<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-32824
5,425,000 SHARES
SMARTSOURCES.COM, INC.
COMMON STOCK
Our primary business focus is our Internet-based, content-management
technology known as kServer(TM). We seek to develop and provide web-based
solutions to communication and content-management needs by applying kServer(TM).
Although our primary focus is content-management solutions, we have
historically focused on our proprietary trade compliance software known as
ORIGIN(TM). We also provide international trade consulting services to
businesses operating under NAFTA and other trade regulatory requirements. See
"Business."
We have prepared this prospectus to allow holders of our convertible
debentures to sell up to 4,900,000 shares of our Common Stock which they may
acquire on conversion of the debentures or exercise of related investment
options and warrants related to the debentures. We have also prepared this
prospectus to allow other persons to sell up to 525,000 shares of our Common
Stock which they may acquire upon exercise of other options and warrants or
which they acquired in exchange for subsidiary shares. The holders of our
debentures and such other persons are collectively referred to as the "Offering
Shareholders," and all such shares of Common Stock are collectively referred to
as the "Shares."
We will receive no portion of the proceeds from the conversion of
debentures or the sale of Shares by the Offering Shareholders, but we will
receive proceeds, if any, from the exercise of investment options or warrants
related to the debentures or the exercise of other options or warrants by the
Offering Shareholders. The Offering Shareholders are under no obligation to
exercise any investment options, options or warrants. We will bear the expenses
in connection with the registration of the Shares. See "Plan of Distribution,"
"Use of Proceeds" and "Offering Shareholders."
The Shares covered by this prospectus may be offered and sold in
accordance with the Plan of Distribution described on page 30.
Our Common Stock is traded on the OTC Electronic Bulletin Board ("OTC
Bulletin Board") under trading symbol SSXX. On August 10, 2000, the closing
price for our Common Stock as reported on the OTC Bulletin Board was $0.843 per
share.
See "Risk Factors," on page 4 of this prospectus for a discussion of
certain factors that should be considered by prospective purchasers.
Neither the Securities and Exchange Commission nor any state
securities commission has passed upon the accuracy or
adequacy of this prospectus. Any representation to the
contrary is a criminal offense.
The date of this prospectus is August 16, 2000.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FORWARD-LOOKING STATEMENTS AND CERTAIN DEFINED TERMS ........................................................... 1
PROSPECTUS SUMMARY ............................................................................................. 1
RISK FACTORS ................................................................................................... 4
USE OF PROCEEDS ................................................................................................ 11
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS ........................................................ 11
DIVIDEND POLICY ................................................................................................ 11
CAPITALIZATION ................................................................................................. 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .......................... 12
BUSINESS ....................................................................................................... 16
MANAGEMENT ..................................................................................................... 22
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ................................................. 27
OFFERING SHAREHOLDERS .......................................................................................... 28
PLAN OF DISTRIBUTION ........................................................................................... 30
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE ........................................................ 31
CERTAIN TRANSACTIONS ........................................................................................... 32
DESCRIPTION OF SECURITIES ...................................................................................... 32
SHARES ELIGIBLE FOR FUTURE SALE ................................................................................ 33
LEGAL MATTERS .................................................................................................. 33
EXPERTS ........................................................................................................ 34
ADDITIONAL INFORMATION ......................................................................................... 34
INDEX TO FINANCIAL STATEMENTS .................................................................................. F-1
</TABLE>
<PAGE> 3
FORWARD-LOOKING STATEMENTS AND CERTAIN DEFINED TERMS
Certain statements incorporated by reference or made in this
prospectus under the captions "Prospectus Summary," "Risk Factors," and
"Business" and elsewhere in this prospectus are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are subject to the safe harbor provisions of that act. The
statements include, without limitation, forward-looking statements about the
competitiveness of the Internet technology and services industries and our
strategies and other statements contained herein that are not historical facts.
The words "anticipate," "believe," "estimate," "intends," "will" and similar
expressions are generally intended to identify forward-looking statements.
Because such statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements, including changes in
general economic and business conditions (including in the Internet technology
and services industries), actions of competitors, the extent to which we are
able to develop new products, services and markets for such products, changes
in our business strategies and other factors discussed under "Risk Factors."
As used in this prospectus, unless the context requires otherwise, (a)
the "Company", "we" or "us" mean SmartSources.com, Inc. and its predecessors
and consolidated subsidiaries, (b) "Common Stock" means our common stock, no
par value; (c) "Offering" means the offering of Shares contemplated by this
prospectus; (d) "Securities Act" means the Securities Act of 1933, as amended;
(e) "Exchange Act" means the Securities Exchange Act of 1934, as amended; and
(f) "SEC" means the Securities and Exchange Commission.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary is not complete and may not contain all of the
information that you should consider before investing in the Shares. You should
read the entire prospectus carefully.
OUR COMPANY
OVERVIEW
Our primary business focus is our Internet-based, content-management
technology known as kServer(TM). We seek to develop and provide web-based
solutions to communication and content-management needs by applying kServer(TM).
We have spent the past two years developing this technology and have recently
rolled out a commercial version of the product. The kServer(TM) technology
allows our customers to expand their knowledge base, streamline content
delivery, leverage self-service data and applications, and ultimately increase
web-based revenues via a vast network of affiliate sites. With kServer(TM), a
business can manage relationships, automate content deployment across an
unlimited number of web-sites, and deliver personalized communication and
highly-targeted applications to its web users.
Web-sites and portals developed with the kServer(TM) technology, known
as kSites, enable all authorized users to create, assemble, publish,
personalize and manage vital business information easily in "real time,"
without any computer programming experience or knowledge. Through the use of a
unique content-management system, businesses can transform the Internet browser
from a one-way viewer to a personalized, two-way application interface.
Although our primary focus is content-management solutions, we have
historically focused on our proprietary trade compliance technology known as
ORIGIN(TM), a Windows-based software system designed to automate the complex
process of international trade and customs compliance. ORIGIN(TM) is an expert
system that contains a knowledge base and determination engine to interpret
NAFTA's Rules of Origin. We also provide international trade consulting
services to businesses operating under NAFTA and other trade regulatory
requirements.
1
<PAGE> 4
STRATEGY
Our strategy includes:
o design of innovative web-based content-management solutions
using our own and existing technology
o establishment of partnerships with key value-chain
participants to enable the creation of a "complete solution"
o collaboration with customers to develop customized
applications uniquely suited to solve their
content-management problems
o continual development of our technology base to extend our
source of advantage
o creation of an open platform, publishing and training to
build a network of kServer(TM) specialists who will promote
the use and potential of our technology
o identification of and focus on carefully selected vertical
markets
HISTORY AND STRUCTURE
Effective December 11, 1998, we completed the acquisition of Nifco
Investments Ltd. and subsidiaries. The acquisition was effected by the exchange
of 6,000,000 shares of Common Stock for all outstanding shares of Nifco
Investments. In connection with the transaction, the shareholders of Nifco
Investments obtained control of the Company; accordingly, the transaction has
been characterized as a reverse acquisition (the "Reverse Acquisition"). As we
had no material amount of assets or liabilities, the transaction was accounted
for as a re-capitalization of Nifco Investments, rather than a business
combination. We effected a 1-for-75 reverse stock split on October 15, 1998,
prior to the reverse acquisition, and all references to share and per share
data have been adjusted accordingly. The Company was formerly named Innovest
Capital Sources Corporation. We conduct our activities through five direct or
indirect subsidiaries: SmartSources.com Technologies, Inc. ("Technologies");
Intelli Trade, Inc.("Intelli Trade"); Origin Software Corporation ("Origin
Software"); Infer Technologies, Inc. ("Infer Technologies") and Nifco
Investments Ltd.
2
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Shares offered by Offering Shareholders: 5,425,000
Shares offered by the Company: None
Shares outstanding as of August 10, 2000: 12,512,666
Use of proceeds from conversion of debentures We will receive no proceeds from the conversion
and sale of Shares: of the debentures, nor will we receive any of the
proceeds from sale of the Shares by the Offering
Shareholders.
Use of proceeds from exercise of the investment options, We will receive the exercise price of any investment
options and warrants: options and warrants related to the debentures and of
any other options or warrants that may be
exercised by the Offering Shareholders. Assuming
no accrued interest and conversion in full of the
debentures and exercise in full of the related
investment options at the fixed conversion price
of $9.7125 per share and exercise in full of the
related warrants at their exercise price of $11.10
per share, the gross proceeds to us would be
$8,663,000. Assuming exercise of all options and
warrants held by the other Offering Shareholders,
the gross proceeds to us would be $2,165,000. We
intend to use any proceeds from exercise of the
investment options, options and warrants for
working capital and general corporate purposes.
OTC Bulletin Board Symbol: SSXX
</TABLE>
3
<PAGE> 6
RISK FACTORS
In addition to the other information contained in this prospectus,
prospective investors should consider carefully the following factors before
deciding to invest in shares of our Common Stock.
WE HAVE A LIMITED OPERATING HISTORY. IT WILL BE DIFFICULT TO EVALUATE OUR
BUSINESS IN MAKING AN INVESTMENT DECISION.
We are still in the early stages of our development, which makes the
evaluation of our business operations and prospects difficult. You should
consider the risks and difficulties frequently encountered by early stage
companies in new and rapidly emerging markets, particularly those companies
whose businesses depend on the Internet. These risks and difficulties, as they
apply to us in particular, are:
o Potential fluctuations in operating results and uncertain
growth rates
o Limited market acceptance of our products
o Concentration of our revenues in a single product
o Our dependence on a small number of orders for most of our
revenue
o Our need to expand our direct sales force and indirect sales
channels
o Our need to manage rapidly expanding operations
o Our need to attract, train and retain qualified personnel
WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES IN THE FUTURE. IF WE DO NOT
ACHIEVE OR SUSTAIN PROFITABILITY IN THE FUTURE, OUR VIABILITY WILL BE IN DOUBT
AND OUR STOCK PRICE WILL DECLINE.
As of June 30, 2000, we had an accumulated deficit of approximately
$7.5 million, and we expect to incur losses at least through 2002. To date, we
have funded operations from the sale of equity and convertible securities and
have marginally generated cash from operations. We expect to continue to incur
significant costs developing and introducing enhancements to the kServer(TM)
Internet solutions and expanding our direct sales and marketing activities. Our
losses could impede our ability to compete effectively by creating doubt among
our potential customers as to our long-term viability and cause a decrease in
the market price of our Common Stock. If we are to achieve profitability, we
will need to increase our revenues significantly. We cannot predict when we
will become profitable, if at all.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT, AND IF
WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE
MARKET PRICE OF OUR COMMON STOCK MAY DECREASE SIGNIFICANTLY.
Our quarterly operating results have varied in the past and may vary
significantly in the future. Because our business is evolving rapidly and we
have a limited operating history, we have limited experience in forecasting our
revenues. Since our operating results are volatile and difficult to predict, we
believe that period-to-period comparisons of our operating results are not a
reliable indication of our future performance. Our future quarterly operating
results may be below the expectations of public market analysts and investors.
In this event, the market price of our Common Stock may decrease significantly.
OUR QUARTERLY RESULTS DEPEND ON A SMALL NUMBER OF LARGE CONTRACTS, SO THE LOSS
OF ANY SINGLE CONTRACT COULD HARM THOSE RESULTS AND CAUSE OUR STOCK PRICE TO
DROP.
Each quarter, we derive a significant portion of our revenues from a
small number of relatively large contracts or orders. As a result, our
operating results could suffer if any large orders or contracts are delayed or
canceled in any future period. We expect that we will continue to depend upon a
small number of large orders and/or contracts for a significant portion of our
revenues.
4
<PAGE> 7
OUR REVENUES WILL DEPEND MAINLY ON A SINGLE PRODUCT LINE, KSERVER(TM), WHICH IS
IN AN EARLY STAGE OF COMMERCIALIZATION.
Most of our revenues will be generated from software licenses and
service fees from the kServer(TM) line of Internet solutions. kServer(TM) is at
an early stage of commercialization, therefore it is difficult to forecast the
level of market acceptance it will attain. Market acceptance could be seriously
impeded in the following circumstances:
o Broad standards for conducting e-business emerge and become
widely adopted, thus reducing the need for our infrastructure
products.
o Information services departments of potential customers
choose to create their e-business portals and e-marketplaces
internally or to use third-party professional developers to
create and maintain their sites.
o Competitors develop products, technologies or capabilities
that render our kServer(TM) products and related services
obsolete or noncompetitive or that shorten the life cycles of
these products and services.
o Our kServer(TM) products do not meet customer performance
needs or fail to remain free of significant software defects
or bugs.
o We are unable to recruit and retain the additional sales
personnel needed to effectively market our products.
Furthermore, to remain competitive, software products such as ours
typically require frequent updates that add new features. There can be no
assurance that we will succeed in creating and selling updated or new versions
of our products. A decline in the demand for, or in the average selling price
of, our products would have a direct negative effect on our primary source of
revenues and could cause our stock price to fall.
WE EXTEND CREDIT TO OUR CUSTOMERS.
We extend credit to customers based on an evaluation of each
customer's 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. Three customers accounted for
56% of accounts receivable at September 30, 1999.
THE MARKET FOR E-BUSINESS PORTALS IS NEW AND EMERGING, AND IF IT DOES NOT GROW
AS RAPIDLY AS WE ANTICIPATE OR FAILS TO EMERGE AT ALL, OUR PLANNED GROWTH AND
FINANCIAL OBJECTIVES WILL NOT BE MET.
Our success is dependent on the emergence of the market for e-business
portals. This is a new and rapidly evolving market. We are planning to dedicate
most of our sales, marketing and product development efforts toward e-business
portals. If this market does not develop as rapidly as we expect, our planned
growth and financial objectives will not be met. A number of factors could
prevent or hinder the emergence of this market, including the following:
o The unwillingness of customers to change their traditional
method of conducting commerce.
o The failure of the Internet network infrastructure to keep
pace with substantial growth.
o Adverse publicity and consumer concern about the security of
electronic commerce transactions.
OUR PRODUCTS HAVE LONG AND VARIABLE SALES CYCLES; IT IS THEREFORE DIFFICULT TO
PREDICT THE TIMING OF INDIVIDUAL ORDERS AND MATCH REVENUES WITH OPERATING
EXPENSES, WHICH ARE RELATIVELY FIXED IN THE SHORT TERM.
Variations in the length of our sales cycles could cause our revenues
to fluctuate widely from period to period. To date, the average sales cycle for
our kServer(TM) products has been six months and has required pre-purchase
evaluation by a significant number of decision makers, including senior
management. Our sales cycles can be much
5
<PAGE> 8
longer for larger opportunities with new customers. Since a number of factors
influence the sales process, the period between our initial contact with a new
customer and the time we recognize revenues from that customer varies widely.
