experience
increased numbers of users, increased frequency of use and increased bandwidth
requirements, the Internet infrastructure may be unable to support the demands
placed on it. In addition, increased users or bandwidth requirements may harm
the performance of the Internet. The Internet has experienced a variety of
outages and other delays and it could face outages and delays in the future.
These outages and delays could reduce the level of Internet usage as well as the
level of traffic, and could result in the Internet becoming an inconvenient or
uneconomical source of products and services which would cause its revenue to
decrease. The infrastructure and complementary products or services necessary to
make the Internet a viable commercial marketplace for the long term may not be
developed successfully or in a timely manner. Even if these products or services
are developed, the Internet may not become a viable commercial marketplace for
the products or services that we offer.
We May Need to Change the Manner in Which We Conduct Our Business if
Government Regulation Increases or Changes
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues such as user privacy, pricing,
taxation, content, copyrights, distribution, security, and the quality of
products and services. For example, the Telecommunications Act of 1996 sought to
prohibit transmitting certain types of information and content over the Web.
Several telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers and online services providers
in a manner similar to long distance telephone carriers and to impose access
fees on these companies. Any imposition of access fees could increase the cost
of transmitting data over the Internet. In addition, the growth and development
of the market for online commerce may lead to more stringent consumer protection
laws, both in the United States and abroad, that may impose additional burdens
on the Company. The United States Congress recently enacted Internet laws
regarding children's privacy, copyrights, taxation and the transmission of
sexually explicit material. The law of the Internet, however, remains largely
unsettled, even in areas where there has been some legislative action. Moreover,
it may take years to determine the extent to which existing laws relating to
issues such as property ownership, libel and personal privacy are applicable to
the Web. Any new, or modifications to existing, laws or regulations relating to
the Web could adversely affect our business.
If one or more states or any foreign country successfully asserts that we
should collect sales or other taxes on the provision of our services, our net
sales and results of operations could be harmed. We do not currently collect
sales or other similar taxes on the provision of our services in any state.
However, one or more states may seek to impose sales tax collection obligations
on companies which engage in or facilitate the provision of services on the
Internet. A number of proposals have been made at the state and local level that
would impose additional taxes on the sale of products and services through the
Internet. Such proposals, if adopted, could substantially impair the growth of
electronic commerce and could adversely affect our opportunity to derive
financial benefit from the provision of our services. Moreover, if any state or
foreign country were to successfully assert that we should collect sales or
other taxes on the provision of our services, our results of operations could be
adversely affected.
Legislation limiting the ability of the states to impose taxes on Internet-
based transactions has been enacted by Congress. However, this legislation,
known as the Internet Tax Freedom Act of
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1998, imposes only a three-year moratorium ending on October 21, 2001 on state
and local taxes on electronic commerce where such taxes are discriminatory and
on Internet access unless such taxes were generally imposed and actually
enforced before October 1, 1998. Failure to renew this legislation would allow
various states to impose taxes on Internet-based commerce.
Collection of Taxes
As our business grows, we hope to generate sales from consumers and
businesses around the world. Each jurisdiction collects sales taxes of various
kinds in different ways. We may need to quickly develop an understanding of a
myriad of tax regimes and to customize our electronic commerce and accounting
systems to collect and remit such taxes for each one. There can be no assurance
that we will be able to develop an understanding of every system and collect and
remit such taxes in a timely manner. Failure to do so may expose us to
significant sanctions, penalties and fines which may have a material adverse
impact on our business.
Operating Results May Prove Unpredictable, and May Fluctuate
Significantly
Our operating results are likely to fluctuate significantly in the future
due to a variety of factors, many of which are outside of our control. Because
our operating results may be volatile and difficult to predict, in the future
the operating results may fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock may fall
significantly. Factors that may cause operating results to fluctuate
significantly include the following:
. rapid changes in the prices and costs of online services
. fluctuations in the levels of user visits to our Web site and the
amount of time that users spend on the Web site using labor
intensive online support services
. new Web sites, services or products introduced by us or by our
competitors
. the timing and uncertainty of advertising sales cycles and
seasonal declines in advertising sales
. general economic conditions, as well as economic conditions
specific to users of our services and the public markets for
Internet-related companies
Common Stock Price May Be Volatile
The market prices of securities of Internet and technology companies are
extremely volatile and sometimes reach unsustainable levels that bear no
relationship to the past or present operating performance of such companies.
Factors that may contribute to the volatility of the trading price of our
common stock include, among others:
. public announcements of technical innovations relating to our
business, new products or services by us or our competitors, or
acquisitions or strategic alliances by us or our competitors
. public reports concerning our services or those of our
competitors
. the announcement of large and noteworthy business deals by our
competitors or us
. our quarterly results of operations
. the variance between our actual quarterly results of operations
and predictions by stock analysts
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. financial predictions and recommendations by stock analysts
concerning Internet companies and companies competing in our
market in general, and concerning us in particular
. the operating and stock price performance of other companies that
investors or stock analysts may deem comparable to us
. the general investment climate and the climate for Internet-
related public companies, such as PCsupport.com, which has
historically been very volatile
In addition to the foregoing factors, the trading prices for equity
securities in the stock market in general, and of Internet-related companies in
particular, have been subject to wide fluctuations that may be unrelated to the
operating performance of the particular company affected by such fluctuations.
Consequently, broad market fluctuations may have an adverse effect on the
trading price of our common stock, regardless of our results of operations.
Limited Market for Our Common Stock
Although our common stock is quoted on the OTC Electronic Bulletin Board,
there is only a limited market for our common stock, and there can be no
assurance that this market will be maintained or broadened. The market price for
shares of common stock is likely to be very volatile, and numerous factors
beyond our control may have a significant effect on the market for these shares.
Substantial Sales of Common Stock Could Cause Stock Price to Fall
As of September 1, 2000, we had outstanding 10,477,662 shares of common
stock of which approximately 7,446,648 shares were "restricted securities" (as
that term is defined under Rule 144 promulgated under the Securities Act of
1933). Currently, 4,470,493 of these restricted shares, as well as an additional
2,820,838 shares underlying currently exercisable warrants, are eligible for
sale pursuant to a registration statement that became effective in June 2000,
and a substantial portion of the remaining restricted shares are currently
eligible for sale under Rule 144.
No prediction can be made as to the effect, if any, that sales of shares of
common stock or the availability of such shares for sale will have on the market
prices prevailing from time to time. Nevertheless, the possibility that
substantial amounts of common stock may be sold in the public market may
adversely affect prevailing market prices for our common stock and could impair
our ability to raise capital through the sale of our equity securities.
No Dividends
The payment of dividends on our common stock is within the discretion of
our Board of Directors and will depend upon our future earnings, our capital
requirements, our financial condition, and other relevant factors. We do not
currently intend to declare any dividends on our common stock for the
foreseeable future.
The Common Stock May Be Deemed "Penny Stock" and Therefore Subject to
Special Requirements
Our common stock may be deemed to be a "penny stock" as that term is
defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934.
Penny stocks are stocks (i) with a price of less than five dollars per share;
(ii) that are not traded on a "recognized" national exchange; (iii) whose prices
are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks
must still meet requirement (i) above); and (iv) in issuers with net tangible
assets of less than
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$2,000,000 (if the issuer has been in continuous operation for at least three
years) or $5,000,000 (if in continuous operation for less than three years), or
with average revenues of less than $6,000,000 for the last three years.
Section 15(g) of the Securities Exchange Act of 1934, and Rule 15g-2
promulgated under the Securities Exchange Act of 1934, require broker-dealers
dealing in penny stocks to provide potential investors with a document
disclosing the risks of penny stocks and to obtain a manually signed and dated
written receipt of the document before effecting any transaction in a penny
stock for the investor's account. Moreover, Rule 15g-9 promulgated under the
Securities Exchange Act of 1934 requires broker-dealers in penny stocks to
approve the account of any investor for transactions in such stocks before
selling any penny stock to that investor. This procedure requires the broker-
dealer to (i) obtain from the investor information concerning his or her
financial situation, investment experience and investment objectives; (ii)
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks of
penny stock transactions; (iii) provide the investor with a written statement
setting forth the basis on which the broker-dealer made the determination in
(ii) above; and (iv) receive a signed and dated copy of such statement from the
investor, confirming that it accurately reflects the investor's financial
situation, investment experience and investment objectives. Compliance with
these requirements may make it more difficult for investors in our common stock
to resell their shares to third parties or to otherwise dispose of them.
