SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
Amendment No. 1
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 11, 1998
SMARTSOURCES.COM
(Exact name of registrant as specified in its charter)
Colorado 33-1933 3-D 84-1073083
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
2030 Marine Drive, Suite 100 North Vancouver, British Columbia V7P 1V7, CANADA
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (604) 986-0889
<PAGE>
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial statements of Nifco Investments Ltd. and Subsidiaries:
1. Audited financial statements for September 30, 1998 and 1997:
NIFCO INVESTMENTS LTD. AND SUBSIDIARIES
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
September 30, 1998 and 1997
<PAGE>
NIFCO INVESTMENTS LTD. AND SUBSIDIARIES
- --- ------- TABLE OF CONTENTS
SEPTEMBER 30, 1998
PAGE
Independent Auditors Report................................................ 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet.......................................................... 2
Statement of Operations.............................................. 3
Statement of Stockholders Deficit..................................... 4
Statement of Cash Flows............................................... 5
Notes to Consolidated Financial Statements............................ 6-16
<PAGE>
[GRAPHIC OMITTED]
- ------------
Certified Public Accountants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Nifco Investments Ltd. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Nifco Investments
Ltd. and Subsidiaries as of September 30, 1998, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for each of the
two years in the period ended September 30, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Nifco
Investments Ltd. and Subsidiaries as of September 30, 1998, and the results of
its operations and its cash flows for each of the two years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
/s/ MOSS ADAMS LLP
Bellingham, Washington
February 5, 1999
<PAGE>
NIFCO INVESTMENTS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
-----------------------------------------
SEPTEMBER 30, 1998 AND 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,700
Investments, available for sale, at fair value 10,100
Trade accounts receivable, net of allowance
of doubtful accounts of $11,100 405,700
----------------
Total current assets 417,500
CAPITALIZED SOFTWARE COSTS, net 111,400
PROPERTY AND EQUIPMENT, net 727,200
INVESTMENT IN JOINT VENTURE 163,800
OTHER ASSETS 6,800
----------------
TOTAL ASSETS $ 1,426,700
================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 58,500
Administrative fees payable 116,500
Sale deposit 98,300
Billings in excess of costs and estimated
earnings on uncompleted contracts 23,900
Income taxes payable 10,500
Note payable 53,100
Current portion of long-term debt 71,600
----------------
Total current liabilities 432,400
LONG-TERM LIABILITIES
Long-term debt, net of current portion 448,400
Due to stockholder 167,100
Deferred gain 2,432,000
Deferred tax liability 172,500
----------------
Total liabilities 3,652,400
----------------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS' DEFICIT
Common stock 100
Accumulated other comprehensive income 169,700
Accumulated deficit (2,395,500)
----------------
Total stockholders' deficit (2,225,700)
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,426,700
================
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>
NIFCO INVESTMENTS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
-----------------------------------------
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<S> <C> <C>
September 30, September 30,
1998 1997
REVENUES EARNED $ 1,571,100 $ 1,054,800
OPERATING EXPENSES 995,900 1,020,500
--------------- ----------------
OPERATING INCOME 575,200 34,300
--------------- ----------------
OTHER INCOME (EXPENSE)
Administrative fees (168,900) (430,700)
Write-down of investment in joint venture (103,400) (109,300)
Interest expense (63,300) (49,800)
Other income 16,000 10,500
--------------- ----------------
(319,600) (579,300)
--------------- ---------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 255,600 (545,000)
PROVISION FOR INCOME TAXES (102,700) 214,800
--------------- ----------------
NET INCOME (LOSS) $ 152,900 $ (330,200)
=============== ================
BASIC EARNINGS (LOSS) PER SHARE $0.14 $(0.31)
===== ======
DILUTED EARNINGS (LOSS) PER SHARE $0.14 $(0.31)
===== ======
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>
NIFCO INVESTMENTS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
-------------------------------------------------
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Accumulated Comprehensive Comprehensive
Shares Amount Deficit Income Income Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1996 1,076,100 $ 100 $ (2,119,200) $ 15,000 $(2,104,100)
Net loss (330,200) $ (330,200) (330,200)
Foreign currency
translation adjustment 33,500 33,500 33,500
Income tax effect (13,400) (13,400) (13,400)
-----------
Total comprehensive income $ (310,100)
============
Dividends - - (34,200) - (34,200)
----------- ------------ ------------ ------------ -----------
BALANCE, September 30, 1997 1,076,100 100 (2,483,600) 35,100 (2,448,400)
Net income 152,900 $ 152,900 152,900
Foreign currency translation
adjustment 224,300 224,300 224,300
Income tax effect (89,700) (89,700) (89,700)
-----------
Total comprehensive income $ 287,500
===========
Dividends - - (64,800) - (64,800)
----------- ------------ ------------ ------------ -----------
BALANCE, September 30, 1998 1,076,100 $ 100 $ (2,395,500) $ 169,700 $(2,225,700)
=========== ============ ============ ============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>
NIFCO INVESTMENTS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
------------ ------
YEARS ENDED SEPTEMBER 30, 1998 AND 1997
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES
Net income (loss) $ 152,900 $ (330,200)
Adjustments to reconcile net income to
net cash from operating activities
