U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-SB
OneSource Technologies, Inc.
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(Name of Small Business Issuer in its charter)
Delaware 65-0691963
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7419 East Helm Drive
Scottsdale, Arizona 85260
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (800) 279-0859
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class to be registered
None None
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Securities to be registered under Section 12(g) of the Act:
Common Stock, $0.001 par value
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(Title of class)
Copies of Communications Sent to:
Mintmire & Associates
265 Sunrise Avenue, Suite 204
Palm Beach, FL 33480
Tel: (561) 832-5696
Fax: (561) 659-5371
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Item 1: Description of Business:
(a) Business Development
OneSource Technologies, Inc. ("the Company" or "OS") is incorporated in the
state of Delaware. The Company was originally incorporated as LW Global
(U.S.A.), Inc. in September 1996, changed its name to Micor Technologies, Inc.
in July 1997 and then finally to OneSource Technologies, Inc. in August 1997.
The Company's Common Stock is currently quoted on the National Quotation
Bureau's "Pink Sheets" and the Company intends to request quotation on the Over
the Counter Bulletin Board once its Form 10SB has been accepted. Its executive
offices are presently located at 7419 East Helm Drive, Scottsdale, AZ 85260. Its
telephone number is (800) 279-0859 and its facsimile number is (480) 889-1166.
The Company is filing this Form 10-SB on a voluntary basis so that the
public will have access to the required periodic reports on OS's current status
and financial condition. The Company will file periodic reports in the event its
obligation to file such reports is suspended under the Securities and Exchange
Act of 1934 (the "Exchange Act".)
Although the Company was initially engaged in the office supply and
equipment business, operations did not commence until July 1997 at the time it
acquired Micor Technologies, Inc., an Arizona corporation ("Micor") as a
wholly-owned subsidiary. Micor was originally incorporated as Micor Financial
Systems, Inc. in April 1990 and is now also known as OneSource Technologies,
Inc.
The Company's founding philosophy arose from the diversified experience of
its management in the equipment sales, service, banking and related industries.
See Part I, Item 1. "Description of the Business - (b) Business of Issuer."
Beginning in September 1996 and prior to its acquisition of Micor, the
Company sold 1,500,000 shares of its Common Stock to one hundred three (103)
investors for $15,000. For such offering, the Company relied upon Section 3(b)
of the Securities Act of 1933, as amended (the "Act"), Rule 504 of Regulation D,
promulgated thereunder ("Rule 504"), Section 517.061(11) of the Florida Code,
Section 10-5-9(13) of the Georgia Code, Section 4[5/4](G) of the Illinois Code,
Section 90.530(11) of the Nevada Code, Section 59.035(12) of the Oregon Code,
Section 35-1- 320(9) of the South Carolina Code, Section 48-2-103(b)(4) of the
Tennessee Code and Section 5[581-5]I(c) of the Texas Code. See Part II, Item 4.
"Recent Sales of Unregistered Securities."
In July 1997, the Company entered into a share exchange agreement with
Micor and its shareholders. The exchange was made whereby the Company issued
8,500,000 shares of its restricted Common Stock to the shareholders of Micor for
all of the issued and outstanding stock of Micor. Jerry Washburn, the current
President, Chief Executive Officer and Chairman of the Company, received
3,300,000 shares in connection with such exchange. William B. Meger, a Director
of the Company, received 3,285,287 shares. This offering was conducted pursuant
to Section 4(2) of the Act, Rule 506 of Regulation D promulgated thereunder
("Rule 506"), Section 44- 1844(6) of the Arizona Code, Section 25103(c) of the
California Code, Section 90.530(17) of the Nevada Code and Section 61-1-14(2)(p)
of the Utah Code. See Part I, Item 1. "Employees and
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Consultants"; Part I, Item 4. "Security Ownership of Certain Beneficial Owners
and Management"; Part I, Item 5. "Directors, Executive Officer, Promoters and
Control Persons"; Part I, Item 6. "Executive Compensation"; Part I, Item 7.
"Certain Relationships and Related Transactions"; and Part II, Item 4. "Recent
Sales of Unregistered Securities."
In July 1997, 1,035 shares of the Company's Common Stock were
cancelled.
In February and March 1998, the Company sold 14,400 shares of its
Common Stock pursuant to an Offering Memorandum dated September 17, 1997 to six
(6) investors for a total of $7,200. For such offering, the Company relied upon
Section 3(b) of the Act, Rule 504, Section 517.061(11) of the Florida Code,
Section 502.203(9) of the Iowa Code, Section 80A.15 Subd.2(a)(1) of the
Minnesota Code, Section 48-2-103(b)(4) of the Tennessee Code, Section
5[581-5]I(c) of the Texas Code and Section 551.23(11) of the Wisconsin Code. See
Part II, Item 4. "Recent Sales of Unregistered Securities."
In July 1998, the Company sold 32,000 shares of its Common Stock to
two (2) investors for a total of $8,000. No offering memorandum was utilized in
connection with this offering. For such offering, the Company relied upon
Section 3(b) of the Act, Rule 504, Section 517.061(11) of the Florida Code and
Section 90.530(11) of the Nevada Code. See Part II, Item 4. "Recent Sales of
Unregistered Securities."
In August 1998, the Company issued 100,000 shares of its Common Stock
to one (1) person for legal services performed on behalf of the Company. For
such offering, the Company relied upon Section 3(b) of the Act, Rule 504 and
Section 517.061(11) of the Florida Code. See Part II, Item 4.
"Recent Sales of Unregistered Securities."
In September 1998, the Company issued 750,000 shares of its Common
Stock to two (2) persons for services rendered to the Company. Donald C. Gause,
who currently serves as a Director, received 250,000 of the shares issued. For
such offering, the Company relied upon Section 4(2) of the Act, Rule 506,
Section 14-4-126(f) of the Arizona Code and Section 11-51-308(1)(j) of the
Colorado Code. See Part I, Item 1. "Employees and Consultants"; Part I, Item 4.
"Security Ownership of Certain Beneficial Owners and Management"; Part I, Item
5. "Directors, Executive Officer, Promoters and Control Persons"; Part I, Item
6. "Executive Compensation"; Part I, Item 7. "Certain Relationships and Related
Transactions"; and Part II, Item 4. "Recent Sales of Unregistered Securities."
In September 1998, Micor entered into a flat rate blanket contract to
provide equipment service to King Soopers stores at seventy-two (72) locations.
While the contract includes items such as: A) labor for: adjustments, repairs
and replacement necessitated by normal use of the equipment, lubrication and
cleaning; B) replacement parts required by normal use of the equipment; and C)
transportation and travel costs, it does not include replacement of consumable
items or damage to equipment items. The term of the contract was for a period of
one (1) year and was automatically renewable. The estimated annual total fees to
be received by Micor was $420,408.
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The King Soopers contract was extended in September 1999 for a period
three (3) years. The total fees for all three (3) years is estimated to be
$1,979,867.36 or $54,996.32 per month.
In April 1999, the Company issued 500,000 shares of its Common Stock
to one (1) entity for services rendered to the Company. For such offering, the
Company relied upon Section 3(b) of the Act, Rule 504 and Section 517.061(11) of
the Florida Code. See Part II, Item 4. "Recent Sales of Unregistered
Securities."
In April 1999, the Company sold 2,624,672 shares of its Common Stock
to two (2) investors for a total of $800,000. The Company accepted a note
receivable from each of the two (2) investors, which notes receivable were due
one hundred eighty (180) days from their date of issuance. In July 1999, the
Company agreed to extend the repayment term for one (1) investor for an
additional three hundred sixty (360) days, which note shall accrue interest at a
rate of six percent (6%) annually. In January 2000, the Company agreed to extend
the repayment for the other investor such that the note is now payable on demand
and bears interest a rate of six percent (6%) annually. For such offering, the
Company relied upon Section 3(b) of the Act, Rule 504, Section 25102(f) of the
California Code and Section 90.530(11) of the Nevada Code. See Part I, Item 2.
"Management's Discussion and Analysis of Operations" and Part II, Item 4,
"Recent Sales of Unregistered Securities"
In April 1999, the Company entered into a share exchange agreement
with the shareholders of Net Express, Inc., an Arizona corporation ("NE"),
whereby the Company exchanged 727,946 shares of its Common Stock for one hundred
percent (100%) of the issued and outstanding stock of NE such that NE became a
wholly-owned subsidiary of the Company. The shares in connection with such
exchange were not issued until December 1999. For such offering, the Company
relied upon Section 4(2) of the Act, Rule 506 and Section 44-1844(6) of the
Arizona Code. See Part I, Item 7. "Certain Relationships and Related
Transactions"; and Part II, Item 4. "Recent Sales of Unregistered Securities".
Contemporaneously with execution of the share exchange with NE, the
Company signed a redemption agreement which effectively allowed either party to
the transaction to rescind the transaction without penalty at any time on or
before July 1, 1999. Neither party elected to redeem and the redemption
agreement has since expired. Additionally, at the time of the NE share exchange,
the Company entered into an employment agreement with Ahlawyss Fulton, which has
since expired.
In May 1999, the Company entered into a Stock Purchase Agreement with
Blackwater Capital Partners II, L.P., a Delaware limited partnership
("Blackwater") wherein Blackwater agreed to purchase 2,905,828 shares of the
Company's Common Stock for a total of $750,000. Payments were to be made: A)
$105,000 at closing; B) in five (5) monthly installments of $105,000 beginning
July 1, 1999 and the first of each month thereafter; and C) a final installment
of $120,000. Although Blackwater missed each payment deadline, $620,000 has been
funded to date, including $250,000 which Blackwater assigned to a third party
investor. To date, only 968,609 shares have been issued to the third party
assignee. No shares have yet been issued to Blackwater. Blackwater's shares
carry certain registration rights. For such offering, the Company relied upon
Section 4(2) of the Act, Rule
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506 and Section 517.061(11) of the Florida Code. See Part II, Item 4. "Recent
Sales of Unregistered Securities."
In July 1999, 500,000 shares of the Company's Common Stock were
cancelled by the Company pursuant to an agreement between the Company and that
shareholder.
In July 1999, the Company sold 50,000 shares of its Common Stock to
three (3) investors for a total of $10,000. The Company relied upon Section 4(2)
of the Act, Rule 506 and Section 30- 1433A(2) of the Idaho Code. See Part II,
Item 4. "Recent Sales of Unregistered Securities."
In September 1999, the Company entered into a share exchange
agreement with the shareholders of Cartridge Care, Inc., an Arizona corporation
("CC"), whereby the Company exchanged 1,887,500 shares of its Common Stock for
one hundred percent (100%) of the issued and outstanding stock of CC such that
CC became a wholly-owned subsidiary of the Company. Of the 1,887,500 shares to
be issued in connection with the exchange, 1,125,000 shares are subject to a two
(2) year "lock-up" provision (the "LU Shares") and the remaining 762,500 shares
are not contractually restricted (but are restricted by Rule 144). To date, only
262,500 of the LU Shares and 243,750 of the remaining shares have been issued.
562,500 of the LU Shares and 381,250 of the remaining shares are beneficially
owned by Maurice Mallette, a current Director of the Company and the President
of CC. For such offering the Company relied upon Section 4(2) of the Act, Rule
506 and Section 44-1844(6) of the Arizona Code. See Part I, Item 1. "Employees
and Consultants"; Part I, Item 4. "Security Ownership of Certain Beneficial
Owners and Management"; Part I, Item 5. "Directors, Executive Officer, Promoters
and Control Persons"; Part I, Item 6. "Executive Compensation"; Part I, Item 7.
"Certain Relationships and Related Transactions"; and Part II, Item 4. "Recent
Sales of Unregistered Securities."
In September 1999, the Company entered into a lease with EJM
Development Co., a California limited partnership for property located at 7419
East Helm Drive, Scottsdale, AZ 85260. This property serves as the Company's
headquarters, service dispatch and parts center for all the Company's
operations. The lease is for a term of five (5) years, two (2) months, for which
the Company pays rent in the amount of $9,025 for the first fourteen (14)
months, $9,370 for months fifteen (15) to twenty-six (26), $9,715 for months
twenty-seven (27) through thirty-eight (38), $9,995 for months thirty-nine (39)
through fifty (50) and $10,270 for months fifty-one (51) through sixty-two (62).
See Part I, Item 1. "Facilities"; and Part I, Item 3. "Description of Property".
In April 2000, the Company issued 1,281,318 shares of its Common
Stock to 30 persons in exchange for services performed on behalf of the Company.
Donald Gause, a Director, received 4,000 shares in connection with such
issuance. For such offering, the Company relied upon Section 4(2) of the Act,
Section 506, Section R14-4-140 of the Arizona Code, Section 25102(f) of the
California Code, Section 11-51-308(1)(p) of the Colorado Code, Section 90.532 of
the Nevada Code, Section 58-13B-24(R) of the New Mexico Code, New Mexico Rule
12NMAC11.4.11.2 and Section 61-1-15.5(2)&R164-15-2 of the Utah Code. See Part I,
Item 1. "Employees and Consultants"; Part I, Item 4. "Security Ownership of
Certain Beneficial Owners and Management"; Part I, Item 5. "Directors, Executive
Officer, Promoters and Control Persons"; Part I, Item 6. "Executive
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Compensation"; Part I, Item 7. "Certain Relationships and Related Transactions";
and Part II, Item 4. "Recent Sales of Unregistered Securities."
See (b) "Business of Issuer" immediately below for a description of
the Company's business.
(b) Business of Issuer.
General
The Company was formed in September 1996 and had little or no
operations until July 1997 when the Company entered into a reverse merger
transaction wherein it issued 8,500,000 shares of stock in exchange for one
hundred percent (100%) of the issued and outstanding shares of Micor. Micor
started business in 1984 as a small banking equipment sales and service company
and was incorporated in 1990 as Micor Financial Systems, Inc. Its name was
changed to Micor Technologies, Inc. in December 1994 and finally to OneSource
Technologies, Inc in August 1997.
OneSource is engaged in three (3) closely related and complimentary
lines of business, 1) renewable contract equipment maintenance services, 2)
equipment sales and integration services and 3) value added equipment supply
sales. The Company is primarily focused on the 1) banking and financial services
and 2) retail industries even though its service and product offerings can be
readily applied in any industry. These two (2) are emphasized because of the
significantly greater number of equipment items used in banking, financial
service and retail enterprises compared to other businesses. Like companies in
other industries, banking and retail enterprises use large numbers of general
business equipment items such as copiers, facsimiles, PCs and peripherals, but
in addition they also utilize significant quantities of industry specific
machines like coin/currency counting and handling machines, check processing and
encoding equipment and ATMs in banking and point-of- sale ("POS") scanner and
register systems in the retail industry.
The Company's customers at the end of 1999 were primarily banking
(25%) and retail (74%) companies located in Arizona, California, Colorado,
Nevada, New Mexico, Utah, Texas and Wyoming. Approximately forty-eight percent
(48%) of the Company's revenue was generated from four (4) customers through
December 31, 1999, the largest of which contributed approximately twenty-three
percent (23%).
Maintenance Services
In Maintenance Services, OneSource has pioneered a patent pending
"flat-rate blanket discount service" approach in these industries covering a
broad array of general business and industry specific equipment. The Company's
patent pending service program is unique because it takes a "horizontal"
approach to equipment maintenance rather than the typical "vertical" approach
traditionally offered. In so doing so, it creates wide based savings by being
able to service multiple equipment items for a flat fee, which constitutes the
basis for a package pricing to customers. Equipment Maintenance service is
delivered on-site to customers by Company
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employed virtual field service technicians operating from their homes throughout
the Company's territorial reach, which presently includes the states of Arizona,
northern California, Colorado, Nevada, New Mexico, Utah and parts of Wyoming and
Texas. All supporting services, including call center dispatching and control,
parts procurement and logistics are centrally housed in the Company's Phoenix,
Arizona corporate facilities. Communication and field service connectivity is
realized through the utilization of a number of communication technology
devices, e.g., wireless telephones, pagers, the Internet and Company Intranet
services.
Maintenance has historically been the Company's primary business
focus. Now, with its added Integration and Supplies capabilities, OneSource will
prospectively be less dependent on this aspect of its business. At December 1999
Maintenance revenues constituted approximately seventy-nine percent (79%) of
total consolidated revenues.
Integration Services
The Company is engaged in a number of network and Internet related
integration products and services including, network (LAN and WAN)
implementation, remote network support services, web hosting and e-commerce
services, DSL and other high speed and broadband Internet connectivity services,
and wireless Internet connectivity. All of these capabilities are in present
high demand. They also readily compliment the Company's Maintenance and Supplies
operations by being able to support these divisions' customer base with IT
products and services. These capabilities were acquired in 1999 through the
Company's acquisition of an Arizona based information technology ("IT") company.
Accordingly, Integration services are presently being delivered in only the
Company's Arizona territory. The Company intends to expand this capability
throughout all its geographic locations. Integration services therefore
represent a major component of the Company's forward growth strategies.
The Integration division operates as a value-added reseller ("VAR")
for a number of computer and peripheral product OEM's and distributors related
to its LAN and WAN integration services, e.g., PC's, servers, communication
equipment, printers, and etc. The division also has a number of agent agreements
in place with high speed Internet and virtual private Network ("VPN") suppliers
to supply these services to the Company's Integration customers. All Integration
products and services are delivered to customers by Company employed systems
engineers and/or outside project specific contract engineers.
Supplies Services
The Supplies segment is focused on delivering equipment supplies and
part requirements to the Company's Maintenance and Integration customers on a
single-source basis. The Company is presently a supplier for a number of
equipment consumable supply items, e.g., ribbons, toner, and OEM and
remanufactured toner cartridges for copiers, faxes and laser printers. Since
toner cartridges represent the Company's largest demand supply item, the Company
acquired an Arizona based high quality toner cartridge remanufacturing company
in order to expand this
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products distribution throughout the Company's Maintenance and Integrations
customer base.
Internet Services
A number of the Company's products and services can be readily
distributed and/or serviced via the Internet on both a retail consumer as well
as a business to business ("B2B") basis. In this regard, the Company launched
its initial on-line Internet distribution channel, (GOINK.com) to supply and
distribute its remanufactured printer and copier toner cartridge products. GOINK
is presently directed toward individual and small business retail customers, but
prospectively will be directed toward the Company's existing Maintenance,
Integration customers. These products are delivered via on-line private catalogs
within GOINK on a true Internet B2B basis.
At year-end 1999 the Company had fifty-two (52) full-time employees
and one (1) part-time employee.
Status of Publicly Announced Products and Services
The Company is primarily focused on its maintenance, integration and
supplies services at this time. However, an increasing number of the Company's
products and services can be distributed and/or serviced via the Internet. The
Company's GOINK.com website was designed with this trend in mind.
Competition
The Company faces competition from large, well-established companies
with considerably greater financial, marketing, sales and technical resources
than those available to the Company. The Company's training and services could
be rendered obsolete or made uneconomical by the development of new products,
technological advances or pricing actions by one or more of the Company's
competitors. The Company's business, financial condition or results of
operations could be materially adversely affected by one or more of such
developments. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competition will not
have an material adverse effect on the Company's business, financial condition
or results of operations.
The equipment sales and service industry as well as the equipment
supplies industry are highly competitive and consist of numerous independent and
competing companies large and small throughout the Company's operating
territory. Any organization, supplier, or equipment sales and service provider
is technically a OS competitor. The differentiating factor between competitors
and the Company is the limited line(s) of service generally provided by
competing companies. Most of these companies are vertical suppliers who focus
primarily on one or a few types of equipment sales with service offered
secondarily as an inducement for increased sales. Further such competitors tend
to be involved with a limited number of equipment types and brands. The Company
offers its customers equipment service with Company employed field service
technicians on a broad
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horizontal basis wherein multiple types and manufacture's brands are covered
under a single maintenance contract known as the OneSource Flat-Rate Blanket
Maintenance System(TM).
Sources and Availability of Raw Materials
The materials needed to service office machinery are widely available
from numerous third parties. No shortage of materials is expected in the
foreseeable future.
Dependence on one or few customers
The Company will rely heavily on its few customers' accounts for the
majority of its business. A change in the relationship of the Company to any one
(1) of its major customers could have a material adverse affect on the Company's
business.
Research and Development
The Company believes that research and development is an important
factor in its future growth. The equipment supply industry is closely linked to
technological advances, which constantly produces new machinery for use by the
public. Therefore, the Company must continually invest in training on the latest
technological advances and the newest office machinery to effectively compete
with other companies in the industry. No assurance can be made that the Company
will have sufficient funds to fund such training efforts to match technological
advances as they become available. Additionally, due to the rapid advance rate
at which technology advances, the Company's equipment and inventory may be
outdated quickly, preventing or impeding the Company from realizing its full
potential profits.
Patents, Copyrights and Trademarks
The Company intends to protect its original intellectual property
with patents, copyrights and/or trademarks as appropriate.
The Company's only trademark extends to its unique flat-rate blanket
maintenance service program. The Company presently has a "business apparatus and
methods" patent application pending with the United States Patent Office for the
Company's OneSource Flat-Rate Blanket Maintenance System(TM), but otherwise the
Company has no other patents, trademarks, royalty agreements, franchises,
concessions or labor contracts in effect.
Governmental Regulation
There are no government approvals required to conduct business and no
regulatory issues other than usual and customary corporate, tax and business
licensing with which the Company is current in all its operating jurisdictions.
State and Local Licensing Requirements
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Currently there are no state or local licensing requirements which
apply to the Company's business or to its products
Effect of Probable Governmental Regulation on the Business
Currently there is no government regulation of the Company's business
nor of the Company's products. However, new laws are emerging which regulate
commerce over the internet and the way data and information may be transmitted
over the Internet. Should the Company engage in activities involving the
Internet in the future, it may be subject to these laws and/or regulations.
As the Company's products and services are available over the
Internet in multiple states and foreign countries, these jurisdictions may claim
that the Company is required to qualify to do business as a foreign corporation
in each such state and foreign country. New legislation or the application of
laws and regulations from jurisdictions in this area could have a detrimental
effect upon the Company's business.
A governmental body could impose sales and other taxes on the
provision of the Company's products and services, which could increase the costs
of doing business. A number of state and local government officials have
asserted the right or indicated a willingness to impose taxes on
Internet-related services and commerce, including sales, use and access taxes;
however, no such laws have become effective to date. The Company cannot
accurately predict whether the imposition of any such taxes would materially
increase its costs of doing business or limit the services which it provides,
since it may be possible to pass on some of these costs to the consumer and
continue to remain competitive.
If, as the law in this area develops, the Company becomes liable for
information carried on, stored on, or disseminated through its website, it may
be necessary for the Company to take steps to reduce its exposure to this type
of liability through alterations in its equipment, insurance or other methods.
This may require the Company to spend significant amounts of money for new
equipment or premiums and may also require it to discontinue offering certain of
its products or services.
Due to the increasing popularity and use of the Internet, it is
possible that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, privacy, access to adult content by
minors, pricing, bulk e-mail (spam), encryption standards, consumer protection,
electronic commerce, taxation, copyright infringement and other intellectual
property issues. P&G cannot predict the impact, if any, that future regulatory
changes or developments may have on the Company's business, financial condition,
or results of operation.
Cost of Research and Development
For fiscal year 1998 and 1999, the Company expended no measurable
amount of money on research and development efforts. At the current time, none
of the costs associates with research and development are bourne directly by the
customer; however there is no guarantee that such costs will
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not be bourne by customers in the future and, at the current time, the Company
does not know the extent to which such costs will be bourne by the customer, if
at all.
Cost and Effects of Compliance with Environmental Laws
The Company's business is not subject to regulation under the state
and Federal laws regarding environmental protection and hazardous substances
control. The Company is unaware of any bills currently pending in Congress which
could change the application of such laws so that they would affect the Company.
Employees and Consultants
At June 30, 2000, the Company employed fifty-three (53) persons. None
of these employees are represented by a labor union for purposes of collective
bargaining. The Company considers its relations with its employees to be
excellent.