Executive Officers, Directors and Major Stockholders Exercise
Significant Control
As of September 1, 2000, our executive officers and Directors and the
holders of 5% or more of our outstanding common stock together beneficially
owned approximately 20.9% of the outstanding common stock. These stockholders
are able to significantly influence all matters requiring approval by
stockholders, including the election of Directors and the approval of
significant corporate transactions. This concentration of ownership may also
have the effect of delaying, deterring or preventing a change in control and may
make some transactions more difficult or impossible to complete without the
support of these stockholders.
Risks of International Operations
We expect a substantial portion of our revenues to be based on sales and
services rendered to customers in the United States, while a significant amount
of our operating expenses will be incurred in Canada. As a result, our
financial performance will be affected by fluctuations in the value of the U.S.
dollar to the Canadian dollar. At the present time, we have no plan or policy
to utilize forward contracts or currency options to minimize this exposure, and
even if these measures are implemented there can be no assurance that such
arrangements will be available, be cost effective or be able to fully offset
such future currency risks.
ITEM 2. DESCRIPTION OF PROPERTY.
We maintain our principal place of business at Suite 300-3605 Gilmore Way,
Burnaby, British Columbia, Canada V5G 4X5, where we lease approximately 24,750
square feet. at an annual rate of (Cdn.) $17.00 per sq. ft., plus operating
costs of approximately (Cdn.) $7.00 per sq. ft per annum. This lease will
expire on August 31, 2005. We also have access to office space at 1875
Charleston Road, Mountain View, California 94043 at $210 per month under a
month-to-month service agreement. Some sales and marketing activities take
place from this Mountain View office, but most of our operations, sales,
services and administration are conducted from our offices in Burnaby. We
anticipate that the space provided by these facilities will be sufficient to
meet our requirements for at least the next twelve months.
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We currently have no policies regarding the acquisition or sale of assets
primarily for possible capital gain or income. We do not presently hold any
investments or interests in real estate mortgages or securities of or interests
in persons primarily engaged in real estate activities.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Shares of our common stock are traded on the OTC Electronic Bulletin Board
under the symbol "PCSP". (From August 18, 1998 until June 24, 1999, our common
stock traded on the OTC Electronic Bulletin Board under the symbol "MXTS".)
The following table shows the range of high and low bid quotations for our
common stock reported by the OTC Electronic Bulletin Board in each fiscal
quarter from September 30, 1998 to June 30, 2000. The information has been
adjusted for all periods presented to reflect the reverse stock split of our
common stock which occurred in 1999.
<TABLE>
<CAPTION>
Quarter Ended High Low
<S> <C> <C>
December 31, 1998 $1.88 $1.70
March 31, 1999 $2.50 $1.56
June 30, 1999 $2.00 $0.78
September 30, 1999 $2.00 $0.56
December 31, 1999 $1.94 $0.88
March 31, 2000 $9.69 $0.97
June 30, 2000 $5.44 $1.94
</TABLE>
These quotations reflect inter-dealer prices, without retail markup, mark-
down or commission and may not represent actual transactions.
As of June 30, 2000, there were approximately 1,100 record holders of our
common stock.
We have not paid any cash dividends on our common stock, and we currently
intend to retain any future earnings to fund the development and growth of our
business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
All statements, other than statements of historical fact, included in this
Form 10-KSB, involve assumptions, known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements,
to be materially different from any future results, performance or achievements
expressed or implied by such statements contained in this Form 10-KSB. Such
potential risks and uncertainties include, without limitation, the impact of
competitive products and pricing, the need to raise additional capital,
uncertain markets for our products and services, our dependence on third parties
and licensing/service supply agreements, and the ability of competitors to
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license the same technologies that we use for the PC Support Center or develop
or license other functionally equivalent technologies.
The following describes in general terms our plan of operation and
development strategy for the next twelve-month period (the "Next Year"). During
the Next Year, our primary focus will be to expand marketing efforts for our
services, to deliver on commitments to corporate customers, to provide online
support services, to continue to enhance our PC Support Center and to develop
and/or contract to provide the infrastructure necessary to deliver our services
to customers and subscribers.
Current Services
We currently offer three services. Our current primary service, the PC
Support Center, is a web-based support portal for PCs which aggregates a number
of support technologies, including interactive online technical trouble-
shooting, software and driver updates, hard disk maintenance, a technical
support forum, and others. Online Data Backup combines an on-line backup
service for notebook and desktop computers with three methods of restoring data
in the event of a PC failure. Phoenix allows a notebook user to transfer a
full-image of all data, applications, preferences and settings to a new
notebook.
Cash Flow Requirements
Between February and April, 2000, we raised aggregate gross proceeds of
$6,878,625 from the sale of common stock and units consisting of common stock
and warrants, $1,000,000 from the sale of convertible notes (which were
subsequently converted in full into equity) and $188,404 from the exercise of
previously issued warrants. We believe that our existing cash reserves are
sufficient to sustain our operations at their current levels until at least
November 30, 2000. However, we plan to hire new employees continuously to
fulfill our obligations to AltaVista, TELUS and other partners and to continue
the development and implementation of additional features of the PC Support
Center. Our agreements with AltaVista require us to make large and continuing
payments. These commitments and plans will require working capital in excess of
our current cash reserves. We anticipate funding these additional working
capital requirements through the proceeds from a private placement of
securities, together with potential revenues generated from customers. The
investment banking firm we have engaged has agreed to use its best efforts to
secure an equity financing of at least $4,000,000 for us prior to November 30,
2000, which we believe will be sufficient to provide us with the working capital
necessary for us to proceed with our current business plan through at least
March 31, 2001.
We do not currently have any commitment from any third party to provide the
additional financing described above, and may be unable to obtain financing on
reasonable terms or at all. Furthermore, if we raise additional working capital
through equity, our shareholders will experience dilution. If we are unable to
secure additional financing when needed and our revenues are inadequate to
provide the necessary working capital, we may be required to slow down or
suspend our growth or reduce the scope of our then current level of business
operations, any of which would have a material adverse effect on our competitive
position.
Sales and Marketing
We plan to increase marketing efforts for our services through direct and
indirect channels, including the following:
Web Portals. We have successfully negotiated agreements or letters of
intent with several companies to offer our PC Support Center services
through a branded support portal to their users, the largest of which are
AltaVista (with whom we have an agreement) and TELUS (with whom we have an
agreement). We are continuing to develop additional partnership
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agreements with other Web portals. However, there can be no assurance that
an agreement will be reached with any other Web portal companies or that
the existing agreements (which have not yet generated revenues for us) will
generate significant revenues in the future.
Internet Service Providers. We have negotiated and are seeking to enter
into additional agreements or letters of intent with companies offering
Internet access to offer our PC Support Center services through a branded
support portal to their users. These Internet service providers (ISPs)
include TELUS, Canada's second largest telecommunications company, and
Paralynx Internet.
Extended Warranty Providers. We have successfully negotiated agreements or
letters of intent with companies offering extended warranties to PC
purchasers to offer our PC Support Center services. Some such extended
warranties may be sold through a branded support portal, and others at the
point of sale.
Computer Service Companies. There are several international companies
which provide a comprehensive range of computer services that permit large
corporations to out-source some or all of their PC support requirements.
Our services complement and extend the range of such support services. In
April 1999 we entered into an agreement with Unisys, an international
computer service company, to private label Online Data Backup under the
Unisys brand name for resale to Unisys' corporate customers.
ManagedStorage International. In 1998, we entered into a contract with
Storage Technologies Inc. ("StorageTek")in which we licensed StorageTek's
backup storage software, which we market under the name Online Data Backup.
StorageTek has recently spun off its online backup storage division into a
new company: ManagedStorage International. We entered into a new agreement
with ManagedStorage in July 2000, in which ManagedStorage will provide the
Online Data Backup branded client software and data storage infrastructure.
During the Next Year, we intend to expand our training and co-selling
activities with ManagedStorage.
Research and Development
Our primary research and development effort over the Next Year will be to
continue to add features to the PC Support Center (which we launched in October
1999) and to release subsequent versions during the Next Year. Due to the
constantly evolving nature of the Internet and related technologies, we will
continuously monitor changes in PC support technologies and Internet-based
support offerings with the goal of adding additional functionality in new
releases of the PC Support Center. An Education Center that provides self-
administered tutorials for PC users was added to the PC Support Center in
January 2000. A service called "Remote Repair", which allows a technician to
take control of the user's PC and perform preventive maintenance and solve
technical problems, was also added to the PC Support Center in January 2000. In
July 2000, we developed and launched an eCommerce engine, which enabled us to
launch a program in which it charges end-users directly for premium online
support services.