Depreciation and amortization 150,100 111,300
Write-down of investment in joint venture 103,400 109,300
Deferred income taxes 78,700 (214,800)
Realized losses on sale of investments 7,100 2,500
Loss on disposal of assets 1,700 23,800
Changes in operating assets and liabilities
Trade accounts receivable (302,900) 185,200
Other assets (7,200) -
Accounts payable and other current liabilities (37,300) (443,700)
Administrative fees payable 122,700 -
Sale deposit 103,400 -
Income taxes payable/refundable (58,200) 65,600
--------------- ----------------
Total cash from operating activities 314,400 (491,000)
--------------- ----------------
CASH FROM INVESTING ACTIVITIES
Software costs capitalized (94,300) (172,500)
Purchase of property and equipment (46,600) (483,900)
Proceeds from sale of investments 180,400 32,300
Purchase of investments (16,600) (204,000)
--------------- ----------------
Total cash from investing activities 22,900 (828,100)
--------------- ----------------
CASH FROM FINANCING ACTIVITIES
Borrowing on (repayment of) note payable, net (59,100) 92,400
Proceeds from long-term debt - 361,000
Principal repayments on long-term debt (66,100) (18,300)
Advances from (repayments to) stockholder, net (156,500) 351,300
Dividends (64,800) (34,300)
--------------- ----------------
Total cash from financing activities (346,500) 752,100
--------------- ----------------
EFFECT OF CHANGES IN EXCHANGE RATES (600) (4,300)
--------------- ----------------
NET CHANGE IN CASH (9,800) (571,300)
CASH AND CASH EQUIVALENTS, beginning of year 11,500 582,800
--------------- ----------------
CASH AND CASH EQUIVALENTS, end of year $ 1,700 $ 11,500
=============== ================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid $ 63,300 $ 49,800
=============== ================
Income taxes paid (refunded) $ 82,300 $ (65,600)
=============== ================
</TABLE>
See accompanying notes to these consolidated financial statements.
<PAGE>
NIFCO INVESTMENTS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
NOTE 1 - ORGANIZATION AND OPERATIONS
Nifco Investments Ltd. (the Company) was incorporated in the province
of British Columbia, Canada in September 1998 for the purpose of
holding all outstanding shares of Nifco Synergy Ltd. (Nifco
Synergy), Intelli Trade Corporation (Intelli Trade), and Origin
Software Corporation (Origin Software).
Nifco Synergy is a British Columbia corporation organized in 1990.
Operations are located in Vancouver, British Columbia where it is
engaged in developing and marketing computer and internet-based
knowledge management software. Over the past five years, efforts have
focused primarily on trade compliance applications, which help
businesses qualify for preferential tariff treatment under the North
American Free Trade Agreement (NAFTA).
Intelli Trade is a British Columbia corporation organized in 1994.
Operations are located in Toronto, Ontario where it provides
international trade consulting services.
Origin Software is a British Columbia corporation organized in September
1998 to hold the rights to certain software products.
On December 11, 1998, all outstanding shares of the Company were
acquired by SmartSources.com, Inc. (SmartSources) in exchange for six
million shares of Smart Sources' stock. SmartSources (formerly, Innovest
Capital Source Corporation; formerly, Telco Communications, Inc.;
formerly Cody Capital Corporation) is a Colorado corporation organized
in 1987. It has no assets, facilities or employees. In connection with
the acquisition, Company stockholders received a controlling interest in
SmartSources. Accordingly, the acquisition will be accounted for as a
reverse merger. No goodwill was recorded in connection with the
acquisition.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying financial statements are
presented in accordance with U.S. generally accepted accounting
principles. Nifco Synergy and Intelli Trade have previously issued
unaudited and unconsolidated financial statements prepared in accordance
with accounting principles generally acceptable in Canada. Dividends
paid in fiscal 1998 and 1997 were based on the Company's equity as
reported under these Canadian principles.
Principles of Consolidation - The consolidated financial statements of
Nifco Investments Ltd. and Subsidiaries include the accounts of its
wholly-owned subsidiaries, Nifco Synergy, Intelli Trade, and Origin
Software. All material intercompany accounts and transactions have been
eliminated in consolidation.
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 amounts reported in the
consolidated financial statements and accompanying notes. Examples of
estimates subject to possible revision based upon the outcome of future
events include billings in excess of costs and estimated earnings on
uncompleted contracts, amortization and valuation of capitalized
software costs, depreciation of property and equipment, and income tax
liabilities. Actual results could differ from those estimates.
Revenue Recognition - The Company recognizes revenue in accordance with
American Institute of Certified Public Accountants Statement of Position
(SOP) 97-2, Software Revenue Recognition, and SOP 98-9, Modification of
SOP 97-2 with Respect to Certain Transactions. Revenue from packaged
software products is recognized when shipped. Maintenance and
subscription revenue is recognized ratably over the contract period.
Revenue attributable to significant support is based on the price
charged for the undelivered elements and is recognized ratably over the
related product's life cycle.
Revenue from fixed-price service contracts and software development
contracts requiring significant production, modification, or
customization are recognized using the percentage-of-completion method.
Service contracts based on time incurred is recognized based on hours
worked. Costs and estimated earnings in excess of billings on
uncompleted contracts represents revenues recognized in excess of
amounts billed. Billings in excess of costs and estimated earnings on
uncompleted contracts represents billings in excess of revenues earned.