In July 1997, the Company entered into a share exchange agreement
with Micor and its shareholders. The exchange was made whereby the Company
issued 8,500,000 shares of its restricted Common Stock to the shareholders of
Micor for all of the issued and outstanding stock of Micor. Jerry Washburn, the
current President, Chief Executive Officer and Chairman of the Company, received
3,300,000 shares in connection with such exchange. William B. Meger, a Director
of the Company, received 3,285,287 shares. This offering was conducted pursuant
to Section 4(2) of the Act, Rule 506, Section 44-1844(6) of the Arizona Code,
Section 25103(c) of the California Code, Section 90.530(17) of the Nevada Code
and Section 61-1-14(2)(p) of the Utah Code. See Part I, Item 4. "Security
Ownership of Certain Beneficial Owners and Management"; Part I, Item 5.
"Directors, Executive Officer, Promoters and Control Persons"; Part I, Item 6.
"Executive Compensation"; Part I, Item 7. "Certain Relationships and Related
Transactions"; and Part II, Item 4. "Recent Sales of Unregistered Securities."
In September 1998, the Company issued 750,000 shares of its Common
Stock to two (2) persons for services rendered to the Company. Donald C. Gause,
who currently serves as a Director, received 250,000 of the shares issued. For
such offering, the Company relied upon Section 4(2) of the Act, Rule 506,
Section 14-4-126(f) of the Arizona Code and Section 11-51-308(1)(j) of the
Colorado Code. See Part I, Item 4. "Security Ownership of Certain Beneficial
Owners and Management"; Part I, Item 5. "Directors, Executive Officer, Promoters
and Control Persons"; Part I, Item 6. "Executive Compensation"; Part I, Item 7.
"Certain Relationships and Related Transactions"; and Part II, Item 4. "Recent
Sales of Unregistered Securities."
In September 1999, the Company entered into a share exchange
agreement with the shareholders of CC, whereby the Company exchanged 1,887,500
shares of its Common Stock for one hundred percent (100%) of the issued and
outstanding stock of CC such that CC became a wholly-owned subsidiary of the
Company. Of the 1,887,500 shares to be issued in connection with the exchange,
1,125,000 shares are the LU Shares and the remaining 762,500 shares are not
contractually restricted (but are restricted by Rule 144). To date, only 262,500
of the LU Shares and
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243,750 of the remaining shares have been issued. 562,500 of the LU Shares and
381,250 of the remaining shares are beneficially owned by Maurice Mallette, a
current Director of the Company and the President of CC. For such offering the
Company relied upon Section 4(2) of the Act, Rule 506 and Section 44-1844(6) of
the Arizona Code. See Part I, Item 4. "Security Ownership of Certain Beneficial
Owners and Management"; Part I, Item 5. "Directors, Executive Officer, Promoters
and Control Persons"; Part I, Item 6. "Executive Compensation"; Part I, Item 7.
"Certain Relationships and Related Transactions"; and Part II, Item 4. "Recent
Sales of Unregistered Securities."
In April 2000, the Company issued 1,281,318 shares of its Common
Stock to 30 persons in exchange for services performed on behalf of the Company.
Donald Gause, a Director, received 4,000 shares in connection with such
issuance. For such offering, the Company relied upon Section 4(2) of the Act,
Section 506, Section R14-4-140 of the Arizona Code, Section 25102(f) of the
California Code, Section 11-51-308(1)(p) of the Colorado Code, Section 90.532 of
the Nevada Code, Section 58-13B-24(R) of the New Mexico Code, New Mexico Rule
12NMAC11.4.11.2 and Section 61-1-15.5(2)&R164-15-2 of the Utah Code. See Part I,
Item 4. "Security Ownership of Certain Beneficial Owners and Management"; Part
I, Item 5. "Directors, Executive Officer, Promoters and Control Persons"; Part
I, Item 6. "Executive Compensation"; Part I, Item 7. "Certain Relationships and
Related Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
Currently, the Company has no employment agreements with its
employees. OS intends to enter into such agreements upon the effectiveness of
its Form10SB.
Facilities
In September 1999, the Company entered into a lease with EJM
Development Co., a California limited partnership for property located at 7419
East Helm Drive, Scottsdale, AZ 85260. This property serves as the Company's
headquarters, service dispatch and parts center for all the Company's
operations. The lease is for a term of five (5) years, two (2) months, for which
the Company pays rent in the amount of $9,025 for the first fourteen (14)
months, $9,370 for months fifteen (15) to twenty-six (26), $9,715 for months
twenty-seven (27) through thirty-eight (38), $9,995 for months thirty-nine (39)
through fifty (50) and $10,270 for months fifty-one (51) through sixty-two (62).
See Part I, Item 3. "Description of Property".
Risk Factors
Before making an investment decision, prospective investors in the
Company's Common Stock should carefully consider, along with other matters
referred to herein, the following risk factors inherent in and affecting the
business of the Company.
1. History of Losses. As of December 31, 1998, the Company had total
assets of $530,480, a net loss of $51,614, net revenues of $1,380,041 and
stockholders deficit of $473,318. As of December 31, 1999, the Company had total
assets of $1,715,486, a net loss of $185,341 on net revenues of $2,476,884 and
stockholders equity of $335,880. Due to the Company's operating
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history and limited resources, among other factors, there can be no assurance
that profitability or significant revenue will occur in the future. Moreover,
the Company expects to continue to incur operating losses through at least the
fiscal year 2000 and there can be no assurance that losses will not continue
thereafter. The ability of the Company to establish itself as a going concern is
dependent upon the receipt of additional funds from operations or other sources
to continue those activities.
2. Minimal Assets. Working Capital and Net Worth. As of December 31,
1999, the Company's total assets in the amount of $1,715,486, consisted,
principally, of accounts receivable in the amount of $460,121, $368,898 in
inventories, $220,000 in stock subscription receivable and $34,061 in other
assets. Further, there can be no assurance that the Company's financial
condition will improve. Management believes, without assurance, that it will
obtain sufficient capital with which to continue its operations through revenues
generated from operations.
3. Need for Additional Capital. Without an infusion of capital or
profits from operations, the Company is not expected to grow and to further
expand its operations. Accordingly, the Company is not expected to overcome its
history of losses unless additional equity and/or debt financing is obtained.
While the Company anticipates the receipt of increased operating revenues, such
increased revenues cannot be assured. Further, the Company may incur significant
unanticipated expenditures which deplete its capital at a more rapid rate
because of among other things, the stage of its business and its lack of a
widespread client base and market recognition. Because of these and other
factors, management is presently unable to predict what additional costs might
be incurred by the Company beyond those currently contemplated. The Company has
not identified sources of additional capital funds, and there can be no
assurance that resources will be available to the Company when needed.
4. Dependence on Management. The possible success of the Company is
expected to be largely dependent on the continued services of its current
President, Jerry Washburn. Virtually all decisions concerning the Company will
be made or significantly influenced by Mr. Washburn. The loss of the services of
Mr. Washburn, would adversely affect the conduct of the Company's business and
its prospects for the future. The Company presently has no employment agreements
with any of its officers and holds no key-man life insurance on the lives of,
and has no other agreement with any of these officers.
5. Limited Distribution Capability. The Company's success depends in
large part upon its ability to distribute its products and services. As compared
to the Company, which lacks the financial, personnel and other resources
required to compete with its larger, better-financed competitors, virtually all
of the Company's competitors have much larger budgets for securing customers.
Depending upon the level of operating capital or funding obtained by the
Company, management believes, without assurance, that it will be possible for
the Company to attract service personnel for its products and services. However,
in the event that only limited funds are available from operations or obtained,
the Company anticipates that its limited finances and other resources may be a
determinative factor in the decision to continue its operations. Until such
time, if ever, as the Company is successful in generating sufficient cash flow
from operations or securing additional
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capital, of which there is no assurance, it intends to continue to operate at
its current stage.
6. High Risks and Unforeseen Costs Associated with the Company's
Expanded Entry into the Equipment Service Industry. There can be no assurance
that the costs for the establishment of a service network will not be
significantly greater than those estimated by Company management or that
significant expenditures will not be needed to perform service and repair with
the speed necessary to satisfy its clients. Therefore, the Company may expend
significant unanticipated funds or significant funds may be expended by the
Company without development of a network of clients to financial support the
Company. There can be no assurance that cost overruns will not occur or that
such cost overruns will not adversely affect the Company. Further, unfavorable
general economic conditions and/or a downturn in customer acceptance and appeal
could have an adverse affect on the Company's business. Additionally,
competitive pressures and changes in customer mix, among other things, which
management expects the Company to experience, could reduce the Company's gross
profit margin from time to time. Accordingly, there can be no assurance that the
Company will be capable of establishing itself in a commercially viable position
in local, state, nationwide markets.
7. Few Clients Under Contract or Customer Base. While the Company has
signed several clients for service and repair contracts, the Company presently
has no a limited customer base. The Company will be dependent upon its
President, Mr. Jerry Washburn, to select new potential clients. Mr. Washburn
will utilize the contacts with banks and others which he has developed in the
equipment service and supply business to select and target potential clients to
be signed by the Company, there can be no assurance that any such clients will
engage the Company's services.
8. Dependency on Securing a Suitable Strategic Partner. The Company's
ability to establish an adequate customer base at a level sufficient to meet the
larger competition depends in part upon the ability of the Company to capitalize
on agreements not yet in place and may include the necessity to establish a
joint venture agreement with a suitable partner for its future endeavors. There
can be no assurance that a qualified strategic arrangement will be found at the
levels which management believes are possible. Further, even if the Company
receives sufficient cash flow from operations or proceeds from equity and/or
debt financing or otherwise, thus enabling it to go forward with its planned
expansion, it will nevertheless be dependent upon the availability of a
qualified strategic partner to progress at the levels which the Company believes
are necessary.
9. Fluctuations in Results of Operations. The Company has experienced
and may in the future experience significant fluctuations in revenues, gross
margins and operating results. In addition, a single client currently represents
a significant portion of the Company's revenues. As with many developing
businesses, the Company expects that some contracts with clients may not meet
management's expectations or expansion into new territories may have to be
deferred as a result of changes in internal schedules, among other factors. As a
result, the Company's operating results for a particular period to date have
been and may in the future be materially adversely affected by delays in
inventory shipping, problems with technicians or cancellation of even one
service contract.
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A large portion of the Company's expenses are variable but difficult
to reduce should revenues not meet the Company's expectations, thus magnifying
the material adverse effect of any revenue shortfall. Additional factors that
may cause the Company's revenues, gross margins and results of operations to
vary significantly from period to period include: inventory production costs,
patent processing, mix of products sold, manufacturing efficiencies, costs and
capacity, price discounts, market acceptance and the timing of availability of
new products by the Company and general economic and political conditions. In
addition, the Company's results of operations are influenced by competitive
factors, including the pricing and availability of and demand for volume
discounts for clients with more than one (1) service location. All of the above
factors are difficult for the company to forecast, and these or other factors
could materially adversely affect the Company's business, financial condition
and results of operations. As a result, the Company believes that
period-to-period comparisons are not necessarily meaningful and should not be
relied upon as indications of future performance. See Part I, Item. 2.
"Management's Discussion and Analysis of Financial Condition or Plan of
Operation."
10. Potential for Unfavorable Interpretation of Future Government
Regulation. The Company is not subject to regulations governing its products at
the present time. The Company may be subject to regulation if it elects to
distribute its products through means such as the Internet, in which case the
Company will be required to comply with new and emerging laws, the
interpretation of which will be uncertain and unclear. In such event the Company
shall have all of the uncertainties such laws present including the risk of loss
of substantial capital in the event the Company is unable to comply with the law
or is unable to utilize the method of distribution it thinks will best serve the
Company's products and services.
11. No Assurance of Product or Service Quality, Performance and
Reliability. The Company expects that its customers will continue to establish
demanding policies for quality, performance and reliability. Although the
Company will attempt to purchase inventory from manufacturers who adhere to good
manufacturing practice standards, there can be no assurance that problems will
not occur in the future with respect to quality, performance, reliability and
price. If such problems occur, the Company could experience increased costs,
delays in or cancellations or rescheduling of orders or shipments and product
returns and discounts, any of which would have a material adverse effect on the
Company's business, financial condition or results of operations.
12. Future Capital Requirements. The Company's future capital
requirements will depend upon many factors, including the cost of production of
the Company's inventory, requirements to either rent or construct adequate
facilities for storage of inventory. The Company believes that it will require
additional funding in order to fully exploit its plan of operations. There can
be no assurance, however, that the Company will secure such additional
financing. There can be no assurance that any additional financing will be
available to the Company on acceptable terms, or at all. If additional funds are
raised by issuing equity securities, further dilution to the existing
stockholders will result. If adequate funds are not available, the Company may
be required to delay, scale back or even eliminate its new territories or obtain
funds through arrangements with partners or others that may require the Company
to relinquish rights to certain of its existing or potential products or other
assets. Accordingly, the inability to obtain such financing could have a
material
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adverse effect on the Company's business, financial condition and results of
operations. See Part I, Item 2. "Management's Discussion and Analysis of
Financial Condition or Plan of Operation."
13. Uncertainty Regarding Protection of Proprietary Rights. The
Company will attempt to protect its intellectual property rights through
patents, trademarks, secrecy agreements, trade secrets and a variety of other
measures. However, there can be no assurance that such measures will provide
adequate protection for the Company's intellectual property, that additional
disputes with respect to the ownership of its intellectual property rights will
not arise between the Company and its competitors, that the Company's products
will not otherwise be copied by competitors or that the Company can otherwise
meaningfully protect its intellectual property rights. There can be no assurance
that any copyright owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future
applications will be issued with the scope of the claims sought by the Company,
if at all. Furthermore, there can be no assurance that others will not develop
similar intellectual property which appeal to the same clients or duplicate the
Company's services or that third parties will not assert intellectual property
infringement claims against the Company. In addition, there can be no assurance
that foreign intellectual property laws will adequately protect the Company's
intellectual property rights abroad. The failure of the Company to protect its
proprietary rights could have a material adverse effect on its business,
financial condition and results of operations.
Litigation may be necessary to protect the Company's intellectual
property rights, to determine the validity of and scope of the proprietary
rights of others or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that
infringement, invalidity, right to use or ownership claims by third parties or
claims for indemnification resulting from infringement claims will not be
asserted in the future. If any claims or actions are asserted against the
Company, the Company may seek to obtain a license under a third party's
intellectual property rights. There can be no assurance, however, that a license
will be available under reasonable terms or at all. In addition, should the
Company decide to litigate such claims, such litigation could be extremely
expensive and time consuming and could materially adversely affect the Company's
business, financial condition and results of operations, regardless of the
outcome of the litigation. See Part I, Item 1. Description of Business - (b)
Business of Issuer - Patents, Copyrights and Trademarks."
14. Ability to Grow. The Company expects to grow through one or more
strategic alliances, acquisitions, internal growth and by establishing client
relationships. There can be no assurance that the Company will be able to create
a greater market presence, or if such market is created, to expand its market
presence or successfully enter other markets. The ability of the Company to grow
will depend on a number of factors, including the availability of working
capital to support such growth, existing and emerging competition, one or more
qualified strategic alliances and the Company's ability to achieve and maintain
sufficient profit margins in the face of pricing pressures. The Company must
also manage costs in an environment which is notorious for unforeseen and
underestimated costs and adapt its infrastructure and systems to accommodate
growth within the niche market which it hopes to create.
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The Company also plans to expand its business, in part, through
acquisitions. Although the Company will continuously review potential
acquisition candidates, it has not entered into any agreement, understanding or
commitment with respect to any additional acquisitions at this time. There can
be no assurance that the Company will be able to successfully identify suitable
acquisition candidates, complete acquisitions on favorable terms, or at all, or
integrate acquired businesses into its operations. Moreover, there can be no
assurance that acquisitions will not have a material adverse effect on the
Company's operating results, particularly in the fiscal quarters immediately
following the consummation of such transactions, while the operations of the
acquired business are being integrated into the Company's operations. Once
integrated, acquisitions may not achieve comparable levels of revenues,
profitability or productivity as the then existing Company products and services
or otherwise perform as expected. The Company is unable to predict whether or
when any prospective acquisition candidate will become available or the
likelihood that any acquisitions will be completed. The Company will be
competing for acquisition and expansion opportunities with entities that have
substantially greater resources than the Company. In addition, acquisitions
involve a number of special risks, such as diversion of management's attention,
difficulties in the integration of acquired operations and retention of
personnel, unanticipated problems or legal liabilities, and tax and accounting
issues, some or all of which could have a material adverse effect on the
Company's results of operations and financial condition.
15. Competition. The equipment service and repair industry in general
is highly competitive, with several major companies involved. The Company will
be competing with larger competitors in international, national, regional and
local markets. In addition, the Company may encounter substantial competition
from new market entrants. Many of the Company's competitors have significantly
greater name recognition and have greater marketing, financial and other
resources than the Company. Further, competition for client contracts has meant
the expenditure of additional monies in the training of its technicians on new
products and services. There can be no assurance that the Company will be able
to complete effectively against such competitors in the future.
The market for online commerce is extremely competitive, and the
Company believes that competition, particularly in connection with online office
machinery consumable sales, will continue to grow and intensify. Although the
Company's primary focus is on its service contracts, rather than consumable
sales, the Company may ultimately compete with existing online websites that
provide equipment parts and consumables on the Internet. Online competitors
include a number of small and large Internet based enterprises offering similar
products and services. The primary competitive factor is price as price
sensitivity is the single greatest consideration of most Internet buyers. Most
competing suppliers though are dealer/distributors and not remanufactures.
Accordingly a differentiating factor for the Company's on-line business is that
it is a manufacturer as well as a distributor and therefore has a greater degree
of control over pricing of its product offerings..
In addition to competition encountered on the Internet, the Company
faces competition from traditional supply chains and office megastores such as
Office Max, Office Depot, Staples, Comp USA, mass merchandisers, consumer
electronics stores and a number of small custom start-up companies.
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16. Dependence on the Growth of Online Commerce. Purchasing products
and services over the Internet is a new and emerging market. The Company's
future revenues and profits may become substantially dependent upon widespread
consumer acceptance and use of the internet and other online services as a
medium for commerce. Rapid growth of the use of the internet and other online
services is a recent phenomenon. This growth may not continue. A sufficiently
broad base of consumers may not adopt, or continue to use, the internet as a
medium of commerce. Demand for and market acceptance of recently introduced
products and services over the internet are subject to a high level of
uncertainty, and there are few proven products and services. For the Company to
grow, consumers who have historically used traditional means of commerce may
instead need to purchase products and services online, which may not be viable
without the growth of internet commerce.
17. Dependence on improvement of the Internet. The Internet has
experienced, and is expected to continue to experience, significant growth in
the number of users and amount of traffic. The Company's success will partially
depend upon the development and maintenance of the Internet's infrastructure to
cope with this increased traffic. This will require a reliable network backbone
with the necessary speed, bandwidth, data capacity and security. Improvement of
the Internet's infrastructure will also require the timely development of
complementary products, such as high-speed modems, to provide reliable Internet
access and services.
18. Requirement for Response to Rapid Technological Change and
Requirement for Frequent New Product Introductions. The equipment supply and
service market is subject to rapid technological change, frequent new equipment
and product introductions and enhancements, product obsolescence and changes in
end-user requirements. The Company's ability to be competitive in this market
will depend in significant part upon its ability to successfully obtain, utilize
and train employees on new products and services on a timely and cost-effective
basis that are based upon this new technology. Any success of the Company in
implementing new and enhanced products and services will depend upon a variety
of factors, including new product selection, timely and efficient completion of
training schedules, performance, quality and reliability of competitive products
and services by competitors. The Company may experience delays from time to time
in completing training and introduction of new products and services. Moreover,
there can be no assurance that the Company will be successful in selecting and
implementing new products, or in training employees to utilize new products and
services. There can be no assurance that defects will not be found in the
products and services utilized by the Company after introduction of these
products to the Company's clients, which could result in harm to client or even
the loss of a client. The inability of the Company to introduce in a timely
manner new products and services that contribute to revenues could have a
material adverse effect on the Company's business, financial condition and
results of operations.
19. Possible Adverse Affect of Fluctuations in the General Economy
and Business of Customers. Historically, the general level of economic activity
has significantly affected the businesses who would engage the services of the
Company, such as supermarkets, retail store chains,
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etc. This in turn, can cause a downsizing of the Company's clients and can
ultimately affect the need for the Company's services. There can be no assurance
that an economic downturn would not adversely affect the demand for the
Company's products and services. There can be no assurance that such economic
factors will not adversely affect the Company's planned products and services.
20. Lack of Working Capital Funding Source. Other than revenues from
the anticipated sale of its remanufactured cartridge products and the service
contracts currently in existence, the Company has no current source of working
capital funds, and should the Company be unable to secure additional financing
on acceptable terms, its business, financial condition, results of operations
and liquidity would be materially adversely affected.
21. Dependence on Contract Manufacturers and Lease of Equipment;
Reliance on Sole or Limited Sources of Supply. As of the date hereof, the
Company has no internal manufacturing/production capacity, nor does it own the
equipment necessary to produce its own inventory, other than its recently
acquired CC subsidiary. The Company will also indirectly rely on raw material
suppliers to provide the materials necessary for the Company's suppliers to
manufacture the inventory. Certain necessary components and services anticipated
to be necessary for the manufacture and production of the Company's inventory
could be required to be obtained from a sole supplier or a limited group of
suppliers. There can be no assurance that the Company's suppliers, will be
sufficient to fulfill the Company's orders.
Should the Company be required to rely solely on a limited group of
suppliers, such increasing reliance involves several risks, including a
potential inability to obtain an adequate supply of finished products and
required components, and reduced control over the price, timely delivery,
reliability and quality of finished products and components. The Company does
not believe that it is currently necessary to have any long-term supply
agreements with its suppliers but this may change in the future. The Company may
experience delays in the delivery of and quality problems with its inventory.
Certain of the Company's suppliers may have relatively limited financial and
other resources. Any inability to obtain timely deliveries of acceptable quality
or any other circumstances that would require the Company to seek alternative
sources of supply, or to manufacture its inventory internally, could delay the
Company's ability to ship its products which could damage relationships with
current or prospective clients and have a material adverse effect on the
Company's business, financial condition and operating results.
22. No Dividends. While payments of dividends on the Common Stock
rests with the discretion of the Board of Directors, there can be no assurance
that dividends can or will ever be paid. Payment of dividends is contingent
upon, among other things, future earnings, if any, and the financial condition
of the Company, capital requirements, general business conditions and other
factors which cannot now be predicted. It is highly unlikely that cash dividends
on the Common Stock will be paid by the Company in the foreseeable future. See
Part I, Item 8. "Description of Securities - Description of Common Stock -
Dividend Policy."
23. No Cumulative Voting. The election of directors and other
questions will be decided by a majority vote. Since cumulative voting is not
permitted and a majority of the Company's
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outstanding Common Stock constitute a quorum, investors who purchase shares of
the Company's Common Stock may not have the power to elect even a single
director and, as a practical matter, the current management will continue to
effectively control the Company. See Part I, Item 8. "Description of Securities
- Description of Common Stock."
24. Control by Present Shareholders. The present shareholders of the
Company's Common Stock will, by virtue of their percentage share ownership and
the lack of cumulative voting, be able to elect the entire Board of Directors,
establish the Company's policies and generally direct its affairs. Accordingly,
persons investing in the Company's Common Stock will have no significant voice
in Company management, and cannot be assured of ever having representation on
the Board of Directors. See Part I, Item 4. "Security Ownership of Certain
Beneficial Owners and Management."
25. Potential Anti-Takeover and Other Effects of Issuance of
Preferred Stock May Be Detrimental to Common Shareholders. Potential
Anti-Takeover and Other Effects of Issuance of Preferred Stock May Be
Detrimental to Common Shareholders. The Company is authorized to issue shares of
preferred stock. ("Preferred Stock") although none has been issued to date. The
issuance of Preferred Stock may not require approval by the shareholders of the
Company's Common Stock. The Board of Directors, in its sole discretion, may have
the power to issue shares of Preferred Stock in one or more series and to
establish the dividend rates and preferences, liquidation preferences, voting
rights, redemption and conversion terms and conditions and any other relative
rights and preferences with respect to any series of Preferred Stock. Holders of
Preferred Stock may have the right to receive dividends, certain preferences in
liquidation and conversion and other rights; any of which rights and preferences
may operate to the detriment of the shareholders of the Company's Common Stock.