Among the functions and services we expect to add to the PC Support Center
over the next six months are: a Connection Wizard which simplifies the access to
the Internet for first time users and protects such Internet access from
subsequent corruption; and an electronic birth certificate which records and
verifies online the configuration of an end-user's hardware and software. We
will also expand the capability of our existing feature set. There can be no
assurance, however, that all or any of these features will be added. We expect
to incur costs of approximately $2,000,000 over the Next Year in order to
develop and implement these additional functions of the PC Support Center.
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Operations
We expect the number of subscribers to the PC Support Center and branded
portals to increase rapidly over the Next Year. To deliver the services in
support of the PC Support Center, we plan to rapidly expand the number of
technicians that we employ directly or otherwise utilize. In April 2000, we
entered into an outsourcing agreement with First Ring, Inc., a Delaware
corporation with operations in Virginia and Bangalore, India, to provide
technical support. In addition, we plan to hire employees in other departments
as well, as discussed below under "Employees." We anticipate that there will be
a significant lag between incurring the expenses to support the PC Support
Center and generating revenues from these expenditures because the PC Support
Center's basic services are currently offered free of charge.
Employees
During the Next Year, we plan to hire additional employees in every
department, including senior management employees in sales and marketing, as
well as additional technical, operations, sales and marketing, and
administrative staff as required to expand our service offerings, sales and
marketing efforts, and to maintain service levels to both new and existing
subscribers. The number and skill sets of individual employees will be
primarily dependent on the relative rates of growth of our different services,
and to the extent which sales and marketing, operations, and development are
executed internally or contracted to outside parties. Subject to the
availability of sufficient working capital and assuming significant customer
acceptance of our products, we currently plan to increase staffing to
approximately 130 people during the Next Year, although there can be no
assurance that such hiring will take place or will be adequate to execute the
growth plans as described herein.
ITEM 7. FINANCIAL STATEMENTS.
Our consolidated financial statements and the accompanying report and notes
thereto, which are attached hereto beginning at page F-1, are incorporated
herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 15, 1999, we engaged KPMG LLP, Richmond, British Columbia, Canada,
as our principal accountant to audit our financial statements. Neither we nor
our predecessor for accounting purposes, Reconnaissance Technologies Inc., had
engaged any accountants prior to the engagement of KPMG LLP.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this Item will be contained in our definitive
Proxy Statement for our 2000 Annual Meeting of Stockholders, and is incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item will be contained in our definitive
Proxy Statement for our 2000 Annual Meeting of Stockholders, and is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item will be contained in our definitive
Proxy Statement for our 2000 Annual Meeting of Stockholders, and is incorporated
herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be contained in our definitive
Proxy Statement for our 2000 Annual Meeting of Stockholders, and is incorporated
herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
2.1 Plan of Reorganization and Merger dated as of May 5, 1999 between the
Company and RTI.*
3.1 Articles of Incorporation of the Company dated as of April 5,
1999.*
3.2 Articles/Certificate of Merger of the Company dated as of April 5,
1999.*
3.3 Certificate of Correction of the Company dated as of June 2,
1999.*
3.4 Articles of Merger of the Company dated as of June 21, 1999.*
3.5 Bylaws of the Company.*
4.1 Specimen Stock Certificate****
4.2 Form of Warrant issued to former RTI warrantholders in connection
with the Merger of the Company.*
4.3 Form of Warrant issued to Advanced in connection with the Merger of
the Company.*
4.4 Warrant issued on January 11, 2000 to CGTF, LLC.**
4.5 Form of Warrants issued on January 11, 2000 to Irwin Olian and
Stanley Elbaum.***
4.6 Form of Warrants issued to Purchasers in February, 2000 Unit
Offering.***
4.7 Form of Convertible Notes issued on February 29, 2000.***
4.8 Form of "A" Warrant issued on March, 10, 2000 to Mike Lee &
Associates.***
4.9 Form of "B" Warrant issued on March, 10, 2000 to Mike Lee &
Associates.***
4.10 Form of warrants issued to ICE Holdings North America, L.L.C. on June
23, 2000.
10.1 Contract for Services dated as of June 23, 1999 between the Company
and The Dromond Technologies Group.*
10.2 Notice of Termination dated as of March 31, 2000 from the Company to
The Dromond Technologies Group, Inc.***
10.3 Consulting Contract dated as of April 1, 1999 between RTI and
Strategic Catalysts Inc.*
</TABLE>
-32-
<PAGE>
<TABLE>
<C> <S>
10.4 Termination Letter dated as of December 31, 1999 from the Company to
Strategic Catalysts Inc.**
10.5 Employment Agreement dated as of March 1, 2000 between the Company and
Michael McLean.***
10.6 Employment Agreement effective January 1, 2000 between the Company and
Steve Macbeth.**
10.7 Employment Agreement effective January 1, 2000 between the Company and
David Rowat.**
10.8 Employment Agreement dated as of November 17, 1999 between the Company
and Bruce McDonald.**
10.9 Employment Agreement dated as of April 6, 2000 between the Company and
Denise Holleran-Boswell.****
10.10 Employment Agreement dated as of April 25, 2000 between the Company and
Bruna Martinuzzi.****
10.11 Directors, Officers and Employee Stock Option Plan, as amended by the
Company's Board of Directors on November 30, 1999.***
10.12 Standard Form of Stock Option Agreement, as amended by the Company's
Board of Directors on November 30, 1999.***
10.13 Stock Pooling and Escrow Agreement dated as of July 31, 1999 among the
Company, Advanced Financial Services Inc., Alan Ackerman, David Rowat,
Clifford Rowlands, Michael McLean, Steve Macbeth, The Dromond Group Ltd.,
and Owen, Bird.*
10.14 Amendment dated as of March 7, 2000 to the Stock Pooling and Escrow
Agreement among the Company, Advanced Financial Services Inc., Alan
Ackerman, David Rowat, Clifford Rowlands, Michael McLean, Steve Macbeth,
The Dromond Group Ltd., and Owen, Bird.***
10.15 Offer to Sub-Lease dated as of April 22, 1999 among Electronic Arts
(Canada), Inc., RTI, and Beutel Goodman Real Estate Group.*
10.16 Lease dated as of March, 26, 1992 between The Canada Life Assurance
Company and Osiware Inc.*
10.17 Assignment Agreement dated as of July 29, 1997 among Infonet Software
Solutions Inc., Electronic Arts (Canada), Inc., and 547495 Ontario
Limited.*
10.18 Service Supply Agreement dated as of June 8, 1998 between RTI and
StorageTek Canada Inc.*
10.19 Service Contract dated as of April 1, 1999 between the Company and Unisys
of Canada Inc.*
</TABLE>
-33-
<PAGE>
<TABLE>
<C> <S>
10.20 Letter of Intent dated as of October 6, 1999 between the Company and Go
Figure Technology Inc.*
10.21 Consulting Contract dated as of August 6, 1999 between the Company and
M.A. Levy & Assoc.*
10.22 Consulting Agreement dated as of September 1, 1999 between the Company
and Irwin Olian.*
10.23 Engagement Letter dated as of October 6, 1999 between the Company and
Sitrick and Company.**
10.24 Service Agreement dated as of January 7, 2000 between the Company and Go
Figure Technology, Inc.**
10.25 Agreement to Convert Notes Into Stock and Warrants dated as of January
11, 2000 between the Company and CGTF, LLC.**
10.26 Term Sheet dated as of February 24, 2000 between the Company and Mike Lee
& Associates.***
10.27 Purchasing Schedule No. 2 dated as of March 13, 2000 between the Company
and Motive Communications, Inc.***
10.28 Engagement Letter dated as of March 21, 2000 between the Company and ICE
Holdings North America, L.L.C.****
10.29 Content License Agreement, dated as of April 4, 2000, between the Company
and AltaVista Company.****+
10.30 Advertising Agreement, dated as of April 7, 2000, between the Company and
AltaVista Company.****+
10.31 Lease, dated as of June 1, 2000, between the Company and Discovery Parks
Incorporated.*****
10.32 Services Distribution Agreement dated as of July 31, 2000 between the
Company and ManagedStorage International.
10.33 Revision to engagement letter dated May 20, 2000 between the Company and
ICE Holdings North America, L.L.C.
10.34 Asset Purchase Agreement with Tavisco Ltd. dated September 15, 2000.
10.35 Letter of Intent between Company and MyHelpDesk dated September 7, 2000.
10.36 License Agreement dated September 24, 2000 between the Company and Remote
Diagnostics, Inc.
21. Subsidiaries.
</TABLE>
-34-
<PAGE>
<TABLE>
<C> <S>
23.1 Consent of Accountants.
27 Financial Data Schedule
</TABLE>
* Incorporated by reference to the Company's Form 10-SB filed on
October 18, 1999.