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents - All highly liquid investments with a
maturity of three months or less at the time of purchase are considered
to be cash equivalents.
Investments - Investments in marketable securities are classified as
available-for-sale and are reported at fair value. Net unrealized gains
or losses are reported as a component of comprehensive income. Realized
gains and losses are recorded using the specific identification method.
Accounts Receivable - The Company extends credit to customers on an
unsecured basis. Management establishes allowances for doubtful accounts
based on evaluation of historical and current payment trends as well as
consideration of specific collection issues that may require additional
specific allowances.
Capitalized Software and Research and Development Costs - Costs incurred
prior to establishing the technological feasibility of software products
are charged to research and development expense. Research and
development expense during fiscal 1998 and 1997 was $38,400 and $73,900,
respectively. Costs incurred once technological feasibility has been
established, but prior to release of product to customers, are
capitalized and amortized using the straight-line method over the
estimated economic useful life of the product, generally three years.
Management periodically compares unamortized costs to net realizable
value and writes off any excess.
Property and Equipment - Property and equipment is recorded at cost.
Depreciation is computed using straight-line and accelerated methods
over estimated useful lives of the assets. Estimated useful lives by
major asset category are as follows: Buildings and improvements - 20
years, computer equipment - four years, computer software - four years ,
furniture and fixtures - five years.
Investment in Joint Venture - The Company accounts for its joint venture
investment using the equity method, whereby the investment is increased
by undistributed income and additional cash investments and decreased by
losses, adjustments for impairment and cash distributions.
Valuation of Long-Lived Assets - The Company periodically reviews
long-lived assets and whenever events or changes in circumstances
indicate that the carrying amount of an asset may be impaired and not
recoverable.
Income Taxes - Income taxes are provided for the tax effect of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes. Deferred taxes are recognized for
differences between the basis of assets and liabilities for financial
statement and income tax purposes. Deferred tax assets and liabilities
represent the future tax consequences of those differences, which will
either be taxable or deductible when the assets or liabilities are
settled. Amounts are computed using enacted tax rates.
Foreign Currency Translation - Assets and liabilities of Canadian
operations, where the functional currency is the local currency, are
translated into U.S. dollars at current exchange rates. Revenues and
expenses are translated using average exchange rates prevailing during
the year. Foreign currency translation adjustments are reported as a
component of accumulated other comprehensive income.
Earnings Per Share - The Company reports earnings per share in
accordance with Statement of Financial Accounting Standards (SFAS)
No. 128, Earnings Per Share.
Segment Information - The Company reports segment information in
accordance with SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 requires that
reportable segments be designated using a management approach, which
relies on the internal organization used by management for making
operating decisions and assessing performance. SFAS No. 131 also
requires certain disclosures about products and services, geographic
areas, and major customers.
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Standard - In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. Among other provisions, SFAS No. 133 requires that entities
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those financial instruments at fair value. Accounting for changes in
fair value is dependent on the use of the derivatives and whether such use
qualifies as hedging activity. The new standard becomes effective for the
Company in fiscal 2000 and management is currently assessing the impact, if any,
it may have on financial position and results of operations.
NOTE 3 - CAPITALIZED SOFTWARE COSTS
Information related to capitalized software costs is as follows:
<TABLE>
<S> <C>
Balance, beginning of year $ 114,100
Costs capitalized 94,300
Amortization expense (85,800)
Effect of change in foreign currency exchange rates (11,200)
-------------
Balance, end of year $ 111,400
=============
Cost $ 244,700
Accumulated amortization (133,300)
--------------
$ 111,400
=============
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Land $ $ 203,000
Buildings and improvements 360,700
Computer equipment and software 325,400
Furniture and fixtures 55,500
----------
944,600
Less accumulated depreciation (217,400)
----------
$ 727,200
===========
</TABLE>
Depreciation expense in fiscal 1998 and 1997 was $64,300 and $61,400,
respectively.
NOTE 5 - INVESTMENT IN JOINT VENTURE
During fiscal 1996, the Company paid $393,100 to acquire a 40% interest
in certain software rights. Payment of additional consideration was
contingent on the level of future revenues derived from the investment.
Under terms of a joint venture agreement between the parties, the
Company appointed the seller as its exclusive agent to maintain,
develop, distribute, and market the software. Through September 30,
1998, the Company had received essentially no revenue from the venture.
Accordingly, the investment has been written down to its net realizable
value.
Effective October 1, 1998, the Company sold its interest in the
software for $163,800. Of the total sales price, $98,300 was received
prior to September 30, 1998 and is presented as a current liability in
the accompanying balance sheet.
<PAGE>
NOTE 6 - UNCOMPLETED CONTRACTS
Costs, estimated earnings, and billings on uncompleted contracts are as
follows:
<TABLE>
<S> <C>
Costs incurred on uncompleted contracts $ 5,900
Estimated earnings 2,000
Less billings to date (31,800)
----------------
$ (23,900)
===========
Presentation in the accompanying balance sheet:
Costs and estimated earnings in excess of billings
on uncompleted contracts $ -
Billings in excess of costs and estimated earnings
on uncompleted contracts (23,900)
----------------
$ (23,900)
========
</TABLE>
NOTE 7 - NOTE PAYABLE AND LONG-TERM DEBT
Note Payable
Through Nifco Synergy, the Company has a line of credit facility with a
Canadian bank that allows for borrowing up to $163,800 at the bank's
prime rate plus 1.5%. The line is collateralized by general assets of
Nifco Synergy and guarantees of Intelli Trade and the majority
stockholder.