We spend significant time educating and providing information to our
prospective customers regarding the use and benefits of our products. Even
after purchase, our customers tend to deploy our solution slowly and
deliberately. Deployment schedules depend on the specific technical
capabilities of each customer, the size of the deployment, the complexity of
each customer's network environment, the quantity of hardware and the degree of
hardware configuration required.
WE FACE COMPETITION PRIMARILY FROM COMPANIES DEVELOPING THEIR OWN INTERNAL
E-BUSINESS INFRASTRUCTURE SYSTEMS AND OTHER PROVIDERS OF E-BUSINESS
INFRASTRUCTURE SOLUTIONS, AND IF WE ARE UNABLE TO COMPETE SUCCESSFULLY, WE WILL
NOT ACHIEVE OUR FINANCIAL OBJECTIVES.
The market for e-business infrastructure applications and services is
intensely competitive, evolving and susceptible to rapid technological change.
We expect the intensity of our competition to increase in the future. Many of
our competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources, significantly greater name
recognition and a larger installed base of customers than we have. Our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products and services than we can. In
addition, many of our current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties that
may improve their ability to address customer needs. Accordingly, it is
possible that new competitors, or alliances among competitors, may emerge and
rapidly acquire significant market share. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share, any
of which could negatively impact our ability to sell our products at the price
levels required to support our continuing operations.
WE NEED TO EXPAND OUR SALES OPERATIONS IF WE ARE TO INCREASE MARKET AWARENESS
OF AND REVENUES DERIVED FROM OUR PRODUCTS AND RELATED SERVICES.
If we fail to expand our direct sales capabilities as we have planned,
our prospects for revenue growth will be diminished. Our products and related
services require sophisticated sales efforts targeted at senior management of
our prospective customers. We plan to hire additional sales personnel, however,
competition for qualified sales personnel is intense, and we might not be able
to hire and retain the type and number of sales personnel we are targeting. New
hires will require extensive training and, typically, take several months to
achieve productivity. We cannot be certain that new hires will be as productive
as necessary.
If we do not develop indirect sales channels, we may miss sales
opportunities that might be available through these other channels. Although we
are currently investing and plan to continue to invest significant resources to
develop these indirect sales channels, we may not succeed in establishing a
channel that can market our products effectively and provide timely and
cost-effective customer support and services. In addition, we may not be able
to manage conflicts across our various sales channels, and our focus on
increasing sales through our indirect channel may divert management resources
and attention from direct sales.
OUR OPERATIONS AND GROWTH PROSPECTS MAY BE SIGNIFICANTLY IMPEDED IF WE ARE
UNABLE TO RETAIN OUR KEY PERSONNEL OR ATTRACT ADDITIONAL KEY PERSONNEL,
PARTICULARLY SINCE EXPERIENCED PERSONNEL AND NEW SKILLED PERSONNEL ARE IN SHORT
SUPPLY.
Competition for key personnel is intense. Our success depends on our
ability to attract, hire, train and retain personnel. We have experienced
difficulties with hiring and retention in the past, and certain of our key
personnel may terminate their employment with us to work for one of our
competitors at any time for any reason. Certain members of management have
employment or consulting agreements. See "Management." There can be no
assurance that we will be successful in attracting and retaining key personnel.
The loss of services of one or more key personnel could have a material adverse
effect on us and would materially impede the operation and growth of our
business.
6
<PAGE> 9
IF WE FAIL TO SUCCESSFULLY MANAGE OUR PLANNED EXPANSION OF OPERATIONS, OUR
GROWTH PROSPECTS WILL BE DIMINISHED AND OUR OPERATING EXPENSES COULD EXCEED
BUDGETED AMOUNTS.
Our ability to offer our products and related services in a quickly
evolving market requires an effective planning and management process. We have
expanded our operations rapidly since inception, and we intend to continue to
expand them in the foreseeable future. This rapid growth places significant
demand on our managerial and operational resources and our internal training
capabilities. In addition, we have recently hired a significant number of
employees and plan to further increase our total work force. This growth will
continue to substantially burden our management team. To manage growth
effectively, we must:
o Implement and improve our operational, financial and other
systems, procedures and controls on a timely basis
o Expand, train and manage our workforce, particularly our
sales and marketing and support organizations
We cannot be certain that our systems, procedures or controls will be
adequate to support our current or future operations or that our management
will be able to manage expansion and still achieve the rapid execution
necessary to meet our growth expectations. Failure to manage our growth
effectively could diminish our growth prospects and could result in lost
opportunities as well as operating expenses exceeding the amount budgeted.
WE HAVE NO SIGNIFICANT EXPERIENCE CONDUCTING OPERATIONS INTERNATIONALLY, WHICH
MAY MAKE IT MORE DIFFICULT THAN WE EXPECT TO EXPAND OVERSEAS AND MAY INCREASE
THE COSTS OF DOING SO.
To date, we have derived all of our revenues from sales in the United
States and Canada. We plan to expand our international operations in the
future. There are many barriers to competing successfully in the international
arena, including:
o cost of customizing products for foreign countries
o restrictions on the use of software encryption technology
o dependence on local vendors
o compliance with multiple conflicting and changing
governmental laws and regulations
o longer sales cycles
o import and export restrictions and tariffs
IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS, THE MARKET
ACCEPTANCE OF OUR PRODUCTS, AND OUR PROFITABILITY, MAY SUFFER.
To offer products and services to a larger customer base, our direct
sales force depends on strategic partnerships and marketing alliances to obtain
customer leads, referrals and distribution. If we are unable to maintain our
existing strategic relationships or fail to enter into additional strategic
relationships, we will have to devote substantially more resources to the
marketing of our products and services. We would also lose anticipated customer
introductions and co-marketing benefits. Our success depends in part on the
success of our strategic partners and their ability to market our products and
services successfully. In addition, our strategic partners may not regard us as
significant for their own businesses. Therefore, they could reduce their
commitment to us or terminate their respective relationships with us, pursue
other partnerships or relationships, or attempt to develop or acquire products
or services that compete with our products and services. Even if we succeed in
establishing these relationships, they may not result in additional customers
or revenues.
7
<PAGE> 10
ACQUISITIONS MIGHT HARM OUR BUSINESS.
As part of our business strategy, we may seek to acquire or invest in
additional businesses, products or technologies that we feel could complement
or expand our business. If we identify an appropriate acquisition opportunity,
we might be unable to negotiate the terms of that acquisition successfully,
finance it, or integrate it into our existing business and operations. We may
also be unable to select, manage or absorb any future acquisitions
successfully. Further, the negotiation of potential acquisitions, as well as
the integration of an acquired business, would divert management time and other
resources. We may have to use a substantial portion of our available cash,
including proceeds to us, if any, of this Offering, to consummate an
acquisition. On the other hand, if we consummate acquisitions through an
exchange of our securities, our shareholders could suffer significant dilution.
In addition, we cannot assure you that any particular acquisition, even if
successfully completed, will ultimately benefit our business.
IF WE FAIL TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR EXISTING
PRODUCTS WILL BECOME OBSOLETE OR UNMARKETABLE.
New approaches to gather, exchange, integrate, personalize and
syndicate information over the Internet based on new technologies and industry
standards could render our products obsolete and unmarketable. We believe that
to succeed, we must enhance our products, develop new products on a timely
basis to keep pace with technological developments, and satisfy the
increasingly sophisticated requirements of our customers. Therefore, we cannot
be certain that we will respond successfully to technological change, evolving
industry standards or customer requirements. If we are unable to adequately
respond to these changes, our revenues and market share could rapidly decline.
In connection with the introduction of new products and enhancements, we have
experienced development delays and related cost overruns, which are not unusual
in the software industry. We could encounter these problems or more serious
delays in the future. Any delays in developing and releasing new products or
enhancements to our products could result in customer dissatisfaction,
cancellation of orders and license agreements, negative publicity, loss of
revenues, slower market acceptance and legal action by customers against us.
Our products are designed to work on a variety of hardware and software
platforms used by our customers. However, these products may not operate well
with future versions of hardware and software platforms, programming languages,
database environments, and other systems that our customers use. We must
constantly modify and improve our technology to keep pace with changes made to
these platforms and to operational applications and other Internet-related
applications. This may result in uncertainty relating to the timing and nature
of new product announcements, introductions or modifications, which may harm
our business. If we fail to modify or improve our products in response to
evolving industry standards, they could rapidly become obsolete or
unmarketable, which would have a direct negative effect on our revenues.
IF OUR PRODUCTS CONTAIN ERRORS, OUR REVENUES AND NET OPERATING RESULTS WILL BE
NEGATIVELY IMPACTED AND OUR REPUTATION AND THE MARKET ACCEPTANCE OF THESE
PRODUCTS WILL BE JEOPARDIZED.
Our e-business infrastructure applications are complex and may contain
undetected errors or result in system failures, especially when first
introduced or when new versions or enhancements are released. Despite extensive
testing, errors could occur in any of our current or future product offerings
after commencement of commercial shipments. We have discovered software defects
in our new products after their introduction. The implementation of our
products typically involves working with sophisticated software, computing and
communications systems. If our software contains undetected errors or we fail
to meet our customers' expectations in a timely manner, we could experience
loss of or delay in revenues and loss of market share, loss of customers,
failure to achieve market acceptance, diversion of development resources,
diversion of customer support resources, negative publicity, increased service
and warranty costs, legal actions by customers against us, and increased
insurance costs.
DEFECTS OR ERRORS IN OUR PRODUCTS MAY RESULT IN PRODUCT LIABILITY CLAIMS.
Because customers rely on our products for critical business
processes, any significant defects or errors in our products or services might
result in tort or warranty claims. Errors or defects in or other performance
problems associated with our products could result in financial or other
damages to our customers. Our customers may then seek damages from us for their
losses. We have not experienced any product liability claims to date. However,
a product liability claim brought against us, even if not successful, would
likely be time-consuming and costly and could harm our reputation. Our licenses
with customers generally contain provisions designed to limit our exposure to
potential product liability claims such as disclaimers of warranties and
limitations on liability for special, consequential and
8
<PAGE> 11
incidental damages. In addition, our license agreements generally limit the
amounts recoverable for damages to the amounts paid by our customers to us for
the products or services giving rise to the damages. We cannot be certain that
the limitations of liability we include in our contracts will be enforceable
because existing or future laws or unfavorable judicial decisions could negate
these liability limiting provisions. Defending a product liability suit,
regardless of its merits, could entail substantial expense and require the time
and attention of key management personnel. The successful assertion of one or
more large claims that exceed contractual limitations on our liability could
have a significant negative impact on our results of operations and cause our
stock price to fall.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR ABILITY
TO COMPETE COULD BE SERIOUSLY HARMED, AND IF OTHER COMPANIES BRING LAWSUITS
CLAIMING THAT WE INFRINGE THEIR INTELLECTUAL PROPERTY RIGHTS, WE COULD BE
LIABLE FOR SIGNIFICANT DAMAGES.
Our success depends in large part on our ability to adequately protect
our intellectual property rights. We seek to protect our source code,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection. We require our customers to enter
into license agreements, which impose restrictions on our customers' ability to
utilize our products. In addition, we seek to avoid disclosure of our trade
secrets by, among other methods, restricting access to our source code and
requiring those persons with access to our proprietary information to sign
confidentiality agreements with us. However, some of these confidentiality
agreements contain provisions that may permit these persons, in some
circumstances, to develop products based on our proprietary information as a
result of their access to our source code. If these persons develop products
based on our proprietary information, the value of our proprietary information
will be adversely impacted. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our technology or
to obtain and use information that we regard as proprietary. Policing
unauthorized use of our technology is difficult, and while we are unable to
determine the extent to which piracy of our products exists, software piracy
can be a persistent problem. In addition, as we expand our operations, we
become increasingly exposed to intellectual property infringement because laws
of some foreign countries do not protect our proprietary rights to as great an
extent as the laws of the United States and Canada. Our means of protecting our
proprietary rights may not be adequate and our competitors may copy our
products, independently develop similar technology, or design around our
intellectual property. If we fail to adequately protect our intellectual
property, our ability to compete may be seriously harmed. There has been a
substantial amount of litigation in the software industry regarding
intellectual property rights. It is possible that in the future third parties
may claim that our current or future products infringe their intellectual
property. We expect that software developers will increasingly be susceptible
to infringement claims as the number of products and competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. Any intellectual property claims, with or without merit,
could be time consuming, result in costly litigation, cause product shipment
delays or require us to enter into royalty or licensing agreements. Any royalty
or licensing agreements, if required, may not be available on terms acceptable
to us, or may not be available at all, which could jeopardize the viability of
our business.
THERE IS SUBSTANTIAL RISK THAT FUTURE REGULATIONS COULD BE ENACTED THAT EITHER
DIRECTLY RESTRICT OUR BUSINESS OR INDIRECTLY IMPACT OUR BUSINESS BY LIMITING
THE GROWTH OF INTERNET COMMERCE.
As Internet commerce evolves, we expect federal, state or foreign
agencies to adopt regulations covering many issues, including user privacy,
pricing, content and quality of products and services. If enacted, these laws,
rules or regulations could limit the market for our products and related
services, which could adversely affect our business prospects and operating
results. Although many of these regulations may not apply to our business
directly, we expect that laws regulating the solicitation, collection or
processing of personal/consumer information could indirectly affect our
business. The Telecommunications Act of 1996 prohibits some types of
information and content from being transmitted over the Internet. The
prohibition's scope and the liability associated with a Telecommunications Act
violation are currently unsettled. In addition, although substantial portions
of the Communications Decency Act were held to be unconstitutional, we are
unsure whether similar legislation will be enacted and upheld in the future. It
is possible that legislation could expose companies involved in Internet
commerce to liability, which could limit the growth of Internet commerce
generally. Legislation like the Telecommunications Act and the Communications
Decency Act could dampen the growth of Internet usage and decrease its
acceptance as a commercial medium. Moreover, the applicability to the Internet
of existing law sin various jurisdictions governing issues such as property
ownership, sales tax, libel and personal privacy is uncertain and may take
years to resolve. Our costs could increase and our growth could be harmed by
any new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws
9
<PAGE> 12
do not currently apply to our business, or the application of existing laws and
regulations to the Internet and on-line businesses.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE ON TERMS
FAVORABLE TO US, IF AT ALL.