** Incorporated by reference to the Company's Amendment No. 2 to Form 10-SB
filed on January 12, 2000.
*** Incorporated by reference to the Company's Report on Form 10-QSB filed on
May 15, 2000.
**** Incorporated by reference to the Company's Form SB-2 filed on May 24,
2000.
***** Incorporated by reference to the Company's Form SB-2A filed on June 19,
2000.
+ Certain portions of this exhibit have been omitted pursuant to an order
for confidential treatment granted by the Securities and Exchange
Commission. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(b) Reports on Form 8-K.
None
-35-
<PAGE>
PCSUPPORT.COM, INC.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
PCSUPPORT.COM, INC.
(Registrant)
Date: September 27, 2000 By
/s/ Michael G. McLean
--------------------------------------
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below on this 27th day of September, 2000 by the
following persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael G. McLean Chairman of the Board, President September 27, 2000
-------------------------------------- and Chief Executive Officer
Michael G. McLean
/s/ Steven W. Macbeth Director September 27, 2000
--------------------------------------
Steven W. Macbeth
/s/ W. Benjamin Catalano Director September 27, 2000
--------------------------------------
W. Benjamin Catalano
/s/ Bruce S. Nelson Director September 27, 2000
--------------------------------------
Bruce S. Nelson
/s/ David W. Rowat Vice President and Chief Financial September 27, 2000
-------------------------------------- Officer, (Principal Accounting
David W. Rowat Officer)
</TABLE>
-36-
<PAGE>
Consolidated Financial Statements of
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
PCSupport.com, Inc.
We have audited the consolidated balance sheets of PCSupport.com, Inc. and
subsidiary (a Development Stage Enterprise) as of June 30, 2000 and 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended June 30, 2000 and 1999 and for the period from
December 10, 1997 (inception) to June 30, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, these consolidated financial statements present fairly, in all
material respects, the financial position of PCSupport.com, Inc. and subsidiary
as of June 30, 2000 and 1999, and the results of their operations and their cash
flows for the years ended June 30, 2000 and 1999 and for the period from
December 10, 1997 (inception) to June 30, 2000, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1 to
the consolidated financial statements, the Company has suffered recurring losses
from operations and negative cash flows from operations 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 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
"KPMG LLP"
/s/ KPMG LLP
---------------
Chartered Accountants
Vancouver, Canada
August 25, 2000, except with respect
to notes 10(e) and 10(f) which are as
of September 15, 2000
F-2
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,149,290 $ 795,809
Goods and services taxes recoverable and other receivables 89,933 14,728
Prepaid expenses and deposits 335,113 33,950
Other current assets 111,860 49,256
----------- ----------
Total current assets 5,686,196 893,743
Property and equipment (note 4) 411,817 11,210
Deferred acquisition costs 25,000 -
Intangible assets (note 5) 7,052 2,697
----------- ----------
$ 6,130,065 $ 907,650
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 657,050 $ 68,266
Stockholders' equity (note 6):
Common stock, $0.001 par value, authorized 100,000,000 shares;
issued 10,477,662 shares in 2000 and 6,007,169 shares in 1999 10,478 6,007
Additional paid-in capital 13,765,041 1,981,782
Deferred stock compensation (387,563) (198,909)
Deficit accumulated during the development stage (7,914,941) (949,496)
----------- ----------
Total stockholders' equity 5,473,015 839,384
----------- ----------
Commitments and contingencies (note 7)
Subsequent events (note 10)
$ 6,130,065 $ 907,650
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Operations
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
Period from
December 10,
1997
Year ended Year ended (inception) to
June 30, 2000 June 30, 1999 June 30, 2000
------------- ------------- --------------
<S> <C> <C> <C>
Revenue:
Support center $ 340 $ - $ 340
Online backup 29,142 99 29,241
----------- ---------- -----------
29,482 99 29,581
Operating expenses:
Support center and online back-up 197,166 86 197,252
Development costs 923,259 17,646 943,719
Marketing and promotion 1,418,465 118,273 1,657,656
General and administrative 1,287,219 138,592 1,484,373
Stock-based compensation expense 412,246 486,191 898,437
----------- ---------- -----------
4,238,355 760,788 5,181,437
----------- ---------- -----------
Loss from operations (4,208,873) (760,689) (5,151,856)
Interest expense, net (note 6(a)(ii)) 2,756,572 6,513 2,763,085
----------- ---------- -----------
Loss for the period $(6,965,445) $ (767,202) $(7,914,941)
=========== ========== ===========
Net loss per common share, basic and diluted $(1.01) $ (0.46) $ (2.22)
=========== ========== ===========
Weighted average common shares outstanding,
basic and diluted 6,884,464 1,659,455 3,572,640
=========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
Period from December 10, 1997 (inception) to June 30, 2000
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Shares Additional Deferred During Total
----------------------- Paid-in Stock Development Stockholders'
Shares Amount Capital Compensation Stage Equity
---------- -------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 10, 1997 (inception) 200 $ - $ - $ - $ - $ -
Issuance of common stock for services in
January, valued at $.13 per share 489,800 490 65,157 - - 65,647
Sale of common stock in January,
$0.13 per share 510,000 510 67,642 - - 68,152
Net loss - - - - (182,294) (182,294)
---------- ------- ----------- ----------- ------------- -----------
Balance, June 30, 1998 1,000,000 1,000 132,799 - (182,294) (48,495)
Fair value of common stock purchase
warrants granted to creditor - - 8,407 - - 8,407
Sale of common stock in January,
approximately $.85 per share, net of
issuance costs of $131,708 291,838 292 116,062 - - 116,354
Issuance of common stock for services in
January and May, valued at approximately
$.85 per share 52,848 53 45,101 - - 45,154
Conversion of note payable to common stock 66,029 66 109,977 - - 110,043
Issuance of common stock for services in
January 63,440 63 53,861 - - 53,924
Issuance of common stock for services in
April 1,500,000 1,500 777,620 (392,356) - 386,764
Amortization of deferred stock compensation - - - 45,247 - 45,247
Issuance of common stock for acquisition in
June, net of acquisition costs of $46,753
(note 3) 3,033,014 3,033 886,155 - - 889,188
Treasury stock repurchased by Company in
June, not cancelled (285,000) - (148,200) 148,200 - -
Net loss - - - - (767,202) (767,202)
---------- ------- ----------- ----------- ------------- -----------
Balance, June 30, 1999 5,722,169 6,007 1,981,782 (198,909) (949,496) 839,384
Exercise of warrants in July, 1999 68,400 69 58,197 - - 58,266
Shares issued in exchange for service 4,160 4 6,504 - - 6,508
Fair value of options issued to employees
and consultants - - 600,900 (600,900) - -
Conversion of notes payable in January,
net of $5,803 in cash financing costs
(note 6(a)(i)) 350,000 350 494,747 - - 495,097
Fully paid warrants issued as financing
compensation cost (note 6(a)(ii)) - - 1,794,000 (1,794,000) - -
Beneficial conversion feature of notes payable
issued in February (note 6(a)(ii)) - - 1,000,000 - - 1,000,000
Amortization of deferred stock compensation - - - 2,206,246 - 2,206,246
Sale of units in March and April, $2.00 per
unit, net of $38,820 in cash financing
costs 666,000 666 1,292,514 - - 1,293,180
Sale of common stock in March, $2.00 per
share, net of $36,222 in cash financing
costs 2,054,000 2,054 4,069,724 - - 4,071,778
Exercise of warrants in March for cash 140,600 141 188,263 - - 188,404
Sale of common stock in April, $2.00 per
share 34,000 34 67,966 - - 68,000
Sale of common stock in April, $2.125 per
share, net of $175,694 in cash
financing costs 645,000 645 1,194,286 - - 1,194,931
Conversion of promissory notes
payable in May (note 6(a)(ii)) 508,333 508 1,016,158 - - 1,016,666
Net loss - - - - (6,965,445) (6,965,445)
---------- ------- ----------- ----------- ------------- -----------
Balance, June 30, 2000 10,192,662 $10,478 $13,765,041 $ (387,563) $(7,914,941) $ 5,473,015
========== ======= =========== =========== ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
Period from
December 10,
1997
Year ended Year ended (inception) to
June 30, 2000 June 30, 1999 June 30, 2000
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss for the period $(6,965,445) $ (767,202) $(7,914,941)
Items not affecting cash:
Depreciation and amortization 108,972 5,336 114,927
Common stock issued in exchange for services 6,508 440,944 513,099
Deemed discount amortization on promissory note 1,000,000 - 1,000,000
Amortization of deferred stock compensation 2,206,246 45,247 2,251,493
Discount on notes payable - 8,407 8,407
Loss on debt extinguishments and other 17,566 - 17,566
Changes in operating assets and liabilities:
Goods and services taxes recoverable and
other receivables (75,205) (14,728) (89,933)
Prepaid expenses and deposits (326,163) (33,950) (360,113)
Other current assets (62,604) (49,014) (111,860)
Accounts payable and accrued liabilities 588,784 64,556 657,050
----------- ---------- -----------
Net cash used in operating activities (3,501,341) (300,404) (3,914,305)
----------- ---------- -----------
Cash flows from investing activities:
Purchase of property and equipment (507,357) (13,055) (523,733)
Purchase of intangible asset (6,577) (3,486) (10,063)
----------- ---------- -----------
Net cash used in investing activities (513,934) (16,541) (533,796)
----------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable - 62,314 110,043
Proceeds from issuance of bridge loan - 17,088 17,088
Repayment of bridge loan - (17,088) (17,088)
Cash acquired in acquisition - 888,932 888,932
Cash costs of conversion of debt to equity (5,803) - (5,803)