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable to a Canadian bank in monthly installments of $4,300 plus
interest at prime plus 1.25%, collateralized by general assets of Nifco
Synergy, due August 2000. $ 94,100
Mortgage payable to a Canadian bank in monthly installments of $1,700
including interest at 8.75%, collateralized by real estate of Nifco
Synergy and assignment of rents, guaranteed by the majority
stockholder, due in 2011. 156,500
Mortgages payable to Canadian finance companies in aggregate monthly
installments of $2,200, including interest at rates of 7% and 9%,
collateralized by real estate, guaranteed byt he majority stockholder,
due January 2001 and June 2002. 269,400
----------------
Total debt 520,000
Less current portion 71,600
Long-term portion ----------------
$ 448,400
----------------
</TABLE>
<PAGE>
NOTE 7 - NOTE PAYABLE AND LONG-TERM DEBT (Continued)
Long-term debt matures as follows:
Year Ending
September 30,
1999 $ 71,600
2000 63,900
2001 99,000
2002 159,700
2003 9,500
Thereafter 116,300
----------------
$ 520,000
----------------
Under the terms of its loan agreements with the bank, the Company is
subject to various covenants, including requirements to maintain certain
financial ratios.
NOTE 8 - DEFERRED GAIN
During fiscal 1995 and 1996, the Company entered into two software sale
agreements with Columbia Diversified Software Fund Limited Partnership
(Columbia), whereby it sold the rights to its principal software
product, ORIGIN. The transactions were structured to take advantage of
certain Canadian tax laws designed to provide tax incentives to
investors in software applications. To facilitate the transactions, the
Company obtained an appraisal of the value of ORIGIN from an independent
third-party. The valuation served as a basis for determining the sales
price to Columbia. During fiscal 1995 and 1996, the Company received
cash payments totaling $2,432,000 and took recourse notes totaling
$7,774,400 for the balance of the sales price. Approximately half the
notes are due from Columbia and half are notes assigned to the Company
that are payable to Columbia from its limited partners. The notes are
due in 2005 and 2009 and bear interest at rates that have varied over
time based on periodic amendments to the original terms of the notes.
The current rate is 3%.
Pursuant to the agreements, the Company was appointed Columbia's agent
to maintain, develop and market ORIGIN for a period of not less than 50
years. Fees for these services were established at an amount equal to
20% of sales revenues from ORIGIN. The agreements also specified the
allocation of cash flows generated from sales of ORIGIN, based on the
following schedule:
The first 20% to be paid to the Company for maintenance,
development and marketing expenses.
Next, an amount to be paid to the Company equal to the amount of
accrued and unpaid interest owing on the notes receivable.
Then, 55% of the remaining balance to be paid to limited partners
of Columbia.
Finally, after allowance for a reasonable reserve for the working
capital needs of Columbia, the remainder to be paid to the Company
to reduce the principal balance of the notes receivable.
The allocation of cash flows is scheduled to be modified once the
principal amount of the notes is paid off, after which the Company will
retain 90% of sales revenue.
Subsequent to execution of the agreements, the Company and Columbia
agreed not to adhere strictly to the allocation of cash flows outlined
above, due to practical business considerations. Generally, the Company
has paid to Columbia an amount equal to the interest accruing on the
notes, plus a negotiated annual fee payable to Columbia for a portion of
its administrative expenses. The Company, in turn, has retained the
remaining balance of ORIGIN sales revenue and has received payment from
Columbia for the interest accruing on the
<PAGE>
NOTE 8 - DEFERRED GAIN (Continued)
notes. Neither the Company or Columbia have otherwise tracked and
allocated cash flows based on the original schedule outlined above.
During the years ended September 30, 1998 and 1997, the Company paid
administrative fees to Columbia in the amount of $168,900 and $430,700,
respectively. At September 30, 1998, a total of $116,500 of fees was due
to Columbia.
Based on the terms of the agreements, together with subsequent
modifications, the Company has concluded that it has a significant
continuing economic interest in ORIGIN and has, in substance, retained
the risks and rewards of ownership. Accordingly, the agreements have
been accounted for as a sale of a tax asset rather than a sale of
software rights.
Revenue Canada is currently reviewing the valuation of ORIGIN used to
determine the sales price to Columbia. In the event a lower value is
placed on the software, the possibility exists that Revenue Canada may
question the amount of the tax benefits claimed by Columbia and its
investors. Under the agreements, the Company is not required to
indemnify the Partnership or its investors in the event of a denial of
the benefits claimed. However, due to uncertainties surrounding the
ultimate outcome of this matter, gain on the sale equal to the
$2,432,000 of cash received has been deferred.
The Company has not recognized the $7,774,400 of notes receivable
because of uncertainties surrounding both the amount and timing of
collection. Through September 30, 1998, approximately $128,000 of
principal payments on the notes had been received. Because the Company
has concluded that it has retained the risks and rewards of ownership,
all interest and principal payments received on the notes, resulting
from cash generated from sales of ORIGIN, are classified as revenue in
the accompanying statement of operations.