Further, the issuance of any shares of Preferred Stock having rights superior to
those of the Company's Common Stock may result in a decrease in the value of
market price of the Common Stock provided a market exists, and additionally,
could be used by the Board of Directors as an anti-takeover measure or device to
prevent a change in control of the Company. See Part I, Item 1. "Description of
Securities - Description of Preferred Stock."
26. No Secondary Trading Exemption. Secondary trading in the Common
Stock will not be possible in each state until the shares of Common Stock are
qualified for sale under the applicable securities laws of the state or the
Company verifies that an exemption, such as listing in certain recognized
securities manuals, is available for secondary trading in the state. The Company
is currently listed in Standard & Poor's Standard Corporation Manuals, although
this exemption is only recognized in a limited number of states. There can be no
assurance that the Company will be successful in registering or qualifying the
Common Stock for secondary trading, or availing itself of an exemption for
secondary trading in the Common Stock, in any state. If the Company fails to
register or qualify, or to obtain or verify an exemption for the secondary
trading of, the Common Stock in any particular state, the shares of Common Stock
could not be offered or sold to, or purchased by, a resident of that state. In
the event that a significant number of states refuse to permit secondary trading
in the Company's Common Stock, a public market for the Common Stock will fail to
develop and the shares could be deprived of any value.
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27. Possible Adverse Effect of Penny Stock Regulations on Liquidity
of Common Stock in any Secondary Market. The Company's Common Stock is currently
subjected to the "penny stock" rules under 17 CAR 240.3a51-1 because such shares
are issued by a small company; are priced under five dollars ($5); and are not
and will not traded on NASDAQ or on a national stock exchange. The SEC has
established risk disclosure requirements for broker-dealers participating in
penny stock transactions as part of a system of disclosure and regulatory
oversight for the operation of the penny stock market. Rule 15g-9 under the
Securities Exchange Act of 1934, as amended, obligates a broker- dealer to
satisfy special sales practice requirements, including a requirement that it
make an individualized written suitability determination of the purchaser and
receive the purchaser's written consent prior to the transaction. Further, the
Securities Enforcement Remedies and Penny Stock Reform Act of 1990 require a
broker-dealer, prior to a transaction in a penny stock, to deliver a
standardized risk disclosure instrument that provides information about penny
stocks and the risks in the penny stock market. Additionally, the customer must
be provided by the broker-dealer with current bid and offer quotations for the
penny stock, the compensation of the broker-dealer and the salesperson in the
transaction and monthly account statements showing the market value of each
penny stock held in the customer's account. For so long as the Company's Common
Stock is considered penny stock, the penny stock regulations can be expected to
have an adverse effect on the liquidity of the Common Stock in the secondary
market, if any, which develops.
Item 2. Management's Discussion and Analysis of Operations
Introduction
The financial results discussed herein include the consolidated
operations of the Company and its wholly owned subsidiaries Net Express, Inc.
and Cartridge Care, Inc. In August 1997 the Company's management team completed
a leveraged buyout ("LBO") of then Micor, an Arizona corporation engaged in the
equipment maintenance and service industry. Following the LBO management entered
into a merger agreement with a dormant Delaware public shell corporation wherein
all of Micor's then outstanding stock was exchanged for 85% of the Delaware
company. Following the merger management of the shell company was replaced by
Micor's management team and both Micor's and the Delaware corporation's names
were changed to OneSource Technologies, Inc.
Overview
The Company's business plan contemplates a substantial thirty to
forty fold increase in the Company's business and scope of practice over the
next five-years. This will be accomplished through a combination of internal
expansion as well as acquisitions of enterprises engaged in the same and/or
complementary lines of business. Year to date 1999 financial results show the
Company has achieved solid gains toward these goals through increased internal
growth as well as through the successful completion of two acquisitions during
the second and third quarters of 1999.
In April 1999 the Company acquired all the outstanding stock of Net
Express, Inc., an Arizona corporation engaged in the LAN and WAN (local and wide
area network) integration business. In September the Company acquired all the
outstanding stock of Cartridge Care, Inc., an Arizona
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corporation engaged in the remanufacturing of printer/copier toner cartridges.
Both acquisitions were effected with issuance of stock. Net Express was
accounted for as pooling of interests and Cartridge Care was accounted for as a
purchase. Accordingly the results of Net Express' operations and financial
condition are included in the Company's consolidated results for the full two
years ended December 31, 1999. The results of operations of Cartridge Care are
only included from the date of purchase, September 1999.
Both acquisitions are logical "fits" for the Company and offer
additional product and service categories that can be readily leveraged and
expanded throughout the Company's current and future customer list. They also
bring an existing customer base that can be leveraged into the Company's core
equipment maintenance services. Accordingly, management intends to significantly
expand both companies' operations by introducing their product and service
offerings into existing OneSource customers as well as add the Company's
equipment maintenance capabilities to their customer base.
These acquisitions contributed approximately twenty-two percent (22%)
of the Company's 1999 revenues and about fourteen percent (14%) of 1998
consolidated revenues. On a pro forma basis, including Cartridge Care's results
as though this subsidiary was purchased at the beginning of 1998, the
acquisitions contributed thirty-eight percent (38%) and forty-nine percent (49%)
of total consolidated revenues in 1999 and 1998 respectively. The proportion of
acquisition revenue contributions though will not necessarily remain constant as
future expansion continues. The Company will continue to expand both internally
as well as through acquisitions and accordingly, timing of new business and/or
acquisitions can have a significant effect on the proportionate relationship of
each to total consolidated revenues.
In July 1999 the Company successfully filed a "business process
apparatus" patent application (S/N 09/395,071) with the United States Patent
Office for its OneSource Flat-Rate Blanket Maintenance System(TM). The
application consists of eight (8) claims that document the unique processes and
methodologies the Company has developed and documented over the past four years
in demonstrating the Company's successfully delivering equipment maintenance
services in a horizontal fashion versus the vertical approach that has been
traditionally followed by the industry over the past fifty to sixty years.
Results of Operations
The Company is engaged in three complimentary lines of business, 1)
equipment maintenance services, 2) equipment sales and integration services and
3) equipment supply sales. The Company is primarily focused on the 1) banking
and financial services and 2) retail industries even though its service and
product offerings can be readily applied in any industry. These two are
emphasized because of the significantly greater number of equipment items used
in banking and retail compared to other businesses. Like companies in other
industries, banking and retail enterprises use large numbers of general business
equipment items such as copiers, facsimiles, PCs and peripherals, but in
addition they also utilize significant quantities of industry specific machines
like coin/currency counting and handling machines, check processing and encoding
equipment and ATMs in banking and point-of-sale (POS) scanner and register
systems in retail.
22
<PAGE>
In the Company's core equipment maintenance operations its OneSource
Flat-Rate Blanket Maintenance System(TM) is uniquely suited for delivering
equipment service solutions to businesses in these industries. To take advantage
of the Company's unique system, management initiated a direct sales program in
the second half of 1998 to focus on adding new equipment service customers in
these industries. This new function was able to add a number of new accounts in
Colorado, a new territory for the Company. This new territory was opened in 1998
so the Company could prove it could implement its unique service system in new
areas the Company hadn't previously operated in and/or where its business
concept was unknown. Management deemed this crucial in as much as most of the
expansion expected in the Company's business plan is anticipated in geographic
areas outside the Company's present operational territory.
Although the historical financial picture has not been especially
positive, current period operating results are improved in most areas. Renewable
contract service revenues are up significantly due to the new sales function and
overall customer satisfaction is at the highest level it has ever been.
Similarly, LAN and WAN systems integration and equipment supplies volumes also
showed increased gains. Further on a percentage basis most cost categories are
approaching the hurdle rate levels envisioned in the Company's business plan.
Operating results improved in most financial categories during the
year ended December 31, 1999. Historically the Company had limited systems and
processes for controlling and managing company operations. The Company has
successfully implemented a completely integrated and automated information
system that covers every facet of its operations from customer contracting
through dispatch, service delivery, billing and collections. The final phase of
this effort will be implemented in 2000 and consists of interfacing field
technicians to corporate host systems on a real-time, three dimensional and
paperless basis.
To make good use of the improved quality and timeliness of
information management has aggressively focused on documenting all its new
processes and systems in order to facilitate monitoring and controlling all
operational functions of service delivery, parts/inventory acquisition and
control and customer relations. This new information and management
infrastructure has contributed to the improved operational results. Moreover,
management believes this new foundation is sufficient to support the much larger
operational volume management intends to grow to in future periods.
The following table sets forth selected consolidated operating
results of the Company for the years ended December 31, 1999 and 1998. The
consolidated results include the operations of OneSource Technologies and it's
wholly owned subsidiary Net Express that was acquired in 1999 and accounted for
as a pooling of interests. The consolidated results also include the operations
of Cartridge Care for the last three months of 1999 following purchase in
September 1999.
23
<PAGE>
<TABLE>
<S> <C> <C>
Income Statement 1999 1998
------------------------------------ ------------- -------------
Operating Revenues $2,476,884 $ 1,380,041
------------------------------------ ------------- -------------
Cost of Revenues 1,484,096 755,461
------------------------------------ ------------- -------------
Gross Margins 992,788 624,580
------------------------------------ ------------- -------------
Selling, General and
Administrative Expenses 1,171,874 620,637
------------------------------------ ------------- -------------
Operating Income (Loss) (179,086) 3,943
------------------------------------ ------------- -------------
Other Income and (Expense) (24,021) (55,557)
------------------------------------ ------------- -------------
Net Income (Loss) (185,341) (51,614)
------------------------------------ ------------- -------------
</TABLE>
Operating Revenues
Total consolidated revenues increased $1,096,843 or 79.5% in the year
ended December 31, 1999 compared to 1998 and $190,464 or 16% for the year ended
December 31, 1998 compared to 1997. Revenues increased in each business category
as compared to the same period in the prior year. Half, (50%) of the 1999
increase in consolidated revenues was from in-house generated sales and
marketing efforts with the other half coming from acquired operations. This is
consistent with the Company's business plan expectations and similar ratios of
in-house generated volume increases and acquisition contributed amounts are
anticipated on a year-to-year basis prospectively.
On a pro forma basis, including the results of operations of
Cartridge Care in the consolidated results as though this division was purchased
at the beginning of 1998, shows the following results for the years ended
December 31, 1999 and 1998.
<TABLE>
<S> <C> <C>
Consolidated Pro Forma Revenues 1999 1998
-------------------------------------------------------- ----------- ----------
Consolidated Operating Revenues $2,476,884 $ 1,380,041
Add Results of Cartridge Care Prior to Purchase Date 709,128 964,929
Fro Forma Operating Revenues $3,186,012 $ 2,344,970
</TABLE>
24
<PAGE>
The pro forma amounts are more representative and consistent with
management's anticipated contribution of revenues from acquired operations in
2000 and beyond than the non pro forma 1999 consolidated results. This is
because management intends to expand acquired companies' product and service
offerings to the Company's core contract maintenance customers. Doing so will
also increase the proportion of non-service revenues of total revenues in future
periods.
The following table shows the amounts each line of business
contributed to total revenues for the years ended December 31, 1999 and 1998.
<TABLE>
<S> <C> <C>
Business Line Revenue Contributions 1999 1998
---------------------------------------------------- ---------- ------------
Equipment Maintenance and Service Revenues $1,966,114 $1,016,372
---------------------------------------------------- ---------- ------------
Equipment Sales and Integration Service Revenues 341,548 323,132
---------------------------------------------------- ---------- ------------
Equipment Supplies and Parts Sales 169,222 40,537
---------------------------------------------------- ---------- ------------
</TABLE>
Equipment maintenance services accounted for fully seventy-nine
percent (79%) of total revenues in 1999 and seventy-four percent (74%) in 1998.
Equipment sales and integration services contributed fourteen percent (14%) and
twenty-three percent (23%) in 1999 and 1998 respectively. Equipment parts and
supplies sales contributed seven percent (7%) of total revenues in 1999 and
three percent (3%) in 1998.
But on a pro forma basis the proportionate percentages are sixty-five
percent (65%) and forty- eight percent (48%) for equipment maintenance services
in 1999 and 1998 respectively and equipment sales and integration services
contributed about eleven percent (11%) in 1999 and fourteen percent (14%) in
1998 and value added equipment supplies and parts sales accounted for
twenty-four percent (24%) and thirty-eight percent (38%) in 1999 and 1998
respectively as shown in the following table.
<TABLE>
<S> <C> <C>
Pro Forma Equipment Service Revenue 1999 1998
----------------------------------------------------------- --------------- ---------------
Equipment Maintenance and Service Revenues $1,983,166 $1,,016,372
----------------------------------------------------------- --------------- ---------------
Add Results of Cartridge Care Prior to Purchase Date 125,984 104,247
Fro Forma Equipment Service Revenue $2,109,150 $1,120,619
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C>
Pro Forma Equipment Sales & Integration Revenue 1999 1998
-------------------------------------------------------- ---------- ----------
Equipment Sales and Integration Revenues 341,548 323,132
-------------------------------------------------------- ---------- ----------
Add Results of Cartridge Care Prior to Purchase Date -0000 000000
Fro Forma Equipment Sales Revenue 341,548 323,132
-------------------------------------------------------- ---------- ----------
Equipment Supplies and Parts Sales 152,170 40,537
-------------------------------------------------------- ---------- ----------
Add Results of Cartridge Care Prior to Purchase Date 583,144 860,682
Fro Forma Equipment Supplies Revenue $735,314 $901,219
</TABLE>
Equipment Maintenance and Service Revenues
Most of the 91% increase in service volumes in 1999 compared to 1998
is the result of internally generated new business from existing as well as new
customer accounts. Only about ten percent (10%) of the increase in service
revenues was contributed by acquired operations. Substantially all this increase
was derived from the Company's new sales programs initiated in 1998. The
Company's annualized contract service revenues grew from approximately $1.2
million at the end of 1998 to almost $2.6 million at December 31, 1999. Retail
industry customers accounted for about seventy-four percent (74%) of equipment
maintenance revenues with about twenty-three percent (23%) and two percent (2%)
coming from banking and other industry clients respectively. In 1998
substantially all service revenues were derived about equally from retail and
banking industry accounts.
In early 1999 management engaged an outside consultant to evaluate
its in-house sales program. As a result the Company adopted a two-tier sales
program featuring a limited number of in-house Regions Account Executives
supported by an outside contract sales organization already positioned in the
retail industry. This organization has an extensive "black book" of existing
clients in retailing and accordingly management believes penetration into
national accounts in this industry can be accelerated using this two-tier
program. The disproportionate increase in retail industry service volumes is
indicative of this strategy.
Prospectively the Company also intends to expand service revenues
through its newly acquired network integration and cartridge remanufacturing
divisions and is in the process of implementing a coordinated sales effort to
expand this service at existing client situations. The new divisions' present
Arizona only territory will also be expanded into all the Company's operating
territories.
26
<PAGE>
The Company ended 1999 with a total backlog of renewable contract
service revenues of approximately $4.1 million with an annualized book of
contract revenue of $2.6 million. In addition to contract equipment service the
Company also performs on-call time and materials service work which amounted to
less than 10% of total service revenues in 1999 and 1998. This reflects the
Company's continuing focus on increasing renewable contract services at the
expense of unsolicited on call work.
Equipment Sales and Integration Service Revenues
The small six percent (6%) increase in equipment sales and
integration service revenues for the year ended December 31, 1999 compared to
1998 reflects the historical incidental nature of equipment sales that has
existed in the past. Historically equipment sales consisted primarily of banking
machine sales to the Company's existing bank customers. In late 1998 and
throughout 1999 though as the Company focused its limited sales resources on
expanding service operations, equipment sales contribution to total consolidated
revenues declined. Sales of this type of equipment decreased fifty-five percent
(55%) in 1999 compared to 1998.
The new LAN/WAN integration acquisition picked up the slack in
equipment sales accounting for about eighty-four percent (84%) of total 1999
equipment sales versus only thirty- eight percent (38%) in 1998. While this
division will contribute additional sales of PCs/Servers and peripherals
prospectively, this type of equipment generally yields very low margins, (5 to
10% on average). Accordingly management is emphasizing the network support and
integration services portion of this business with their attendant much higher
profit margins. Management is committed to increasing sales of industry specific
equipment however in both its retail and financial service industry markets
through its emerging in-house equipment sales function and through alliances
with equipment dealer/distributor organizations in these industries. Margins on
this type of equipment are generally double to triple the margins on PC and
peripheral sales.
Equipment Supplies and Parts Sales
As noted, historically the Company hasn't focused on supplies and
parts sales but prospectively management intends to expand this portion of the
business. This in fact was the impetuous for the cartridge remanufacturing
company's acquisition in September 1999. The increase in 1999 supply sales
compared to 1998 totals is all the result of including the cartridge sales of
Cartridge Care from the date of purchase.
On a pro forma basis, supplies and parts sales actually declined
sixteen percent (16%) for the year ended December 31, 1999 compared to 1998 and
1998 supply revenues were level with 1997 amounts. The new cartridge
remanufacturing acquisition accounts for about ninety-five percent of total pro
forma supply and part sales in both 1999 and 1998. The pro forma decline in 1999
compared to 1998 reflects the Company's changed focus away from selling to tiny
businesses and individuals; emphasizing large multi-location accounts instead
like the Company's core service customers. During the transition overall sales
volumes from small accounts were
27
<PAGE>
permitted to drop in anticipation of replacing them with larger volume
transactions in 2000 and beyond.
Management intends to substantially expand this division because it's
equipment contract maintenance customer have thousands of laser printers under
contracts with existing customers, all of which utilize toner cartridges. In
this regard management has incorporated a new e-commerce company, GOINK.com,
Inc., to be the cartridge divisions on-line Internet fulfillment delivery
system. This site will be available to anyone on the Internet in addition to the
Company's customer base. The GOINK.com site will be launched in the first
quarter of 2000.
Profit Margins
While overall gross margins remained steady in 1999 compared to 1998,
profit margins improved in each business unit over the past two years compared
to previous periods except in 1999 equipment sales where profit margins declined
compared to 1998.
<TABLE>
<S> <C> <C>
Gross Profit 1999 1998
---------------------------------------------- --------- ----------
Service Operations $892,058 $409,722
---------------------------------------------- --------- ----------
Equipment Sales and Integration Operations 36,186 194,678
---------------------------------------------- --------- ----------
Equipment Supplies and Parts Sales 64,544 20,180
---------------------------------------------- --------- ----------
</TABLE>
Consolidated gross margin percentages were 45% for both years ended
December 31, 1999 and 1998 respectively. This is lower than the Company's target
margin rate of 50%. The decreased margin percentage reflects the Company's
aggressive expansion activities from both in-house generated expansion as well
as from acquisitions. The increase in overall gross margin dollars is the result
of the Company's expanded level of business volume.
Service gross margin percentages were 45.3% for the year ended
December 31, 1999 compared to only 40% in 1998. While service margins increased
in 1999 compared to 1998 and 1997's forty percent (40%) rate, they were still
below the Company's hurdle rate of fifty percent (50%) that is the Company's
business plan model. This is a function of the Company's significant expansion
in service volumes in late 1998 and throughout 1999. To support the higher
service volumes the Company invested in additional supervisory staff resources
in the second half of 1999 and incurred higher than anticipated new contract
startup costs in connection with expanded work for the Company's large Colorado
grocery chain, both of which depressed 1999 service margins.
Management believes service margins higher than the Company's 50%
hurdle rate can be prospectively achieved as the business matures. As roll out
continues and new business is added, it's not always possible to sustain the 50%
hurdle rate. Timing of new business as well as the amount of
28
<PAGE>
required spares and parts to support new contracts are variables that directly
impact service gross margins. The Company's service model however is based on a
50% service gross margin and management is committed to achieving this rate
Equipment gross profit was only 10.8% for the year ended December 31,
1999 compared to 60.2% and 40% in 1998 and 1997 respectively. The 10.8% margin
is a function of 1) lower equipment sales in the Company's core banking and
retail customer sector in 1999 compared to 1998 and 2) low margin PC and
peripheral equipment sales of the newly acquired network integration division.
With limited resources since the LBO management has focused on expanding its
contract service business and accordingly hasn't aggressively pursued equipment
sales. The combination of these factors is the primary reason for the unusually
low equipment margin in 1999. Prospectively, management anticipates a gross
margin rate closer to the Company's historical 30% equipment gross profit.
As the table bellows shows, on a pro forma basis supplies margins for
the year ended December 31, 1999 were 39.6% compared to 43.2% and 38.9% in 1998
and 1997 respectively. The lower margin rate in 1999 is the result of greater
numbers of in-house remanufactured shipments versus purchased products in 1998
versus 1999. Margins on purchased cartridges average thirty to thirty-five
percent (30 to 35%) whereas margins on in-house produced ones average forty to
fifty percent (40% to 50%). Resulting margins therefore are a function of the
product mix between in- house versus outside purchased cartridge shipments.
Anticipated future margins in the cartridge division are expected to be closer
to the thirty to thirty-five percentile as expansion continues. Management
believes a greater proportion of purchased cartridges will be required to
support the expected expansion of this division, particularly in the on-line
Internet fulfillment GOINK.com site.
<TABLE>
<S> <C> <C>
Pro Forma Parts and Supplies Margins 1999 1998
-------------------------------------------------------- --------- ----------
Equipment Supplies and Parts Margins $ 64,544 $ 20,180
-------------------------------------------------------- --------- ----------
Add Results of Cartridge Care Prior to Purchase Date 237,933 368,962
Fro Forma Equipment Supplies Margins $302,477 $389,142
</TABLE>
General and Administrative Costs
With a eighty-five percent (85%) increase in G&A costs for the year
ended December 31, 1999 compared to 1998 this is the one category where costs
are significantly out of step with forecasts. Most, approximately seventy-seven
percent (77%) of the general and administrative cost increases for the year
ended December 31, 1999 compared to 1998 were incurred at OneSource corporate.
G&A costs between periods from acquired operations only contributed (23%) in
1999 results and most of these costs were in the new cartridge supplies
division.. Most of the dollar increases therefore in both periods is the result
of added costs in corporate operations incurred in anticipation of supporting
the expected higher level of consolidated operations.
29
<PAGE>
<TABLE>
<S> <C> <C>
Administrative Costs 1999 1998
-------------------------------------- --------------------------- ------------------------
Officer and Administrative Payroll $ 486,034 $ 220,170
-------------------------------------- --------------------------- ------------------------
Facilities 149,704 52,403
-------------------------------------- --------------------------- ------------------------
Medical and Casualty Insurance 71,641 51,532
-------------------------------------- --------------------------- ------------------------
Travel and Entertainment 66,098 25,597
-------------------------------------- --------------------------- ------------------------
Legal and Professional Fees 69,453 54,644
-------------------------------------- --------------------------- ------------------------
Other 99,482 77,441
-------------------------------------- --------------------------- ------------------------
Total $942,412 $481,774
-------------------------------------- --------------------------- ------------------------
</TABLE>
Four cost categories account for most of the increase above forecast
levels in general and administrative costs, 1) officers' and administrative
compensation, 2) facilities, 3) travel and entertainment expenses and 4) other
costs. Because of the "turnaround" situation following the LBO in 1997, owner
officers of the Company didn't draw their full salaries until the second quarter
of 1999. A number of additional senior level managers and staff were also added
in 1999 as a result of acquisitions and additional staff to support present and
anticipated increases in business volumes.
Much of the increase in facilities costs in 1999 compared to 1998 is
due to costs related to relocating and combining all the Company's operations
into new facilities in the Scottsdale Airpark. Onetime costs related to the
relocation totaled approximately $40 thousand. Higher rents and related
utilities associated with the larger facilities also contributed to the
increase.
Additional travel and entertainment cost increases of $34 thousand
for the year ended December 31, 1999 compared to 1998 are a function of expanded
participation in business development activities in 1999. A number of business
development trips that were made during 1999 in anticipation of forging certain
new business venture relationships and service industry alliances.
All the increase in "other" expenses in 1999 compared to 1998 is due
to costs incurred in integrating acquired operations into the consolidated group
and costs related to relocating. Onetime costs related to assimilating acquired
operations amounted to approximately $30 thousand.