Proceeds from promissory notes 1,500,000 - 1,500,000
Proceeds from exercise of share purchase warrants 246,670 - 246,670
Net proceeds from sale of common stock 6,627,889 161,508 6,857,549
----------- ---------- -----------
Net cash provided by financing activities 8,368,756 1,112,754 9,597,391
----------- ---------- -----------
Net increase in cash and cash equivalents 4,353,481 795,809 5,149,290
Cash and cash equivalents at beginning of period 795,809 - -
----------- ---------- -----------
Cash and cash equivalents at end of period $ 5,149,290 $ 795,809 $ 5,149,290
=========== ========== ===========
Supplemental disclosure:
Cash paid for:
Income taxes $ - $ - $ -
Interest 7,200 - 7,200
Non-cash activities:
Notes payable and promissory notes
converted into common stock 1,516,666 110,043 1,626,709
Deferred stock compensation 2,394,900 392,356 2,787,256
Treasury stock acquired - 285 285
Discount on promissory note payable 1,000,000 - 1,000,000
Discount on notes payable - 8,407 8,407
Common stock issued for services 6,508 486,191 558,346
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
1. Nature of development stage activities:
Mex Trans Seafood Consulting, Inc. was incorporated in Texas on February 13,
1989 and was a holding company prior to its merger with Reconnaissance
Technologies Inc. ("Reconnaissance"). In anticipation of this merger, a
shell company was incorporated in Nevada in April, 1999 and Mex Trans
Seafood Consulting, Inc. was merged into it, with PCSupport.com, Inc.
("PCS") as the surviving company. PCS had no substantive operations at that
time. In June 1999, PCS merged with Reconnaissance, with PCSupport.com, Inc.
(the "Company") being the surviving corporation (note 2(a)). The Company
currently operates in one business segment and is in the business of
developing and commercializing support services for the personal computer
market. The Company's services include providing daily secured backup of
personal computer hard-drives over the Internet, overnight laptop
replacements and an aggregation of web-based computer support services.
These consolidated financial statements have been prepared on a going
concern basis in accordance with United States generally accepted accounting
principles. The going concern basis of presentation assumes the Company will
continue in operation for the foreseeable future and will be able to realize
its assets and discharge its liabilities and commitments in the normal
course of business. Certain conditions, discussed below, currently exist
which raise substantial doubt upon the validity of this assumption. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
The Company's future operations are dependent upon the market's acceptance
of its services and the Company's ability to secure cost effective third
party license and service supply agreements. There can be no assurance that
the Company's services will be able to secure market acceptance or that cost
effective license and service supply agreements will exist or continue to
exist. As of June 30, 2000, the Company is considered to be in the
development stage as the Company has not generated significant revenues, is
continuing to develop its business, and has experienced negative cash flow
from operations. Operations have primarily been financed through the
issuance of common stock and debt. The Company does not have sufficient
working capital to sustain operations until the end of the year ended June
30, 2001. The Company has contracted with third parties to assist them in
securing funds through additional debt or equity financings. Such financings
may not be available or may not be available on reasonable terms.
2. Significant accounting policies:
(a) Reverse take-over and basis of presentation:
On June 23, 1999, PCS merged with Reconnaissance, with Reconnaissance's
stockholders receiving the largest number of shares and control of the
Company. Accordingly, Reconnaissance is deemed the accounting acquiror
for financial statement purposes.
F-7
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 2
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
2. Significant accounting policies (continued):
(a) Reverse take-over and basis of presentation (continued):
The acquisition is accounted for as a reverse take-over using the
purchase method. The Company's historical financial statements reflect
the results of operations and cash flows of Reconnaissance from the
date of its incorporation on December 10, 1997 under the Company Act
(British Columbia). During June, 1999, Reconnaissance continued its
incorporation into Wyoming. The historical stockholders' equity gives
effect to the shares issued to the stockholders of Reconnaissance. The
financial position and results of operations of PCS are included from
the date of acquisition, June 23, 1999.
(b) Basis of consolidation:
These consolidated financial statements have been prepared using
generally accepted accounting principles in the United States. The
financial statements include the accounts of the Company's wholly-owned
subsidiary, Reconnaissance International Ltd. All significant
intercompany balances and transactions have been eliminated in the
consolidated financial statements.
(c) Use of estimates:
The preparation of consolidated financial statements in accordance with
United States generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements and reported revenues and expenses for the reporting
periods. Actual results may significantly differ from these estimates.
(d) Contract revenue recognition:
Revenue from customer support service contracts is recognized over the
term of the customer support agreement. The Company also provides web-
based computer solutions to customers, including developing customized
branded web-based support portals or other products. Revenue from these
services are recognized when the product is delivered and no
significant performance obligations remain. For longer-term contracts
with significant customization, the Company recognizes revenue based on
the percentage of completion method of accounting.
Anticipated losses on contracts are charged to earnings as soon as such
losses can be estimated. Changes in estimated profits on contracts are
recognized during the period in which the change in estimate is known.
F-8
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 3
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
2. Significant accounting policies (continued):
(e) Foreign currency:
The functional currency of the Company and its subsidiary is the United
States dollar. Transactions in foreign currencies are translated to
United States dollars at the rates in effect on the transaction date.
Exchange gains or losses arising on translation or settlement of
foreign currency denominated monetary items are included in the
consolidated statement of operations.
(f) Cash and cash equivalents:
The Company considers all short-term investments with a maturity date
at purchase of three months or less to be cash equivalents.
(g) Prepaid expenses and deposits:
Prepaid expenses and deposits primarily includes prepaid advertising
and software license fees and deposits relating to its office operating
leases.
(h) Property and equipment:
Property and equipment are recorded at cost and are depreciated using
the straight-line method over their estimated useful lives as follows:
Computer equipment and software 2 years
Furniture and fixtures 7 years
Office equipment 7 years
Leasehold improvements Over the lease term
The cost of maintenance and repairs are charged to expenses as
incurred. The Company reviews property and equipment for impairment
whenever events or changes in circumstances indicate the carrying value
may not be recoverable. If the sum of future cash flows expected to
result from the use of the asset and its eventual disposition is less
than the carrying amount, an impairment loss is recognized for the
excess of the carrying amount of the asset over the fair value of the
asset.
(i) Income taxes:
The Company follows the asset and liability method of accounting for
income taxes. Under this method, current taxes are recognized for the
estimated income taxes payable for the current period.
Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between financial statement carrying
amounts of assets and liabilities and their respective tax bases as
well as the benefit of losses available to be carried forward to future
years for tax purposes.
F-9
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 4
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
2. Significant accounting policies (continued):
(i) Income taxes (continued):
Deferred tax assets and liabilities are measured using enacted tax
rates that are 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 is recognized in operations in the period that includes
the substantive enactment date. A valuation allowance is recorded for
deferred tax assets when it is more likely than not that such deferred
tax assets will not be realized.
(j) Research and development:
Research and development costs are expensed when incurred.
The Company accounts for the costs of developing and maintaining its
website in accordance with EITF 00-02 and SOP 98-1. Costs incurred
during the preliminary project stage are expensed as incurred. Costs
incurred during the application development stage are capitalized and
costs incurred during the operating stage are expensed, unless they
represent upgrades or enhancements that result in additional
functionality. Costs capitalized are reviewed for impairment in
accordance with SFAS 121. Also included in development costs are costs
incurred to develop branded support portals for third parties under
contract.
(k) Net loss per share:
Basic earnings per share is computed using the weighted average number
of common stock outstanding during the periods. Diluted loss per share
is computed using the weighted average number of common and potentially
dilutive common stock issuances outstanding during the period. As the
Company has a net loss in each of the periods presented, basic and
diluted net loss per share is the same.