Subsequent to September 30, 1998, the Company's subsidiary, Origin
Software Corporation, was in the process of negotiating to repurchase
the rights to the software product and obtain release from any
contingent liability related to the original sale.
NOTE 9 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<S> <C> <C>
1998 1997
--------------- ----------
Current Canadian federal and provincial expense $ 24,000 $ -
Deferred Canadian federal and provincial expense (benefit) 78,700 (214,800)
--------------- ----------------
$ 102,70 $ (214,800)
========== ==========
The total tax provision differs from the amount computed using the U.S.
federal statutory income tax rate as follows:
1998 1997
--------------- ----------
Pretax net income (loss) $ 255,600 $ (545,000)
U.S. statutory rates 34 % 34%
Tax at statutory rates 86,900 (185,300)
Excess income tax payable (refundable) in Canadian jurisdictions 15,800 (29,500)
--------------- ----------------
$ 102,700 $ (214,800)
=============== ================
</TABLE>
<PAGE>
NOTE 9 - INCOME TAXES (Continued)
Tax effects of temporary differences that give rise to deferred tax
assets (liabilities), based on a 40% Canadian tax rate, are as follows:
Assets
Deferred gain $ 1,541,000
Research and development costs 110,700
---------------
1,651,700
Liabilities
Investment in joint venture (778,000)
Depreciation (77,000)
Capitalized software costs (44,600)
Foreign currency translation adjustments (113,200)
-------------
(1,012,800)
Valuation allowance (811,400)
-------------
Net deferred tax liability $ (172,500)
===============
The Company believes uncertainty exists surrounding realization of
certain deferred tax assets. Accordingly, it has recorded an $811,400
valuation allowance to reduce deferred tax assets to an amount that will
more likely than not be realized.
NOTE 10 - EARNINGS PER SHARE
The numerators and denominators of basic and diluted earnings per share
are as follows:
1998 1997
--------- ----------
Numerator - net income (loss) $ 152,900 $ (330,200)
=============== ================
Denominator - weighted average number of
shares outstanding (Note 11) 1,076,100 1,076,100
=============== ================
At September 30, 1998, the Company had no potential common shares that
would have had a dilutive effect.
NOTE 11 - STOCKHOLDERS' EQUITY
Common Stock
The Company has a single class of no par value common stock. Authorized
shares total ten million. At September 30, 1998, one share had been
issued to the Company's registered agent in connection with the
Company's incorporation on September 28, 1998. Subsequent to September
30, 1998, a total of 1,076,100 shares were issued. As discussed in Note
1, on December 11, 1998, all issued and outstanding shares were acquired
by SmartSources.com, Inc.
Redeemable Preferred Stock
Subsequent to September 30, 1998, the Board of Directors authorized the
creation of 100,000 shares of $0.01 par value redeemable preferred
stock. The preferred stock is redeemable by the Company at the
discretion of the Board of Directors at a redemption value equal to an
agreed upon fair value of the consideration received by the Company for
shares at the date of issuance. Upon thirty days notice, preferred
stockholders may require the Company to redeem their shares at the
redemption value. The preferred stock is ranked in priority to common
stock in the event of liquidation, dissolution, or winding up of the
affairs of the Company. It has no voting rights or rights to dividends.
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Operating Leases
In the course of business, the Company obtains the use of certain office
equipment under terms of operating lease agreements. Future minimum
lease payments are as follows:
Year Ending
September 30,
1999 $ 21,200
2000 20,000
2001 7,600
2002 2,600
---------
$ 51,400
---------
Intelli Trade leases its office under an annual renewable lease
currently requiring monthly payments of $3,200. Total lease payments
were $58,300 and $60,100 in 1998 and 1997, respectively.
Sale of Software Rights
As discussed in Note 8, during fiscal 1995 and 1996, the Company sold
all rights to its principal software product, ORIGIN, to Columbia
Diversified Software Limited Partnership ("Columbia"). The sale
transactions were structured to take advantage of certain Canadian tax
laws designed to provide tax incentives to investors in software
applications. In connection with the sale, the Company obtained an
appraisal of the value of ORIGIN from an independent third-party to help
determine the sales price to Columbia.
Revenue Canada is currently reviewing the valuation of ORIGIN. In the
event a lower value is placed on the software, the possibility exists
that Revenue Canada may question the amount of the tax benefits claimed
by Columbia and its investors. Under the agreements, the Company is not
required to indemnify the Partnership or its investors in the event of a
denial of the benefits claimed.
As discussed also in Note 8, certain provisions in the sale agreements
specify the allocation of cash flows from sales of ORIGIN. By mutual
agreement, the Company and Columbia agreed not to adhere strictly to
these provisions. Subsequent to September 30, 1998, the Company's
subsidiary, Origin Software Corporation, was in the process of
negotiating to repurchase the rights to the software product and obtain
release from any contingent liabilities related to the original sale.
Cost Sharing and Royalty Agreement
During fiscal 1996, the Company entered into a technology and
applications development project agreement (the Project Agreement) with
a not-for-profit organization (the Organization) that serves to disburse
funds on behalf of the Canadian Minister of Industry. Funds are provided
as part of a cost sharing arrangement designed to facilitate development
of Canada's communications infrastructure. Under terms of the Project
Agreement, the Company is reimbursed for a portion of costs incurred to
develop advanced network technologies and applications. Funds committed
to the Company under this arrangement total $262,000. At September 30,
1998, approximately $189,200 of available funds had been received or
committed, including $15,200 due to the Company for holdbacks on
qualified claims pending completion of the development project. This
amount is included in accounts receivable in the accompanying balance
sheet.