Selling Expenses
Substantially all the cost increases in this category are the result
of the Company's implementation of its first selling organization in the second
quarter of 1998. During most of 1997 the Company operated without the benefit of
any sales effort. An experienced outside sales person
30
<PAGE>
was recruited in early 1998 in Colorado to open that territory and in the fourth
quarter of 1998 the Company's founder was hired as a sales person for Arizona.
The newly acquired cartridge division also hired a salesperson in the second
quarter of 1999. Another Southwest Region Account Executive was added in the
June of 1999 as well as an outside contract sales firm. The contract sales
organization is compensated on a commission only basis whereas employee
salespeople are compensated via salary plus commission arrangements. Management
anticipates this cost category will continue to increase proportionally as the
Company builds its internal expansion momentum.
Operating Income
The significant decrease (360%) in operating income for the year
ended December 31, 1999 compared to 1998 is the result of higher costs incurred
in expanding the overall volume of business operations as well as costs incurred
in building the corporate infrastructure need to support the larger and more
complex business.
Other Income and Expenses
<TABLE>
<S> <C> <C>
Income and (Expenses) 1999 1998
------------------------- ------------------------------- ------------------------
Interest Expense $ (34,590) $ (55,557)
------------------------- ------------------------------- ------------------------
Other Income 174 0
------------------------- ------------------------------- ------------------------
</TABLE>
Interest expense decreased for the year ended December 31, 1999
compared to 1998 because of declines in outstanding interest bearing debt. Also
contributing to the decline was a decrease in payment penalties and interest
charges associated with vendor purchases. During 1999 the Company focused on
improving its procurement systems to assure more timely vendor payments compared
to the prior periods and with additional investment capital in 1999 was able to
do so and eliminate much of this cost.
Financial Condition
In addition to improved operations since the LBO in 1997 the Company
significantly improved its financial condition during 1999, ending the period
with a positive equity position and/or positive working capital balance for the
first time since the buy-out.
To further strengthen the Company's financial condition management
has initiated a number of activities to further improve its financial condition.
In April of 1999 management received word its application for public trading
clearance of the Company's Common Stock had been cleared by the NASD. In May the
Company entered into a private placement agreement with a Chicago based
investment firm for an infusion of $750 thousand in equity funding over a one
year period. The initial advance pursuant to this agreement was received in June
of 1999 and a second payment received in
31
<PAGE>
August. At December 31, 1999 $300,000 of this commitment was yet unfunded. With
this funding commitment as well as interest in the company from other investment
groups and the Company's tradable stock and improving operational results, the
Company is better positioned to aggressively pursue its business plan
opportunities that it has been at any time in its past.
The following sets forth selected financial condition information as
of December 31 1999 and 1998:
<TABLE>
<S> <C> <C>
Balance Sheet - 1999 1998
Working Capital $ 115,567 $ (224,374)
------------------------------------ --------------------------- --------------------------
Total Assets 1,697,720 530,480
------------------------------------ --------------------------- --------------------------
Debt Obligations 316,246 322,894
------------------------------------ --------------------------- --------------------------
Shareholders' Equity (Deficit) 369,632 (473,318)
------------------------------------ --------------------------- --------------------------
</TABLE>
As the above table illustrates with the enhanced operational
improvements implemented since the buy-out each category of the Company's
financial condition improved as of December 31, 1999 compared to prior periods.
While cash flow from operations decreased in 1999 compared to 1998, the decrease
resulted largely from increased Accounts Receivables and Inventories at December
31, 1999 compared to the same date in 1998 and reflects the Company's increased
level of operations in 1999 compared to 1998. Investments from financing
activities during the year ended December 31, 1999 enabled the Company to
finance this decrease in cash from operations as well as improve the Company's
current ratio to a positive 1.12 as of December 31, 1999, up from the December
1998 negative ratio of .68. Total assets tripled in the same period and
stockholders equity improved substantially to a positive balance of $369,932 as
of December 31, 1999. .
To further improve the Company's financial position the Company and a
group of investors executed an agreement on March 4, 2000 with PF Holdings, Inc.
(PF) to purchase the promissory note held by PF with a face value of $285,000
and accrued interest of $36,972 for $150,000 in cash provided by the investors
and 175,000 shares of the Company's common stock with a fair market value on
March 4 of $93,438.00. The investor group exchanged the promissory note for
643,944 shares of OneSource stock. The investor's are restricted from selling
the combined 818,944 shares of stock for a period of one year. Completion of
this transaction enables the Company to now pursue traditional stand-by credit
facility financing arrangements with banking institutions.
As of December 31, 1999 the Company has accrued delinquent payroll
taxes, penalties and interest of approximately $210,000. The Company is
corresponding with the IRS and attempting to negotiate payment terms. The
Company has committed to making certain scheduled payments based on the
availability of funds. There can be no assurance however that the IRS will not
take other action
32
<PAGE>
should the Company fail to make committed payments. Based on present arrangement
with the IRS, management believes that the Company will be able to successfully
liquidate this liability without incurring any adverse effects on the Company's
financial condition from actions of the IRS.
During 1999 the Company successfully completed two acquisitions with
the issuances of shares of the Company's Common stock. While both transactions
were completed with stock the company did incur significant non-operating costs
of approximately $90,000 for facility relocation and other costs of integrating
the operations into the consolidated group. The Company intends to acquire
additional companies in the future and will attempt to do so with issuances of
the Company's Common stock. To the extent cash is required to finance
acquisitions the Company will seek outside capital from investors rather than
attempt to finance the cash component from operations.
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of potential problems with computer
systems or any equipment with computer chips that use dates where the date has
been stored as just two digits (e.g. 98 for 1998). On January 1, 2000, any clock
or date recording mechanism including date sensitive software which uses only
two digits to represent the year, may recognize the date using 00 as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar activities.
The Company is aware of the issues associated with the programming
code in existing computer systems as the millennium (Year 2000) approaches. The
Company has confirmed that its systems are Year 2000 Compliant.
The Company believes that it has disclosed all required information
relative to Year 2000 issues relating to its business and operations. However,
there can be no assurance that the systems of other companies on which the
Company's systems rely also will be timely converted or that any such failure to
convert by another company would not have an adverse affect on the Company's
systems.
Forward-Looking Statements
This Form 10-SB includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements, other
than statements of historical facts, included or incorporated by reference in
this Form 10-SB which address activities, events or developments which the
Company expects or anticipates will or may occur in the future, including such
things as future capital expenditures (including the amount and nature thereof),
demand for the Company's products and services, expansion and growth of the
Company's business and operations, and other such matters are forward-looking
statements. These statements are based on certain assumptions and analyses made
by the Company in light of its experience and its perception of historical
trends, current conditions and expected future developments as well as other
factors it believes are appropriate in the
33
<PAGE>
circumstances. However, whether actual results or developments will conform with
the Company's expectations and predictions is subject to a number of risks and
uncertainties, general economic market and business conditions; the business
opportunities (or lack thereof) that may be presented to and pursued by the
Company; changes in laws or regulation; and other factors, most of which are
beyond the control of the Company. Consequently, all of the forward-looking
statements made in this Form 10-SB are qualified by these cautionary statements
and there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected consequence to or effects on the Company or its
business or operations. The Company assumes no obligations to update any such
forward-looking statements.
Item 3. Description of Property
In September 1999, the Company entered into a lease with EJM
Development Co., a California limited partnership for property located at 7419
East Helm Drive, Scottsdale, AZ 85260. This property serves as the Company's
headquarters, service dispatch and parts center for all the Company's
operations. The lease is for a term of five (5) years, two (2) months, for which
the Company pays rent in the amount of $9,025 for the first fourteen (14)
months, $9,370 for months fifteen (15) to twenty-six (26), $9,715 for months
twenty-seven (27) through thirty-eight (38), $9,995 for months thirty-nine (39)
through fifty (50) and $10,270 for months fifty-one (51) through sixty- two
(62).
The Company owns no real property and its personal property consists
of furniture and fixtures, computer, peripheral and other general business
equipment utilized in the conduct of the Company's business. The Company also
has certain manufacturing equipment it uses in connection with its cartridge
remanufacturing operations.
Item 4. Security Ownership of Certain Beneficial Owners and Management:
The following table sets forth information as of June 30, 2000,
regarding the ownership of the Company's Common Stock by each shareholder known
by the Company to be the beneficial owner of more than five percent (5%) of its
outstanding shares of Common Stock, each director and all executive officers and
directors as a group. Except as otherwise indicated, each of the shareholders
has sole voting and investment power with respect to the share of Common Stock
beneficially owned.
34
<PAGE>
<TABLE>
<S> <C> <C> <C>
Name and Address of Title of Amount and Nature of Percent of
Beneficial Owner Class Beneficial Owner Class
Jerry M. Washburn(1)(2) Common 3,300,000 18.8%
William B. Meger(1) Common 3,285,287 18.7%
Joseph Umbach(1) Common 968,609 5.5%
Maurice Mallette(1)(4)(6) Common 943,750 0%
Pasquali Rizzi(1)(6) Common 943,750 0%
Donald C. Gause(1)(3)(5) Common 254,000 1.4%
Norman E. Clarke(1) Common 0 0%
Steven R. Green(1) Common 0 0%
Ford L. Williams(1) Common 0 0%
All Executive Officers and Common 7,783,037 44.3%
Directors as a Group
(Seven (7) persons)
----------
</TABLE>
(1) The address for each of the above is c/o OneSource Technologies, Inc.,7419
East Helm Drive, Scottsdale, AZ 85260.
(2) In July 1997, the Company entered into a share exchange agreement with
Micor and its shareholders. The exchange was made whereby the Company
issued 8,500,000 shares of its restricted Common Stock to the shareholders
of Micor for all of the issued and outstanding stock of Micor. Jerry
Washburn, the current President, Chief Executive Officer and Chairman of
the Company, received 3,300,000 shares in connection with such exchange.
William B. Meger, a Director of the Company, received 3,285,287 shares.
This offering was conducted pursuant to Section 4(2) of the Act, Rule 506,
Section 44-1844(6) of the Arizona Code, Section 25103(c) of the California
Code, Section 90.530(17) of the Nevada Code and Section 61-1-14(2)(p) of
the Utah Code. See Part I, Item 5. "Directors, Executive Officer, Promoters
and Control Persons"; Part I, Item 6. "Executive Compensation"; Part I,
Item 7. "Certain Relationships and Related Transactions"; and Part II, Item
4. "Recent Sales of Unregistered Securities."
(3) In September 1998, the Company issued 750,000 shares of its Common Stock to
two (2) persons for services rendered to the Company. Donald C. Gause, a
Director, received 250,000 of the shares issued. For such offering, the
Company relied upon Section 4(2) of the Act, Rule 506, Section 14-4-126(f)
of the Arizona Code and Section 11-51-308(1)(j) of the Colorado Code. See
Part I, Item 5. "Directors, Executive Officer, Promoters and Control
Persons"; Part I, Item 6. "Executive Compensation"; Part I, Item 7.
"Certain Relationships and Related Transactions"; and Part II, Item 4.
"Recent Sales of Unregistered Securities."
(4) In September 1999, the Company entered into a share exchange agreement with
the shareholders of CC, whereby the Company exchanged 1,887,500 shares of
its Common Stock for one hundred percent (100%) of the issued and
outstanding stock of CC such that CC
35
<PAGE>
became a wholly-owned subsidiary of the Company. Of the 1,887,500 shares to
be issued in connection with the exchange, 1,125,000 shares are the LU
Shares and the remaining 762,500 shares are not contractually restricted
(but are restricted by Rule 144). To date, only 262,500 of the LU Shares
and 243,750 of the remaining shares have been issued. 562,500 of the LU
Shares and 381,250 of the remaining shares are beneficially owned by
Maurice Mallette, a current Director of the Company and the President of
CC. For such offering the Company relied upon Section 4(2) of the Act, Rule
506 and Section 44-1844(6) of the Arizona Code. See Part I, Item 5.
"Directors, Executive Officer, Promoters and Control Persons"; Part I, Item
6. "Executive Compensation"; Part I, Item 7. "Certain Relationships and
Related Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
(5) In April 2000, the Company issued 1,281,318 shares of its Common Stock to
30 persons in exchange for services performed on behalf of the Company.
Donald Gause, a Director, received 4,000 shares in connection with such
issuance. For such offering, the Company relied upon Section 4(2) of the
Act, Section 506, Section R14-4-140 of the Arizona Code, Section 25102(f)
of the California Code, Section 11-51-308(1)(p) of the Colorado Code,
Section 90.532 of the Nevada Code, Section 58-13B-24(R) of the New Mexico
Code, New Mexico Rule 12NMAC11.4.11.2 and Section 61-1-15.5(2)&R164-15-2 of
the Utah Code. See Part I, Item 5. "Directors, Executive Officer, Promoters
and Control Persons"; Part I, Item 6. "Executive Compensation"; Part I,
Item 7. "Certain Relationships and Related Transactions"; and Part II, Item
4. "Recent Sales of Unregistered Securities."
(6) Mr. Mallette and Mr. Rizzi have not yet been issued their shares.
There are no arrangements which may result in the change of control
of the Company.
Item 5. Directors, Executive Officers, Promoters and Control Persons:
Executive Officers and Directors
Set forth below are the names, ages, positions, with the Company and
business experiences of the executive officers and directors of the Company.
Name Age Position(s) with Company
Jerry M. Washburn 56 Chairman, President, CEO
Ford L. Williams 47 Director, Treasurer and Secretary
Maurice E. Mallette 64 Director, President of Subsidiary, Interim VP
Norman E. Clarke 47 Director
Donald C. Gause 41 Director
Steven R. Green 41 Director
William B. Meger 53 Director
36
<PAGE>
All directors hold office until the next annual meeting of the
Company's shareholders and until their successors have been elected and qualify.
Officers serve at the pleasure of the Board of Directors. The officers and
directors will devote such time and effort to the business and affairs of the
Company as may be necessary to perform their responsibilities as executive
officers and/or directors of the Company.
In July 1997, the Company entered into a share exchange agreement
with Micor and its shareholders. The exchange was made whereby the Company
issued 8,500,000 shares of its restricted Common Stock to the shareholders of
Micor for all of the issued and outstanding stock of Micor. Jerry Washburn, the
current President, Chief Executive Officer and Chairman of the Company, received
3,300,000 shares in connection with such exchange. William B. Meger, a Director
of the Company, received 3,285,287 shares. This offering was conducted pursuant
to Section 4(2) of the Act, Rule 506, Section 44-1844(6) of the Arizona Code,
Section 25103(c) of the California Code, Section 90.530(17) of the Nevada Code
and Section 61-1-14(2)(p) of the Utah Code. See Part I, Item 6. "Executive
Compensation"; Part I, Item 7. "Certain Relationships and Related Transactions";
and Part II, Item 4. "Recent Sales of Unregistered Securities."
In September 1998, the Company issued 750,000 shares of its Common
Stock to two (2) persons for services rendered to the Company. Donald C. Gause,
a Director, received 250,000 of the shares issued. For such offering, the
Company relied upon Section 4(2) of the Act, Rule 506, Section 14-4-126(f) of
the Arizona Code and Section 11-51-308(1)(j) of the Colorado Code. See Part I,
Item 6. "Executive Compensation"; Part I, Item 7. "Certain Relationships and
Related Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
In September 1999, the Company entered into a share exchange
agreement with the shareholders of CC, whereby the Company exchanged 1,887,500
shares of its Common Stock for one hundred percent (100%) of the issued and
outstanding stock of CC such that CC became a wholly- owned subsidiary of the
Company. Of the 1,887,500 shares to be issued in connection with the exchange,
1,125,000 shares are the LU Shares and the remaining 762,500 shares are not
contractually restricted (but are restricted by Rule 144). To date, only 262,500
of the LU Shares and 243,750 of the remaining shares have been issued. 562,500
of the LU Shares and 381,250 of the remaining shares are beneficially owned by
Maurice Mallette, a current Director of the Company and the President of CC. For
such offering the Company relied upon Section 4(2) of the Act, Rule 506 and
Section 44-1844(6) of the Arizona Code. See Part I, Item 6. "Executive
Compensation"; Part I, Item 7. "Certain Relationships and Related Transactions";
and Part II, Item 4. "Recent Sales of Unregistered Securities."
In April 2000, the Company issued 1,281,318 shares of its Common
Stock to 30 persons in exchange for services performed on behalf of the Company.
Donald Gause, a Director, received 4,000 shares in connection with such
issuance. For such offering, the Company relied upon Section 4(2) of the Act,
Section 506, Section R14-4-140 of the Arizona Code, Section 25102(f) of the
California Code, Section 11-51-308(1)(p) of the Colorado Code, Section 90.532 of
the Nevada Code, Section 58-13B-24(R) of the New Mexico Code, New Mexico Rule
12NMAC11.4.11.2 and Section 61-1- 15.5(2)&R164-15-2 of the Utah Code. See Part
I, Item 6. "Executive Compensation"; Part I, Item
37
<PAGE>
7."Certain Relationships and Related Transactions"; and Part II, Item 4. "Recent
Sales of Unregistered Securities."
Family Relationships
There are no family relationships between or among the executive
officers and directors of the Company.
Business Experience
Jerry Washburn, age 56, has over thirty (30) years of financial and
administrative experience in a variety of business situations. Jerry, a CPA,
spent ten (10) years with Arthur Andersen & Co., LLC where among other things he
managed two (2) of that firm's Fortune 200 audit clients. Following Andersen,
Mr. Washburn served as President of Total Information Systems, Inc., ("TIS") for
eight (8) years, during which time he successfully guided this vertical market
computer software company from its inception and startup through eventual sale
in 1989. At the time of its sale TIS had over three hundred (300) customer
installations in forty-one (41) states and five (5) provinces. Prior to joining
the Company, he worked for a number of closely held business owners as an
advisor on a variety of financial and operational matters. Mr. Washburn has a BS
degree in Accounting from Brigham Young University.
Ford L. Williams, age 47, serves as OneSource's Controller,
Secretary/Treasurer and a Director. Mr. Williams has twenty-three (23) years of
progressively challenging experience in a variety of senior financial positions.
He was Corporate Controller for First Interstate Bank's (now Wells Fargo Bank)
Arizona operations. Other noteworthy positions include deputy CFO for a $660
million business bank, international finance controller for Security Pacific
Corporation and division auditor with RCA. Mr. Williams holds a BA in Economics
from the University of California at Santa Barbara and a Masters in Business
Administration from University of Southern California with an emphasis in
financial administration.
Maurice Mallette, age 64, has over thirty years (30) of
administration and operational experience. Maurice, and engineer spent thirty
(30) years with Avon Products Inc. where, among other things, he was responsible
for the company's Asian, Latin American and European operations. Maurice has a
BS degree in Engineering from the University of Montreal.
Norman Clarke, age 47, has a diversified background in finance, sales
and marketing, specializing in technology companies. Clarke has over twenty
years (20) experience in turnaround, venture capital fund-raising and pre IPO
situations. Mr. Clarke has held management positions with MCI Corporation, AT&T
Corporation, ICOT Corporation and Phoenix based Three-Five Systems, Inc. While
at Three-Five Systems Clarke was a key management team member that initiated the
company's rapid growth and initial public offering. Clarke has a BA degree from
Michigan State University and an MBA from Wayne State University.
38
<PAGE>
Donald Gause, age 41, has over fourteen years (14) of experience,
seven (7) years of which were with Clifton, Gunderson & Co., a regional CPA
firm. Don also spent three (3) years as Controller of Blockbuster Video's
largest Arizona Franchisee prior to its sale to Blockbuster Corporate. Prior to
joining OneSource in the summer of 1998, Don spent three (3) years as Managing
Director of a multi-location franchisee of Blimpie Subs & Salads. Gause has a BS
degree in Accounting from Arizona State University.
Steven Green, age 41, has over twenty years (20) experience in
investment banking, corporate finance and securities trading. From 1984 to 1990,
Green held senior positions with Jefferies & Co., Inc. and Bear Sterns & Co.,
Inc as an institutional equity block trader assisting risk arbitrageurs,
corporate and financial takeover specialists, leveraged buyout groups, pension
funds and money managers. In 1990, Steve formed Arcadian Capital, Inc., a
boutique investment- banking firm specializing in mergers and acquisitions,
initial public offerings, refinancings, recapitalizations and reorganizations.
Mr. Green holds a BA from UCLA.
William Meger, age 53, has over twenty-seven (27) years of experience
in the electronics and equipment service industry gained through several
positions with a number of business equipment manufacturers prior to founding
OneSource in 1984. In addition to assisting with new business development in the
banking and retail industries, Meger provides a valuable wealth of knowledge and
experience in all facets of the equipment service industry. He is also well
known and respected in the banking industry and has a significant network of
contacts in that industry.
Item 6. Executive Compensation
The following sets forth the compensation paid to the Company's executive
officers.
<TABLE>
<CAPTION>
Long-term Compensation
Annual Compensation Awards Payouts Other
Restricted Number of All Other
Fiscal Stock Securities/ LTIP Compen-
Name & Position Year Salary Bonus Other Awards SARs Payments sation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jerry M. Washburn, 1999 $51,000 $ 0.00 $0.00 $60,000 200,000 $0.00 $ 0.00
CEO & President 1998 $25,457 $ 0.00 $0.00 $0.00 None $0.00 $ 0.00
1997 $56,708 $ 0.00 $0.00 $0.00 None $0.00 $ 0.00
Donald C. Gause, 1999 $46,200 $ 0.00 $0.00 $75,000 250,000 $0.00 $ 0.00
Director (former Secretary 1998 $12,250 $ 0.00 $0.00 $0.00 None $0.00 $ 0.00
and Treasurer)
William B. Meger, 1999 $24,792 $ 0.00 $0.00 $0.00 None $0.00 $ 0.00
Director and sales person 1998 $ 5,833 $ 0.00 $3,933 $0.00 None $0.00 $ 0.00
Maurice E. Mallette 1999 37,500 $ 0.00 $0.00 $0.00 None $0.00 $ 0.00
Daniel C. Webb 1999 41,500 $ 0.00 $79,800 $0.00 None $0.00 $ 0.00
Vice President - Sales 1998 $6,000 $ 0.00 $13,138 $0.00 None $0.00 $ 0.00
</TABLE>
39
<PAGE>
(1) All other compensation includes certain health and life insurance benefits
paid by the Company on behalf of its employee.
(2) Mr. Gause started with the Company in June 1998.
(3) During 1998, Mr. Washburn and Mr. Washburn were not paid regular salaries
but took draws in lieu thereof as cash flows permitted. The amounts shown
as "salaries" represent the total of each officer's draws for 1998.
(4) In addition to his Director position, Meger was employed by the Company as
a sales person in 1998 and 1999. Meger's "other compensation" consisted of
sales commissions paid for services rendered.
(5) Mallette is President of the Company's wholly owned subsidiary, Cartridge
Care, Inc. and a Director of the Company.
(6) Webb started with the Company in mid 1998 and was an officer and director
in 1998 and part of 1999 but as of December 31, 1999, he was a commission
sales person only. Webb's "other" compensations consisted of sales
commissions paid in 1998 and 1999 for services.
(7) None of the Directors are compensated for their Director activities on
behalf of the Company.
(8) In July 1997, the Company entered into a share exchange agreement with
Micor and its shareholders. The exchange was made whereby the Company
issued 8,500,000 shares of its restricted Common Stock to the shareholders
of Micor for all of the issued and outstanding stock of Micor. Jerry
Washburn, the current President, Chief Executive Officer and Chairman of
the Company, received 3,300,000 shares in connection with such exchange.
William B. Meger, a Director of the Company, received 3,285,287 shares.
This offering was conducted pursuant to Section 4(2) of the Act, Rule 506,
Section 44-1844(6) of the Arizona Code, Section 25103(c) of the California
Code, Section 90.530(17) of the Nevada Code and Section 61-1-14(2)(p) of
the Utah Code. See Part I, Item 7. "Certain Relationships and Related
Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
47
<PAGE>
(9) In September 1998, the Company issued 750,000 shares of its Common Stock to
two (2) persons for services rendered to the Company. Donald C. Gause, a
Director, received 250,000 of the shares issued. For such offering, the
Company relied upon Section 4(2) of the Act, Rule 506, Section 14-4-126(f)
of the Arizona Code and Section 11-51-308(1)(j) of the Colorado Code. See
Part I, Item 7. "Certain Relationships and Related Transactions"; and Part
II, Item 4. "Recent Sales of Unregistered Securities."