Excluded from the computation of diluted loss per share for the year
ended June 30, 2000 are warrants to purchase 2,965,838 (1999 - 311,838)
shares of common stock and options to purchase 1,311,869 (1999 - nil)
shares of common stock because their effects would be anti-dilutive.
(l) Stock-based compensation:
The Company accounts for its stock-based compensation arrangement in
accordance with provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense under fixed plans would
be recorded on the date of grant only if the market value of the
underlying stock at the date of grant exceeded the exercise price. The
Company recognizes compensation expense for stock options, common stock
and other equity instruments issued to non-employees for services
received based upon the fair value of the services or equity
instruments issued, whichever is more reliably determined. This
information is presented in note 6(b)(ii).
F-10
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 5
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
2. Significant accounting policies (continued):
(l) Stock-based compensation (continued):
SFAS No. 123, Accounting for Stock Based Compensation, requires
entities that continue to apply the provisions of APB Opinion No. 25
for transactions with employees to provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied to these transactions. This
information is presented in note 6(b)(i).
(m) Comparative figures:
Certain comparative figures have been reclassified to conform to the
basis of presentation adopted for the current period.
3. Acquisitions:
In June, 1999, PCS merged with Reconnaissance. As described in note 2(a),
the acquisition was a reverse take-over with Reconnaissance being the deemed
accounting acquiror for financial statements purposes.
Net assets acquired through the issuance of common stock consisted of cash
and cash equivalents with a fair value of $935,685. The cash and cash
equivalents held by PCS were obtained through a private placement.
Acquisition related costs of $46,753 were incurred and were recorded as a
decrease in the acquisition amount carried in stockholders' equity.
The following table reflects unaudited pro forma information which combines
the operations of PCS and Reconnaissance for the year ended June 30, 1999
and the period from December 10, 1997 (inception) to June 30, 1998 as if the
acquisition of PCS had taken place at the beginning of the period. There
were no pro forma adjustments required in combining this information of
these two entities. This pro forma information does not reflect any non-
recurring charges or credits directly attributable to the transaction. This
pro forma information does not purport to be indicative of the revenues and
net loss that could have resulted had the acquisition been in effect for the
period presented and is not intended to be a projection of future results or
trends.
F-11
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 6
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
3. Acquisitions (continued):
<TABLE>
<CAPTION>
Period from
December 10,
Year ended 1997 (inception)
June 30, to June 30,
1999 1999
---------- ----------------
<S> <C> <C>
Revenue $ 99 $ 99
Expenses:
On-line back-up 86 86
Research and development 17,646 20,460
Marketing and promotion 477,103 598,021
General and administrative 317,685 376,247
Interest, net 6,513 6,513
--------- -----------
Net loss for the period $(818,934) $(1,001,228)
========= ===========
Net loss per share $ (0.14) $ (0.23)
========= ===========
</TABLE>
4. Property and equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------------
2000 1999
--------- -----------
<S> <C> <C>
Computer equipment $ 335,546 $ 14,173
Furniture and fixtures 51,608 1,584
Office equipment 64,184 -
Leasehold improvements 71,776 -
--------- -----------
523,114 15,757
Less accumulated depreciation 111,297 4,547
--------- -----------
$ 411,817 $ 11,210
========= ===========
</TABLE>
5. Intangible assets:
Intangible assets includes the cost of acquiring the Company's World Wide Web
domain names and trademarks and is amortized straight-line over a three year
period.
F-12
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 7
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
6. Stockholders' equity:
(a) Convertible debt:
(i) Promissory notes:
In November, 1999, the Company issued promissory notes to an
investor totaling $500,000 with interest payable monthly, not in
advance, at a rate of 10% per annum. On January 11, 2000, the
Company agreed to convert the notes into 350,000 common shares and
warrants to purchase 240,000 common shares at a price of $1.40 per
share. The loss on extinguishment of the debt was approximately
$900.
(ii) Convertible promissory notes:
On February 29, 2000, the Company issued promissory notes
("Convertible Promissory Notes") to private investors totaling
$1,000,000, convertible into common stock of the Company at a
conversion rate of $2.00 per common share. The notes bore interest
at an annual rate of 10% and payable monthly. The notes carried a
beneficial conversion feature valued at $1,250,000, equal to the
aggregate excess of the market value of the Company's common
shares at the date of agreement over the conversion rate. The
beneficial conversion feature recorded was limited to the proceeds
of the promissory note offering of $1,000,000 and was amortized to
interest expense over the period to the earliest conversion date,
which resulted in full amortization of the $1,000,000 to interest
expense during the year.
The notes, including $16,666 in accrued interest, were converted
in May 2000 into 508,333 common shares.
Under the terms of the financing agreement, the Company granted
1,000,000 "A" warrants and 500,000 "B" warrants to its agent for
the $1,000,000 Convertible Promissory Notes financing and for
future general financing services. Each "A" warrant entitles the
holder to acquire one common share at an exercise price of $1.25
per share to February 28, 2001 and $1.75 thereafter to February
28, 2002. Each "B" warrant entitles the holder to acquire one
common share at an exercise price of $2.00 per share to February
28, 2001 and $2.50 thereafter to February 28, 2002. The estimated
fair value of the warrants of $1,794,006 was recorded as deferred
financing costs and was amortized to interest expense over the
period to the earliest conversion date, which resulted in full
amortization of the $1,794,000 to interest expense during the
current year.
F-13
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 8
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
6. Stockholders' equity (continued):
(b) Stock options and stock-based compensation:
(i) Stock options:
On July 2, 1999, the Company adopted a fixed stock option plan that
provides for the issuance of incentive and non-qualified stock
options to officers, directors, employees, and consultants to
acquire shares of the Company's common stock.
The Board of Directors determines the terms of the options granted,
including the number of options granted, the exercise price and the
vesting schedule. The exercise price for qualified incentive stock
options shall not be less than the fair market value of the
underlying stock at the date of grant, and have terms no longer
than five years from the date of grant. Subsequent to year end, the
Company amended certain terms of its stock option plan (note
10(a)).
Stock option activity since the inception of the plan is presented
below:
<TABLE>
<CAPTION>
Weighted
Number average
of shares exercise price
--------- --------------
<S> <C> <C>
Outstanding, July 1, 1999 - $ -
Granted 1,311,869 2.32
Exercised - -
Cancelled - -
--------- --------------
Outstanding, June 30, 2000 1,311,869 $2.32
========= ==============
</TABLE>
The following table summarizes the stock options outstanding at
June 30, 2000:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------- ----------------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of exercise price of shares contractual life exercise price exercisable exercise price
----------------------- --------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.50 691,000 4.1 years 1.01 314,750 1.01
$1.69 - $2.48 201,369 4.9 years 2.02 119,008 1.99
$2.67 - $3.95 105,000 4.9 years 3.14 3,194 3.21
$4.22 - $6.06 314,500 4.8 years 5.10 28,167 5.08
--------- ---------------- ---- ------- ----
1,311,869 4.5 years 2.32 465,119 1.52
========= ================ ==== ======= ====
</TABLE>
As at June 30, 2000, 465,119 stock options have vested and are
exercisable. The weighted average fair value of the options granted
during the year ended June 30, 2000 was $1.72 per option.
F-14
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 9
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
6. Stockholders' equity (continued):
(b) Stock options and stock-based compensation (continued):
(i) Stock options (continued):
As explained in note 2(l), the Company adopted only the disclosure
provisions of FAS No. 123 for options granted under the existing
employee stock option plan. FAS No. 123 uses a fair value method of
calculating the cost of stock option grants. Had compensation cost
for the employee stock option plan been determined by this method,
loss and basic loss per share would have been as follows:
<TABLE>
<CAPTION>
June 30, 2000
-------------
<S> <C>
Loss:
As reported $ (6,965,445)
Pro-forma (7,295,259)
=============
Basic loss per share:
As reported $ (1.01)
Pro-forma (1.06)
=============
</TABLE>
The Company recognizes the calculated compensation cost at the date
of granting the stock options on a straight-line basis over the
vesting period.
The Company has estimated the fair value of each option on the date
of the grant using the Black-Scholes option-pricing model with the
following assumptions:
<TABLE>
<CAPTION>
June 30, 2000
-------------
<S> <C>
Expected dividend yield -
Expected stock price volatility 70%
Risk-free interest rate 6%
Expected life of options 4 years
</TABLE>
(ii) Stock-based compensation:
In January, 1998, the Company recorded non-cash compensation
expense of $65,647 related to the sale of 489,800 common shares at
$0.01 per share to certain stockholders and officers of the
Company. The fair value of the common shares was estimated at $0.13
per share at the time of the transaction.