In turn, the Company is obligated to pay a 3% royalty to the
Organization based on sales of any and all products whose development
was funded under the Project Agreement. Total royalties to be paid are
limited to the lesser of twice the amount of funding received or the
amount of royalties due during the period September 1997 through March
2001. At September 30, 1998, the project was not complete and management
is currently unable to assess the probable timing of completion or
estimate a range of the amount of future royalties that might ultimately
be due to the Organization.
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
Year 2000 Issue
The Company is currently reviewing its computer software programs and
hardware components to identify those areas, if any, that could be
affected by the Year 2000 issue. The Company is also reviewing how the
Year 2000 issue may impact the computer processing systems of its
customers, suppliers, banks and other outside parties. In connection
with this process, management is making an assessment of the potential
expense, if any, to be incurred to ensure all Company computer systems
are Year 2000 compliant.
Because of the unprecedented nature of the Year 2000 issue, its effects
and the success of related remediation efforts, if any are required,
will not be fully determinable until the year 2000 and thereafter.
NOTE 13 - RELATED PARTIES
The Company is affiliated through common ownership with the following
entities.
Tradespace Technologies Corporation (Tradespace)
Tradespace is a Delaware corporation operating in Vancouver, British
Columbia where it develops software applications related to electronic
barter and trade.
PMG Project Management Groupware Inc. (PMG)
PMG is a British Columbia corporation operating in Vancouver, British
Columbia where it develops and markets software applications to assist
school districts with centralized purchasing and inventory control.
Synergy Strategy Inc. (Synergy Strategy)
Synergy Strategy is a British Columbia corporation organized to contract
with a U.S. company to market financial information services technology
in Mexico.
Transactions with these entities are summarized as follows:
1998 1997
------------- ----------
Sales to affiliates $ 722,700 $ 105,500
============== ===========
Amounts due from affiliates,
included in trade accounts
receivable $ 270,200 $ -
=============== =========
NOTE 14 - CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, investments and accounts receivable. The Company places its
temporary cash investments with major financial institutions. At
September 30, 1998, investments consist of common shares of a single
U.S. company in the computer industry. The Company extends credit to
customers based on evaluation of customers' financial condition and
credit history. Collateral is generally not required. Customers include
Canadian and U.S. entities engaged in international trade and software
development in North America. One customer accounted for 64% of accounts
receivable at September 30, 1998.
NOTE 15 - SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Segment Information
The Company's primary operations consist of the development and sale of
trade compliance software products to entities subject to the North
American Free Trade Agreement. Other services include international
trade consulting and software engineering contracts. Management assesses
the operations of its software sales and engineering activities and its
consulting activities as separate segments. The following tables and
schedules summarize certain information about these segments.
<PAGE>
NOTE 15 - SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS (Continued)
<TABLE>
<CAPTION>
1998 1997
---------------------------------------- -----------------------
Software Software
Sales and Trade Sales and Trade
Development Consulting Total Development Consulting Total
<S> <C> <C> <C> <C> <C> <C>
External revenues $ 1,219,200 $ 351,900 $ 1,571,100 $ 788,900 $ 265,900 $ 1,054,800
Intersegment revenues 9,300 16,200 25,500 10,500 - 10,500
Interest expense 62,200 1,100 63,300 47,900 1,900 49,800
Depreciation and
amortization 147,600 2,500 150,100 110,600 700 111,300
Income tax expense
(benefit) 90,700 12,000 102,700 (214,800) - (214,800)
Segment profit (loss) 109,500 68,900 178,400 (312,600) (7,100) (319,700)
Segment assets 1,363,600 88,000 1,451,600 1,541,200 71,300 1,612,500
Expenditures for
segment assets 38,500 8,100 46,600 479,500 4,400 483,900
Investment in joint
venture 163,800 - 163,800 289,400 - 289,400
</TABLE>
<TABLE>
<S> <C> <C>
1998 1997
--------------- ---------
Total revenues for reportable segments $ 1,596,600 $ 1,065,300
Less intersegment revenues (25,500) (10,500)
--------------- ----------------
Consolidated total $ 1,571,100 $ 1,054,800
=============== ================
Total income (loss) before tax for reportable segments $ 281,100 $ (534,500)
Elimination of intersegment income (25,500) (10,500)
--------------- ----------------
Consolidated total $ 255,600 $ (545,000)
=============== ================
Total assets for reportable segments $ 1,451,600 $ 1,612,500
Elimination of intersegment receivables (24,900) (53,700)
--------------- ----------------
Consolidated total $ 1,426,700 $ 1,558,800
=============== ================
</TABLE>
Geographic Information
Following is a summary of revenues and long-lived assets related to the
respective countries in which the Company operates. Revenues are
attributed to countries based on location of customers.