We may need to raise additional capital in the future, and we cannot
be certain that we will be able to obtain additional financing on favorable
terms, if at all. If we cannot raise additional capital on acceptable terms, we
may not be able to develop or enhance our products and services, take advantage
of future opportunities or respond to competitive pressures or unanticipated
requirements. To fully realize our business objectives and potential, we may
require significant additional financing. We cannot be sure that we will be
able to secure the financing we will require, or that it will be available on
favorable terms. If we are unable to obtain any necessary additional financing,
we will be required to substantially curtail our approach to implementing our
business objectives. Additional financing may be debt, equity or a combination
of debt and equity. If equity, it could result in significant dilution to our
shareholders.
ISSUANCE OF SHARES UPON CONVERSION OF THE DEBENTURES AND EXERCISE OF THE
RELATED INVESTMENT OPTIONS AND WARRANTS MAY RESULT IN SUBSTANTIAL DILUTION TO
OUR SHAREHOLDERS.
On February 24, 2000, we issued (i) warrants to purchase 330,000
shares of Common Stock exercisable at any time until February 24, 2005, at an
exercise price of $11.10 per share, and (ii) convertible debentures in the
aggregate principal amount of $5,475,000. In addition, at the time of each
conversion, the holder of the debentures has an investment option to purchase,
at the fixed conversion price of $9.7125, one additional share of Common Stock
for each share issuable upon conversion of the debentures. See "Recent Events."
Subject to adjustment upon the occurrence of certain events, the
principal amount of the debentures (plus all accrued interest and any additional
amounts owed) is convertible, in whole or in part, at the option of the holders,
into shares of Common Stock at a conversion price based on the trading price of
our Common Stock over a fixed period prior to conversion of the debentures, up
to a fixed conversion price of $9.7125. Based on a market price of $0.84 on
August 10, 2000, assuming no accrued interest, conversion in full of the
debentures and exercise in full of the related investment options and warrants
would result in the issuance of an aggregate of 6,797,181 shares. The actual
number of shares issuable upon conversion of the debentures and exercise of the
related investment options is indeterminate and depends on a number of factors
which cannot be predicted by us at this time, including the future market price
of our Common Stock and whether the mandatory redemption and default provisions
of the debentures are triggered. The actual number of shares issued could be
materially greater than the number set forth above, and could result in
significant dilution to our shareholders.
OUR DIRECTORS AND OFFICERS CONTROL A MAJORITY OF OUR STOCK.
Immediately after the closing of this offering, approximately 52.25%
of our outstanding capital stock will be owned by our directors and executive
officers and their affiliates. As a result, these shareholders, acting
together, would be able to control all matters requiring approval by the
shareholders, including the election of all directors and approval of
significant corporate transactions.
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
If our shareholders sell substantial amounts of our Common Stock, in
the public market after this Offering, the market price of our Common Stock
could be adversely affected. In addition, the sale of these shares could impair
our ability to raise capital through the sale of additional equity securities.
WE ARE LISTED ON THE OTC BULLETIN BOARD, WHICH CAN BE A VOLATILE MARKET.
Our Common Stock is quoted on the OTC Bulletin Board, a NASD sponsored
and operated quotation system for equity securities. It is a more limited
trading market than the Nasdaq SmallCap, and timely, accurate quotations of the
price of our Common Stock may not always be available. You may expect trading
volume to be low in such a market. Consequently, the activity of only a few
shares may affect the market and may result in wide swings in price and in
volume.
10
<PAGE> 13
WE MAY BE SUBJECT TO EXCHANGE RATE FLUCTUATIONS.
A substantial portion of our revenues are received, and a substantial
portion of our operating costs are incurred, in Canadian dollars. Because our
financial statements are presented in U.S. dollars, any significant fluctuation
in the currency exchange rates between the Canadian dollar and the U.S. dollar
will affect our reported results of operations. We do not currently engage in
currency-hedging transactions.
USE OF PROCEEDS
All of the Shares offered hereby are being offered by the Offering
Shareholders for their own accounts. We will not receive any proceeds from the
conversion of the debentures, nor will we receive any of the proceeds from the
sale of Shares by the Offering Shareholders.
We will receive the exercise price of any investment options and
warrants related to the debentures and any other options or warrants that may
be exercised by the Offering Shareholders. Assuming no accrued interest and
conversion in full of the debentures and exercise in full of the related
investment options at the fixed conversion price of $9.7125 per share and
exercise in full of the related warrants at their exercise price of $11.10 per
share, the gross proceeds to us from the exercise of the investment options and
warrants would be $8,663,000. Assuming exercise of all other options and
warrants held by the other Offering Shareholders, the gross proceeds to us
would be $2,165,000. We intend to use any proceeds from exercise of the
investment options, options and warrants for working capital and general
corporate purposes.
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our Common Stock is traded on the OTC Bulletin Board under the symbol
"SSXX." Set forth below are the high and low bid prices (which reflect prices
between dealers and do not include retail markup, markdown or commissions and
may not represent actual transactions) for each quarter since the Reverse
Acquisition on December 11, 1998.
<TABLE>
<CAPTION>
Period High Bid Low Bid
------ ---------- ----------
<S> <C> <C>
December 11, 1998 to December 31, 1998 ............... $ 4.0000 $ 3.6250
January 1, 1999 to March 31, 1999 ................... 5.5000 3.6250
April 1, 1999 to June 30, 1999 ....................... 6.0000 4.5000
July 1, 1999 to September 30, 1999 ................... 4.7500 3.7500
October 1, 1999 to December 31, 1999 ................. 5.3125 3.5000
January 1, 2000 to March 31, 2000 ..................... 11.562 5.3750
April 1, 2000 to June 30, 2000 ........................ 6.875 1.125
</TABLE>
As of August 10, 2000, there were approximately 269 shareholders of
record of our Common Stock. The closing bid and asked prices on August 10, 2000
were $0.76 and $0.84, respectively.
DIVIDEND POLICY
Since the Reverse Acquisition on December 11, 1998, we have not paid
any dividends. We do not anticipate paying a cash dividend in the foreseeable
future.
11
<PAGE> 14
CAPITALIZATION
The table below sets forth, as of June 30, 2000, the following
information:
o our actual capitalization
<TABLE>
<CAPTION>
ACTUAL
-----------
<S> <C>
Debt and leases, current and long-term 3,924,800
-----------
Minority interest 3,407,000
Shareholders' equity:
Common Stock, no par value, 50,000,000 shares authorized, 6,693,800
12,512,666 shares outstanding
Accumulated other comprehensive income 91,300
Accumulated deficit and deferred compensation (8,349,500)
-----------
Total shareholders' equity (1,564,400)
-----------
Total capitalization $ 5,767,400
===========
</TABLE>
The table excludes the following information:
o 2,004,000 shares issuable upon exercise of outstanding
options at March 31, 2000
o 1,505,000 shares issuable upon exercise of outstanding
warrants at March 31, 2000
o 200,000 shares issuable upon exercise of outstanding
warrants, issued after March 31, 2000
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and
results of operations contains various "forward-looking statements." Such
statements consist of any statement other than a recitation of historical fact
and can be identified by the use of forward-looking terminology such as "may,"
"expect," "anticipate," "estimate" or "continue" or use of negative or other
variations or comparable terminology.
We caution that these statements are further qualified by important
facts that could cause actual results to differ materially from those contained
in the forward-looking statements, that these forward-looking statements are
necessarily speculative, and there are certain risks and uncertainties that
could cause actual events or results to differ materially from those referred
to in such forward-looking statements.
OPERATIONS ANALYSIS
During the quarter ended June 30, 2000 we had consolidated revenues of
$499,000 operating expenses of $1,127,100 and a net loss before interest and
depreciation of $773,100. For the nine months ending June 30,2000, revenues
were $1,137,600, operating expenses were $3,124,300 and the net loss before
depreciation, amortization and interest was $2,231,100.
Revenues for the three months ended June 30, 2000 increased 243% as
compared to 1999 revenues for the same period, which totaled $145,500. The
increase is a result of new revenues generated by kServer(TM), launched during
the current fiscal year and an increased client base for the International
Trade products and services. A kServer(TM) contract entered into with the
Government of Canada was the main contributor to the increase in revenues.
Furthermore, the deployment of Ktravel to the Uniglobe Western Canada region
commenced during the quarter, resulting in initial deployment and customer
support revenues.
12
<PAGE> 15
Operating expenses include research and development, sales and
marketing, and general and administrative expenses. The aggregate of these
costs increased considerably as compared to the previous period. The increase
was due to a significant increase in staffing and activity levels across all
our departments.
Research and development costs for the three months ended June 30,
2000 totaled $262,600 as compared to $72,800 for the same period in the
previous fiscal year. This was a direct result of continued costs incurred in
the development of the kServer(TM) line of products, including higher payroll
costs due to the increased number of engineers and other technical personnel
working on kServer(TM).
Sales and marketing costs increased 117% during the quarter, from
$110,200 to $239,000 as a result of higher payroll expenses and costs
associated with more sales, marketing and support personnel, and increased
travel expenses incurred in the promotion of our lines of products.
General and administrative expenses increased 124%, from $279,300 to
$625,500. The increase was the result of higher payroll costs, travel expenses,
shareholder relations costs and professional fees as compared to the previous
year.
Amortization and depreciation costs increased from $56,000 to
$136,600, mainly as a result of the amortization costs for the ORIGIN(TM)
software acquired in May 1999.
Interest expense for the three months ending June 30, 2000 was
$173,800, a significant increase as compared to the same period in fiscal year
1999. The increase is a direct result of the Company issuing $5 million of
convertible debentures in February 2000, which bear interest at a rate of 7.0%
per annum.
Net loss during the quarter was $1,017,700. In the quarter ended June
30,1999, we reported a net loss of $418,000. The increase in the net loss was
primarily due to higher interest expense and an increase in operating costs.
In the nine months ended June 30, 2000, revenues increased 130%
compared to revenues for the period ended June 30, 1999. In the same period of
analysis, the gross profit margin decreased from 85% to 79% as a result of the
Company incurring new direct sales costs.
Research and Development expenditures increased 381% as compared to
expenditures for the nine months ended June 30, 1999. We have increased our
engineering staff and incurred significant additional costs since the
deployment of the kServer(TM) line of products. To support our sales effort, we
have increased our Sales and Marketing expenditures by 130%, an increase
consistent with the sales growth disclosed in the previous paragraph.
General and Administrative expenses for the nine months ended June 30,
2000 total $1,753,300, a 175% increase compared to administrative expenditures
for the nine months of the previous fiscal year. Costs associated with
compliance as a public company, such as legal, accounting and regulatory costs
are grouped in this category. All of these costs have increased in the current
fiscal year.
Amortization and depreciation expense as of June 30, 2000 has
increased 227%. The main factor behind this increase is the amortization of the
Origin Software rights. We have also increased our hardware and software asset
base considerably to support the deployment of kServer(TM).
For the nine months ended June 30, 2000, interest expenses is
$1,831,400. The figure is dramatically higher than the $36,500 spent in the
same nine months of the previous year. As explained above, this increase
resulted from the Company issuing convertible debentures for $5 million,
bearing interest at 7% per annum. The debentures included a beneficial
conversion feature that was immediately exercisable. This circumstance resulted
in the Company immediately recognizing over $1.5 million of interest expense
related to this feature during the second quarter of fiscal 2000.
As a result of the above, our net loss for the nine months ended June
30, 2000 is $4,295,800, a loss 390.1% higher than the $877,100 lost in the nine
months ended June 30, 1999.
13
<PAGE> 16
INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY
On June 30, 2000, our cash and cash equivalents totaled $3,829,600.
This is a significant increase in cash as compared to the September 30, 1999
cash position of $164,200. The increase resulted from the issuance on February
24, 2000, of convertible debentures in the aggregate principal amount of
$5,000,000. The debentures bear interest at a rate of 7% per annum commencing
February 24, 2000 and mature on February 24, 2005. The principal amount of the
debentures (plus all accrued interest and any additional amounts owed) is
convertible, in whole or in part, at the option of the holders, into shares of
Common Stock. In connection with this issuance, we incurred $448,000 of issue
costs.
On June 30, 2000, the Company had working capital of $3,470,700 and a
current ratio of 6.2 to 1. The working capital position has increased
significantly as compared to the balance at September 30, 1999 when working
capital was $84,300 with a current ratio of 1.3 to 1. The current working
capital position was achieved through the issuance of additional equity capital
during the nine months ended June 30, 2000 for gross proceeds of approximately
$1,184,000 and the issuance of convertible debentures in the aggregate
principal amount of $5,000,000.
Investing activities during the nine months ended June 30, 2000 have
consisted primarily of purchases of property and equipment, principally
computer hardware and software. Capital expenditures, including those under
capital leases, totaled $139,500 in fiscal 1999 and $280,500 in the nine months
ended June 30, 2000. We expect that capital expenditures will increase with our
anticipated growth in operations, infrastructure and personnel.
To date, we have not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. We
expect that in the future, cash in excess of current requirements will continue
to be invested in high credit-quality, interest-bearing securities.
We believe that the net proceeds of the debentures, together with cash
and cash equivalents, will be sufficient to meet our working capital
requirements for at least the next 12 months. Thereafter, we may require
additional funds to support our working capital demand or for other purposes
and may seek to raise additional funds through public or private equity
financings or from other sources. There can be no assurance that additional
financing will be available on acceptable terms, if at all. If adequate funds
are not available or are not available on acceptable terms, we may be unable to
develop or enhance our products, take advantage of future opportunities, or
respond to competitive pressures or unanticipated requirements, which could
have a material adverse effect on our business, financial condition and
operating results.
There are no legal or practical restrictions on the ability of the
subsidiaries to transfer funds to the parent company (SmartSources.com Inc.).
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivatives and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 is effective
for all fiscal quarters beginning with the quarter ending December 31, 2000.
SFAS No.133 establishes accounting and reporting standards for derivative
instruments, including other contracts, and for hedging activities. We will
adopt SFAS No. 133 in the quarter ending December 31, 2000 and do not expect
its adoption to have an impact on our results of operations, financial position
or cash flows.
MATERIAL COMMITMENTS
The Company has not undertaken any material commitments for
expenditures as of June 30, 2000.
TRENDS OR UNCERTAINTIES
There are no known trends or uncertainties that will have a material
impact on revenues.
14
<PAGE> 17
ISSUANCE OF CONVERTIBLE DEBENTURES AND WARRANTS
On February 24, 2000, we issued (i) warrants to purchase 330,000
shares of Common Stock exercisable at any time until February 24, 2005, at an
exercise price of $11.10 per share, and (ii) convertible debentures in the
aggregate principal amount of $5,000,000. In addition, at the time of each
conversion, the holder of the debentures has an investment option to purchase,
at the fixed conversion price of $9.7125, one additional share of Common Stock
for each share issuable upon conversion of the debentures.