(10) In September 1999, the Company entered into a share exchange agreement with
the shareholders of CC, whereby the Company exchanged 1,887,500 shares of
its Common Stock for one hundred percent (100%) of the issued and
outstanding stock of CC such that CC became a wholly-owned subsidiary of
the Company. Of the 1,887,500 shares to be issued in connection with the
exchange, 1,125,000 shares are the LU Shares and the remaining 762,500
shares are not contractually restricted (but are restricted by Rule 144).
To date, only 262,500 of the LU Shares and 243,750 of the remaining shares
have been issued. 562,500 of the LU Shares and 381,250 of the remaining
shares are beneficially owned by Maurice Mallette, a current Director of
the Company and the President of CC. For such offering the Company relied
upon Section 4(2) of the Act, Rule 506 and Section 44-1844(6) of the
Arizona Code. See Part I, Item 7. "Certain Relationships and Related
Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
(11) In April 2000, the Company issued 1,281,318 shares of its Common Stock to
30 persons in exchange for services performed on behalf of the Company.
Donald Gause, a Director, received 4,000 shares in connection with such
issuance. For such offering, the Company relied upon Section 4(2) of the
Act, Section 506, Section R14-4-140 of the Arizona Code, Section 25102(f)
of the California Code, Section 11-51-308(1)(p) of the Colorado Code,
Section 90.532 of the Nevada Code, Section 58-13B-24(R) of the New Mexico
Code, New Mexico Rule 12NMAC11.4.11.2 and Section 61-1-15.5(2)&R164-15-2 of
the Utah Code. See Part I, Item 7. "Certain Relationships and Related
Transactions"; and Part II, Item 4. "Recent Sales of Unregistered
Securities."
The following table sets forth the officers and Directors that were
granted stock options in 1999 for share of the Company's Common Stock:
<TABLE>
<CAPTION>
Option/SAR Grants in 1999
Individual Grants
% of Total
Options/SARs Granted
Number of Securities to Employees in Fiscal Exercise or Base
Name & Position Options/SARs Granted Year Price per share Expiration Date)
<S> <C> <C> <C> <C>
Jerry M. Washburn, 200,000 28.6% $0.55 15 October 2002
John L. Day 250,000 35.7% $0.55 15 October 2002
(former off/dir)
Donald C. Gause, 250,000 35.7% $0.55 15 October 2002
</TABLE>
Employee Contracts and Agreements
The Company has not entered into Employee Agreements with its
officers and directors, but intends to enter into formal contracts with each of
them in the near future.
Key Man Life Insurance
The Company intends to apply for Key Man Life Insurance and
Officer/Director Insurance upon becoming a reporting company under the 1934 Act.
Employee and Consultants Stock Option Plans
There is currently no employee nor consultant stock option plan in
place, although the Company plans to submit such a plan or plans to the
shareholders in the future.
Compensation of Directors
The Company has no standard arrangements for compensating the
directors of the Company for their attendance at meetings of the Board of
Directors.
Item 7. Certain Relationships and Related Transactions
In July 1997, the Company entered into a share exchange agreement
with Micor and its shareholders. The exchange was made whereby the Company
issued 8,500,000 shares of its restricted Common Stock to the shareholders of
Micor for all of the issued and outstanding stock of Micor. Jerry Washburn, the
current President, Chief Executive Officer and Chairman of the Company, received
3,300,000 shares in connection with such exchange. William B. Meger, a Director
of the Company, received 3,285,287 shares. This offering was conducted pursuant
to Section 4(2) of the Act, Rule 506, Section 44-1844(6) of the Arizona Code,
Section 25103(c) of the California Code, Section 90.530(17) of the Nevada Code
and Section 61-1-14(2)(p) of the Utah Code. See Part II, Item 4. "Recent Sales
of Unregistered Securities."
In September 1998, the Company issued 750,000 shares of its Common
Stock to two (2) persons for services rendered to the Company. Donald C. Gause,
a Director, received 250,000 of the shares issued. For such offering, the
Company relied upon Section 4(2) of the Act, Rule 506, Section 14-4-126(f) of
the Arizona Code and Section 11-51-308(1)(j) of the Colorado Code. See Part II,
Item 4. "Recent Sales of Unregistered Securities."
52
<PAGE>
In April 1999, the Company entered into a share exchange agreement
with the shareholders of NE, whereby the Company exchanged 727,946 shares of its
Common Stock for one hundred percent (100%) of the issued and outstanding stock
of NE such that NE became a wholly-owned subsidiary of the Company. The shares
in connection with such exchange were not issued until December 1999. For such
offering, the Company relied upon Section 4(2) of the Act, Rule 506 and Section
44-1844(6) of the Arizona Code. See Part II, Item 4. "Recent Sales of
Unregistered Securities".
Contemporaneously with execution of the share exchange with NE, the
Company signed a redemption agreement which effectively allowed either party to
the transaction to rescind the transaction without penalty at any time on or
before July 1, 1999. Neither party elected to redeem and the redemption
agreement has since expired. Additionally, at the time of the NE share exchange,
the Company entered into an employment agreement with Ahlawyss Fulton, which has
since expired.
In September 1999, the Company entered into a share exchange
agreement with the shareholders of CC, whereby the Company exchanged 1,887,500
shares of its Common Stock for one hundred percent (100%) of the issued and
outstanding stock of CC such that CC became a wholly-owned subsidiary of the
Company. Of the 1,887,500 shares to be issued in connection with the exchange,
1,125,000 shares are the LU Shares and the remaining 762,500 shares are not
contractually restricted (but are restricted by Rule 144). To date, only 262,500
of the LU Shares and 243,750 of the remaining shares have been issued. 562,500
of the LU Shares and 381,250 of the remaining shares are beneficially owned by
Maurice Mallette, a current Director of the Company and the President of CC. For
such offering the Company relied upon Section 4(2) of the Act, Rule 506 and
Section 44-1844(6) of the Arizona Code. See Part II, Item 4. "Recent Sales of
Unregistered Securities."
In April 2000, the Company issued 1,281,318 shares of its Common
Stock to 30 persons in exchange for services performed on behalf of the Company.
Donald Gause, a Director, received 4,000 shares in connection with such
issuance. For such offering, the Company relied upon Section 4(2) of the Act,
Section 506, Section R14-4-140 of the Arizona Code, Section 25102(f) of the
California Code, Section 11-51-308(1)(p) of the Colorado Code, Section 90.532 of
the Nevada Code, Section 58-13B-24(R) of the New Mexico Code, New Mexico Rule
12NMAC11.4.11.2 and Section 61-1-15.5(2)&R164-15-2 of the Utah Code. See Part
II, Item 4.
"Recent Sales of Unregistered Securities."
Item 8. Description of Securities
Description of Capital Stock
The Company's authorized capital stock consists of 20,000,000 shares
of Common Stock, $0.001 par value per share and 1,000,000 shares of Preferred
Stock, $0.001 par value per
53
<PAGE>
share. As of June 30, 2000, the Company had 17,554,160 shares of its Common
Stock outstanding and none of its Preferred Stock outstanding.
Description of Common Stock
All shares of Common Stock have equal voting rights and, when validly
issued and outstanding, are entitled to one vote per share in all matters to be
voted upon by shareholders. The shares of Common Stock have no preemptive,
subscription, conversion or redemption rights and may be issued only as
fully-paid and non-assessable shares. Cumulative voting in the election of
directors is not permitted; which means that the holders of a majority of the
issued and outstanding shares of Common Stock represented at any meeting at
which a quorum is present will be able to elect the entire Board of Directors if
they so choose and, in such event, the holders of the remaining shares of Common
Stock will not be able to elect any directors. In the event of liquidation of
the Company, each shareholder is entitled to receive a proportionate share of
the Company's assets available for distribution to shareholders after the
payment of liabilities and after distribution in full of preferential amounts,
if any, to be distributed to holders of the Preferred Stock. All shares of the
Company's Common Stock issued and outstanding are fully- paid and nonassessable.
Dividend Policy
Holders of shares of Common Stock are entitled to share pro rata in
dividends and distribution with respect to the Common Stock when, as and if
declared by the Board of Directors out of funds legally available therefore,
after requirements with respect to preferential dividends on, and other matters
relating to, the Preferred Stock, if any, have been met. The Company has not
paid any dividends on its Common Stock and intends to retain earnings, if any,
to finance the development and expansion of its business. Future dividend policy
is subject to the discretion of the Board of Directors and will depend upon a
number of factors, including future earnings, capital requirements and the
financial condition of the Company.
Description of Preferred Stock
Shares of Preferred Stock may be issued from time to time in one or
more series as may be determined by the Board of Directors. The voting powers
and preferences, the relative rights of each such series and the qualifications,
limitations and restrictions thereof shall be established by the Board of
Directors, except that no holder of Preferred Stock shall have preemptive
rights.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Company's Common Stock is
Interwest Transfer Co., Inc. which is located at 1981 East Murray Holliday Road,
Suite 100, Salt Lake City, Utah 84117, telephone (801) 272-9294 and facsimile
(801) 277-3147. There is no transfer agent for shares of the Company's preferred
stock.
54
<PAGE>
PART II.
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters.
a) Market Information.
The Company's Common Stock is presently quoted on the National
Quotation Bureau's "Pink Sheets", but it intends to apply to have its Common
Stock quoted on the Over the Counter Bulletin Board once its Form 10SB has been
accepted.
The Common Stock of the Company currently is quoted under the symbol
"OSTK" and has been since May 1999. The high, low and average bid information
for each quarter since May 1999 to the present are as follows:
Quarter High Bid Low Bid Average Bid
Second Quarter 1999 .625 .25 .438
Third Quarter 1999 .875 .375 .625
Fourth Quarter 1999 .688 .16 .424
First Quarter 2000 1.875 .25 1.063
Second Quarter 2000 .67 .20 .435
Please note that over-the-counter market quotations have been
provided herein. The quotations reflect inter-dealer prices, without retail
markup, mark-down or commission and may not represent actual transactions.
(b) Holders.
As of June 30, 2000, the Company had 163 shareholders of record of
its 17,554,160 outstanding shares of Common Stock, 12,777,341 of which are
restricted Rule 144 shares and 4,776,819 of which are free-trading. Of the Rule
144 shares, 6,585,287 shares have been held by affiliates of the Company for
more than one (1) year.
(c) Dividends.
The Company has never paid or declared any dividends on its Common
Stock and does not anticipate paying cash dividends in the foreseeable future.
Item 2. Legal Proceedings
No legal proceedings have been initiated either by or against the
Company to date.
Item 3. Changes in and Disagreements with Accountants
None.
55
<PAGE>
Item 4. Recent Sales of Unregistered Securities
The Company relied upon Section 4(2) of the Act and Rule 506 for
several transactions regarding the issuance of its unregistered securities. In
each instance, such reliance was based upon the fact that (i) the issuance of
the shares did not involve a public offering, (ii) there were no more than 35
investors (excluding "accredited investors"), (iii) each investor who was not an
accredited investor either alone or with his purchaser representative(s) has
such knowledge and experience in financial and business matters that he is
capable of evaluating the merits and risks of the prospective investment, or the
issuer reasonably believes immediately prior to making any sale that such
purchaser comes within this description, (iv) the offers and sales were made in
compliance with Rules 501 and 502, (v) the securities were subject to Rule 144
limitation on resale and (vi) each of the parties is a sophisticated purchaser
and had full access to the information on the Company necessary to make an
informed investment decision by virtue of the due diligence conducted by the
purchaser or available to the purchaser prior to the transaction.
The Company relied upon Section 3(b) of the Act and Rule 504 for
several transactions regarding the issuance of its unregistered securities. In
each instance, such reliance was based on the following: (i) the aggregate
offering price of the offering of the shares of Common Stock and warrants did
not exceed $1,000,000, less the aggregate offering price for all securities sold
with the twelve months before the start of and during the offering of shares in
reliance on any exemption under Section 3(b) of, or in violation of Section 5(a)
of the Act; (ii) no general solicitation or advertising was conducted by the
Company in connection with the offering of any of the shares; (iii) the fact the
Company has not been since its inception (a) subject to the reporting
requirements of Section 13 or 15(d) of the Securities Act of 1934, as amended,
(b) and "investment company" within the meaning of the Investment Company Act of
1940, as amended, or (c) a development stage company that either has no specific
business plan or purpose or has indicated that its business plan is to engage in
a merger or acquisition with an unidentified company or companies or other
entity or person.
The Company relied upon Florida Code Section 517.061(11) for several
transactions. In each instance, such reliance is based on the following: (i)
sales of the shares of Common Stock were not made to more than 35 persons; (ii)
neither the offer nor the sale of any of the shares was accomplished by the
publication of any advertisement; (iii) all purchasers either had a preexisting
personal or business relationship with one or more of the executive officers of
the Company or, by reason of their business or financial experience, could be
reasonably assumed to have the capacity to protect their own interests in
connection with the transaction; (iv) each purchaser represented that he was
purchasing for his own account and not with a view to or for sale in connection
with any distribution of the shares; and (v) prior to sale, each purchaser had
reasonable access to or was furnished all material books and records of the
Company, all material contracts and documents relating to the proposed
transaction, and had an opportunity to question the executive officers of the
Company. Pursuant to Rule 3E-500.005, in offerings made under Section
517.061(11) of the Florida
56
<PAGE>
Statutes, an offering memorandum is not required; however each purchaser (or his
representative) must be provided with or given reasonable access to full and
fair disclosure of material information. An issuer is deemed to be satisfied if
such purchaser or his representative has been given access to all material books
and records of the issuer; all material contracts and documents relating to the
proposed transaction; and an opportunity to question the appropriate executive
officer. In the regard, the Company supplied such information and was available
for such questioning (the "Florida Exemption").
The Company relied upon Geogia Code Section 10-5-9(13) for several
transactions. In each instance such reliance is based on the following: (i) the
number of Georgia purchasers did not exceed fifteen (15); (ii) the securities
were not offered for sale by means of any form of general or public
solicitations or advertisements; (iii) a legend was placed upon the
certificates; and (iv) each purchaser represented that he purchased for
investment. (the "Georgia Exemption").
The Company relied upon Nevada Code Section 90.530(11) for several
transactions. In each instance, such reliance is based on the following: the
following transactions are exempt from NRS 90.460 and 90.560, except as
otherwise provided in this subsection, a transaction pursuant to an offer to
sell securities of an issuer if: (a) the transaction is part of an issue in
which there are no more than 25 purchasers in this state, other than those
designated in subsection 10, during any 12 consecutive months; (b) no general
solicitation or general advertising is used in connection with the offer to sell
or sale of the securities; (c) no commission or other similar compensation is
paid or given, directly or indirectly, to a person, other than a broker-dealer
licensed or not required to be licensed under this chapter, for soliciting a
prospective purchaser in this state; and (d) one of the following conditions is
satisfied: (1) the seller reasonably believes that all the purchasers in this
state, other than those designated in subsection 10, are purchasing for
investment; or (2) immediately before and immediately after the transaction, the
issuer reasonably believes that the securities of the issuer are held by 50 or
fewer beneficial owners, other than those designated in subsection 10, and the
transaction is part of an aggregate offering that does not exceed $500,000
during any 12 consecutive months. The administrator may by rule or order as to a
security or transaction or a type of security or transaction, may withdraw or
further condition the exemption set forth in this subsection or waive one or
more of the conditions of the exemption. (the "Nevada Exemption").
Beginning in September 1996 and prior to its acquisition of Micor,
the Company sold 1,500,000 shares of its Common Stock to one hundred three (103)
investors for $15,000. For such offering, the Company relied upon Section 3(b)
of the Act, Rule 504, the Florida Exemption, the Georgia Exemption, Section
4[5/4](G) of the Illinois Code, the Nevada Exemption, Section 59.035(12) of the
Oregon Code, Section 35-1-320(9) of the South Carolina Code, Section 48-2-
103(b)(4) of the Tennessee Code and Section 5[581-5]I(c) of the Texas Code.
The facts upon which the Company relied in Oregon are as follows: (A)
The transaction resulted in not more than ten (10) purchasers in Oregon of
securities of the Company during any twelve (12) consecutive months; (B) No
commission or other remuneration was paid or given directly or indirectly in
connection with the offer or sale of the securities; (C) No public advertising
or general solicitation was used in connection with the offer or sale of the
securities; (D) At the time
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of the transaction, the Company did not have under the Oregon Securities Law, an
application for registration or an effective registration of securities which
were part of the same offering.
The facts upon which the Company relied in South Carolina are as
follows: (A) The transaction was pursuant to an offer directed by the Company to
not more than twenty-five persons in South Carolina during any period of twelve
consecutive months; (B) The Company reasonably believed that all the buyers in
South Carolina purchased for investment; and (C) No commission or other
remuneration was paid or given directly or indirectly for soliciting any
prospective buyer in South Carolina. The Company failed to file with the state
securities bureau as mandated by the state statute.
The facts upon which the Company relied in Tennessee are as follows:
(A) The aggregate number of persons in Tennessee purchasing the securities from
the Company and all affiliates of the Company pursuant to this exemption during
the twelve month period ending on the date of such sale did not exceed fifteen
(15) persons, exclusive of persons who acquired the securities in transactions
which were not subject to this exemption or which were otherwise exempt from
registration under the provisions of this exemption or which have been
registered pursuant to Sec. 48-2-105 or Sec. 48- 2-106. (B) The securities were
not offered for sale by means of publicly disseminated advertisements or sales
literature; and (C) All purchasers in Tennessee purchased such securities with
the intent of holding such securities for investment for their own accounts and
without the intent of participating directly or indirectly in a distribution of
such securities.
The facts upon which the Company relied in Texas are as follows: The
sale during the period of twelve (12) months ending with the date of the sale in
question was to not more than fifteen (15) persons and such persons purchased
such securities for their own account and not for distribution.
In July 1997, the Company entered into a share exchange agreement
with Micor and its shareholders. The exchange was made whereby the Company
issued 8,500,000 shares of its restricted Common Stock to the shareholders of
Micor for all of the issued and outstanding stock of Micor. Jerry Washburn, the
current President, Chief Executive Officer and Chairman of the Company, received
3,300,000 shares in connection with such exchange. William B. Meger, a Director
of the Company, received 3,285,287 shares. This offering was conducted pursuant
to Section 4(2) of the Act, Rule 506, Section 44-1844(6) of the Arizona Code,
Section 25103(c) of the California Code, Section 90.530(17) of the Nevada Code
and Section 61-1-14(2)(p) of the Utah Code.
The facts upon which the Company relied in Arizona are: The
transaction was incident to a statutorily or judicially approved reorganization,
merger, triangular merger, consolidation, or sale of assets, incident to a vote
by securities holders pursuant to the articles of incorporation, the applicable
corporate statute or other controlling statute, a partnership agreement or the
controlling agreement among securities holders.
The facts upon which the Company relied in California are: (A) The
transaction was an exchange incident to a merger, or sale of assets in
consideration of the issuance of securities of
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another issuer; (B) Less than twenty-five percent (25%) of the outstanding
securities of any class, any holders of which received securities in the
exchange, were held by persons who had addresses in California, according to the
records of Micor; (C) The transaction was not a rollup transaction as defined by
Section 25014.6, nor was it a transaction excluded from the definition of rollup
transaction by virtue of paragraph (5) or (6) of subdivision (b) of Section
25014.6.
The facts upon which the Company relied in Nevada are: (A) The
transaction involved the distribution of the securities of an issuer to the
security holders of another person in connection with a merger, consolidation,
exchange of securities, sale of assets or other reorganization to which the
issuer and the other person were parties; and (B) The securities distributed
were not required to be registered under the Securities Act of 1933, 15 U.S.C.
sections 77a et seq. The Company did not file notice, a copy of the materials by
which approval of the transaction was solicited or a fee with the Nevada
administrator as required by the statute.
The facts upon which the Company relied in Utah are: (A) The
transaction involved a merger, consolidation, reorganization, recapitalization,
reclassification, or sale of assets; and (B) The consideration for which, in
whole or in part, was the issuance of securities of a person or persons; and (C)
The transaction was incident to a vote of the securities holders of each person
involved or by written consent or resolution of some or all of the securities
holders of each person involved; and (D) The vote, consent, or resolution was
given under a provision in: (a) the applicable corporate statute or other
controlling statute; (b) the controlling articles of incorporation, trust
indenture, deed of trust, or partnership agreement; (c) the controlling
agreement among securities holders; and (E) All persons involved in the
transaction were exempt from filing under Section 12(g)(1) of the Securities
Exchange Act of 1934. The persons did not, however, file with the division any
proxy or informational material, nor did it distribute such materials to the
securities holders entitled to vote in the transaction as mandated by the
statute.
In February and March 1998, the Company sold 14,400 shares of its
Common Stock pursuant to an Offering Memorandum dated September 17, 1997 to six
(6) investors for a total of $7,200. For such offering, the Company relied upon
Section 3(b) of the Act, Rule 504, the Florida Exemption, Section 502.203(9) of
the Iowa Code, Section 80A.15 Subd.2(a)(1) of the Minnesota Code, Section
48-2-103(b)(4) of the Tennessee Code, Section 5[581-5]I(c) of the Texas Code and
Section 551.23(11) of the Wisconsin Code.
The facts upon which the Company relied in Iowa are: (1) Sales were
made to less than thirty-five (35) purchasers in Iowa, exclusive of purchasers
by bona fide institutional investors for their own account for investment in a
period of twelve (12) consecutive months; (2) The issue was not an issue of: (a)
fractional undivided interests in oil, gas, or other mineral leases, rights, or
royalties or (b) interests in a partnership organized under the laws of or
having its principal place of business in a foreign jurisdiction; (3) The issuer
reasonably believed that all buyers in Iowa purchased for investment; (4)
Commission or other remuneration was not paid or given, directly or indirectly,
for the sale, except as was permitted by the administrator by rule; and (4) The
issuer or a person acting on behalf of the issuer did not offer or sell the
securities by any form of general solicitation or advertising.
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The facts upon which the Company relied in Minnesota are: (1) No more
than ten (10) sales were made pursuant to this exemption, exclusive of sales
pursuant to 80A.15 Subd.2(a)(2) during any period of twelve (12) consecutive
months except sales registered under the Act or sales exempted by 3(b) of the
Act; (2) The seller reasonably believed that all buyers purchased for
investment; and (3) the securities were not advertised for sale to the general
public in newspapers or other publications of general circulation or otherwise,
or by radio, television, electronic means or similar communications media, or
through a program of general solicitation by means of mail or telephone.
The facts upon which the Company relied in Tennessee are as follows:
(A) The aggregate number of persons in Tennessee purchasing the securities from
the Company and all affiliates of the Company pursuant to this exemption during
the twelve month period ending on the date of such sale did not exceed fifteen
(15) persons, exclusive of persons who acquired the securities in transactions
which were not subject to this exemption or which were otherwise exempt from
registration under the provisions of this exemption or which have been
registered pursuant to Sec. 48-2-105 or Sec. 48- 2-106. (B) The securities were
not offered for sale by means of publicly disseminated advertisements or sales
literature; and (C) All purchasers in Tennessee purchased such securities with
the intent of holding such securities for investment for their own accounts and
without the intent of participating directly or indirectly in a distribution of
such securities.
The facts upon which the Company relied in Texas are as follows: The
sale during the period of twelve (12) months ending with the date of the sale in
question was to not more than fifteen (15) persons and such persons purchased
such securities for their own account and not for distribution.
The facts upon which the Company relied in Wisconsin are: (1) The
transaction was pursuant to an offer directed by the offeror to not more than
ten (10) persons in Wisconsin, excluding persons exempt under subsection eight
(8) of this section but including persons exempt under subsection ten (10)
during any period of twelve (12) consecutive months, whether or not the offeror
or any of the offerees was present in Wisconsin; (2) The offeror reasonably
believed that all persons in Wisconsin purchased for investment; and (3) no
commission or other remuneration was paid or given directly or indirectly for
soliciting any person in Wisconsin other than those exempt by subsection eight
(8).