<TABLE>
<CAPTION>
1998 1997
---------------------------------- --------------------
Long-Lived Long-Lived
Revenues Assets Revenues Assets
<S> <C> <C> <C> <C>
Canada $ 636,000 $ 838,600 $ 754,500 $ 937,400
United States 935,100 - 300,300 -
--------------- --------------- ---------------- ----------
Total $ 1,571,100 $ 838,600 $ 1,054,800 $ 937,400
=============== =============== ================ ================
</TABLE>
Major Customers
In 1998, revenues from two related parties, Tradespace Technologies
Corporation (Tradespace) and PMG Project Management Groupware, Inc.,
accounted for 20% and 26% of the Company's consolidated revenues,
respectively. In 1997, revenues from Tradespace accounted for 10% of
consolidated revenues. Revenues from these customers were earned in the
Company's software sales and development segment.
<PAGE>
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash and cash equivalents, accounts receivable and
payable, and other current liabilities approximate their carrying
amounts. The fair value of advances due to stockholder approximates its
carrying amount because of the short-term nature of the financial
instrument. The fair value of other long-term debt approximate their
carrying amount because the instruments bear interest at rates similar
to the Company's incremental borrowing rate.
<PAGE>
2. Unaudited financial statements for the greater ended December 31, 1998:
NIFCO INVESTMENTS LTD. AND SUBSIDIARIES
BALANCE SHEET (UNAUDITED)
December 31, 1998
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 18,900
Investments, available for sale, at fair value 10,800
Trade accounts receivable, net 141,100
------------
Total current assets 170,800
CAPITALIZED SOFTWARE COSTS, net 90,400
PROPERTY AND EQUIPMENT, net 663,600
OTHER ASSETS 8,400
------------
TOTAL ASSETS $ 933,200
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 110,200
Administrative fees payable 154,300
Income taxes payable 22,700
Current portion of long-term debt 71,600
-------------------
Total current liabilities 358,800
------------------
LONG-TERM LIABILITIES
Long-term debt, net of current portion 434,000
Due to stockholder 69,000
Deferred gain 2,414,200
Deferred income taxes 105,300
-------------------
Total liabilities 3,381,300
------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock 100
Accumulated other comprehensive income 177,500
Accumulated deficit (2,625,700)
--------------------
Total stockholders' deficit (2,448,100)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 933,200
===================
<PAGE>
NIFCO INVESTMENTS LTD AND SUBSIDIARIES
STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended December 31, 1998
REVENUES EARNED $ 161,600
OPERATING EXPENSES (213,500)
-------------------
OPERATING LOSS (51,900)
-------------------
OTHER INCOME (EXPENSE)
Administrative fees (38,700)
Loss on disposal of assets (48,400)
Interest expense (12,400)
Other 1,500
-------------------
(98,000)
LOSS BEFORE PROVISION ------------------
FOR INCOME TAXES (149,900)
PROVISION FOR INCOME TAXES 59,900
------------------
NET LOSS $ (90,000)
============
</TABLE>
(b) Pro forma financial information.
The unaudited pro forma condensed combined statement of operations for the nine
months ended September 30, 1998 and the year ended December 31,1997 combine
historical statements of operations for the Company and Nifco Investments Ltd.
and Subsidiaries ("Nifco") as if the acquisition had occurred on January 1,
1997.
The unaudited pro forma condensed combined statement of operations for the nine
months ended September 30, 1998 combines historical financial information of the
Company for the nine months ended September 30, 1998 and Nifco for the nine
months ended September 30, 1998. The unaudited pro forma condensed combined
statement of income for the year ended December 31, 1997 combines historical
financial information of the Company for the year ended December 31, 1997 and
Nifco for the year ended September 30, 1997. As the most recent fiscal year end
of Nifco differs from the Company's fiscal year end by less than 93 days, no
adjustments were made to Nifco's financial statements for the purpose of the pro
forma presentation. In the opinion of management, the results of operations of
the consolidated company would not have been significantly different than the
results previously reported, and accordingly no pro forma adjustments have been
reported in the following pro forma statements of income or the pro forma
balance sheet.
The business of these entities is subject to seasonal fluctuations and,
therefore, the results of operations for periods less than twelve months may not
be indicative of annual results. The pro forma financial statements are not
necessarily indicative of the financial position or results of operations which
would actually have been reported had the transaction been consummated on
January 1, 1997 or which may be reported in the future.
The pro forma data should be read in conjunction with the notes to unaudited pro
forma condensed combined financial information and the audited historical
financial statements and notes thereto of Nifco contained elsewhere herein.