TERMS OF SECURITIES
The debentures bear interest at a rate of 7% per annum commencing on
February 24, 2000 and mature on February 24, 2005. The principal amount of the
debentures (plus all accrued interest and any additional amounts owed) is
convertible, in whole or in part, at the option of the holders, into shares of
Common Stock at a conversion price based on the trading price of our Common
Stock over a fixed period prior to conversion of the debentures, up to a fixed
conversion price of $9.7125. The conversion price is subject to adjustment upon
the occurrence of certain events, including without limitation, if the Common
Stock is not listed on the American Stock Exchange or the Nasdaq SmallCap
Market by October 24, 2000 or on the Nasdaq National Market by February 24,
2001 or if we default on certain other provisions of the Registration Rights
Agreement executed in connection with the investment.
After August 24, 2000, if the conversion price is lower than the fixed
conversion price and certain other requirements are met, we may elect to pay
cash in lieu of Common Stock upon conversion of the debentures. In addition, if
specified default events occur, the debentures are redeemable for cash, either
automatically or upon election of the holders of 50% of the outstanding
debentures, at 120% of the purchase price plus interest and default payments,
which may be substantial. Events triggering automatic redemption include our
making an assignment for the benefit of our creditors, or our bankruptcy,
insolvency, reorganization or liquidation. Events triggering the holders' right
to elect redemption include our failure to: (a) issue shares of Common Stock
upon conversion of the debentures; (b) transfer to the converting debenture
holders stock certificates for shares of Common Stock upon conversion of the
debentures; (c) keep the specified number of shares of Common Stock reserved
for issuance upon conversion of the debentures; (d) obtain effectiveness of the
registration statement of which this prospectus is a part prior to August 24,
2000; or (e) maintain listing of our Common Stock on the OTC Bulletin Board or
on other stock exchanges or quotation services on which the Shares may be
trading. In the event that NASD rules apply, the principal amount of the
debentures in excess of 20% of the outstanding shares of Common Stock on the
date of issuance of the debentures is also redeemable for cash in lieu of
shares if we do not obtain the approval of our shareholders to issue shares in
an amount in excess of such limit. If the conversion price of the debentures
were significantly lower than the fixed conversion price, or if the default
provisions of the debentures were triggered, the potential number of shares
issuable could substantially exceed the 20% limit.
REGISTRATION RIGHTS
Under a Registration Rights Agreement entered into in connection with
the issuance of the debentures, we have filed with the SEC a registration
statement, of which this prospectus is a part, to register for resale the
shares of Common Stock that may be acquired upon conversion of the debentures,
and exercise of the investment options and warrants. We must keep the
registration statement effective until all of the securities offered have been
sold. We are responsible for the payment of all fees and costs associated with
the registration of the securities. We may be liable for penalty payments if
(i) the holders of the debentures cannot make sales pursuant to the
registration after it has been declared effective; or (ii) the Common Stock
ceases to be traded on the OTC Bulletin Board or such other national securities
exchange on which the Common Stock is listed at the time of registration.
PLACEMENT FEE
In connection with issuance of the debentures, we paid a placement fee
of $325,000 to AB Phoenix Inc. and issued two-year warrants for 3,750 shares at
$11.10 per share to G. Kopolow & Associates and 21,250 shares at $11.10 per
share to AB Phoenix Inc.
The foregoing is a summary of provisions of the agreements and
instruments that we executed in connection with the issuance of the debentures
and related warrants. This summary is not intended to be complete and is
qualified
15
<PAGE> 18
by reference to the provisions of applicable law and to the agreements and
instruments listed as exhibits to the registration statement of which this
prospectus is a part. See "Additional Information."
BUSINESS
Our primary business focus is our internet-based, content-management
technology known as kServer(TM). We seek to develop and provide web-based
solutions to communication and content-management needs by applying kServer(TM).
We have spent the past two years developing this technology and have recently
rolled out a commercial version of the product. The kServer(TM) technology
allows our customers to expand their knowledge base, streamline content
delivery, leverage self-service data and applications, and ultimately increase
web-based revenues via a vast network of affiliate sites. With kServer(TM), a
business can manage relationships, automate content deployment across an
unlimited number of web-sites, and deliver personalized communication and
highly-targeted applications to its web users.
Web-sites and portals developed with the kServer(TM) technology, known
as kSites, enable all authorized users to create, assemble, publish,
personalize and manage vital business information easily in "real time," and
without any computer programming experience or knowledge. Through the use of a
unique content-management system, businesses can transform the Internet browser
from a one-way viewer to a personalized, two-way application interface.
Although our primary focus is content-management solutions, we have
historically focused on our proprietary trade compliance technology known as
ORIGIN(TM), a Windows-based software system designed to automate the complex
process of international trade and customs compliance. ORIGIN(TM) is an expert
system that contains a knowledge base and determination engine to interpret
NAFTA's Rules of Origin. We also provide international trade consulting
services to businesses operating under NAFTA and other trade regulatory
requirements.
INDUSTRY BACKGROUND
The competitive online environment is driving companies to deploy
complex web-sites that offer enhanced user experiences. These web-sites can
contain hundreds of thousands of content-rich web pages, and this content has
been increasing in volume and complexity. In addition, today's web-sites must
be updated frequently by numerous contributors throughout an enterprise. Web
teams find it difficult to manage the increasing complexity, volume and
variability of this content. At the same time, the large number of web
authoring tools and web application servers has contributed to the increasing
technological complexity involved in developing and maintaining web-sites.
These trends have created a need for content-management solutions that can
accommodate this increasing volume of web content and allow more contributors
to add content to a web-site.
Until recently, businesses have attempted to satisfy their web
content-management needs largely through in-house solutions. In-house solutions
can be expensive and difficult to maintain, which can increase the risk of
delaying the launch of important eBusiness initiatives. For example, in-house
solutions may need to be extensively re-engineered each time a new web
authoring tool or eBusiness application is introduced. Other businesses have
used third-party solutions, typically turning to either workgroup software or
web publishing software. Workgroup software is generally designed to enable
small groups of developers to manage relatively simple web-sites. They
generally do not scale to support large numbers of contributors or the
increasing complexity and volume of web content. Using workgroup software may
impair a company's ability to deliver up-to-date and accurate web content. Web
publishing software is generally designed only to collect and display
information on a web-site and, because it is often proprietary, does not
accommodate many popular web authoring tools or web application servers. In
addition, other third-party solutions do not: (i) allow large numbers of
contributors to add content to a web-site; (ii) allow web teams to work on
applications simultaneously; or (iii) integrate new web technologies easily,
thereby slowing the deployment of eBusiness initiatives.
With the proliferation of eBusiness initiatives, the need has emerged
for a common infrastructure, or "platform," that can (i) accommodate large and
diverse groups of content contributors; (ii) accommodate popular web authoring
tools; and (iii) integrate leading web application servers. An open
architecture for such a platform enables customers to leverage their existing
investments in information technology and facilitates rapid adoption of new web
technologies and standards.
16
<PAGE> 19
THE SMARTSOURCES.COM SOLUTION
We provide web content-management software known as kServer(TM).
kServer(TM) enables customers to migrate their businesses to the web rapidly,
thereby increasing their ability to generate more revenues and compete more
effectively. Today, the volume and complexity of web content and the number of
eBusiness applications continue to grow so rapidly that it can be difficult for
businesses to meet their web-site development schedules. kServer(TM) enables
customers to develop and deploy multiple kSite applications simultaneously.
This approach allows businesses to complete their eBusiness initiatives more
rapidly. In addition, kServer(TM) allows content contributors to perform quality
assurance functions on content modifications, which significantly reduces
testing time.
Complex web-sites can consist of up to hundreds of thousands of pages
containing both static and dynamic content supplied by departments throughout
the enterprise. As a result, these sites can be expensive to deploy and manage.
kServer(TM) lowers the costs of web operations primarily by reducing the
dependency on specialized web development personnel and by improving operating
efficiency through automation of workflow processes, such as task assignment,
routing and approval. Automated workflow processes can reduce the time required
to assemble, test and validate new web content. In addition, our products
support evolving web standards and our open architecture is compatible with
third-party web authoring tools and web application servers. As a result,
businesses can productively leverage their existing information technology
infrastructure.
To attract and retain online customers, today's leading web-sites
continuously enhance their users' online experience. Businesses seek to achieve
this by introducing new web technologies and refreshing content frequently. The
open architecture of kServer(TM) facilitates rapid integration of new web
technologies and simultaneous development of multiple eBusiness applications. In
addition, kServer(TM) is highly scalable, permitting the collaborative efforts
of hundreds of contributors to be coordinated as the need arises.
STRATEGY
Our strategy includes:
o design of innovative, web-based content-management solutions
using our own and existing technology
o establishment of partnerships with key value chain
participants to enable the creation of a "complete solution"
o collaboration with customers to develop customized
applications uniquely suited to solve their
content-management problems
o continual development of our technology base to extend our
source of advantage
o creation of an open platform, publishing and training to build
a network of kServer(TM) specialists who will promote the use
and potential of our core technology
o identification of and focus on carefully selected vertical
markets
MARKETS
The market segments we will focus on include:
Travel and transportation
We have chosen the travel industry, travel agencies in particular, as
a key market segment to focus our sales and marketing efforts. We estimate that
there are approximately 32,000 travel agencies worldwide. Traditional travel
agencies have been under considerable threat due to the pressure from online
travel agencies. The travel industry faces key business issues such as (i) time
lag in information dissemination to travel agents and customers; (ii) the need
to share
17
<PAGE> 20
information focused on the specific needs of clients; and (iii) the requirement
for value-added services to justify their service fee.
As a solution to these business issues, we offer personalized/
customized portals to travel agents and their customers. These portals allow
the user to pull up-to-date airline, hotel, cruise packages, car rental,
weather and other relevant information onto their personal web-sites. By
presenting customers with this useful and timely information through
personalized portals, travel agents will be better able to engage and retain
customers and increase bookings.
We have entered into a memorandum of understanding with the franchise
division of Uniglobe International Travel, one of the world's largest
single-brand franchisor of travel agencies with over 1,000 locations, to deploy
the kServer(TM) product to participating travel agencies.
The kServer(TM) technology will provide a highly functional web-site
to each participating Uniglobe agency complete with value-added content and
applications. The kServer(TM) will allow travel agents to update local content
and manage users' profiles, all from a browser-based interface. For the
frequent traveler, agencies will be able to provide a personalized travel
portal delivering value-added content and applications that can be personalized
for each client's preferences. The kServer(TM) will provide pre-packaged,
ready-to-deploy content modules allowing for personalization of information to
the end-user, such as weather, travel advisories, currency rates, hotel links,
mapping and stock quotes, delivered to each personalized travel portal as
applications that provide for the travel agency operator to post local
specials.
Financial services
The Internet has increased the occurrences of remote access to trading
entities networks and the number of participants involved in trading. This
trend is expected to continue vigorously for the next several years. The
financial service sector, brokerage and corporate finance firms in particular,
are receptive to technological advances as long as there is a clear value in
implementing the new technology.
As with travel agencies, the kServer(TM) product can be used by
financial service firms to create personal investment portals for each client.
The portals can be customized to each client's investment interests or could be
used to bring together and disseminate securities laws and regulations
information from globally dispersed databases.
We will initially focus on obtaining critical domain expertise and
then on developing a compelling market message stressing enhanced performance,
efficiency and effectiveness resulting from improved knowledge and
content-management. Furthermore, it is imperative that we form key partnerships
and alliances with integrators who have significant presence and experience in
the financial service sector.
Government
Governments, at all levels, face key issues, such as the following:
o complexity and high costs associated with dissemination and
sharing of massive amounts of information throughout various
government agencies
o lack of cross-departmental sharing within an individual
government agency
o lack of integration of information between countries on a
variety of issues
The kServer(TM) product can provide a solution to these problems. For
example, we can develop a web-based portal bringing together all information
from various departments of a government agency. Also, we can create a
web-based portal integrating policies and laws of member nations on a variety
of issues such as taxes, tariffs, immigration and environmental standards.
18
<PAGE> 21
PRODUCT FEATURES
Multi-site
A big part of the power of kServer(TM) is the ability to create
thousands of different kSites very quickly without writing any HTML and XML
codes. A template-based publishing environment and a visual page builder allows
site administrators to customize the look and feel of each site. All kSites are
built on top of a common knowledge base and can easily share content between
each other and establish content syndication networks that allow for real-time
content exchange.
Multi-user
kServer(TM) includes a collaborative authoring environment so that many
different users can work together on creating and managing content. All users
have their own accounts and can belong to any number of kSites.
Browser-based environment
All administrative and authoring functionality is delivered through a
browser. This means that users can collaborate from any computer anywhere in
the world without having to download and install desktop applications.
Content-Management templates
All content in kServer(TM) is structured in user-designed content
templates. These templates force a content- structuring methodology that gives
meaning or context to information. When large amounts of content is stored in
kServer(TM) this structure prevents "information overload" (i.e., what happens
when there is too much information for it to be effectively mined).
Content syndication
Content can be shared between a single kSite and other kSites or
external databases. kSites can subscribe to specific content and display that
content in-line as if it were native to that kSite.
Built-in services
kServer(TM) makes it easy to solve web-programming problems like
e-commerce, database access, and HTML and XML coding. Through the use of
built-in objects, users can easily add external content or user e-commerce
objects to sell goods and services through their sites.
Sales, Marketing and Distribution
We market and sell our kServer(TM) product primarily through a direct
sales force in North America. To date, we have licensed the software to two
customers: Everdream Corporation and the NAFTA Institute. We intend to
significantly increase our sales and marketing team this year.
To extend our market reach and increase sales opportunities, we intend
to establish relationships with leading technology partners and information
technology service providers. To date, we have established a partnership with
First City Partners Group Inc. to assist in the sales of kServer(TM) to certain
government and international trade organizations.
COMPETITION
The market for content-management solutions is rapidly emerging and is
characterized by intense competition. We expect existing competition and
competition from new market entrants to increase dramatically. A growing number
of companies are trying to provide web content-management solutions. In this
market, new products are frequently introduced and existing products are often
enhanced. In addition, new companies, or alliances among existing companies,
may be formed that may rapidly achieve a significant market position.
19
<PAGE> 22
We compete with third party, content-management solution providers
and, to a lesser extent, with workgroup solutions and content publishing
application providers. We may face increased competition from these providers
in the future. Other potential competitors include client/server software
vendors currently developing or improving existing products addressed to our
market. Other large software companies, such as Microsoft and IBM, may also
introduce competitive products. Many of our existing and potential competitors
have greater technical marketing and financial resources than us.