In July 1998, the Company sold 32,000 shares of its Common Stock to
two (2) investors for a total of $8,000. No Offering Memorandum was utilized in
connection with this offering. For such offering, the Company relied upon
Section 3(b) of the Act, Rule 504, the Florida Exemption and the Nevada
Exemption.
In August 1998, the Company issued 100,000 shares of its Common Stock
to one (1) person for legal services performed on behalf of the Company. For
such offering, the Company relied upon Section 3(b) of the Act, Rule 504 and the
Florida Exemption.
In September 1998, the Company issued 750,000 shares of its Common
Stock to two (2) persons for services rendered to the Company. Donald C. Gause,
a Director, received 250,000 of
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the shares issued. For such offering, the Company relied upon Section 4(2) of
the Act, Rule 506, Section 14-4-126(f) of the Arizona Code and Section
11-51-308(1)(j) of the Colorado Code.
For purposes of Section 14-4-126(f) of the Arizona Code, the facts
upon which the Company relied are: (i) units were sold to less than thirty-five
(35) persons; (ii) each purchaser who was not an accredited investor either
alone or with purchaser representative had such knowledge and experience in
financial and business matters sufficient to evaluate the merits and risks of
the prospective investment; (iii) the bad boy provisions of the rule apply to
neither the Company nor its predecessors or affiliates; and (iv) neither the
issuer nor any person acting on its behalf offered or sold the securities by any
form of general solicitation or general advertising. Although a filing was
required by the Rule, none was made.
For purposes of Section 11-51-308(1)(j) of the Colorado Code, the
facts upon which the Company relied are: (i) the offering was directed to not
more than twenty (20) persons in Colorado; (ii) the securities were sold to not
more than ten (10) buyers in Colorado; (iii) all purchasers represented that
they purchased for investment; (iv) no commission or other remuneration was paid
or given for soliciting any prospective buyer in Colorado.
In April 1999, the Company issued 500,000 shares of its Common Stock
to one (1) entity for services rendered to the Company. For such offering, the
Company relied upon Section 3(b) of the Act, Rule 504 and the Florida Exemption.
In April 1999, the Company sold 2,624,672 shares of its Common Stock
to two (2) investors for a total of $800,000. The Company accepted a note
receivable from each of the two (2) investors, which notes receivable were due
one hundred eighty (180) days from their date of issuance. In July 1999, the
Company agreed to extend the repayment term for one (1) investor for an
additional three hundred sixty (360) days, which note shall accrue interest at a
rate of six percent (6%) annually. In January 2000, the Company agreed to extend
the repayment for the other investor such that the note is now payable on demand
and bears interest a rate of six percent (6%) annually. For such offering, the
Company relied upon Section 3(b) of the Act, Rule 504, Section 25102(f) of the
California Code and the Nevada Exemption.
For purposes of Section 25102(f) of the California Code, the facts
upon which the Company relied are: (i) units were sold to not more than
thirty-five (35) persons, including persons not in California; (ii) all
purchasers had a preexisting relationship with the offeror or its officers,
directors or by reason of business or financial experience or by reason of their
professional advisors had the capacity to protect their own interests; (iii)
each purchaser represented that they were purchasing for their own account and
with a view to or for sale in connection with any distribution; and (iv) the
offer and sale were not accomplished by the publication of any advertisement.
Although the Rule required the filing of notice, none was filed. Failure to file
notice did not affect the applicability of the exemption.
In April 1999, the Company entered into a share exchange agreement
with the shareholders of NE, whereby the Company exchanged 727,946 shares of its
Common Stock for one hundred
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percent (100%) of the issued and outstanding stock of NE such that NE became a
wholly-owned subsidiary of the Company. The shares in connection with such
exchange were not issued until December 1999. For such offering, the Company
relied upon Section 4(2) of the Act, Rule 506 and Section 44-1844(6) of the
Arizona Code.
Contemporaneously with execution of the share exchange with NE, the
Company signed a redemption agreement which effectively allowed either party to
the transaction to rescind the transaction without penalty at any time on or
before July 1, 1999. Neither party elected to redeem and the redemption
agreement has since expired. Additionally, at the time of the NE share exchange,
the Company entered into an employment agreement with Ahlawyss Fulton, which has
since expired.
The facts upon which the Company relied in Arizona are: The
transaction was incident to a statutorily or judicially approved reorganization,
merger, triangular merger, consolidation, or sale of assets, incident to a vote
by securities holders pursuant to the articles of incorporation, the applicable
corporate statute or other controlling statute, a partnership agreement or the
controlling agreement among securities holders.
In May 1999, the Company entered into a Stock Purchase Agreement with
Blackwater wherein Blackwater agreed to purchase 2,905,828 shares of the
Company's Common Stock for a total of $750,000. Payments were to be made: A)
$105,000 at closing; B) in five (5) monthly installments of $105,000 beginning
July 1, 1999 and the first of each month thereafter; and C) a final installment
of $120,000. Although Blackwater missed each payment deadline, $620,000 has been
funded to date, including $250,000 which Blackwater assigned to a third party
investor. To date, only 968,609 shares have been issued to the third party
assignee. No shares have yet been issued to Blackwater. Blackwater's shares
carry certain registration rights. For such offering, the Company relied upon
Section 4(2) of the Act, Rule 506 and the Florida Exemption.
In July 1999, the Company sold 50,000 shares of its Common Stock to
three (3) investors for a total of $10,000. The Company relied upon Section 4(2)
of the Act, Rule 506 and Section 30- 1433A(2) of the Idaho Code.
The Company relied upon Section 30-1433A(2) of the Idaho Code,
although it failed to file a Form D, consent to service of process and to pay
the fee required in connection with the filing.
In September 1999, the Company entered into a share exchange
agreement with the shareholders of CC, whereby the Company exchanged 1,887,500
shares of its Common Stock for one hundred percent (100%) of the issued and
outstanding stock of CC such that CC became a wholly-owned subsidiary of the
Company. Of the 1,887,500 shares to be issued in connection with the exchange,
1,125,000 shares are the LU Shares and the remaining 762,500 shares are not
contractually restricted (but are restricted by Rule 144). To date, only 262,500
of the LU Shares and 243,750 of the remaining shares have been issued. 562,500
of the LU Shares and 381,250 of the remaining shares are beneficially owned by
Maurice Mallette, a current Director of the Company
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and the President of CC. For such offering the Company relied upon Section 4(2)
of the Act, Rule 506 and Section 44-1844(6) of the Arizona Code.
The facts upon which the Company relied in Arizona are: The
transaction was incident to a statutorily or judicially approved reorganization,
merger, triangular merger, consolidation, or sale of assets, incident to a vote
by securities holders pursuant to the articles of incorporation, the applicable
corporate statute or other controlling statute, a partnership agreement or the
controlling agreement among securities holders.
In April 2000, the Company issued 1,281,318 shares of its Common
Stock to 30 persons in exchange for services performed on behalf of the Company.
Donald Gause, a Director, received 4,000 shares in connection with such
issuance. For such offering, the Company relied upon Section 4(2) of the Act,
Section 506, Section R14-4-140 of the Arizona Code, Section 25102(f) of the
California Code, Section 11-51-308(1)(p) of the Colorado Code, Section 90.532 of
the Nevada Code, Section 58-13B-24(R) of the New Mexico Code, New Mexico Rule
12NMAC11.4.11.2 and Section 61-1-15.5(2)&R164-15-2 of the Utah Code.
The facts upon which the Company relied upon for purposes of Section
14-4-140 of the Arizona Code are: (i) offers by the issuer were made only by the
Company's employees, officers and directors who were not retained for the
primary purpose of making offers; (ii) the sale of securities did not exceed
$1,000,000; (iii) the Company was not a development stage company with no
specific business plan or a development stage company that has indicated that
its business plan is to engage in a merger or acquisition with an unidentified
company or companies, or other entity or person; (iv) offers specified that they
would be made only to accredited investors and sales were made only to
accredited investors; (v) a legend was placed on all offering documents; and
(vi) the issuer, any of its predecessors, affiliates, directors, officers,
beneficial owners of ten (10) percent or more of any class of its equity
securities did not fall within the disqualification provisions.
For purposes of Section 25102(f) of the California Code, the facts
upon which the Company relied are: (i) shares were sold to not more than
thirty-five (35) persons, including persons not in California; (ii) all
purchasers had a preexisting relationship with the offeror or its officers,
directors or by reason of business or financial experience or by reason of their
professional advisors had the capacity to protect their own interests; (iii)
each purchaser represented that they were purchasing for their own account and
with a view to or for sale in connection with any distribution; and (iv) the
offer and sale were not accomplished by the publication of any advertisement.
For purposes of Section 11-51-308(1)(p) of the Colorado Code, the
facts upon which the Company relied are: (1) The transaction was in compliance
with an exemption from registration with the Securities and Exchange Commission
under section 3(b) or 4(2) of the Act pursuant to regulations adopted thereunder
by the Securities and Exchange Commission; and (2) The Company filed notice with
the securities commissioner of Colorado and paid an exemption fee.
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For purposes of Section 90.532 of the Nevada Code, the facts upon
which the Company relied are: (1) The securities were those set forth is Section
18(b)(4)(D) of the Act; and (2) The Company filed notice with the State of
Nevada and a fee.
For purposes of Section 58-13B-24(R) of the New Mexico Code and New
Mexico Rule 12NMAC11.4.11.2, the facts upon which the Company relied are: The
Company filed notice with the New Mexico administrator, a consent to service of
process and a fee.
For purposes of Section 61-1-15.5(2)&R164-15-2 of the Utah Code, the
facts upon which the Company relied are: The Company filed notice, a consent to
service of process and a fee as proscribed by the statute.
Item 5. Indemnification of Directors and Officers
The Company's Articles of Incorporation provide that: To the fullest
extent permitted by law, no director or officer of the Corporation shall be
personally liable to the Corporation or its shareholders for damages for breach
of any duty owed to the Corporation or its shareholders. In addition, the
Corporation shall have the power, in its Bylaws or in any resolution of its
stockholders or directors, to undertake to indemnify the officers and directors
of this Corporation against any contingency or peril as may be determined to be
in the best interests of this Corporation, and to procure policies of insurance
at this Corporation's expense.
The Corporation shall, to the fullest extent permitted by the
provisions of ss.145 of the General Corporation law of the State of Delaware, as
the same may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any and all
expenses, liabilities, or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any Bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall insure to
the benefit of the heirs, executors, and administrators of such a person.
The Company's Bylaws provide that: The Corporation hereby indemnifies
each person (including the heirs, executors, administrators, or estate of such
person) who is or was a director or officer of the Corporation to the fullest
extent permitted or authorized by current or future legislation or judicial or
administrative decision against all fines, liabilities, costs and expenses,
including attorneys' fees, arising out of his or her status as a director,
officer, agent, employee or representative. The foregoing right of
indemnification shall not be exclusive of other rights to which those seeking an
indemnification may be entitled. The Corporation may maintain insurance, at its
expense, to protect itself and all officers and directors against fines,
liabilities, costs and expenses, whether or not the Corporation would have the
legal power to indemnify them directly against such liability.
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The Delaware Corporation Law provides inss.145. Indemnification of Officers,
Directors, Employees and Agents; Insurance that:
(a) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation as a
director, officer, employee or agent of the corporation) by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorney's fees), judgements,
fines and amounts paid or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was or
is a party or is threatened to made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue, or matters as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or such other court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b), or in defense
of any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
(d) Any indemnification under subsections (a) and (b), (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b). Such
determination shall be made (1) by a majority vote of the directors who are not
parties to such action,
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suit or proceeding, even though less than a quorum, or (2) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director on defending any civil, criminal, administrative, or investigative
action, suit or proceeding upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
authorized in this Section. Such expenses (including attorneys' fees) incurred
by other employees and agents may be so paid upon such terms and conditions, if
any, as the board of directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, other subsections of the section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement , vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee of agent or the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this section.
(h) For purposes of this Section, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Section with
respect to the resulting or surviving corporation as he would have with respect
to such constitutent corporation if its existence had continued.
(i) For purposes of this Section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes a duties on, or involves services by, such director, officer, employee,
or agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner be
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
Section.
66
<PAGE>
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any by-law, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees). (As amended by Ch. 186, Laws of 1967, Ch. 421, Laws of 1970, Ch. 437,
Laws of 1974, Ch. 25, Laws of 1981, Ch. 112, Laws of 1983, Ch. 289, Laws of
1986, Ch. 376, Laws of 1990, and Ch. 261, Laws of 1994.)
PART F/S
The Financial Statements of the Company required by Regulation S-X
commence on page F-1 hereof in response to Part F/S of this Registration
Statement on Form 10-SB and are incorporated herein by this reference.
67
<PAGE>
ONESOURCE TECHNOLOGIES, INC.
Consolidated Financial Statements as of
December 31, 1999 and 1998
And Independent Auditors' Report
<PAGE>
ONESOURCE TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE YEARS ENDED DECEMBER 31, 1999 AND 1998 F-3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIT) FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE YEARS ENDED DECEMBER 31, 1999 AND 1998 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 1999 AND 1998 F-7
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors of
OneSource Technologies, Inc.:
We have audited the accompanying balance sheet of OneSource Technologies, Inc.
as of December 31, 1999 and the related statements of operations, stockholders'
deficit and cash flows for each of the two years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of OneSource Technologies, Inc. as
of December 31, 1999, and the results of its operations and cash flows for each
of the two years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
As discussed in Note 9 to the financial statements, the presentation for the
year ended December 31, 1998 is restated to reflect the retroactive result of
the acquisition of Net Express, Inc. under pooling of interests accounting.
/s/ King, Weber & Associates, P.C.
Tempe, Arizona
April 21, 2000
<PAGE>
<TABLE>
<CAPTION>
ONESOURCE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
1999 1998 (Note 9)
---------------------- -----------------------
<S> <C> <C>
ASSESTS
CURRENT ASSESTS:
Cash $ 37,692 $ 49,544
Accounts receivable 460,121 220,282
Inventories 368,898 165,905
Stock subscription recivable 220,000 -
Other current assests 34,061 20,799
Total current assests 1,120,772 456,530
PROPERTY AND EQUIPMENT, net of accumulated depreciation 218,753 53,528
DEFERRED INCOME TAXES 17,766 -
GOODWILL, net of accumulated amortization of $4,763 269,901 -
OTHER ASSETS 88,294 20,692
TOTAL ASSESTS $ 1,715,486 530,480
====================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
CURRENT LIABILITIES:
Accounts payable $ 345,718 129,700
Accrued expenses and other liabilities 338,593 281,223
Deferrred revenue 210,036 182,018
Bank lines of credit 88,837
Current portion capital leases 5,496
Current portion of long-term debt 68,043 87,963
Total current liabilities 1,056,723 680,904
CAPITAL LEASES-LONG TERM PORTION 6,637
NOTES PAYABLE-LONG TERM PORTION (Note 5) 316,246 322,894
Total Liabilities 1,379,606 1,003,798
---------------------- -----------------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.001 par value, 1,000,000
shares authorized, none issued
Common Stock, $.001 par value, 20,000,000 shares
authorized, 14,549,230 and 11,623,281 issued
at December 31, 1999 and 1998 respectively, and
3,876,802 subscribed but not issued shares at December 31, 1999 14,549 11,623
Paid in Capital 1,687,877 (358,736)
Treasury Stock, 500,000 shares at $0 cost - -
Stock subscription (1,055,000) -
Accumulated deficit (311,546) (126,205)
Total stockholders' equity (deficit) 335,880 (473,318)
---------------------- -----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,715,486 $ 530,480
====================== =======================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
ONESOURCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
1999 1998
(Note 9)
--------------------- ------------------------
<S> <C> <C>
REVENUE, net $ 2,476,884 $ 1,380,041
COST OF REVENUE 1,484,096 755,461
--------------------- ------------------------
GROSS PROFIT 992,788 624,580
GENERAL AND ADMINISTRATIVE EXPENSES 942,412 481,774
SELLING AND MARKETING EXPENSES 229,462 138,863
--------------------- ------------------------
Operating (loss) income (179,086) 3,943
--------------------- ------------------------
OTHER INCOME (EXPENSE)
Interest expense (24,195) (55,557)
Other income 174
--------------------- ------------------------
Total other (expense) (24,021) (55,557)
--------------------- ------------------------
LOSS BEFORE INCOME TAXES (203,107) (51,614)
INCOME TAX BENEFIT 17,766 -
--------------------- ------------------------
NET LOSS $ (185,341) $ (51,614)
====================== ========================
NET Loss Per Share:
Basic $ (0.02) $ (*)
Diluted $ (0.02) $ (*)
Weighted Average Shares Outstanding:
Basic 11,878,710 11,007,952
Diluted 11,878,710 11,007,952
* Less than $(0.01) per share.
</TABLE>
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
ONESOURCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 and 1998
--------------------------------------------------------------------------------
Stock Paid-in
Common Stock Subscription Capital Accumulated
Shares Amount Receivable (Deficit) Deficit Total
------------------------- ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE
DECEMBER 31, 1997 (Note 9) 10,726,881 $ 10,727 $(423,165) $ (74,591) $ (487,029)
Stock issued for cash 14,400 14 7,186 7,200
Stock issued for trade payables 32,000 32 7,968 8,000
Stock issued for legal services 100,000 100 24,900 25,000
Stock issued to employee as compensation 750,000 750 24,375 25,125
Net Loss (51,614) (51,614)
------------- -------------- ------------ ----------- ------------ -------------
DECEMBER 31, 1998 11,623,281 $ 11,623 $(358,736) $ (126,205) $ (473,318)
------------- -------------- ------------ ----------- ------------ -------------
Stock for acquired companies 1,163,888 1,164 368,773 369,937
Stock Subscribed for Notes Receivable 3,124,672 3,125 (925,000) 921,875
Stock issuances for cash 108,333 108 29,892 30,000
Investment Group Funding subscription - 2,905,828 2,906 (750,000) 747,094
Funded subscriptions 400,000 400,000
Subscriptions funded after December 31, 220,000 220,000
1999
(3,876,772) (3,877) 3,877
Stock subscribed not issued
(25,398) (25,398)
Capital placement fees
Net loss (185,341) (185,341)
Reacquired shares (500,000) (500) 500
------------- -------------- ------------ ----------- ------------ -------------
BALANCE, December 31, 1999 14,549,230 $ 14,549 $(1,055,000) $1,687,877 $ (311,546) $ 335,880
------------- -------------- ------------ ----------- ------------ --------------
</TABLE>
The accompanying notes are an
integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
ONESOURCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED DECEMBER 31
1999 1998
-------------- -------------------
(Note 9)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (185,341) $ (51,614)
Adjustments to reconcile net loss to net cash provided (used) by operations
Depreciation and goodwill amortization 30,514 22,068
Gain on retirement of debt (5,000)
Stock issued for legal fees 12,500
Stock issued to employees as compensation 25,125
Changes in assets and liabilities (net of acquisitions):
Accounts receivable (163,382) (43,101)
Inventory (151,109) (83,011)
Other current assets (8,440) (13,798)
Accounts payable (77,100) 23,510
Accrued expenses and other liabilities 146,041 112,910
Deferred revenue 32,267 64,138
Net cash provided (used) by operating activities (387,635) 68,727
---------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (44,919) (23,999)
Net cash provided (used) by investing activities (44,919) (23,999)
---------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 40,500
Payments on notes payable and capital leases 24,000 (46,618)
Net receipts on line of credit (73,737)
Funds received for stock subscriptions 65,837
Issuance of common stock (net of capital placement fees) 404,602 8,000
Net cash provided (used) by financing activities 420,702 1,882
---------------- ------------------
INCREASE (DECREASE) IN CASH (11,852) 46,610
CASH, January 1 49,544 2,934
---------------- -------------------
CASH, March 31 $ 37,692 $ 49,544
---------------- -------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 16,989 $ 22,870
================ ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
ONESOURCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED DECEMBER 31
--------------------------------------------------------------------------------
1999 1998
---------------- ------------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Fair value of Cartridge Care net assets
Acquired for common stock $ 369,937
=========
Property and equipment acquired under
capital leases and notes payable $ 65,567
=========
Sale of vehicle at net book value to employee in
exchange for note. Basis of vehicle $20,650,
accumulated depreciation $14,176 $ 6,474
==========
Common stock issued in exchange for
legal services and trade debt $ 33,000
=========
Common stock issued to employees as
compensation $ 25,125
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ONESOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 1999 AND 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
OneSource Technologies, Inc. (the "Company") is a general office and
industry specific equipment repair and maintenance service company.
Service work is performed pursuant to renewable term contracts and on-call
relationships with customers. The Company's customers are primarily in
banking and retail businesses located in the western and southwestern
United States.
The accompanying financial statements represent the financial position and
results of operations of OneSource Technologies, Inc., Cartridge Care,
Inc. and Net Express, Inc. on a consolidated basis. The 1998 consolidated
amounts have been restated to include the figures of Net Express.
Operating results of Cartridge Care for the period from October 1, 1999
(acquisition date) to December 31, 1999 are included in OneSource's
operating results for the year ended December 31, 1999 (Note 9).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash includes all short-term highly liquid investments that are readily
convertible to known amounts of cash and have original maturities of three
months or less.
Inventories consist primarily of used equipment, new and used parts and
supplies and are stated at the lower of cost (specific identification) or
market. Cartridge Care inventories consist of raw materials and finished
goods, consisting of remanufactured toner cartridges. Cartridge Care
inventories are stated on a FIFO basis.
Property and equipment is recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets ranging
from 3 to 10 years.
Goodwill - Costs in excess of the fair values assigned to the underlying
net assets of acquired companies are being amortized on the straight-line
method over fifteen (15) years.
Revenue recognition - The Company recognizes revenue on contracts pro rata
over the term of the contract or when the service is performed depending
on the terms of the agreement with customers. Sales of parts and equipment
are recognized when shipped or installed. Deferred revenue is recorded for
advanced billings and cash receipts prior to revenue recognition under a
pro rata basis under the terms of service contracts.
Income taxes - The Company provides for income taxes based on the
provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, which among other things, requires that
recognition of deferred income taxes be measured by the provisions of
enacted tax laws in effect at the date of financial statements.
Advertising expenses- The Company expenses advertising costs as incurred.
Advertising expenses for the years ended December 31, 1999 and 1998 were
$18,001 and $0 respectively.
F-7
<PAGE>
Financial Instruments - Financial instruments consist primarily of cash,
accounts receivable, stock subscription receivable and obligations under
accounts payable, accrued expenses, debt and capital lease instruments.
The carrying amounts of cash, accounts receivable, accounts payable,
accrued expenses and short-term debt approximate fair value because of the
short maturity of those instruments. The carrying value of the Company's
capital lease arrangements approximates fair value because the instruments
were valued at the retail cost of the equipment at the time the Company
entered into the arrangements.
Principles of Consolidation - The accompanying financial statements
include the accounts and balances of OneSource Technologies, Inc. and its
two subsidiaries Cartridge Care and Net Express. All significant
intercompany balances and transactions have been eliminated.
Net Loss per share - Net loss per share is calculated using the weighted
average number of shares of Common Stock outstanding during the year. Debt
convertible to 570,140 shares of Common Stock and partially paid Common
Stock subscriptions of 5,449,334 shares were excluded from the computation
of diluted loss per share because the inclusion of such would be
anti-dilutive.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
3. INVENTORIES
Inventories consisted of the following at December 31:
1999 1998
Finished Goods (toner cartridges) $ 4,867
Equipment 55,429 $ 51,404
Parts 308,558 103,158
Supplies 16,584 18,961
Less: Allowance for obsolescence (16,540) (7,618)
Total inventory $ 368,898 $ 165,905
======== ========
There are slow-moving inventories, which consist primarily of parts
removed from larger pieces of equipment and stored until needed for future
jobs. Costs are allocated to these items as components of the larger piece
of equipment from which they were removed. Much of this inventory has been
allocated minimum costs and management believes market value exceeds
recorded costs.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
1999 1998
---------- -----------
Equipment $ 113,715 $ 41,044
Furniture, fixtures and other 100,527 32,978
Vehicles 75,363 40,932
Leasehold improvements 10,816 8,397
Total 300,421 123,351
Less accumulated depreciation (81,668) (70,093)
Property, machinery and equipment - net $ 218,753 $ 53,258
========= =========
F-8
<PAGE>
Depreciation expense for the years ended December 31, 1999 and 1998 was $
25,751 and $17,050 respectively.