<PAGE>
SMARTSOURCES.COM AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
HISTORICAL
NIFCO INVESTMENTS SMARTSOURCES.COM PRO FORMA ADJUSTMENTS(A) PRO FORMA COMBINED
-------------------------------------------------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,700 $ 1,700
Investments, available for sale,
at fair value 10,100 10,100
Trade accounts receivable, net 405,700 405,700
-------------------------------------------------------- --------------
Total current assets 417,500 0 0 417,500
CAPITALIZED SOFTWARE COSTS, net 111,400 111,400
PROPERTY AND EQUIPMENT, net 727,200 727,200
INVESTMENT IN JOINT VENTURE 163,800 163,800
OTHER ASSETS 6,800 6,800
======================================================== ==============
TOTAL ASSETS $ 1,426,700 0 0 $ 1,426,700
======================================================== ==============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 58,500 $ 77,200 $ 135,700
Administrative fee's payable 116,500 116,500
Sale deposit 98,300 98,300
Billings in excess of costs and estimated
earnings on uncompleted contracts 23,900 23,900
Income taxes payable 10,500 10,500
Note payable 53,100 134,400 187,500
Current portion of long term debt 71,600 71,600
-------------------------------------------------------- ---------------
Total current liabilities 432,400 211,600 0 644,000
LONG TERM DEBT, net of current portion 448,400 448,400
DUE TO STOCKHOLDER 167,100 167,100
DEFERRED GAIN 2,432,000 2,432,000
DEFERRED TAX LIABILITY 172,500 172,500
-------------------------------------------------------- --------------
Total liabilities 3,652,400 211,600 0 3,864,000
-------------------------------------------------------- -------------
STOCKHOLDERS' DEFICIT
Common stock 100 1,000 1,100
Accumulated other comprehensive income 169,700 169,700
Accumulated deficit (2,395,500) (212,600) (2,608,100)
-------------------------------------------------------- ---------------
Total stockholders deficit (2,225,700) (211,600) 0 (2,437,300)
======================================================== ==============
TOTAL LIABILIITES AND STOCKHOLDERS' DEFICIT $ 1,426,700 $0 $0 $ 1,426,700
======================================================== ==============
</TABLE>
(A) In the opinion of management there would not be any proforma
adjustments to the condensed combined balance sheet had the
transaction been completed on September 30, 1998
<PAGE>
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
HISTORICAL
NIFCO INVESTMENTS SMARTSOURCES.COM PRO FORMA ADJUSTMENTS PRO FORMA COMBINED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES EARNED $ 1,178,300 $ 0 $ 1,178,300
OPERATING EXPENSES 746,900 45,200 792,100
---------------------------------------------------------- ------------
OPERATING INCOME 431,400 (45,200) 0 386,200
OTHER INCOME(EXPENSE)
Administrative fees (126,700) 0 (126,700)
Write-down of investment in joint venture (77,600) 0 (77,600)
Interest expense (47,400) 0 (47,400)
Other income 12,000 0 12,000
---------------------------------------------------------- -----------
(239,700) 0 0 (239,700)
---------------------------------------------------------- ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 191,700 (45,200) 0 146,500
PROVISION FOR INCOME TAXES (76,700) 0 (76,700)
========================================================== ===========
NET INCOME $ 115,000 $ (45,200) $ 0 $ 69,800
========================================================== ============
Basic earnings per share $ 0.11 $ (0.0009) $ (0.0991) A $ 0.01
========================================================== ===========
Diluted earnings per share $ 0.11 $ (0.0009) $ (0.0991) A $ 0.01
========================================================== ===========
Shares of common stock used in computing earnings per share:
Basic 1,076,100 50,000,000 (44,406,100) B 6,670,000
========================================================== ===========
Diluted 1,076,100 50,000,000 (44,406,100) B 6,670,000
========================================================== ===========
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
A To reflect earnings per share as if recapitalized share amounts had
been outstanding at September 30, 1998
B To reflect outstanding shares as if recapitalized share amounts had
been outstanding at September 30, 1998
<PAGE>
SMARTSOURCES.COM AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL
NIFCO INVESTMENTS SMARTSOURCES.COM PRO FORMA ADJUSTMENTS PRO FORMA COMBINED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES EARNED $ 1,054,800 $ 0 $ 1,054,800
OPERATING EXPENSES 1,020,500 166,400 1,186,900
---------------------------------------------------------- -----------
OPERATING INCOME 34,300 (166,400) 0 (132,100)
OTHER INCOME(EXPENSE)
Administrative fees (430,700) 0 (430,700)
Write-down of investment in joint venture (109,300) 0 (109,300)
Interest expense (49,800) (2,300) (52,100)
Other income 10,500 0 10,500
---------------------------------------------------------- ----------
(579,300) (2,300) 0 (581,600)
---------------------------------------------------------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (545,000) (168,700) 0 (713,700)
PROVISION FOR INCOME TAXES 214,800 214,800
========================================================== ===========
NET INCOME $ (330,200) $ (168,700) $ 0 $ (498,900)
========================================================== ===========
Basic earnings per share $ (0.31) $ (0.0034) $ 0.2434 A $ (0.07)
========================================================== ===========
Diluted earnings per share $ (0.31) $ (0.0034) $ 0.2434 A $ (0.07)
========================================================== ===========
Shares of common stock used in computing earnings per share:
Basic 1,076,100 50,000,000 (44,406,100) B 6,670,000
========================================================== ===========
Diluted 1,076,100 50,000,000 (44,406,100) B 6,670,000
========================================================== ===========
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
A To reflect earnings per share as if recapitalized share amounts had
been outstanding at December 31, 1997
B To reflect outstanding shares as if recapitalized share amounts had
been outstanding at December 31, 1997
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SMARTSOURCES.COM, INC.
Date: March 11, 1999 /s/:Nathan Nifco
By: --------------------------------
Nathan Nifco, Chairman, President,
Chief Executive Officer
<PAGE>
Exhibit Index
Share exchange agreement, dated December 11, 1998, among Nathan Nifco and
Dina Nifco, residents of West Vancover, British Columbia, Canada, and the Nifco
Family Trust, a British Columbia, Canada trust, Nifco Investments Ltd., a
British Columbia Corporation, and SmartSources.com, Inc., a Colorado Corporation
formerly known as Investment Capital Sources Corporation. (Previously filed)