INTERNATIONAL TRADE SOFTWARE AND SERVICES
Overview
Although our primary focus is content-management solutions, we have
historically focused on our proprietary trade compliance technology,
ORIGIN(TM), a Windows-based software system designed to automate the complex
process of international trade and customs compliance. ORIGIN(TM) is an expert
system that contains a knowledge base and determination engine to interpret
NAFTA's Rules of Origin.
We also provide international trade consulting services to businesses
operating under NAFTA and other trade regulatory requirements. We provide
consulting services to over 50 clients such as Sun Microsystems, Mattel, Delco
Remy America, Inc., Lipton and Levi Strauss & Co.
Clients of the trade division receive benefits such as:
o management of the complete NAFTA process
o specific services such as classification of bills of
materials
o review and evaluation of internal NAFTA qualification
processes to determine if there are any weaknesses in the
processes
Industry and Competition
NAFTA is by far one of the most comprehensive and complex trade
agreements in existence, with more than 1,500 rules of origin regulating its
application. Businesses have found that keeping up with NAFTA and ensuring
trade compliance is a major task costing them millions of dollars in consulting
fees and excess tariff rates.
The ORIGIN(TM) software is an expert system containing NAFTA's rules of
origin in its knowledge base. ORIGIN(TM) applies these complex rules to a
product's unique bill(s) of materials and produces all the necessary
documentation to prove compliance. Unlike other trade compliance methods,
ORIGIN(TM) automatically produces an audit trail to outline how a product
complied under NAFTA.
There are currently a number of companies and organizations that offer
NAFTA and trade compliance information and import/export information to trade
participants. These resources range from free access to pay-per-use to monthly
and annual subscription-based services.
Both producers of competing software products and non-software
producing organizations maintain the capacity to compete with us on several
different levels. The Internet represents a fundamentally competitive medium
with a reduced level of supply and distribution constraints. Consequently,
there are numerous companies providing various levels of trade information and
services.
Product Features
Our product, ORIGIN(TM), is a software system designed to automate the
complex process of international trade and customs compliance. ORIGIN(TM)
assists companies operating within the international business environment with
their trade-management solutions.
20
<PAGE> 23
The ORIGIN(TM) product line is made up of ORIGIN(TM) Basic, ORIGIN(TM)
Pro, and ORIGIN(TM) Trade Tools.
o ORIGIN(TM) Basic enables the user to process country of
origin determinations in any of the NAFTA countries,
interactive referencing and interpreting the NAFTA
legislation. The software produces a NAFTA certificate of
origin and an audit trail containing the steps taken to meet
NAFTA.
o ORIGIN(TM) Pro is a comprehensive, customized NAFTA solution
that is able to automatically interpret bills of materials,
batch process 10,000 NAFTA determinations, and produce
detailed audit trails and compliance reports.
o ORIGIN(TM) Trade Tools is an innovative line of trade
compliance products used to further automate and manage the
entire logistics of NAFTA compliance.
Sales, Marketing and Distribution
Currently, our International Trade Division maintains a continuous and
comprehensive direct mail campaign informing select manufacturers of the
features and benefits of ORIGIN(TM) specific to their industry needs and
requirements. Target clients receive a comprehensive ORIGIN(TM) kit outlining
each application included in the ORIGIN(TM) product line and how these
applications can streamline their trade compliance process. Each direct mail
package includes an ORIGIN(TM) brochure, product specifications, pricing sheet,
CD-ROM multimedia demonstration, and CD-ROM trial version of ORIGIN(TM). Each
package is followed up by a one-on-one sales call to ensure understanding of
the product and to arrange real-time online software demonstrations.
Sales associates offer real-time online software demonstrations to
potential customers, presenting the benefits and features of the ORIGIN(TM)
software first hand. The presentation, accompanied by a conference call, walks
the client through each step of the software's function and illustrates how
ORIGIN(TM) could streamline the user's specific trade compliance process.
All current sales and marketing are handled directly by an in-house
sales and marketing team. We are currently reviewing partnership opportunities.
RESEARCH AND DEVELOPMENT
We continue to invest in research and development to enhance the
kServer(TM) and ORIGIN(TM) products. Research and development costs expensed
were $374,700 and $38,400 for 1999 and 1998, respectively. Product development
expenditures are expected to increase substantially in the future. As of
December 31, 1999, approximately 10 employees were engaged in research and
development activities. We expect to hire additional engineers in the future
for further research and development activities.
PATENTS AND TRADEMARKS
Our success depends on our ability to maintain the proprietary aspects
of our technology and operate without infringing the proprietary rights of
others. We rely on a combination of trademarks, trade secret and copyright
laws, and contractual restrictions to protect the proprietary aspects of our
technology. We seek to protect the source code for our software, documentation
and other written materials under trade secret and copyright laws. We do not
currently have any United States or foreign patents issued. Our license
agreements impose certain restrictions on our customers' ability to utilize our
software. We also seek to protect our intellectual property by requiring
employees and consultants with access to proprietary information to execute
confidentiality agreements and by restricting access to the source code.
Due to rapid technological change, we believe that factors such as the
technological and creative skills of our personnel and new product developments
and enhancements to existing products are as equally important as the various
legal protections of our technology in establishing and maintaining a
technology leadership position.
21
<PAGE> 24
PROPERTIES
We operate out of two offices, located in North Vancouver, British
Columbia and Toronto, Ontario. We own the North Vancouver office space, which
is approximately 3,400 square feet and lease an additional 3,000 square feet of
office space in the same building. There are mortgages payable of approximately
$431,000 collateralized by the North Vancouver office. The Toronto office space
consists of 3,200 square feet of leased office space.
LITIGATION
We have no pending litigation.
EMPLOYEES
As of June 30, 2000, we employed 20 full-time employees.
MANAGEMENT
DIRECTORS
The names of the directors and certain information about them are set
forth below:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION/ DIRECTOR
NAME AGE POSITION HELD WITH THE COMPANY SINCE
---- --- ------------------------------ -----
<S> <C> <C> <C>
Nathan Nifco 36 Chairman; President and Chief Executive Officer; and Director 1998
Charles K. Kelly 51 Chairman of Canadian Public Affairs Consulting Group, Vista 1999
Strategic Management, Inc.; North American Institute - Canada
and The Cascadia Institute; and Director
Norman R. Miller 52 Attorney; and Director 1999
Anna Stylianides 35 President, Owner of Uniglobe Vista Travel Ltd.; President, 2000
kTravel Solutions Inc.; and Director
David C. Walker 53 President, founder of West-Can Consultants Ltd.; Chairman of 2000
Acsion Industries, a founding member of the Board of Directors
of the Canada Pension Plan Investment Board; formerly a
member of Parliament from 1988-1997; and Director
</TABLE>
----------
Nathan Nifco
Nathan Nifco founded Nifco Synergy Ltd. in 1991. In September 1998,
Mr. Nifco incorporated Nifco Investments Ltd. for the purposes of holding all
outstanding shares of Nifco Synergy Ltd. In December 1998, Nifco Investments
Ltd. and all of its subsidiaries were acquired by the Company (formerly
Innovest Capital Sources Corporation). In connection with the transaction, Mr.
Nifco obtained control of the Company. Mr. Nifco served as a member of the
Canadian Blue Ribbon Panel for Smart Communities (1991 to 1999), and currently
serves as a member of the Canadian National Selection Panel for Smart
Communities (1999 - present). Mr. Nifco was nominated for the British Columbia
Entrepreneur of the Year award in 1999. Mr. Nifco received his B.Sc. in
computer science from the Monterrey Institute of Technology in Mexico City
(1986); an M.Sc. from the Rosenbluth Foundation in artificial intelligence,
also in Mexico City (1988); an MBA with a concentration in International
Business Management from Asia Pacific International University (1994); and a
diploma in executive leadership and management from the Sloan School
22
<PAGE> 25
of Management, Massachusetts Institute of Technology (1992). Mr. Nifco is
currently taking Professional Development courses at the John F. Kennedy School
of Government at Harvard University.
Charles K. Kelly
Charles Kelly has been the Chairman and Chief Executive Officer of
Vista Strategic Management, Inc. (1990-Present), Chairman of the Canadian
Public Affairs Consulting Group, Inc. (1978-Present) and the Chairman of
Resortport Development Corporation Ltd. (Present). Mr. Kelly has served as the
Chairman of two not-for-profit public policy organizations: The Cascadia
Institute and North American Institute-Canada since 1991 and 1994,
respectively. Mr. Kelly received his B.A. degree from Queen's University in
1971.
Norman R. Miller
Norman R. Miller is a founding partner of Wolin, Ridley & Miller LLP,
a law firm based in Dallas, Texas. Mr. Miller has practiced corporate and
securities law for more than 25 years. Mr. Miller received his J.D. from
Harvard Law School in 1973 and his B.A. degree, with distinction, from
Northwestern University in 1970.
Anna Stylianides
In October 1997, Anna Stylianides purchased Uniglobe Vista Travel Ltd.
("Uniglobe Vista"), a travel agency in Vancouver, British Columbia, and serves
as its President. In addition Ms. Stylianides is President of kTravel Solutions
Inc., which was formed to provide domain expertise to the Company. See "Certain
Transactions." In 1992, Ms. Stylianides was named special counsel to Investec
Merchant Bank Ltd., a major investment bank in South Africa and from 1992 to
1997 was a member of its corporate finance division where she was involved in
multi-million dollar international transactions assisting her clients with tax
structuring, acquisitions and securities offerings. Ms. Stylianides served on
the Bank's Risk Management Committee and Credit Committee. Ms. Stylianides
graduated from the University of the Witwatersrand in Johannesburg, South
Africa with a post graduate law degree in 1989 and obtained her B.A. degree in
1986.
David C. Walker
Dr. David Walker is the President and founder of West-Can Consultants
Ltd. (1978-Present), Chairman of Acsion Industries (2000-Present), and a
founding member of the Board of Directors of the Canada Pension Plan Investment
Board. Dr. Walker served as a Member of Parliament from 1988-1997. During that
time, he served from 1993-1996 as Parliamentary Secretary to the Minister of
Finance after which he became Chair of the House of Commons Industry Committee.
From 1974-1988, Dr. Walker was a Professor of Political Science at the
University of Winnipeg. Currently, Dr. Walker serves on the Board of Directors
of St. Boniface Hospital, the Manitoba Theatre Center, the Canada-U.S.
Fulbright Program and the Carleton University's Arthur Kroeger College of
Public Affairs Advisory Committee. In December of 1998, Dr. Walker was
appointed Honorary Consul General for the Republic of Korea.
Directors are elected for a term of one year and serve until their
successors are duly elected and qualified.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended September 30, 1999, the Board of
Directors had three meetings. Each director attended 100% of the meetings of
the Board of Directors held during the period for which he was a Director. The
Board's Audit Committee held two telephone conference meetings during 1999, and
the Compensation Committee did not hold any meetings during 1999.
Audit Committee. The Committee meets with our auditors to review the
results of the annual audit and discuss our financial statements. The Committee
currently consists of two directors, Norman Miller (Chairman) and Charles
Kelly.
Compensation Committee. The Committee considers and makes
recommendations concerning salaries and incentive compensation awards to
employees and consultants under our stock option plan; determines compensation
23
<PAGE> 26
levels; and performs such other functions regarding compensation as the Board
may delegate. There are no board or committee interlocks. The Committee
currently consists of two directors, Charles Kelly (Chairman) and Norman
Miller.
COMPENSATION OF DIRECTORS
The members of the Board of Directors do not receive cash compensation
for their services as directors but are reimbursed for their reasonable
expenses incurred in connection with attendance at meetings of the Board of
Directors and committees.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Our Articles of Incorporation limit the liability of directors to the
maximum extent permitted by Colorado law. Colorado law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
o any breach of their duty of loyalty to the corporation or its
shareholders;
o acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
o unlawful payments of dividends or unlawful stock repurchases
or redemptions; or
o any transaction from which the director, directly or
indirectly, derived an improper personal benefit.
The limitation of liability does not apply to liabilities arising
under the federal securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
Our Articles of Incorporation and bylaws provide that we will
indemnify our directors and officers and may indemnify our employees,
fiduciaries and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of the indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee, fiduciary or
other agent for any liability arising out of his or her actions in their
capacity as an officer, director, employee, fiduciary or other agent of the
Company and subsidiaries, regardless of whether the bylaws would permit
indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and persons controlling
the Company pursuant to the foregoing provision, or otherwise, we have been
advised that, in the opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
OTHER OFFICERS AND KEY EMPLOYEES
Executive officers are appointed by the Board and serve at the
discretion of the Board. Set forth below is information regarding executive
officers of the Company who are not directors.
<TABLE>
<CAPTION>
Name Age Principal Occupation/Position Held with the Company
---- --- ---------------------------------------------------
<S> <C> <C>
Jack Michaan 40 Chief Technology Officer
Darryl Cardey 32 Chief Financial Officer
Carol Beaul 47 President, Intelli Trade, Inc., a wholly-owned subsidiary
</TABLE>
24
<PAGE> 27
Jack Michaan, Chief Technology Officer
Jack Michaan has been Senior Software Engineer of the Company since
December 1999. From April 1999 to November 1999, Mr. Michaan was a Project
Engineer at Catouzer Electronic Publishing and Consulting, Inc. and Systems
Analyst with MacDonald Dettwiler and Associates. From 1990 to 1999, Mr. Michaan
was a Development Manager/Owner with Memory Systems, Ltd., in Sao Paulo,
Brazil. Mr. Michaan received his B.Sc., in Electronics Engineering in 1983 from
the University of Sao Paulo, Polytechnic School, Sao Paulo, Brazil.
Darryl Cardey, Chief Financial Officer
Darryl Cardey has been Chief Financial Officer of the Company since
September 1999. From 1996 to 1999 and 1994 to 1996, Mr. Cardey was the Chief
Financial Officer for Mercury Scheduling Systems Inc. and Kirkton Holdings
Ltd., respectively. Mr. Cardey received his B. Comm. degree (equivalent to B.S.
degree in Finance) from the University of British Columbia in 1990 and became a
Chartered Accountant in 1993.
Carol Beaul, President, Intelli Trade, Inc.
Carol Beaul has served as the President of Intelli Trade since 1994.
She has been a member of the board of directors of the Canadian Industrial
Transportation League since 1995. Ms. Beaul received her B.A. degree from
Windsor University in 1975.
There are no family relationships among any of the Company's
directors, officers or key employees.