5. NOTES PAYABLE
Notes payable at December 31consisted of the following:
<TABLE>
<S> <C> <C>
1999 1998
----------- ------------
(Note 9)
Bank note payable, collateralized by accounts receivable, inventories and
property and equipment, interest at prime plus 2% (9.75% at December 31, 1999)
principal payments of $2,778 plus interest are due monthly, due August 2000 $ 30,554 $ 58,335
Notes payable, collateralized by vehicles, interest from 8% to 12%, total
monthly installments of $2,058 from April 2000 through May 2002 46,948 21,067
Notes payable, unsecured, interest at 9% to 10%, convertible to stock,
due on demand 24,000 38,668
Note payable to shareholder, unsecured, interest at 6%, monthly interest
payments only, converted to 60,000 shares of OneSource stock April 2000 30,000 40,000
Note payable to Company's former parent company in connection with the
management buy-out of the Company. Stated face value, $285,000; stated
interest rate of 5%. The note was discounted at 9% and based on the
scheduled principal and interest payments. The discounted value of the
note was determined to be $252,787. The debt was
extinguished March 4, 2000 (see Note 15 - Subsequent event) 252,787 252,787
Total 384,289 410,857
Less current portion 68,043 87,963
Long-term portion $ 316,246 $ 322,894
========= =========
</TABLE>
The bank note payable is personally guaranteed by the Company's officers. Future
maturities of principal at December 31, 1999 are as follows:
2000 $ 68,043
2001 7,919
2002 17,890
2003 4,079
2004 286,358
----------
Total $384,289
6. LINES OF CREDIT
The company has various revolving line of credit agreements with banks
totaling $100,000 with interest ranging from 9.75% to 18%. At December 31,
1999 the Company had utilized $88,837 of the total $100,000 credit
facility.
F-9
<PAGE>
7. INCOME TAXES
The Company recognizes deferred income taxes for the differences between
financial accounting and tax bases of assets and liabilities. Income taxes
for the years ended December 31, consisted of the following:
1999 1998
--------- --------
Current tax provision (benefit) $ (67,948) $(9,645)
Deferred tax provision (benefit) 50,182 9,645
--------- --------
Total income tax provision (benefit) $ (17,766) $ 0
--------- --------
Deferred tax assets of $194,000 and $122,000 at December 31, 1999 and 1998
respectively relate primarily to federal net operating loss carryforwards
of $485,000, and state operating loss carryforwards of $585,000 at
December 31, 1999, and $305,000 and $406,000 respectively at December 31,
1998. The carry forwards expire from 2000 through 2019. Approximately
$17,000 of the deferred tax asset at December 31, 1999 relates to
allowances on accounts receivable and inventories. At December 31, 1999
there is a deferred income tax liability of $2,689 that relates to book
and tax differences for property, equipment and intangibles. The net
deferred income tax asset of $191,000 at December 31, 1999 is partially
offset by valuation allowance of $174,000. The valuation allowance on the
net deferred income tax asset increased by $52,000 and $11,000 in the
years ended December 31, 1999 and 1998 respectively.
Reconciliation of statutory and effective tax rates:
1999 1998
----------- -------------
Federal $(64,420) (31%) $(7,742) (15%)
State (16,240) ( 8%) (4,129) ( 8%)
Valuation allowance 51,928 25% 11,410 22%
Miscellaneous 10,966 5% 461 1%
========= ====== ====== ====
$(17,766) (9)% $ 0 0%
8. LEASES
Operating Leases
The Company leases its facilities under long-term operating leases that
expire through 2004. Rent expense under these leases was $98,577 for the
year ended December 31, 1999. Minimum annual lease payments under these
agreements are as follows:
Years ended December 31:
2000 $122,788
2001 117,330
2002 117,140
2003 120,490
2004 102,700
-----------
$580,448
F-10
<PAGE>
Capital leases
The Company entered into several capital leases for equipment. The
following presents future minimum lease payments under capital leases by
year and the present value of minimum lease payments as of December 31,
1999:
Year ended December 31, 1999:
2000 $ 6,770
2001 4,791
2002 2,693
--------------------------------------------------
Total minimum lease payments 14,254
Less amount representing interest 2,121
---------
Present value of minimum lease payments 12,133
Current portion 5,496
---------
Long-term portion $ 6,637
=========
Assets capitalized under the capital lease total $16,098 and related
accumulated amortization of $1,610.
9. BUSINESS ACQUISITIONS
The Company acquired Net Express, Inc. ("Net Express") on April 15, 1999
by issuing 727,946 shares of the Company's common stock for 100% of the
outstanding stock of Net Express. The transaction is accounted for as a
pooling of interests. Accordingly, the Company's consolidated financial
statements have been restated for all periods prior to the combination to
include the combined financial position and operating results of the
Company and Net Express. The officers and management of Net Express remain
with the Company. Net Express is a computer equipment reseller and network
integration company.
The following table presents a reconciliation of the net revenues and net
loss previously reported by the Company and for the current period prior
to the combinations:
Period January 1, 1999
Year ended to April 15, 1999
December 31, 1998 (Unaudited)
Net Revenues:
OneSource Technologies, Inc. $ 1,191,068 $ 472,197
Net Express 188,973 98,888
Combined $ 1,380,041 $ 571,085
=========== ===========
Net (Loss) Income:
OneSource Technologies, Inc. $ (55,766) $ 936
Net Express 4,152 3,632
Combined $ (51,614) $ 4,568
============= ===========
For the period prior to the merger there were no inter-company
transactions that required elimination from the combined consolidated
results of operations and there were no adjustments necessary to conform
the accounting practices of the two companies.
The Company acquired Cartridge Care, Inc. ("Cartridge Care") on September
30, 1999. The Company issued 1,163,888 shares of common stock for all the
outstanding stock of Cartridge Care. The acquisition of Cartridge Care was
accounted for under the purchase method. The $369,937, ($0.318 per share)
value of the transaction was determined on the basis of recent private
placements of the Company's common stock, taking into consideration
contractual and legal restrictions related to these private transactions
and management's present assessment of the affect on the value of this
transaction of post purchase adjustments
F-11
<PAGE>
currently being negotiated. Following the close of the purchase, OneSource
agreed to assume additional liabilities arising from operational losses
and relocation costs of Cartridge Care in exchange for the return of a
portion of the shares originally tendered, see Note 12. Goodwill of
$274,664 associated with the purchase is being amortized over fifteen (15)
years. Officers and management of Cartridge Care remain with the Company
and Cartridge Care is being operated as a separate subsidiary of
OneSource. Cartridge Care is a toner cartridge re-manufacturer.
The purchase price contains a contingency whereby the sellers may receive
an additional 723,612 shares of the Company's common stock (see Note 12).
Those shares are non-voting and are being held in escrow pending the
resolution of the contingency.
Had the Cartridge Care acquisition occurred at the beginning of 1999,
revenues and net loss would have been $3,186,012 and $191,237 ($0.01 per
share) as of December 31, 1999 (unaudited).
10. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily accounts receivable.
Approximately $ 244,500 of the accounts receivable balance at December 31,
1999 is due from five (5) customers.
11. EMPLOYEE BENEFIT PLAN
The Company provides benefits through a 401(k) plan for all full time
employees who have completed six months of service and are at least 21
years of age. Contributions to the plan are at the discretion of the Board
of Directors. The Company made no contributions to the plan for the years
ended December 31, 1999 and 1998.
12. COMMITMENTS AND CONTINGENCIES
A former employee has filed a complaint against the Company for a claim of
allegedly unpaid sales commissions of $25,620. The Company has attempted
to settle with this former employee but believes the individual has
significantly inflated the claim and that the former employee cannot
substantiate the amount of the claim. The Company and its counsel believe
that it has a substantial defense due to numerous inconsistencies and the
former employee's lack of substantiation. The Company intends to
vigorously defend this case. The Company and its counsel do not believe
that the outcome of this case can yet be determined. The Company has
accrued $2,300 with respect to this claim. If the court determines that
the Company did not act in good faith with respect to this former
employee's claim, the potential damages may be trebled.
The purchase agreement for Cartridge Care contains a contingency for an
additional 723,612 shares of the Company's common stock to be issued
pending resolution of the contingency. The Company is pursuing legal
remedies against the original owners for misrepresentations made that
materially affect the value of Cartridge Care. The sellers of Cartridge
Care have agreed to escrow the 723,612 shares of the Company's stock on
the pending the results of the litigation. The ultimate resolution of this
matter could result in an increase of the purchase price of Cartridge
Care, which would increase the basis of the net assets acquired. The
recorded purchase price reflects management's current best estimates of
what the final figure will be.
The Company has accrued delinquent payroll taxes, penalties and interest of
approximately $210,000 at December 31, 1999. The Company is corresponding
with the IRS and is attempting to negotiate payment terms. The Company has
committed to making certain scheduled payments based on the availability of
funds. There
F-12
<PAGE>
can be no assurance however that the IRS will not take other action should
the Company fail to make committed payments.
13. MAJOR CUSTOMERS
Approximately 50% of the Company's revenue was generated from six
customers for the year ended December 31, 1999, the largest customer accounting
for approximately 25%. For the year ended December 31, 1998 about 38% of the
Company's total revenues were derived from eight customers with the largest
contributing approximately 9%.
14. BUSINESS SEGMENTS
The Company's revenues are derived from three closely related and
complimentary service and product categories, 1) renewable contract
equipment maintenance services, 2) equipment sales and integration
services and 3) value added equipment supply sales. . While three revenue
streams accrue, all operations share common personnel, processes, assets,
facilities, capital resources and strategic management. Accordingly, any
allocation of costs and expenses between segments in an attempt to
determine net incomes for each would be arbitrary and therefore
potentially misleading.
Following are the revenues contributed by each of these categories in the
past two years:
1999 1998
Equipment maintenance service revenues $1,966,114 $1,016,372
Equipment sales and integration services revenues 341,548 323,132
Equipment supplies and parts sales 169,222 40,537
$2,476,884 $1,380,041
========== ==========
15. SUBSEQUENT EVENT
On March 4, 2000 the Company and a group of investors executed an
agreement with PF Holdings, Inc. ("PF") to purchase the promissory note
held by PF with a face value of $285,000.00 and accrued interest of $36,
972 for $150,000 in cash provided by the investors and 175,000 shares of
the Company's common stock with an estimated fair market value on March 4,
2000 of $93,438. Following the purchase and assumption of the note the
investor group exercised the conversion feature in the note for 643,944
shares of the Company's Common stock. The investor's are restricted from
selling any of the combined 818,944 shares of stock for a period of one
year.
16. STOCKHOLDERS' DEFICIT
The Company reacquired 500,000 shares from one of the founding
shareholders of the Company. The shares were reacquired in settlement of
disputes with the former shareholder and the transaction was recorded at
no cost.
The Company obtained several subscriptions for its common stock totaling
6,030,500 shares during the year ended December 31, 1999. Of the total
shares subscribed, 3,876,772 were not yet issued at December 31, 1999.
Subsequent to December 31, 1999, $220,000 of the subscriptions were funded
representing payment for 852,376 shares. The remaining balance of
3,656,000 shares is subscribed for $1,055,000.
* * * * * *
F-13
<PAGE>
PROFORMA INFORMATION (UNAUDITED)
The accompanying Pro Forma information is presented for illustrative purposes
only and is not necessarily indicative of the results of operations that would
have actually been reported had this transaction occurred at the beginning of
the period presented. The accompanying Pro Forma Condensed Consolidated
Statement of Operations should be read in conjunction with the historical
financial statements and related footnotes of OneSource Technologies, Inc.
In September 1999 the Company purchased all the outstanding stock of Cartridge
Care, Inc., (Cartridge Care) in exchange for 1,887,500 shares of OneSource
Technologies, Inc. common stock. The transaction was accounted for as a
purchase. Since the date of acquisition the Company has funded the facilities
relocation costs and operating losses of Cartridge Care. It is anticipated that
these costs as well as ongoing funding requirements will result in an adjustment
of the purchase price of the acquisition.
In as much as the Company's stock was thinly traded at the time of the purchase,
the underlying value, ($369,937 or $0.318 per share) ascribed to the shares
tendered was based on share values utilized in a number of independently
negotiated capital funding transactions with third party investors. At December
1999 the value assigned to the purchase reflects management's current best
estimate of what the adjusted purchase price will be based on all presently
available facts.
<TABLE>
<S> <C> <C> <C> <C>
Historical Cartidge Care
OneSource December 31, Pro Forma Pro Forma
December 31, 1999 1999 Adjustments Combined
-------------- -------------- ------------- --------------
REVENUE, net $ 2,336,536 $ 849,476 $ (21,996)(3) $ 3,186,012
COST OF SERVICE 1,407,242 499,359 (19,524)(3) 1,906,601
GROSS PROFIT 929,294 350,117 (2,472) 1,279,411
-------------- -------------- ------------- --------------
OPERATING EXPENSES 1,006,963 445,086 1,452,049
Amortization of goodwill 14,289(1) 14,289
Depreciation on increased basis of
equipment 5,322(2) 5,322
Operating income (77,669) (99,969) (22,083) (194,721)
-------------- -------------- ------------- --------------
OTHER INCOME (EXPENSE)
Interest (income) expense 22,820 979 23,799
Other (income) expense (174) (27,109) (27,283)
-------------- -------------- ------------- --------------
Total other expense 22,646 (26,130) - (3,484)
NET INCOME $ (100,315) $ (68,839) $ (22,083) (191,237)
============== ============== ============= ==============
</TABLE>
Note1: Pro Forma Adjustments
The following is a description of each of the pro forma adjustments: (1)
Amortization of goodwill over 15 years (2) Depriciation on adjusted basis of
equipment purchased (3) Elimination of inter-company revenues and profits
F-14
<PAGE>
CARTRIDGE CARE, INC.
Financial Statements as of
December 31, 1998
And Independent Auditors' Report
<PAGE>
CARTRIDGE CARE, INC.
TABLE OF CONTENTS
Page
AUDITORS' REPORT F-1
BALANCE SHEET AS OF DECEMBER 31,1998 F-2
STATEMENT OF OPERATIONS FOR
THE YEAR ENDED DECEMBER 31,1998 F-3
STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY FOR THE YEAR ENDED DECEMBER 31 1998 F-4
STATEMENT OF CASH FLOWS FOR
THE YEAR ENDED DECEMBER 31,1998 F-5
NOTES TO FINANCIAL STATEMENTS F-7
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders of
Cartridge Care, Inc.:
We have audited the accompanying balance sheet of Cartridge Care, Inc. as of
December 31, 1998 and the related statements of operations, stockholders'
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cartridge Care, Inc. as of
December 31, 1998, and the results of its operations and cash flows for the year
then ended in conformity with generally accepted accounting principles.
/s/ King, Weber & Associates, P.C.
Tempe, Arizona
May 25, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
CARTRIDGE CARE, INC.
BALANCE SHEET
DECEMBER 31, 1998
------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
<S> <C>
Cash $100
Accounts receivable 49,797
Inventories 34,985
Other current assets 5,249
--------------
Total current assets 90,131
PROPERTY AND EQUIPMENT, net of depreciation 69,444
OTHER ASSETS 9,569
TOTAL ASSETS $169,144
---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $86,071
Accrued expenses and other liabilities 19,927
Deferred revenue 15,805
Bank lines of credit 39,983
Current portion of notes payable 3,218
Income taxes payable 13,655
Deferred income taxes 4,292
---------------
Total current liabilities 182,951
NOTES PAYABLE - LONG-TERM PORTION 1,346
===============
Total liabilities 184,297
-------
STOCKHOLDERS' EQUITY
Common Stock, no par value, 150 shares issued and authorized, 38,663
Accumulated deficit (53,816)
---------------
Total stockholders' equity (15,153)
LIABILITIES AND STOCKHOLDERS' EQUITY $169,144
---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
CARTRIDGE CARE, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------
<S> <C>
REVENUE, net $964,930
COST OF REVENUE 565,090
-----------------
GROSS PROFIT 399,840
GENERAL AND ADMINISTRATIVE EXPENSES 306,878
SELLING AND MARKETING EXPENSES 61,481
-----------------
Operating income 31,481
OTHER INCOME (EXPENSE)
Other income 14,5708
Interest (expense) (5,136)
-----------------
Total other income 9,434
-----------------
NET INCOME BEFORE TAXES 40,915
PROVISION FOR INCOME TAXES 12,057
NET INCOME $ 28,858
=================
Basic Net Income Per Common Share $ 192.39
=================
Weighted Average Shares Outstanding 150
=================
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CARTRIDGE CARE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------
Common Stock Accumulated Total
Shares Amount Deficit Equity
------ ------- ------
<S> <C> <C> <C> <C>
BALANCE
DECEMBER 31, 1997 150 $38,663 $(82,674) $(44,011)
NET INCOME 28,858 28,858
BALANCE
DECEMBER 31, 1998 150 $38,663 ($53,816) $(15,153)
--------- ------------ ----------------- ----------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CARTRIDGE CARE, INC.
STATEMENT OF CASH FLOWS FOR
THE YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net income $28,858
Adjustments to reconcile net income to net cash
provided by operations
Gain on disposition of equipment (13,792)
Depreciation 22,453
Deferred income taxes 2,097
Changes in assets and liabilities
Accounts receivable (4,759)
Inventory 4,028
Other current assets (427)
Other assets 1,388
Accounts payable 18,828
Accrued expenses and other liabilities (7,808)
Deferred revenue 39,611
Income taxes payable 6,058
Net cash provided by operating activities 58,172
---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (3,018)
Net cash used by investing activities (3,018)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of loans from shareholders (50,460)
Principle payments on loans (5,394)
Net borrowings on line of credit 800
Net cash used by financing activities (55,054)
---------------
INCREASE IN CASH 100
CASH BALANCE, January 1, 1998 0
CASH BALANCE, December 31, 1998 $100
===============
Supplemental Cash Flow Information:
Interest paid $18,055
===============
Income taxes paid $5,995
===============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
F-5
<PAGE>
CARTRIDGE CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
Cartridge Care, Inc. (the "Company") is a remanufacturer of laser printer,
copier and facsimile cartridges. The Company also operates an equipment
repair and maintenance service company. Service work is performed pursuant
to renewable term contracts and on-call relationships with customers. The
Company's customers are primarily in located in Arizona.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash includes all short-term highly liquid investments that are readily
convertible to known amounts of cash and have original maturities of three
months or less.
Inventories consist primarily of new parts and toner cartridges, including
used components of same. Inventories are stated at the lower of cost or
market on a first-in, first-out (FIFO) basis. Remanufactured cartridges
generally are completed by at the end of the day and therefore no work in
progress exists.
Property and equipment is recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets ranging
from 3 to 10 years.
Revenue recognition - The Company recognizes revenue on service contracts
pro rata over the term of the contract or when the service is performed
depending on the terms of the agreement with customers.
Deferred revenue is recorded for advanced billings and cash receipts
prior to revenue recognition under a pro rata basis under the terms of
service contracts. Sales of parts and equipment are recognized when
shipped or installed.
Income taxes - The Company provides for income taxes based on the
provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, which among other things, requires that
recognition of deferred income taxes be measured by the provisions of
enacted tax laws in effect at the date of financial statements.
Advertising expenses- The Company expenses advertising costs as incurred.
Advertising expense for the year ended December 31, 1998 was $21,010.
Financial Instruments - Financial instruments consist primarily of cash,
accounts receivable, and obligations under accounts payable, accrued
expenses, debt and capital lease instruments. The carrying amounts of
cash, accounts receivable, accounts payable, accrued expenses and
short-term debt approximate fair value because of the short maturity of
those instruments. The carrying value of the Company's capital lease
arrangements approximates fair value because the instruments were valued
at the retail cost of the equipment at the time the Company entered into
the arrangements.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the
F-7
<PAGE>
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Net Income Per Share - Net income per share is calculated using the
weighted average number of shares of common stock outstanding during the
year. The Company had a simple capital structure and no potentially
dilutive securites outstanding at December 31, 1998.
3. INVENTORIES
Inventories consisted of the following at December 31, 1998:
Finished goods $ 5,155
New parts and supplies 24,579
Used cartridge components 5,251
-----
Total $34,985
-------
Labor costs associated with finished goods inventory is typically not
significant.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1998:
Equipment $ 99,966
Furniture, fixtures and other 40,300
Vehicles 14,776
Leasehold improvements 17,144
---------
Total 172,186
Less accumulated depreciation (102,742)
-------
Property, machinery and equipment - net $ 69,444
=========
Depreciation expense for the year ended December 31, 1998 was $22,453.
5. LINES OF CREDIT
The company has a revolving line of credit agreement with a bank totaling
$40,000 with interest at the prime rate plus 3% (10.75% at December 31,
1998). At December 31, 1998 the company had drawn $39,983.
6. NOTES PAYABLE
Notes payable at December 31, 1998 consisted of the following:
Note payable, collateralized by vehicle, interest at 10.25%, monthly payments of
$293 due through October 2000 $ 4,564
Less current portion 3,218
------------
Long-term portion $ 1,346
============
F-8
<PAGE>
Future maturities of principal at December 31, 1998 are as follows:
1999 $ 3,218
2000 1,346
----------
Total $ 4,564
=========
7. LEASES
Operating Leases
The Company leases its office space over a long term operating lease
expiring in September 1999. Rent expense was $46,361 for the year ended
December 31, 1998. Future minimum lease payments under that lease at
December 31, 1998 were:
1999 $65,621
------
8. INCOME TAXES
The Company recognizes deferred income taxes for the differences between
financial accounting and tax bases of assets and liabilities. Income taxes
for the year ended December 31, 1998 consisted of the following:
Current tax provision $ 9,960
Deferred tax provision 2,097
---------
Total income tax provision $ 12,057
=========
The deferred income tax liability at December 31, 1998 of $4,292
relates to temporary differences in book and tax depreciation methods for
property and equipment.
Reconciliation of statutory and effective tax rates:
Federal $ 6,137 15%
State 3,273 8%
Other 2,647 6%
------- -----
$12,057 29%
======= =====
9. MAJOR CUSTOMERS
Approximately 20% of the Company's revenue was generated from three
customers for the year ended December 31, 1998, the largest customer
accounting for approximately 10%.
10. SUBSEQUENT EVENTS
In March of 1999 all of the outstanding stock of the Company was sold to
two individuals for cash and notes totaling approximately $610,000. These
two individuals exchanged 100% of their stock in the Company for stock of
OneSource Technologies, Inc., a Delaware corporation in September 1999.
11. RELATED PARTY TRANSACTION
During 1998 cash advances of $50,460 were made to the principle
shareholders of the company who in turn repaid the advances as of
December 31, 1999.
F-9
<PAGE>
ONESOURCE TECHNOLOGIES, INC.