In January, 1999, the Company recorded non-cash interest expense of
$8,407 related to the issuance of warrants to purchase 20,000
shares of common stock. The warrants were exercisable immediately
at an exercise price of $0.85 per share and expired in January,
2000.
In January and May, 1999, the Company issued 52,848 shares of
common stock in exchange for services relating to share issuances.
The fair value of these services was estimated based upon the
estimated fair value of the shares at $0.85 per share or $45,154.
The costs were deducted from the additional paid-in capital from
the sale of common stock in January, 1999.
F-15
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 10
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
6. Stockholders' equity (continued):
(b) Stock options and stock-based compensation (continued):
(ii) Stock-based compensation (continued):
In January, 1999, the Company recorded non-cash compensation
expense of $53,924 related to the issuance of 63,440 shares of
common stock to certain stockholders and officers of the Company.
The fair value of the shares was estimated at $0.85 per share at
the time of the transaction.
In April, 1999, the Company recorded non-cash compensation expense
and deferred compensation expense of $779,120 related to the
issuance of 1,500,000 shares of common stock at no cost to certain
officers and stockholders. The value of the shares was estimated
at $0.52 per share. A certain portion of these shares are subject
to vesting over a period of time. The compensatory element
relating to these shares were recorded as deferred stock
compensation to be amortized over their respective vesting
periods. In June, 1999, the Company repurchased 285,000 common
shares at $0.001 per share and recorded the transaction as shares
held in treasury as of June 30, 1999.
Common shares held in treasury total 285,000 at June 30, 2000.
Pursuant to an agreement dated July 31, 1999, the Company has the
option to re-purchase certain shares held by executive officers if
their employment ceases with the Company prior to January 1, 2002
at a price of $0.01 per share.
(c) Share purchase warrants:
In July, 1999 and March, 2000, warrants to purchase 68,400 and 140,600
common shares at a price of $0.85 and $1.34 per common share,
respectively, were exercised.
Share purchase warrants outstanding at June 30, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
Shares issuable on exercise of
outstanding warrants
------------------------------
Expiry dates Exercise price per share June 30, 2000 June 30, 1999
------------ ------------------------ -------------- -------------
<S> <C> <C> <C>
March, 2001 (6(c)(iii)) $2.00 333,000 -
January, 2000 (6(b)(ii)) $0.85 - 20,000
January, 2002(6(a)(ii)) $1.40 240,000 -
February, 2002 (6(a)(iii)) $1.25 / $1.75 1,000,000 -
February, 2002 (6(a)(iii)) $2.00 / $2.50 500,000 -
March, 2002 (6(c)(ii)) $2.00 500,000 -
June, 2002 (6(c)(iv)) various 250,000 -
January, 2003 (6(c)(iv)) $1.05 10,000 -
April, 2003 (6(c)(iv)) $5.40 50,000 -
Various (6(c)(i)) $1.34 82,838 291,838
--------- -------
2,965,838 311,838
========= =======
</TABLE>
F-16
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 11
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
6. Stockholders' equity (continued):
(c) Share purchase warrants (continued):
(i) Between January 26, 1999 and February 18, 1999, the Company issued
warrants which are exercisable at $0.85 per share for a period
expiring three months after the completion of an initial public
offering by the Company of its common shares at a price per share
of $0.85 prior to July 18, 1999 and $1.34 per share thereafter.
(ii) In March 2000, the Company completed a private placement for
2,054,000 common shares of the Company for proceeds of $4,071,778,
being net of $36,222 of cash financing costs. The Company agreed to
issue warrants to purchase 500,000 common shares of $2.00 per share
for consulting and advisory services in connection with this
transaction. The warrants will expire March 2002. The estimated
fair value of these warrants at the date of grant was $1,736,000
and has been recorded as a charge against additional paid-in
capital.
(iii) In March and April, 2000, the Company completed a private placement
issuing 666,000 units to investors for proceeds of $1,293,180, net
of $38,820 of cash financing costs. Each unit consists of one
common share of the Company and one-half of one warrant, with two
one-half warrants exercisable to purchase an additional one common
share at an exercise price of $2.00 per share, with the warrants
expiring in March 2001.
(iv) In April, 2000, the Company completed a private placement for
645,000 common shares for proceeds of $1,194,931, net of $175,694
of cash financing costs. The Company also issued warrants to
purchase 310,000 common shares as compensation for arranging the
financing. The exercise price of 250,000 of the warrants is
dependent on the issuance price of an expected future private
placement. The value of these warrants have initially been measured
at their fair value using current market information and will be
readjusted as this fair value changes until the date of the future
private placement. The value assigned to these warrants is recorded
in equity. Of the remaining warrants, 10,000 and 50,000 have
exercise prices of $1.05 and $5.40, respectively. The estimated
fair value of the warrants of $260,451 has been recorded as a
charge against additional paid-in capital.
F-17
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 12
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
7. Commitments and contingencies:
(a) Operating leases:
The Company leases office facilities in British Columbia under
operating lease agreements that expire in November, 2002 and June,
2005. Minimum lease payments under these operating leases and other
license software and lease equipment are as follows:
<TABLE>
<S> <C>
2001 $493,500
2002 495,500
2003 357,000
2004 280,500
2005 280,500
Thereafter 46,500
</TABLE>
Rent expense totalled $79,413 and $9,587 for the years ended June 30,
2000 and 1999, respectively.
(b) Internet portal advertising agreement:
The Company entered into an agreement with an Internet service company
to allow the Company to advertise its services on the Internet service
Company's website for a one year term. Also, the Company has agreed to
create a co-branded website to provide its services to the Internet
service Company's customers for a two year term. The Company paid
$570,000 under the agreement for fiscal year 2000 and is committed to
paying $2,460,000 in fiscal year 2001 and $2,250,000 in fiscal year
2002. The agreement is subject to cancellation after one year at the
Company's option.
(c) Financing agreement:
The Company entered into a financing agreement with ICE Holdings North
America, LLC in March, 2000. Subject to the completion of direct and
indirect financing milestones, the Company will be required to issue
and register with the United States Securities and Exchange Commission
1,000,000 warrants as consideration for their services. As at June 30,
2000, 250,000 warrants were earned and issued (note 6(c)(iv)).
F-18
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 13
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
8. Deferred tax assets and liabilities:
<TABLE>
<CAPTION>
June 30,
------------------------
2000 1999
----------- ---------
<S> <C> <C>
Deferred tax assets:
Start-up costs and other $ 311,200 $ 269,953
Operating loss carry forwards 1,413,000 -
Property and equipment 71,056 4,547
Accounts payable and accrued liabilities 6,207 -
----------- ---------
Total deferred tax assets before valuation allowance 1,801,463 274,500
Valuation allowance (1,801,463) (274,500)
----------- ---------
Net deferred tax assets $ - $ -
=========== =========
</TABLE>
Management believes that it is not more likely than not that it will create
sufficient taxable income sufficient to realize its deferred tax assets. It
is reasonably possible these estimates could change due to future income and
the timing and manner of the reversal of deferred tax liabilities. Due to
its losses, the Company has no income tax expense.
The Company has operating loss carry forwards for income tax purposes at
June 30, 2000 of approximately $4,137,000. Operating losses begin to expire
in fiscal year 2020.
9. Financial instruments:
(a) Fair values:
The Company regularly invests funds in excess of its immediate needs in
money market accounts. The fair value of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities
approximates their financial statement carrying amounts due to the
short-term maturities of these instruments. The carrying amount of
notes payable approximates fair value since they have a short-term to
maturity.
(b) Foreign currency risk:
The Company operates internationally which gives rise to the risk that
cash flows may be adversely impacted by exchange rate fluctuations. The
Company does not enter into foreign currency hedge transactions.
(c) Market risk:
Approximately 83% (1999 - 100%) of the Company's revenues were from one
Canadian customer for the year ended June 30, 2000. All of the
Company's capital assets are located in Canada.
F-19
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 14
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
10. Subsequent events:
(a) In July 2000, the Company amended its stock option plan whereby all
options granted to a starting employee in any fiscal quarter will have
an exercise price equal to the average closing price for every trading
day in the previous quarter. All options granted since January 1, 2000
are to be retroactively repriced in accordance with the amended terms
unless the new exercise price exceeds the original exercise price. For
accounting purposes, all repriced options will be considered to be
variable plan options and compensation expense will be recognized to
the extent that the market price of the Company's stock increases to
the exercise or expiry date.