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows compensation awarded or paid to, or earned
by the Company's Chief Executive Officer ("Named Executive Officer") for the
fiscal year ended September 30, 1999. The Company had no other executive
officers whose compensation exceeded $100,000 for such year.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION AWARDS
-----------------------------
NAME AND OTHER SECURITIES
PRINCIPAL ANNUAL RESTRICTED UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARD OPTIONS COMPENSATION
-------- ---- ------ ----- ------------ ----------- ------- ------------
($) ($)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Nathan Nifco, 1998 57,951 -0- $ 92,049(1) -0- -0- -0-
Chief Executive 1999 109,280 -0- 142,395 -0- 200,000 -0-
Officer, Chairman
and Director
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
----------
*All figures are shown in U.S. dollars.
(1) Nathan Nifco received other compensation in 1998 in the amount of
$92,049, which was earned but not paid in fiscal 1997.
(2) Compensation was paid pursuant to a management consulting agreement
with the Company.
25
<PAGE> 28
CONSULTING AND EMPLOYMENT AGREEMENTS
The Company has management consulting and employment agreements with
the executive officers and key employees named below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
ANNUAL
NAME DATE OF AGREEMENT COMPENSATION EXPIRATION DATE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nathan Nifco (Nifco Investment Ltd.)(1) November 30, 1998 $145,706 2003
-------------------------------------------------------------------------------------------------------------
Darryl Cardey September 1, 1999 $ 72,853 90-day notice
-------------------------------------------------------------------------------------------------------------
Carol Beaul (2) January 1, 1996 $ 55,633 Open
-------------------------------------------------------------------------------------------------------------
</TABLE>
----------
*All figures are shown in U.S. dollars.
(1) In addition, it is entitled to a bonus, to be determined at the
discretion of the Board of Directors, which shall not be less than ten
(10%) percent of annual compensation.
(2) Ms. Beaul is President of Intelli Trade, Inc.
STOCK INCENTIVE COMPENSATION PLAN
Our 1999 Stock Incentive Compensation Plan, as amended, (the "1999
Stock Plan") provides for the grant of incentive stock options, non-qualified
stock options and stock awards to employees, directors and consultants. On July
21, 2000, at the Annual Meeting of shareholders an increase in the total number
of shares of Common Stock available for issuance under the 1999 Stock Plan to
4,000,000 shares was approved. As of August 10, 2000, 1,795,000 options had been
granted to employees, officers and directors under the 1999 Stock Plan.
The compensation committee of the Board of Directors administers the
1999 Stock Plan and determines the terms of options granted, including the
exercise price, the number of shares subject to individual option awards and
the vesting period of the options. The exercise price of stock option grants
cannot be lower than 100% of the fair market value of the Common Stock on the
date of grant and, in the case of incentive stock options granted to holders of
more than 10% of our voting power, not less than 110% of the fair market value.
The term of a stock option cannot exceed ten years, and the term of an
incentive stock option granted to a holder of more than 10% of our voting power
cannot exceed five years. The Board of Directors may amend, modify or terminate
the 1999 Stock Plan at any time as long as such amendment, modification or
termination does not impair the rights of plan participants with respect to
outstanding options under the 1999 Stock Plan. Our 1999 Stock Plan will
terminate in 2009, unless terminated earlier by the Board of Directors.
26
<PAGE> 29
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
INDIVIDUAL GRANTS RATES OF STOCK ALTERNATE TO
PRICE (f) AND (g):
APPRECIATION FOR GRANT DATE
OPTION TERM VALUE
----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF EXERCISE OR GRANT DATE
SECURITIES TOTAL OPTIONS BASE PRICE PRESENT
NAME UNDERLYING GRANTED ($/SH) EXPIRATION 5% 10% VALUE $
OPTIONS TO EMPLOYEES DATE ($) ($)
GRANTED (#) IN FISCAL YEAR
(a) (b) (c) (d) (e) (f) (g) (f)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Nathan Nifco(1) 200,000 23% 5.50 June 22, 2004 -- -- 0.71
Michael J. Forster(1) 150,000 17.2% 5.50 August 1, 2004 -- -- 0.71
Darryl Cardey(1) 100,000 11.5% 5.50 September 1, 2004 -- -- 0.71
Sokhie S. Puar(1) 100,000 11.5% 5.50 June 22, 2004 -- -- 0.71
Carol Beaul 100,000 11.5% 5.50 June 22, 2004 -- -- 0.71
Peter Rive 40,000 .05% 5.50 June 22, 2004 -- -- 0.71
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The individuals entered into a management consulting
agreement with the Company and will receive Non-Qualified
Stock Options.
* Total number of options granted to employees and directors
during fiscal year 1999 was 929,000.
* We use the Black-Scholes option-pricing model to compute
estimated fair value, based on the following assumptions:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Risk free interest rate 6.0%
Dividend yield rate -0-%
Price volatility 27.7%
Weighted average expected life of options 4.5 years
</TABLE>
Option Exercises In Last Fiscal Year
For the fiscal year ended September 30, 1999, there were no options
exercised by the Named Executive Officers.
SAR Grants in Last Fiscal Year
There were no stock appreciation rights granted during fiscal year
ended September 30, 1999.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of our Common Stock as of March 1, 2000 by: (i) each nominee for
director; (ii) each of the executive officers named in the Summary Compensation
Table; (iii) all executive officers and directors of the Company as a group;
and (iv) all those known by us to be beneficial owners of more than five
percent of our Common Stock.
27
<PAGE> 30
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
-----------------------------------------
BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
---------------- ---------------- ----------------
<S> <C> <C>
Nathan Nifco(3) ................................................ 3,003,070(2)* 24.00%
Anna Stylianides ............................................... 0* **
David C. Walker ................................................ 0* **
Charles K. Kelly ............................................... 0* **
Norman R. Miller ............................................... 0* **
Darryl Cardey .................................................. 50,000* **
Aurora Davidson ................................................ 0* **
Carol Beaul .................................................... 0* **
Dina Nifco(3) .................................................. 2,991,355(2) 23.91%
All executive officers and directors as a group (9 persons) 6,044,425* 47.91%
</TABLE>
----------
* The number of beneficial shares owned includes options that the person
has the right to acquire beneficial ownership within a sixty day
period.
** Less than one percent.
(1) This table is based upon information supplied by officers, directors
and principal shareholders and by Schedules 13D and 13G filed with the
SEC. Unless otherwise indicated in the footnotes to this table and
subject to community property laws where applicable, we believe that
each of the shareholders named in this table has sole voting and
investment power with respect to the shares indicated as beneficially
owned. Applicable percentages are based on 12,512,666 shares of Common
Stock outstanding on August 10, 2000, adjusted as required by rules
promulgated by the SEC.
(2) This does not include 5,575 shares of Common Stock beneficially owned
by the Nifco Family Trust, of which Nathan Nifco is the Trustee and
Dina Nifco is a beneficiary.
(3) Dina Nifco is the wife of Nathan Nifco.
OFFERING SHAREHOLDERS
This prospectus relates to the offering by the Offering Shareholders
for resale of shares of our Common Stock acquired by them upon conversion of
debentures or exercise of investment options, options and warrants received in
private placement transactions or which they acquired in exchange for
subsidiary shares. See "Security Ownership of Certain Beneficial Owners and
Management." All of the Shares offered by this prospectus are being offered by
the Offering Shareholders for their own accounts.
The following table sets forth certain information with respect to the
number of Shares offered by the Offering Shareholders. To our knowledge, the
Offering Shareholders would have sole voting and investment power over the
Shares listed in the table below, if Shares were issued upon conversion of the
debentures or exercise of the investment options, options and warrants.
28
<PAGE> 31
<TABLE>
<CAPTION>
Aggregate Number Shares Beneficially Owned
Shares Beneficially of Shares to be Sold After Offering
Owned Prior to Offering in Offering -------------------------
----------------------- ----------- Number Percent
------ -------
<S> <C> <C> <C> <C>
RGC International Investors, LDC ("RGC") 4,900,000 4,900,000 0 --
Continental Capital & Equity Corporation 200,000 200,000 0 --
G. Kopolow & Associates 3,750 3,750 0 --
AB Phoenix Inc. 21,250 21,250 0 --
Peter Sanders 100,000 100,000 0 --
Murdock Capital Partners Corp. 200,000 200,000 0 --
-------------- --------------
5,425,000 5,425,000
</TABLE>
----------
Subject to adjustment, the debentures issued to RGC are convertible
into shares of Common Stock at a conversion price based on the trading price of
our Common Stock over a fixed period prior to conversion of the debentures, up
to a fixed conversion price of $9.7125. The related investment options are
exercisable at the fixed conversion price of $9.7125 per share, and the related
warrants are exercisable at the fixed price of $11.10 per share. See "Recent
Developments." Assuming no accrued interest, conversion in full of the
debentures at a price of $3.125 per share and exercise in full of the related
investment options at the fixed conversion price and exercise in full of the
warrants at their fixed price would result in the issuance of an aggregate of
2,444,801 shares. In accordance with our agreement with the holder of the
debentures, to assure that adequate shares are available for issuance in the
event of decreases in the conversion price of the debentures, the number of
shares we have reserved, and the number of Shares set forth in the table above
for RGC, represents an agreed upon calculation of a multiple of the number of
shares potentially issuable upon conversion of the debentures and exercise in
full of the related investment options at an assumed conversion price and
exercise in full of the warrants at their fixed exercise price. The actual
number of shares issuable upon conversion of the debentures and exercise of the
related investment options is indeterminate and depends on a number of factors
which cannot be predicted by us at this time, including the future market price
of our Common Stock and whether the mandatory redemption and default provisions
of the debentures are triggered, and could be materially less or more than the
number set forth above. The amount to be registered represents a good faith
estimate of the shares of Common Stock issuable upon conversion of the
debentures and exercise of the related investment options and warrants. The
registration statement of which this prospectus is a part also relates to an
indeterminate number of additional shares issuable upon conversion of the
debentures and exercise of the related investment options and the warrants and
exercise of the other options and warrants, as such number may be adjusted as a
result of stock splits, stock dividends and similar transactions in accordance
with Rule 416 under the Securities Act.
Under the terms of the debentures and the related warrants, the
debentures are convertible and the investment options and warrants are
exercisable by any holder only to the extent that the number of shares of
Common Stock issuable pursuant to such securities, together with the number of
shares of Common Stock owned by such holder and its affiliates (but not
including shares of Common Stock underlying unconverted debentures or
unexercised portions of the investment options or warrants) would not exceed
4.9% of the then outstanding Common Stock as determined in accordance with
Section 13(d) of the Exchange Act. Accordingly, the number of shares of Common
Stock set forth in the table for RGC exceeds the number of shares of Common
Stock that RGC could own beneficially at any given time through their ownership
of the debentures, the investment options and the warrants. In that regard, the
beneficial ownership of the Common Stock by RGC set forth in the table is not
determined in accordance with Rule 13d-3 under the Exchange Act.
The warrants issued to G. Kopolow & Associates and AB Phoenix Inc. are
exercisable at $11.10 per share. The options granted to Continental Capital &
Equity Corporation are exercisable as follows: 50,000 at $5.25 per share,
50,000 at $6.00 per share, 50,000 at $7.50 per share and 50,000 at $8.00 per
share. The options granted to Peter Sanders
29
<PAGE> 32
were exercisable at $5.50 per share, on May 24, 2000 the options were repriced
at $1.50 per share. The warrants issued to Murdock Capital Partners Corp. are
exercisable at $6.00 per share.
PLAN OF DISTRIBUTION
The Shares being offered under this prospectus by the Offering
Shareholders or their respective pledgees, donees, transferees or other
successors in interest, may be offered and sold from time to time on the OTC
Bulletin Board, or on other stock exchanges or quotation services on which the
Shares may be trading, at prevailing market prices or in privately negotiated
transactions. Such Shares may be sold by one or more of the following methods,
without limitation:
o a block trade in which a broker or dealer will attempt to
sell the Shares as agent but may position and resell a
portion of the block as principal to facilitate the
transaction
o the writing of options on the Shares
o short sales
o purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this
prospectus
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers
o face-to-face transactions between sellers and purchasers
without a broker/dealer
o any combination of the foregoing
Brokers or dealers engaged by the Offering Shareholders may arrange
for other brokers or dealers to participate. Brokers or dealers may receive
commissions or discounts from the Offering Shareholders in amounts to be
negotiated. Participating brokers and dealers and the Offering Shareholders may
be deemed to be "Underwriters" within the meaning of the Securities Act in
connection with such sales.
The Shares may also be sold pursuant to Rule 144. The Offering
Shareholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The Offering Shareholders or their respective pledgees, donees,
transferees or other successors in interest, may also sell the Shares directly
to market makers acting as principals and/or broker-dealers acting as agents
for themselves or their customers. Such broker-dealers may receive compensation
in the form of discounts, concessions or commissions from the Offering
Shareholders and/or the purchasers of Shares for whom such broker-dealers may
act as agents or to whom they sell as principal or both, which compensation as
to a particular broker-dealer might be in excess of customary commissions.
Market makers and block purchasers purchasing the Shares will do so for their
own account and at their own risk. It is possible that an Offering Shareholder
will attempt to sell Shares in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
Offering Shareholders cannot assure that all or any of the Shares offered in
this prospectus will be issued to, or sold by, the Offering Shareholders. The
Offering Shareholders and any brokers, dealers or agents, upon effecting the
sale of any of the Shares offered in this prospectus, may be deemed
"underwriters," as that term is defined under the Securities Act or the
Exchange Act, or the rules and regulations under such acts.
To comply with certain state securities laws, if applicable, the
Shares will be offered or sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states the Shares may not
be sold or offered unless they have been registered or qualified for sale in
such states or an exception for registration or qualification is available and
is complied with.
30
<PAGE> 33
The Offering Shareholders, alternatively, may sell all or any part of
the Shares offered by this prospectus through an underwriter. To our knowledge,
no Offering Shareholder has entered into any agreement with a prospective
underwriter. If an Offering Shareholder enters into such an agreement or
agreements, the relevant details will be set forth in a supplement or revisions
to this prospectus.
The Offering Shareholders and any other persons participating in the
sale or distribution of the Shares will be subject to applicable provisions of
the Exchange Act and the rules and regulations under such act including,
without limitation, Regulation M, which provisions may restrict certain
activities of, and limit the timing of purchases and sales of any of the Shares
by the Offering Shareholders or any other such person. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions, subject to specified exceptions or
exemptions. All of these limitations may affect the marketability of the
Shares.