Consolidated Financial Statements as of
March 31, 2000 and 1999
(Unaudited)
<PAGE>
ONESOURCE TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 F-1
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 F-2
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 F-3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THREE MONTHS ENDED MARCH 31, 2000 AND 1999- F-4
<PAGE>
<TABLE>
<CAPTION>
ONESOURCE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31 2000
(Unaudited)
----------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 50,333
Accounts receivable 409,957
Stock subscription receivable 25,000
Inventories (Note 3) 379,028
Other current assests 24,702
Total current assests 889,020
PROPERTY AND EQUIPMENT, net of accumulated depreciation (Note 4) 272,405
GOODWILL, net of accumulated amortization of $9,526 265,138
OTHER ASSETS 115,994
TOTAL ASSESTS $ 1,542,557
===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
CURRENT LIBILITIES:
Accounts payable $ 246,343
Accrued expenses and other liabilities 213,201
Deferred revenue 261,797
Bank lines of credit (Note6) 127,950
Current portion capital leases 4,803
Current portion of long-term debt (Note 5) 54,085
Total current liabilities 908,159
CAPITAL LEASES-LONG TERM PORTION 5,961
NOTES PAYABLE-LONG-TERM PORTION (Note 5) 31,853
Total liabilities 945,993
------------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock, $.001 par value, 1,000,000 shares authorized, none issued
Common Stock, $.001 par value, 20,000,000 shares authorized,
15,478,174 and 11,623,281 issued at March 31, 2000 and 1999 respectively,
and 3,876,802 subscribed but not issued shares at March 31, 2000
15,478
Paid in capital 1,978,386
Stock subscription (1,055,000)
Treasury stock (500,000 shares at $0 cost) -
Accumulated deficit (342,300)
Total stockholders' equity 596,564
------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,542,557
==================
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-1
<PAGE>
<TABLE>
<CAPTION>
ONESOURCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31
(Unaudited) (Unaudited)
2000 1999
---- -----
<S> <C> <C>
REVENUE, net $ 890,545 $ 503,628
COST OF REVENUE 540,636 305,958
---------------------- --------------------
GROSS PROFIT 349,909 197,670
GENERAL AND ADMINISTRATIVE EXPENSES 409,130 144,623
SELLING AND MARKETING EXPENSES 60,328 38,803
----------------------- ---------------------
Operating (loss) income (119,549) 14,244
------------------------ --------------------
OTHER INCOME (EXPENSE)
Interest expense (11,265) (7,698)
Other income 2,933 3,955
----------------------- ---------------------
Total other (expense) (8,332) (3,743)
------------------------ --------------------
NET LOSS BEFORE EXTRAORDINARY ITEM (127,881)
Extraordinary item - Gain on extinguishments of debt 63,375
------------------------
NET (LOSS) INCOME $ (64,506) $ 10,501
======================== ====================
NET Loss Per Share:
Basic, before extraordinary item $( * ) $( * )
====== ======
after extraordinary item $( * ) $( * )
====== ======
Diluted,before extraordinary item $( * ) $( * )
====== ======
after extraordinary item $( * ) $( * )
====== ======
Weighted Average Shares Outstanding:
Basic 15,772,402 11,623,281
========== ==========
Diluted 15,772,402 11,623,281
========== ==========
* Less than $0.01 per share.
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
ONESOURCE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED MARCH 31
(Unaudited) (Unaudited)
2000 1999
--------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (64,506) $ (51,614)
Adjustments to reconcile net loss to net cash provided
(used) by operations
Depreciation and goodwill amortization 12,653 22,068
Gain on retirement of debt (63,375)
Stock issued for legal fees 12,500
Stock issued to employees as compensation 25,125
Changes in assets and liabilities (net of acquisitions):
Accounts receivable 38,164 (43,101)
Inventory (10,130) (83,011)
Other current assets (18,341) (13,798)
Accounts payable (99,375) 23,510
Accrued expenses and other liabilities (14,847) 112,910
Deferred revenue 51,761 64,138
Net cash provided (used) by operating activities (167,996) 68,727
-------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (61,542) (23,999)
Net cash provided (used) by investing activities (61,542) (23,999)
-------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 40,500
Payments on notes payable and capital leases (166,934) (46,618)
Net receipts on line of credit 39,113
Funds received for stock subscriptions 220,000
Issuance of common stock (net of capital placement fees) 150,000 8,000
Net cash provided (used) by financing activities 242,179 1,882
-------------- -------------------
INCREASE (DECREASE) IN CASH 12,641 46,610
CASH, January 1 37,692 2,934
-------------- -------------------
CASH, March 31 $ 50,333 $ 49,544
-------------- -------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 5,578 $ 22,870
============== ===================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock subscribed in exchange for notes receivable $ 278,438
==============
Common stock issued in exchange for note payable $ 30,000
==============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-3
<PAGE>
ONESOURCE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
1. ORGANIZATION AND BASIS OF PRESENTATION
OneSource Technologies, Inc. (the "Company") is a general office and
industry specific equipment repair and maintenance service company.
Service work is performed pursuant to renewable term contracts and on-call
relationships with customers. The Company's customers are primarily in
banking and retail businesses located in the western and southwestern
United States.
The accompanying financial statements represent the financial position and
results of operations of OneSource Technologies, Inc., Cartridge Care, Inc.
and Net Express, Inc. on a consolidated basis. The 1999 consolidated
amounts have been restated to include the figures of Net Express. The
acquisition of Cartridge Care was effective on September 30, 1999 and
therefore not reflected in the Company's operations for the three months
ended March 31, 1999.
The financial statements for the three months ended March 31, 2000 and
1999 are unaudited and include all adjustments which in the opinion of
management are necessary for fair presentation, and such adjustments are
of a normal and recurring nature. The results for the three months are not
indicative of a full year results.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash includes all short-term highly liquid investments that are readily
convertible to known amounts of cash and have original maturities of three
months or less.
Inventories consist primarily of used equipment, new and used parts and
supplies and are stated at the lower of cost (specific identification) or
market. Cartridge Care inventories consist of raw materials and finished
goods, consisting of remanufactured toner cartridges. Cartridge Care
inventories are stated on a FIFO basis.
Property and equipment is recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the assets ranging
from 3 to 10 years.
Goodwill - Costs in excess of the fair values assigned to the underlying
net assets of acquired companies are being amortized on the straight-line
method over fifteen (15) years. The Company recognized $4,763 of
amortization in the three months ended March 31, 2000 in connection with
the purchase of Cartridge Care, Inc.
Revenue recognition - The Company recognizes revenue on contracts pro rata
over the term of the contract or when the service is performed depending
on the terms of the agreement with customers. Sales of parts and equipment
are recognized when shipped or installed. Deferred revenue is recorded for
advanced billings and cash receipts prior to revenue recognition under a
pro rata basis under the terms of service contracts.
Income taxes - The Company provides for income taxes based on the
provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, which among other things, requires that
recognition of deferred income taxes be measured by the provisions of
enacted tax laws in effect at the date of financial statements.
F-4
<PAGE>
Advertising expenses- The Company expenses advertising costs as incurred.
The company had incurred no direct advertising costs in the first three
months of 2000 or 1999.
Financial Instruments - Financial instruments consist primarily of cash,
accounts receivable, stock subscription receivable and obligations under
accounts payable, accrued expenses, debt and capital lease instruments.
The carrying amounts of cash, accounts receivable, accounts payable,
accrued expenses and short-term debt approximate fair value because of the
short maturity of those instruments. The carrying value of the Company's
capital lease arrangements approximates fair value because the instruments
were valued at the retail cost of the equipment at the time the Company
entered into the arrangements.
Principles of Consolidation - The accompanying financial statements
include the accounts and balances of OneSource Technologies, Inc. and its
two subsidiaries Cartridge Care and Net Express. All significant
intercompany balances and transactions have been eliminated.
Net Loss per share - Net loss per share is calculated using the weighted
average number of shares of Common Stock outstanding during the year. Debt
convertible to 570,140 shares of Common Stock and partially paid Common
Stock subscriptions of 4,805,716 shares were excluded from the computation
of diluted loss per share because the inclusion of such would be
anti-dilutive.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
3. INVENTORIES
Inventories consisted of the following at March 31:
2000 1999
---- -----
Finished Goods (Cartridges) $ 6,250 $
Equipment 59,741 65,691
Parts 310,613 137,635
Supplies 17,874 25,429
Less: Allowance for obsolescence (15,450) (7,618)
---------- ---------
Total inventory $ 379,028 $221,137
======== ========
There are slow-moving inventories, which consist primarily of parts
removed from larger pieces of equipment and stored until needed for future
jobs. Costs are allocated to these items as components of the larger piece
of equipment from which they were removed. Much of this inventory has been
allocated minimum costs and management believes market value exceeds
recorded costs.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at March 31:
2000 1999
---- ----
Equipment $ 135,272 $ 43,760
Furniture, fixtures and other 98,433 32,978
F-5
<PAGE>
Vehicles 75,363 45,440
Leasehold improvements 43,534 8,397
----------- -----------
Total 352,602 130,575
Less accumulated depreciation (80,197) (61,844)
----------- ---------
[GRAPHIC?OMITTED]
Property, machinery and equipment- net $ 272,405 $ 68,731
========= ==========
Depreciation and amortization expense for the three months ended March 31,
2000 and 1999 was $12,653 and $3,314 respectively.
5. NOTES PAYABLE
Notes payable at March 31consisted of the following:
<TABLE>
<S> <C> <C>
2000 1999
Bank note payable, collateralized by accounts receivable, inventories and
property and equipment, interest at prime plus 2%
(9.75% at December 31, 1999) principal payments of $2,778 plus $ 19,443 $ 58,335
interest are due monthly, due August 2000
Notes payable, collateralized by vehicles, interest from 8% to 12%, total
monthly installments of $2,058 from April 2000
through May 2002 42,495 21,067
Note payable to shareholder, unsecured, interest at 6%, monthly interest
payments only, converted to 60,000 shares of OneSource
stock April 2000 40,000
Note payable to Company's former parent company in connection
with the management buy-out of the Company. Stated face value,
$285,000; stated interest rate of 5%. The note was discounted at 9%
and based on the scheduled principal and interest payments. The
discounted value of the note was determined to be $252,787. The
debt was extinguished March 4, 2000 252,787
---------------- -------------------
Total 85,938 410,857
Less current portion 54,085 87,963
---------------- -------------------
Long-term portion $ 31,853 $ 322,894
================ ===================
</TABLE>
The bank note payable is personally guaranteed by the Company's officers. Future
maturities of principal at December 31, 1999 are as follows:
2000 $ 54,085
2001 7,426
2002 17,650
2003 4,079
2004 2,698
----------
Total $ 85,938
F-6
<PAGE>
On March 4, 2000 the Company and a group of investors executed an
agreement with PF Holdings, Inc. ("PF") to purchase the promissory note
held by PF with a face value of $285,000.00 and accrued interest of $36,
972 for $150,000 in cash provided by the investors and 175,000 shares of
the Company's common stock with an estimated fair market value on March 4,
2000 of $93,438. Following the purchase and assumption of the note the
investor group exercised the conversion feature in the note for 643,944
shares of the Company's Common stock. The investor's are restricted from
selling any of the combined 818,944 shares of stock for a period of one
year.
6. LINES OF CREDIT
The company has various revolving line of credit agreements with banks
totaling $150,000 with interest ranging from 9.75% to 18%. At March 31,
2000 the Company had utilized $127,950 of the total $150,000 credit
facility, .
7. INCOME TAXES
The Company recognizes deferred income taxes for the differences between
financial accounting and tax bases of assets and liabilities. Income taxes
for the three months ended March 31, consisted of the following:
2000 1999
---- ----
Current tax provision (benefit) $(18,927) $ 2,415
Deferred tax provision (benefit) (18,927) 2,415
------- --------
Total income tax provision (benefit) $ 0 $ 0
========== =======
A net deferred tax asset of $ 187,000 relates primarily to federal net
operating loss carryforwards at March 31, 2000 of $434,000, and state
operating loss carryforwards of $535,000. The carry forwards expire from
2000 through 2019. Approximately $14,000 of the deferred tax asset at
December 31, 1999 relates to allowances on accounts receivable and
inventories. At December 31, 1999 there is a deferred income tax liability
of $2,689 that relates to book and tax differences for property, equipment
and intangibles. The net deferred income tax of $166,997 is fully offset
by an equal valuation allowance.
Reconciliation of statutory and effective tax rates:
2000 1999
---- ----
Federal $(13,127) (20%) $ 1,575 15%
State (5,801) ( 8%) 940 8%
Valuation allowance 21,648 32% (2,415) (22%)
Miscellaneous (2,720) 4% 461 1%
---------- --- --- ----
$ 0 0% $ 0 0%
========== ==== ======= ====
8. LEASES
Operating Leases
The Company leases its facilities under long-term operating leases that
expire through 2004. Rent expense under these leases was $47,810 for the
three months ended March 31, 2000. Minimum annual lease payments under
these agreements are as follows:
F-7
<PAGE>
Years ended December 31:
2001 $122,788
2002 117,330
2003 117,140
2004 120,490
2005 102,700
---------
$580,448
Capital leases
The company entered into several capital leases for equipment. The
following presents future minimum lease payments under capital leases by
year and the present value of minimum lease payments as of March 31, 1999:
Three months ended March 31, 2000:
2000 $ 4,791
2001 4,791
2002 2,875
-----
Total minimum lease payments 12,457
Less amount representing interest 1,693
----------
Present value of minimum lease payments 10,764
Current portion 4.803
----------
Long-term portion $ 5,961
=========
Assets capitalized under the capital lease total $16,098 and related
accumulated amortization of $2,415.
9. BUSINESS ACQUISITIONS
The Company acquired Net Express, Inc. ("Net Express") on April 15, 1999
by issuing 727,946 shares of the Company's Common stock for 100% of the
outstanding stock of Net Express. The transaction is accounted for as a
pooling of interests. Accordingly, the Company's consolidated financial
statements have been restated for all periods prior to the combination to
include the combined financial position and operating results of the
Company and Net Express. The officers and management of Net Express remain
with the Company. Net Express is a computer equipment reseller and network
integration company.
The following table presents a reconciliation of the net revenues and net
loss previously reported by the Company and for the current period prior
to the combinations:
Period January 1, 1999
to March 31, 1999
(Unaudited)
----------------------
Net Revenues
OneSource Technologies, Inc. $ 404,740
Net Express 98,888
----------------------
Combined $ 503,628
======================
Net (Loss) Income:
OneSource Technologies, Inc. $ 6,869
Net Express 3,632
----------------------
Combined $ 10,501
======================
F-8
<PAGE>
For the period prior to the merger there were no inter-company
transactions that required elimination from the combined consolidated
results of operations and there were no adjustments necessary to conform
the accounting practices of the two companies.
The Company acquired Cartridge Care, Inc. ("Cartridge Care") on September
30, 1999. The Company issued 1,889,750 shares of common stock for all the
outstanding stock of Cartridge Care. The acquisition of Cartridge Care was
accounted for under the purchase method. The $369,937, ($0.318 per share)
value of the transaction was determined on the basis of recent private
placements of the Company's Common stock, taking into consideration
contractual and legal restrictions related to these private transactions
and management's present assessment of the affect on the value of this
transaction of post purchase adjustments currently being negotiated.
Following the close of the purchase, OneSource agreed to assume additional
liabilities arising from operational losses and relocation costs of
Cartridge Cares in exchange for the return of a portion of the shares
originally tendered, see Note 12. Goodwill of $274,664 associated with the
purchase is being amortized over fifteen (15) years. Officers and
management of Cartridge Care remain with the Company and Cartridge Care is
being operated as a separate subsidiary of OneSource. Cartridge Care is a
toner cartridge re-manufacturer.
Had the Cartridge Care acquisition occurred at the beginning of 1999,
revenues and net loss would have been $749,769 and $20,743 (less than
$0.01 per share) respectively, as of March 31, 1999.
10. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily accounts receivable.
Approximately $ 293,000 of the accounts receivable balance at March 31,
2000 is due from seven (7) customers.
11. EMPLOYEE BENEFIT PLAN
The Company provides benefits through a 401(k) plan for all full time
employees who have completed six months of service and are at least 21
years of age. Contributions to the plan are at the discretion of the Board
of Directors. The Company made no contributions to the plan for the years
ended December 31, 1999 and 1998.
12. COMMITMENTS AND CONTINGENCIES
A former employee has filed a complaint against the Company for a claim of
allegedly unpaid sales commissions of $25,620. The Company has attempted
to settle with this former employee but believes the individual has
significantly inflated the claim and that the former employee cannot
substantiate the amount of the claim. The Company and its counsel believe
that it has a substantial defense due to numerous inconsistencies and the
former employee's lack of substantiation. The Company intends to
vigorously defend this case. The Company and its counsel do not believe
that the outcome of this case can yet be determined. The Company has
accrued $2,300 with respect to this claim. If the court determines that
the Company did not act in good faith with respect to this former
employee's claim, the potential damages may be trebled.
In connection with the purchase of Cartridge Care the management of
OneSource and Cartridge Care have agreed to discount the original purchase
price of the company. The Company is pursuing legal remedies against the
original owners for misrepresentations made that materially affect the
value of Cartridge Care. The sellers of Cartridge Care have agreed to
reduce the purchase price and return shares of the Company's stock to
OneSource based on the results of pending litigation. The ultimate
resolution of this matter could result in a reduction of the purchase
price of Cartridge Care, which
F-9
<PAGE>
would reduce the basis of the net assets acquired. The present purchase
amount reflects management's current best estimates of what the final
figure will be.
The Company has accrued delinquent payroll taxes, penalties and interest
of approximately $170,000 at March 31, 2000. The Company is corresponding
with the IRS and is attempting to negotiate payment terms. The Company has
committed to making certain scheduled payments based on the availability
of funds. There can be no assurance however that the IRS will not take
other action should the Company fail to make committed payments.
13. MAJOR CUSTOMERS
Approximately 50% of the Company's revenue was generated from six
customers for the three months ended March 31, 2000, the largest customer
accounting for approximately 25%. For the three months ended March 31,
1999 about 38% of the Company's total revenues were derived from eight
customers with the largest contributing approximately 9%.
14. BUSINESS SEGMENTS
The Company's revenues are derived from three closely related and
complimentary service and product categories, 1) renewable contract
equipment maintenance services, 2) equipment sales and integration
services and 3) value added equipment supply sales. While three revenue
streams accrue, all operations share common personnel, processes, assets,
facilities, capital resources and strategic management. Accordingly, any
allocation of costs and expenses between segments in an attempt to
determine net incomes for each would be arbitrary and therefore
potentially misleading.
Following are the revenues contributed by each of these categories in the
past two years:
1999 1998
---- ----
Equipment maintenance service revenues $ 650,494 $ 391,555
Equipment sales and integration services revenues 37,556 102,993
Equipment supplies and parts sales 202,485 9,080
------------ -----------
$ 890,535 $ 503,628
=========== ===========
15. RELATED PARTY TRANSACTION
During the quarter a note payable to a shareholder and Director of the
Company in the amount of $30,000 was repaid by issuance of 60,000 share of
common stock of the Company.
16. STOCKHOLDERS' EQUITY
The following transactions involving the Company's common
stock occurred in the three months ended March 31, 2000:
<TABLE>
<S> <C> <C>
Shares Value
Conversion of stockholder note payable to common stock 60,000 $ 30,000
Common stock issued for cash 643,944 150,000
Common stock issued for debt extinguishment 175,000 984,437
Common stock subscribed (net of fees of $13,000) 50,000 13,000
--------------- -------------
928,944 $ 291,437
=============== =============
</TABLE>
F-10
<PAGE>
PROFORMA INFORMATION (UNAUDITED)
The accompanying Pro Forma information is presented for
illustrative purposes only and is not necessarily indicative of the
results of operations that would have actually been reported had this
transaction occurred at the beginning of the period presented. The
accompanying Pro Forma Condensed Consolidated Statement of Operations
should be read in conjunction with the historical financial statements and
related footnotes of OneSource Technologies, Inc.
In September 1999 the Company purchased all the outstanding
stock of Cartridge Care, Inc., (Cartridge Care) in exchange for 1,887,500
shares of OneSource Technologies, Inc. common stock. The transaction was
accounted for as a purchase. Since the date of acquisition the Company has
funded the facilities relocation costs and operating losses of Cartridge
Care. It is anticipated that these costs as well as ongoing funding
requirements will result in an adjustment of the purchase price of the
acquisition.
In as much as the Company's stock was thinly traded at the
time of the purchase, the underlying value, ($369,937 or $0.318 per share)
ascribed to the shares tendered was based on share values utilized in a
number of independently negotiated capital funding transactions with third
party investors. At March 31,1999 the value assigned to the purchase
reflects management's current best estimate of what the adjusted purchase
price will be based on all presently available facts.
Pro Forma Condensed Consolidated Statements of Operations for the three months
ended March 31, 1999 Unaudited
<TABLE>
<S> <C> <C> <C> <C>
Historical
OneSource Cartidge Care Pro Forma Pro Forma
March 31, 1999 March 31, 1999 Adjustments Combined
------------ -- ----------- ------------ -----------
REVENUE, net $ 503,628 $ 246,141 $ $ 749,769
COST OF SERVICE 305,958 162,731 468,689
GROSS PROFIT 197,670 83,410 281,080
------------ ----------- ----------- -----------
OPERATING EXPENSES 183,426 75,355 258,080
Amortization of goodwill 3,572 (1) 3,572
Depreciation on increased basis of 1,330
equipment 1,330 (2)
Operating income 14,244 8,055 (4,902) 17,397
------------ ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest (income) expense 7,698 1,968 9,666
Other (income) expense (3,955) (9,057) (13,012)
------------ ----------- ----------- -----------
Total other expense 3,743 (7,089) (3,346)
NET INCOME $ 10,501 15,144 $(4,902) 20,743
============ =========== =========== ===========
</TABLE>
Note1: Pro Forma Adjustments
The following is a description of each of the pro forma adjustments: (1)
Amortization of goodwill over 15 years (2) Depriciation on adjusted basis of
equipment purchased
<PAGE>
PART III
<TABLE>
<S> <C> <C>
Item 1. Index to Exhibits
3.(i).1 * Certificate of Incorporation of L W Global (U.S.A.), Inc. filed August 27, 1996.
3.(i).2 * Certificate of Amendment of Certificate of Incorporation filed January 16, 1997.
3.(i).3 * Certificate of Amendment of Certificate of Incorporation changing name to Micor
Technologies, Inc. dated July 28, 1997.
3.(i).4 * Certificate of Amendment of Certificate of Incorporation changing name to
OneSource Technologies, Inc. dated August 22, 1997.
3.(ii).1 * Bylaws of L W Global (U.S.A.), Inc.
4.1 * Form of Private Placement Offering of 1,200,000 common shares at $0.01 per share dated
September 10, 1996.
4.2 * Form of Private Placement Offering of 300,000 common shares at $0.01 per share dated
July 14, 1997.
4.3 * Form of Private Placement Offering of 575,000 common shares at $0.50 per share dated
September 17, 1997.
10.1 * Share Exchange Agreement between L W Global (U.S.A.), Inc. and Micor
Technologies, Inc. dated July 15, 1997.
10.2 * King Soopers Agreement dated September 1, 1998.
10.3 * Attachment B to King Soopers Agreement dated September 1, 1998.
10.4 * King Soopers Contract Renewal and Extension dated September 8, 1999.
10.5 * Promissory Note by Cossack Financial, LLC in favor of the Company dated March
31, 1999.
10.6 * Agreement to Extend Promissory Note by Cossack Financial, LLC in favor of the
Company dated January 3, 2000.
10.7 * Promissory Note by Titan Capital Partners, LLC in favor of the Company dated
March 31, 1999.
10.8 * Agreement to Extend Promissory Note by Titan Capital Partners, LLC in favor of
the Company dated January 4, 2000.
10.9 * Share Exchange Agreement with Net Express, Inc. dated April 15, 1999.
10.10 * Stock Redemption Agreement (Exhibit A to Net Express Share Exchange).
10.11 * Employment Agreement (Exhibit B to Net Express Share Exchange).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Item 1. Index to Exhibits
10.12 * Stock Purchase Agreement with Blackwater Capital Partners II, L.P. dated May 26,
1999.
10.13 * Investor Rights Agreement with Blackwater Capital Partners II, L.P. dated May 26,
1999.
10.14 * Share Exchange Agreement with Cartridge Care, Inc. dated September 1, 1999.
10.15 * Lease of Scottsdale, Arizona property dated September 20, 1999.
27.1 * Financial Data Schedule.
----------------
</TABLE>
(* Filed herewith)
Item 2. Description of Exhibits
The documents required to be filed as Exhibits Number 2 and 6 and in Part
III of Form 1-A filed as part of this Registration Statement on Form 10-SB are
listed in Item 1 of this Part III above. No documents are required to be filed
as Exhibit Numbers 3 , 5 or 7 in Part III of Form 1-A and the reference to such
Exhibit Numbers is therefore omitted. The following additional exhibits are
filed hereto:
None
----------------
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
One Source Technologies, Inc.
(Registrant)
Date: July 7, 2000 By: /s/ Jerry M. Washburn
-----------------------------------------------------
Jerry M. Washburn, Chairman, President and CEO
By: /s/Maurice E. Mallette
-----------------------------------------------------
Maurice E. Mallette, Director,
President of subsidiary, interim VP
By: /s/ Donald C. Gause
-----------------------------------------------------
Donald C. Gause, Director
By: /s/William B. Meger
-----------------------------------------------------
William B. Meger, Director