(b) Subsequent to June 30, 2000 the Company granted 68,500 stock options
to officers, directors and employees with an exercise price of $3.44
per share.
(c) In July 2000, the Company obtained a license to use specific dial-up
connection technology in exchange for minimum payments of $100,000 in
cash and 100,000 common shares. The Company is required to issue
warrants for each incremental 100,000 licenses sold to users over
400,000 licenses. These warrants will entitle the holder for a period
of five years to purchase shares of the Company at the stated prices.
(d) In August 2000, the Company issued 50,000 common shares and received
as consideration a note receivable in the amount of $261,800. This
note bears interest at 6.62% per annum payable at the end of each year
and is payable in full on July 25, 2005.
(e) On September 7, 2000, the Company signed a Letter of Intent to acquire
all of the assets and assume certain liabilities of MyHelpDesk, Inc.
in exchange for 1,250,000 common shares of the Company and a further
250,000 common shares one year after closing. MyHelpDesk, Inc. is a
development stage company that provides web-based computer support
services.
(f) On September 15, 2000, the Company acquired substantially all of the
assets of Tavisco Ltd., a producer of anti-virus services and
products. The purchase price for Tavisco Ltd.'s assets consisted of
200,000 shares of common stock (with up to 100,000 of these shares
subject to cancellation under certain circumstances related to
continued employment) and a cash payment of $50,000. Tavisco Ltd.
designs, develops and provides state-of-the-art virus diagnostic
products for computer service professionals. Its products include
virus scanners and cleaners, a full-featured anti-virus protection
system, and a rapid screening test that prevents virus infections.
F-20
<PAGE>
PCSUPPORT.COM, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, page 15
(Expressed in U.S. Dollars)
Years ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
10. Subsequent events (continued):
(f) Continued:
The total purchase price of $376,000, including estimated acquisition
costs is allocated to the assets acquired based upon these relative
fair values as follows:
<TABLE>
<S> <C>
Software $338,400
Licences, patents and other intangibles 37,600
--------
$376,000
========
Consideration:
Cash $ 70,000
Common shares 306,000
--------
$376,000
========
</TABLE>
The common shares issued have been recorded at their market value at
September 15, 2000. The purchase price allocation is an estimate only
and is subject to change.
F-21
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
2.1 Plan of Reorganization and Merger dated as of May 5,
1999 between the Company and RTI.*
3.1 Articles of Incorporation of the Company dated as of
April 5, 1999.*
3.2 Articles/Certificate of Merger of the Company dated
as of April 5, 1999.*
3.3 Certificate of Correction of the Company dated as of
June 2, 1999.*
3.4 Articles of Merger of the Company dated as of June
21, 1999.*
3.5 Bylaws of the Company.*
4.1 Specimen Stock Certificate****
4.2 Form of Warrant issued to former RTI warrantholders
in connection with the Merger of the Company.*
4.3 Form of Warrant issued to Advanced in connection
with the Merger of the Company.*
4.4 Warrant issued on January 11, 2000 to CGTF, LLC.**
4.5 Form of Warrants issued on January 11, 2000 to Irwin
Olian and Stanley Elbaum.***
4.6 Form of Warrants issued to Purchasers in February,
2000 Unit Offering.***
4.7 Form of Convertible Notes issued on February
29, 2000.***
4.8 Form of "A" Warrant issued on March, 10, 2000 to
Mike Lee & Associates.***
4.9 Form of "B" Warrant issued on March, l0, 2000 to
Mike Lee & Associates.***
4.10 Form of Warrants issued to ICE Holdings North
America, L.L.C. on June 23, 2000.
10.1 Contract for Services dated as of June 23, 1999
between the Company and The Dromond Technologies
Group.*
10.2 Notice of Termination dated as of March 31, 2000
from the Company to The Dromond Technologies Group,
Inc.***
10.3 Consulting Contract dated as of April 1, 1999
between RTI and Strategic Catalysts Inc.*
<PAGE>
10.4 Termination Letter dated as of December 31, 1999 from the
Company to SCI.**
10.5 Employment Agreement dated as of March 1, 2000 between the
Company and Michael McLean.***
10.6 Employment Agreement effective January 1, 2000 between the
Company and Steve Macbeth.**
10.7 Employment Agreement effective January 1, 2000 between the
Company and David Rowat.**
10.8 Employment Agreement dated as of November 17, 1999 between
the Company and Bruce McDonald.**
10.9 Employment Agreement dated as of April 6, 2000 between the
Company and Denise Holleran-Boswell.****
10.10 Employment Agreement dated as of April 25, 2000 between
the Company and Bruna Martinuzzi.****
10.11 Directors, Officers and Employee Stock Option Plan, as
amended by the Company's Board of Directors on November
30, 1999.***
10.12 Standard Form of Stock Option Agreement, as amended by the
Company's Board of Directors on November 30, 1999.***
10.13 Stock Pooling and Escrow Agreement dated as of July 31,
1999 among the Company, Advanced Financial Services Inc.,
Alan Ackerman, David Rowat, Clifford Rowlands, Michael
McLean, Steve Macbeth, The Dromond Group Ltd., and Owen,
Bird.*
10.14 Amendment dated as of March 7, 2000 to the Stock Pooling
and Escrow Agreement among the Company, Advanced Financial
Services Inc., Alan Ackerman, David Rowat, Clifford
Rowlands, Michael McLean, Steve Macbeth, The Dromond Group
Ltd., and Owen, Bird.***
10.15 Offer to Sub-Lease dated as of April 22, 1999 among
Electronic Arts (Canada), Inc., RTI, and Beutel Goodman
Real Estate Group.*
10.16 Lease dated as of March, 26, 1992 between The Canada Life
Assurance Company and Osiware Inc.*
10.17 Assignment Agreement dated as of July 29, 1997 among
Infonet Software Solutions Inc., Electronic Arts (Canada),
Inc., and 547495 Ontario Limited.*
10.18 Service Supply Agreement dated as of June 8, 1998 between
RTI and StorageTek Canada Inc.*
10.19 Service Contract dated as of April 1, 1999 between the
Company and Unisys of Canada Inc.*
<PAGE>
10.20 Letter of Intent dated as of October 6, 1999 between the
Company and Go Figure Technology Inc.*
10.21 Consulting Contract dated as of August 6, 1999 between the
Company and M.A. Levy & Assoc.*
10.22 Consulting Agreement dated as of September 1, 1999 between
the Company and Irwin Olian.*
10.23 Engagement Letter dated as of October 6, 1999 between the
Company and Sitrick and Company.**
10.24 Service Agreement dated as of January 7, 2000 between the
Company and Go Figure Technology, Inc.**
10.25 Agreement to Convert Notes Into Stock and Warrants dated
as of January 11, 2000 between the Company and CGTF,
LLC.**
10.26 Term Sheet dated as of February 24, 2000 between the
Company and Mike Lee & Associates.***
10.27 Purchasing Schedule No. 2 dated as of March 13, 2000
between the Company and Motive Communications, Inc.***
10.28 Engagement Letter dated as of March 21, 2000 between the
Company and ICE Holdings North America, L.L.C.****
10.29 Content License Agreement, dated as of April 4, 2000,
between the Company and AltaVista Company.****+
10.30 Advertising Agreement, dated as of April 7, 2000, between
the Company and AltaVista Company.****+
10.31 Lease, dated as of June 1, 2000, between the Company and
Discovery Parks Incorporated.*****
10.32 Services Distribution Agreement dated as of July 31, 2000
between the Company and ManagedStorage International.
10.33 Revision to engagement letter dated May 20, 2000 between
the Company and ICE Holdings North America, L.L.C.
10.34 Asset Purchase Agreement with Tavisco Ltd. dated September
15, 2000.
10.35 Letter of Intent between Company and MyHelpDesk dated
September 7, 2000
10.36 License Agreement dated September 24, 2000 between the
Company and Remote Diagnostics, Inc.
<PAGE>
21. Subsidiaries.
23.1 Consent of Accountants.
27 Financial Data Schedule.
* Incorporated by reference to the Company's Form 10-SB filed on
October 18, 1999.
** Incorporated by reference to the Company's Amendment No. 2 to Form
10-SB filed on January 12, 2000.
*** Incorporated by reference to the Company's Report on Form 10-QSB
filed on May 15, 2000.
**** Incorporated by reference to the Company's Form SB-2 filed on May
24, 2000.
***** Incorporated by reference to the Company's Form SB-2A filed on June
19, 2000.
+ Certain portions of this exhibit have been omitted pursuant to an
order for confidential treatment granted by the Securities and
Exchange Commission. Omitted portions have been filed separately
with the Securities and Exchange Commission.