We have agreed to indemnify the Offering Shareholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments the Offering
Shareholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
We will pay the costs of registering the Shares. There can be no
assurances that the Offering Shareholders will sell any or all of the offered
Shares.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than ten percent of a registered class of
our equity securities, to file initial reports of ownership and reports of
changes in ownership of Common Stock and our other equity securities with the
SEC. Officers, directors and greater than ten percent (10%) shareholders are
required by SEC regulation to furnish us with copies of all Section 16(a) forms
they file.
To our knowledge, the following table sets forth the directors,
officers and beneficial owners of more than ten percent of any class of our
equity securities registered pursuant to Section 12 of the Exchange Act that
failed to file on a timely basis:
<TABLE>
<CAPTION>
NO. OF LATE NO. OF TRANSACTIONS
INDIVIDUAL REPORTS NOT REPORTED TIMELY
---------- ------- -------------------
<S> <C> <C>
Carol Beaul 2 1
Darryl Cardey 1 1
Michael J. Forster 1 1
Lionel Prins 1 1
Charles K. Kelly 2 2
Nathan Nifco 1 1
Sokhie S. Puar 2 2
Gerald J. Wittenberg 1 1
</TABLE>
The number of late reports and transactions recorded above were
related to appointments of directors and the issuance of stock options. There
were no failures to file the required form.
31
<PAGE> 34
CERTAIN TRANSACTIONS
The Company is affiliated through common ownership with Tradespace
Technologies Corporation ("Tradespace"), PMG Project Management Groupware Inc.
("PMG") and Synergy Strategy Inc. ("Synergy Strategy"). Tradespace is a Delaware
corporation operating in Vancouver, British Columbia. It develops software
applications related to electronic barter and trade. PMG is a British Columbia
corporation operating in Vancouver, British Columbia. It develops and markets
software applications to assist school districts with centralized purchasing and
inventory control. Synergy Strategy is a British Columbia corporation organized
to contract with a U.S. company to market financial information services
technology in Mexico.
Nathan Nifco, the Chairman, Chief Executive Officer and Director of
the Company owns approximately eighty percent (80%) interest in Tradespace,
twenty percent (20%) interest in PMG and fifteen percent (15%) interest in
Synergy Strategy, a company that is no longer in operation. Sales to these
affiliates in 1998 and 1999 totaled $722,700 and $89,700, respectively.
On July 26, September 16 and November 16, 1999, the Company sold
200,000 shares of Common Stock for cash, at a price of $3.45 per share, to
certain of its Officers and Directors set forth below, in a private placement
pursuant to Rule 506, Regulation D, of the Securities Act:
<TABLE>
<CAPTION>
SHARES PRICE TOTAL
NAME TITLE(S) PURCHASED PER SHARE COST
---- -------- --------- --------- ----
<S> <C> <C> <C> <C>
Michael Forster President, Director 100,000 $3.45 $345,000
Sokhie Puar Vice President, Corporate Development 50,000 $3.45 $172,500
Darryl Cardey Chief Financial Officer 50,000 $3.45 $172,500
</TABLE>
In 1998, Nifco Synergy, Ltd., now known as SmartSources.com
Technologies, Inc., a wholly-owned subsidiary of the Company, entered into a
non-interest bearing, non-recourse note in the principal amount of $68,000 with
Nathan Nifco for additional working capital. Mr. Nifco is a Director, Officer
and majority shareholder of the Company. In fiscal year 1999, Mr. Nifco forgave
$44,100 of the related party debt. The balance on the note is $24,000.
In 1996, the Company acquired its Vancouver, Canada office space. There
are mortgage payables to a Canadian bank in the amount of $156,000, due in 2011,
and to two Canadian finance companies in the amount of $275,000, due in 2001 and
2002. The notes are guaranteed by Nathan Nifco, a Director, Officer and majority
shareholder of the Company.
Norman R. Miller serves on the Company's Board of Directors and is a
founding partner of Wolin, Ridley & Miller LLP, a law firm based in Dallas,
Texas. The firm acts as general counsel to the Company and is compensated for
its legal services.
Anna Stylianides, a director nominee, owns Uniglobe Vista Travel Ltd.
("Uniglobe Vista"), a travel agency. Sales made by Uniglobe Vista to
SmartSources.com, Inc. in fiscal year 1999 and through June 23, 2000 totaled
$12,427 and (Cdn) $270,789, respectively. Additionally, the Company entered into
a Master Relationship Agreement with kTravel Solutions Inc., on February 17,
2000. The Company has made no payments to kTravel Solutions Inc. to date.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 shares of Common
Stock. As of August 10, 2000, 12,512,666 shares of Common Stock were
outstanding, 4,000,000 shares were reserved for issuance upon exercise of
outstanding stock options, 525,000 shares were reserved for issuance upon
conversion or exercise of other outstanding options and warrants and that an
indeterminant number of shares of the Common Stock of the Company, initially
3,732,716 shares were reserved for issuance upon conversion or redemption of the
debentures or exercise of the related investment options and warrants, such
number to be subject to adjustment from time to time in accordance with the
debentures and the warrants.
32
<PAGE> 35
COMMON STOCK
Our Articles of Incorporation provide that each share of Common Stock
entitles its holder to one vote on all matters on which shareholders are
entitled to vote. Holders of Common Stock are entitled to receive dividends if
and when declared by our Board of Directors and are entitled to share ratably in
all of the assets of the Company available for distribution to holders of Common
Stock upon liquidation, dissolution or winding up of the Company. Holders of
Common Stock do not have preemptive or conversion rights, or cumulative voting
rights.
SHARES ELIGIBLE FOR FUTURE SALE
As of August 10, 2000, 12,512,666 shares of our Common Stock were
outstanding. Of these, 5,418,950 shares are immediately eligible for sale in the
public market without restriction or further registration.
All other outstanding shares of our Common Stock are "restricted
securities" as such term is defined under Rule 144 under the Securities Act, in
that such shares were issued in private transactions not involving a public
offering, and/or are "control securities" as such term is defined under Rule
144, in that such shares are held by our officers, directors or other
affiliates. Restricted and control securities may not be sold in the absence of
registration other than in accordance with Rule 144 or another exemption from
registration. In general, under Rule 144, as currently in effect, a person (or
persons whose shares are required to be aggregated), including an "affiliate" of
the Company, as that term is defined under Rule 144, who has beneficially owned
restricted securities for at least one year, is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (a) 1% of the then
outstanding shares of our Common Stock or (b) the average weekly trading volume
in our Common Stock during the four calendar weeks preceding the date on which
notice of such sale is filed, subject to various restrictions. In addition, a
person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale and who has beneficially owned restricted
securities proposed to be sold for at least two years would be entitled to sell
those shares under Rule 144(k) without regard to the requirements described
above. An officer, director or other affiliate who holds shares that are not
restricted securities may sell such shares within the volume limitations
described above but is not subject to the holding period described above. As of
March 1, 2000, 6,000,000 of our outstanding shares of Common Stock were eligible
for sale in compliance with Rule 144.
As of August 10, 2000, 1,795,000 shares of Common Stock were subject to
outstanding options for employees, officers and directors under our 1999 Stock
Plan, which 160,000 are vested. We intend to file a registration statement on
Form S-8 to register for resale the shares of Common Stock reserved for issuance
under our 1999 Stock Plan. Shares covered by the registration statement will be
eligible for sale in the public market upon effectiveness of such registration
statement and the exercise of the options without restriction, unless held by an
"affiliate," as that term is defined under Rule 144.
Nathan Nifco, Dina Nifco and the Nifco Family Trust have registration
rights with respect to 6,000,000 shares of Common Stock. They have waived
registration of such shares on the registration statement of which this
prospectus is a part. Level Jump Asset Management, Inc. will have registration
rights with respect to 150,000 shares of Common Stock upon exercise of its
warrants.
Sales of substantial amounts of our Common Stock under Rule 144, this
prospectus or otherwise could adversely affect the prevailing market price of
our Common Stock and could impair our ability to raise capital through the
future sale of our securities.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for us by
Wolin, Ridley & Miller LLP, Dallas, Texas. Norman R. Miller, a director of the
Company, is a founding partner of Wolin, Ridley & Miller LLP. See "Management."
33
<PAGE> 36
EXPERTS
The consolidated financial statements included in this prospectus have
been audited by Moss Adams LLP, independent certified public accountants, to the
extent and for the periods set forth in their report appearing herein, and are
included in reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.
With respect to the unaudited financial information for the period
ended June 30, 2000 included herein, the independent public accountants have
applied limited procedures in accordance with professional standards for a
review of such information. However, as stated in their separate report
included in the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 and incorporated by reference herein, they did not audit
and they do not express an opinion on that interim financial information.
Because of the limited nature of the review procedures applied, the degree of
reliance on their report on such information should be restricted. The
accountants are not subject to the liability provisions of Section 11 of the
Securities Act of 1933 for their report on the unaudited interim financial
information because that report is not a "report" or a "part" of the
Registration Statement prepared or certified by the accountants within the
meaning of Sections 7 and 11 of the 1933 Act.
ADDITIONAL INFORMATION
We are subject to the information requirements of the Exchange Act and
in accordance therewith files reports, proxy materials and other information
with the SEC. Such reports, proxy materials and other information can be
inspected and copied at the public reference facilities maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the SEC: Seven World Trade Center, 13th Floor, New
York, N.Y. 10048 and 500 West Madison Street, Chicago, Illinois 60661. Copies of
such material can also be obtained from the Public Reference Section of the SEC
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The SEC maintains a web-site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of such site is: http://www.sec.gov.
The Common Stock is listed on the OTC Bulletin Board and the reports, proxy
statements and certain other information filed by us may be obtained by calling
the Nasdaq Public Reference Room Disclosure Information Group at (800) 638-8241
or (202) 728-8298.
This prospectus contains a part of the Registration Statement on Form
SB-2/A, together with all exhibits and amendments thereto, the ("Registration
Statement") filed by us under the Securities Act. This prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain items of which are
contained in schedules and exhibits to the Registration Statement as permitted
by the rules and regulations of the SEC. Statements contained in this prospectus
as to the contents of any agreement, instrument or other document referred to
are not necessarily complete. With respect to each such agreement, instrument or
other document filed as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such reference.
No dealer, sales representative or any other person has been authorized
to give any information or to make any representations in connection with this
Offering other than those contained in this prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by us, and Offering Shareholders or any Underwriter. This prospectus
does not constitute an offer to sell, or a solicitation of, any person in any
jurisdiction where such an offer or solicitation would be unlawful. Neither the
delivery of this prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in our
affairs since the date hereof or that the information contained herein is
correct as of any time subsequent to the date hereof.
We furnish our shareholders with annual reports containing audited
financial statements, and we intend to furnish our shareholders with quarterly
reports containing unaudited financial statements.
34
<PAGE> 37
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors..................................................................................F-2
Consolidated Balance Sheet as of September 30, 1999.............................................................F-3
Consolidated Statement of Operations for the years ended September 30, 1998 and 1999............................F-4
Consolidated Statement of Shareholders' Equity for the years ended September 30, 1998 and 1999..................F-5
Consolidated Statement of Cash Flows for the years ended September 30, 1998 and 1999............................F-6
Notes to Consolidated Financial Statements......................................................................F-7
Independent Accountants Report.................................................................................F-27
Consolidated Balance Sheet for June 30, 2000 and September 30, 1999............................................F-28
Consolidated Statement of Operations - Unaudited for Quarter and Nine Months
ended June 30, 2000 and 1999..........................................................................F-29
Consolidated Statement of Cash Flows - Unaudited Nine months ended June 30, 2000 and 1999......................F-30
Notes to Consolidated Financial Statements - Unaudited for Quarter and Nine Months
ended June 30, 2000 and 1999..........................................................................F-31
</TABLE>
<PAGE> 38
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
SmartSources.com, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of SmartSources.com,
Inc. and Subsidiaries as of September 30, 1999, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for each of the
two years in the period 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
SmartSources.com, Inc. and Subsidiaries as of September 30, 1999, and the
results of its operations and its cash flows for each of the two years in the
period then ended in conformity with generally accepted accounting principles.
/s/ Moss Adams LLP
Bellingham, Washington
March 14, 2000, except for the second
paragraph of Note 17, as to which
the date is May 1, 2000
F-2
<PAGE> 39
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 164,200
Trade accounts receivable, net of allowance
for doubtful accounts of $36,500 184,800
Prepaid expenses 12,300
------------
Total current assets 361,300
CAPITALIZED SOFTWARE COSTS AND
PURCHASED SOFTWARE RIGHTS, net 1,550,500
PROPERTY AND EQUIPMENT, net 764,300
OTHER ASSETS 33,300
------------
TOTAL ASSETS $ 2,709,400
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 140,000
Income tax payable 78,300
Current portion of long-term debt 58,700
------------
Total current liabilities 277,000
LONG-TERM LIABILITIES
Due to stockholder 24,700
Long-term debt, net of current portion 414,800
Deferred tax liability 64,200
------------
Total liabilities 780,700
------------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
MINORITY INTEREST 3,441,100
------------
STOCKHOLDERS' DEFICIT
Common stock, no par value, 50 million shares authorized,
11,563,200 shares outstanding 1,821,300
Accumulated other comprehensive income 124,500
Accumulated deficit (3,210,700)
Deferred compensation (247,500)
------------
Total stockholders' deficit (1,512,400)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,709,400
============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<PAGE> 40
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, September 30,
1998 1999
------------ ------------
<S> <C> <C>
REVENUES EARNED $ 1,571,100 $ 721,000
OPERATING EXPENSES 1,164,800 2,023,900
------------ ------------
OPERATING INCOME (LOSS) 406,300 (1,302,900)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (63,300) (50,300)
Other income (expense) 16,000 (13,000)
Write-down of investment in joint venture (103,400) --
------------ ------------
(150,700) (63,300)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 255,600 (1,366,200)
BENEFIT FROM (PROVISION FOR) INCOME TAXES (102,700) 693,400
------------ ------------
NET INCOME (LOSS) $ 152,900 $ (672,800)
============ ============
BASIC EARNINGS (LOSS) PER SHARE $ 0.02 $ (0.07)
============ ============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.02 $ (0.07)
============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4
<PAGE> 41
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
YEARS ENDED SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Comprehensive
------------------------ Comprehensive Accumulated Deferred Income
Shares Amount Income Deficit Compensation (Loss) Total
----------- ----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1997 6,688,300 $ 100 $ 35,100 $(2,483,600) $ -- $ $(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 6,688,300 100 169,700 (2,395,500) -- (2,225,700)
Net loss -- -- -- (672,800) -- $ (672,800) (672,800)
Foreign currency translation
adjustment -- -- (68,500) -- -- (68,500) (68,500)
Income tax effect -- -- 23,300 -- -- 23,300 23,300
-----------
Total comprehensive income -- -- -- -- -- $ (718,000) --
===========
Common stock issued 4,874,900 1,500,000 -- -- -- 1,500,000
Stock warrants issued for
compensation -- 277,100 -- -- -- 277,100
Forgiveness of related
party debt -- 44,100 -- -- -- 44,100
Deferred compensation -- -- -- -- (247,500) (247,500)
Dividends -- -- -- (142,400) -- (142,400)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, September 30, 1999 11,563,200 $ 1,821,300 $ 124,500 $(3,210,700) $ (247,500) $(1,512,400)
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-5
<PAGE> 42
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
September 30, September 30,
1998 1999
------------ ------------
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES
Net income (loss) $ 152,900 $ (672,800)
Adjustments to reconcile net income (loss) to
net cash from operating activities
Depreciation and amortization 150,100 272,500
Loss on disposal of assets 1,700 40,500
Stock-based compensation -- 63,700
Realized (gains) losses on sale of investments 7,100 (10,400)
Deferred income taxes 78,700 (784,200)
Write-down of investment in joint venture 103,400 --
Changes in operating assets and liabilities
Trade accounts receivable (302,900) 229,400
Other assets (7,200) (39,000)
Accounts payable and other current liabilities 85,400 (63,700)
Income taxes payable and refundable (58,200) 65,500
Sale deposit 103,400 --
------------ ------------
Net cash flows from operating activities 314,400 (898,500)
------------ ------------
CASH FROM INVESTING ACTIVITIES
Purchase of property and equipment (46,600) (139,500)
Proceeds from sale of investments 180,400 86,900
Purchase of investments (16,600) --
Software costs capitalized (94,300) --
------------ ------------
Net cash flows from investing activities 22,900 (52,600)
------------ ------------
CASH FROM FINANCING ACTIVITIES
Repayment of note payable, net (59,100) (53,600)
Principal repayments of long-term debt (66,100) (64,800)
Repayment of advances from stockholder (156,600) (102,000)
Proceeds from issuance of common stock -- 1,500,000
Dividends (64,800) (142,400)
------------ ------------
Net cash flows from financing activities (346,500) 1,137,200
------------ ------------
EFFECT OF CHANGES IN EXCHANGE RATES (600) (23,600)
------------ ------------
NET CHANGE IN CASH (9,800) 162,500
CASH AND CASH EQUIVALENTS, beginning of year 11,500 1,700
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 1,700 $ 164,200
============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid $ 63,300 $ 50,300
============ ============
Income taxes paid $ 82,300 $ 32,300
============ ============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-6
<PAGE> 43
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION, REVERSE ACQUISITION, AND OPERATIONS
ORGANIZATION
SmartSources.com, Inc. (the Company) was incorporated in 1987 in the
State of Colorado as Cody Capital Corporation. The Company completed a
public offering in 1988. In 1989, it acquired Telco of Baton Rouge,
Inc., which was merged into the Company, and the Company changed its
name to Telco Communications, Inc. In 1994, the Company filed for
Chapter 11 bankruptcy protection. The Bankruptcy Court (the Court)
subsequently converted the status of the filing to Chapter 7 and
appointed a Trustee to manage the affairs of the Company.
In 1996, under direction of the Court, all authorized but unissued
shares were sold to an individual, and the Company emerged from
bankruptcy with no assets, liabilities, and subject to no claims or
litigation. In 1997, the Company name was changed to Innovest Capital
Sources Corporation, and control of the Company was obtained by
Intrepid International, S.A., a Panamanian corporation, through
purchase of approximately 85% of the Company's outstanding shares.
From the date of its emergence from bankruptcy on April 12, 1996 until
December 11, 1998, the date of the acquisition discussed below, the
Company operated as a development stage company. Prior to the
acquisition, the Company had no material amount of assets or
liabilities.
REVERSE ACQUISITION
Effective December 11, 1998, the Company completed the acquisition of
Nifco Investments Ltd. (Nifco Investments) and Subsidiaries. The
acquisition was effected by exchanging six million shares of common
stock for all outstanding shares of Nifco Investments. In connection
with the transaction, the stockholders of Nifco Investment obtained
control of the Company; and, accordingly, the transaction is
characterized as a reverse acquisition. However, because the Company
had no material amount of assets or liabilities, the transaction was
accounted for as a recapitalization of Nifco Investments, rather than
a business combination. The capital structure presented in the
accompanying financial statements reflects the capital structure of
the Company subsequent to a one for 75 reverse stock split authorized
on October 15, 1998 and the six million shares issued in connection
with the acquisition.
Concurrent with the acquisition, the Company name was changed to
SmartSources.com, Inc., and it adopted the September 30 fiscal
year-end of Nifco Investments.
OPERATIONS
Nifco Investments was incorporated in the province of British Columbia,
Canada in September 1998 for the purpose of holding all outstanding
shares of SmartSources.com Technologies, Inc. ((Technologies), formerly
Nifco Synergy Ltd.); Intelli Trade, Inc. (Intelli Trade); Infer
Technologies, Inc. (Infer Technologies); and Origin Software
Corporation (Origin Software).
Technologies 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 imarily on international trade compliance applications, which
help businesses qualify for preferential tariff treatment under the
North American Free Trade Agreement (NAFTA).
F-7
<PAGE> 44
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION, REVERSE ACQUISITION, AND OPERATIONS (CONTINUED)
Intelli Trade is a British Columbia corporation organized in 1994.
Operations are located in Toronto, Ontario, where it provides
international trade consulting services.
Infer Technologies is a Delaware corporation organized in 1999 to
exploit the Company's knowledge-management applications software known
as kServer. Operations are located in Silicon Valley.
Origin Software is a British Columbia corporation organized in
September 1998 to hold the rights to certain software products (see
Note 3).
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.
PRINCIPLES OF CONSOLIDATION AND MINORITY INTEREST - The consolidated
financial statements of SmartSources.com, Inc. and Subsidiaries include
the accounts of its direct and indirect wholly-owned subsidiaries:
Nifco Investments, Inc.; SmartSources.com Technologies, Inc.; Intelli
Trade, Inc.; Infer Technologies, Inc.; and Origin Software Corporation.
All material intercompany accounts and transactions have been
eliminated in consolidation.
Minority interest represents the preferred stockholders' proportionate
share of the equity of Origin Software Corporation and Infer
Technologies, Inc. The Company owns all issued and outstanding common
stock of these subsidiaries, which represents 100% of voting rights.
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 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.
Revenues from fixed-price service contracts and software development
contracts requiring significant production, modification, or
customization are recognized using the percentage-of-completion
method. Revenue from service contracts that are based on time incurred
is recognized as work is performed.
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.
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.
F-8
<PAGE> 45
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 incurred during fiscal 1998 and 1999
was $38,400 and $374,700, respectively. Costs incurred once
technological feasibility has been established, but prior to release of
product to customers, are capitalized and amortized on a
product-by-product basis. Annual amortization is the greater of the
amount computed using (a) the ratio that current gross revenues for a
product bear to total current and estimated future revenues or (b) the
straight-line method over the remaining estimated economic life of the
product. Management periodically compares unamortized costs to net
realizable value and writes off any excess.
It is reasonably possible that estimates of future gross revenues, the
remaining economic useful life of the products, or both will be
significantly revised. As a result, the carrying amount of the
capitalized software costs may be reduced materially in the near term.
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 and software - four to ten years, furniture
and fixtures - five years.
INTANGIBLE ASSETS - Costs of perfecting and protecting patents and
trademarks are capitalized and amortized using the straight-line
method over 20 years. No expense was incurred in 1998. Amortization
expense for 1999 was $1,400.
VALUATION OF LONG-LIVED ASSETS - The Company periodically reviews
long-lived assets, including identifiable intangible assets, whenever
events or changes in circumstances indicate that the carrying amount
of an asset may be impaired and not recoverable. Adjustments are made
if the sum of the expected future undiscounted cash flows is less than
the carrying amount.
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 - Basic earnings per share amounts are computed
based on the weighted average number of shares outstanding during the
period after giving retroactive effect to stock dividends, stock
splits and mergers accounted for as poolings of interests. Diluted
earnings per share are computed by determining the number of
additional shares that are deemed outstanding due to stock options and
other potentially dilutive share equivalents using the treasury stock
method.
F-9
<PAGE> 46
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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, as amended, becomes effective
for the Company in fiscal 2001 and management is currently assessing
the impact, if any, it may have on financial position and results of
operations.
NOTE 3 - CAPITALIZED SOFTWARE COSTS AND PURCHASED SOFTWARE RIGHTS
Information related to capitalized software costs and purchased software rights
is as follows:
<TABLE>
<CAPTION>
1998
--------------------------------------
Capitalized Purchased
Software Software
Costs Rights Totals
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 114,100 $ -- $ 114,100
Costs capitalized 94,300 -- 94,300
Amortization expense (85,800) -- (85,800)
Effect of changes in foreign currency exchange rates (11,200) -- (11,200)
--------- --------- ---------
Balance, end of year $ 111,400 $ -- $ 111,400
========= ========= =========
Cost $ 244,700 -- $ 244,700
Less accumulated amortization (133,300) -- (133,300)
--------- --------- ---------
$ 111,400 $ -- $ 111,400
========= ========= =========
<CAPTION>
1999
---------------------------------------------
Capitalized Purchased
Software Software
Costs Rights Totals
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year $ 111,400 $ -- $ 111,400
Costs capitalized -- -- --
Software rights purchased -- 1,614,600 1,614,600
Amortization expense (82,400) (98,600) (181,000)
Effect of changes in foreign currency exchange rates 2,100 3,400 5,500
----------- ----------- -----------
Balance, end of year $ 31,100 $ 1,519,400 $ 1,550,500
=========== =========== ===========
Cost $ 254,100 $ 1,620,700 $ 1,874,800
Less accumulated amortization (223,000) (101,300) (324,300)
----------- ----------- -----------
$ 31,100 $ 1,519,400 $ 1,550,500
=========== =========== ===========
</TABLE>
F-10
<PAGE> 47
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 3 - CAPITALIZED SOFTWARE COSTS AND PURCHASED SOFTWARE RIGHTS (CONTINUED)
REPURCHASE OF SOFTWARE RIGHTS
In 1995 and 1996, the Company's subsidiary, Technologies, sold the
rights to its primary software product, ORIGIN, to Columbia Diversified
Software Fund Limited Partnership (Columbia) for $2,432,000 and
$7,774,400 of notes receivable. For accounting purposes, the substance
of the ORIGIN sale was characterized as a sale of a tax benefit. Under
Canadian tax law, Columbia was immediately able to write off the entire
cost of the software and pass the benefit on to its limited partners.
Following the sale, the risks and rewards of ownership remained with
Technologies. Any future cash inflows to Technologies, either from
collection of principal and interest on the notes receivable or from
profit sharing arrangements, were wholly dependent on Technologies'
continued efforts to develop and market the software.
Due to uncertainties surrounding collection, Technologies did not
recognize the $7,774,400 notes receivable. Further, because of
contingent issues related to Revenue Canada's reviewing the value of
the software and the related tax deductions claimed by Columbia and its
investors, recognition of revenue for the $2,432,000 of cash received
by Technologies was deferred.
Under an agreement signed in May 1999, the Company's subsidiary, Origin
Software Corporation (Origin Software), reacquired the rights to ORIGIN
from Columbia. Terms of the agreement to be followed are summarized as
follows:
1. At closing in May 1999, Columbia transfers the software rights
to Origin Software in exchange for 11,670,400 class A
preferred shares and 5,000,000 class B preferred shares of
Origin Software.
2. On October 1, 1999, Origin Software redeems the 11,670,400
class A shares in exchange for a $7,774,400 note payable to
Columbia.
3. On October 1, 1999, Columbia exchanges the $7,774,400 note
from Origin software for the $7,774,400 of notes receivable
from Columbia that are held by Technologies.
4. At any time after October 1, 1999, Columbia may exercise an
option to exchange the 5 million class B shares of Origin
Software for an amount of common shares of the Company with
market value of Cdn $5 million (not to exceed 5 million common
shares reserved for the exchange), based on average trading
price during the fourteen-day period immediately prior to
exercise. The agreement requires that the common shares issued
are to be freely tradable, but 80% of the shares will be held
in trust and released ratably to Columbia over the following
four years.
The repurchase agreement also includes a mutual release designed to
insulate the Company and Columbia against claims arising against either
party.
The reacquisition of the software rights was accounted for using the
Cdn $5 million (US $3.4 million) value of the Company's common shares
that may ultimately be issued to Columbia upon conversion of the Class
B preferred shares. This amount was reduced by the Cdn $3.7 million (US
$2.5 million) of deferred gain, net of Cdn $1.1 million (US $.7
million) of associated deferred tax assets. Because Technologies did
not recognize the $7,774,400 note receivable taken as consideration
when the software rights were sold to Columbia in 1995 and 1996, no
value was assigned to the Class A shares issued to ultimately settle
this note. The rights are being amortized over four years.
F-11
<PAGE> 48
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1999
---------
<S> <C>
Land $ 210,800
Buildings and improvements 416,200
Computer equipment and software 345,400
Furniture and fixtures 94,900
---------
1,067,300
Less accumulated depreciation (303,000)
---------
$ 764,300
=========
</TABLE>
Depreciation expense in fiscal 1998 and 1999 was $64,300 and $90,100,
respectively.
NOTE 5 - INVESTMENT IN SOFTWARE RIGHTS
During fiscal 1996, the Company's subsidiary, Technologies, paid
$393,100 to acquire a 40% interest in certain software rights. Another
$1,637,900 of consideration was given in the form of a promissory
note, but payment of the note was contingent on the level of future
revenues derived from the investment. Through September 30, 1998,
Technologies had received essentially no revenue from the investment.
Accordingly, the investment was written down to its net realizable
value of $163,800.
Effective October 1, 1999, Technologies sold its interest in the
software for $163,800 cash and a $458,600 promissory note. Due to
uncertainties surrounding collection of the note receivable, the
Company has not recognized the note, and no gain or loss was
recognized on the sale.
NOTE 6 - NOTE PAYABLE AND LONG-TERM DEBT
NOTE PAYABLE
The Company's subsidiary, Technologies, had a line of credit facility
with a Canadian bank that allowed for borrowing up to $170,100. In
September 1999, the borrowing agreement expired, and the Company
elected not to renew the facility.
F-12
<PAGE> 49
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 6 - NOTE PAYABLE AND LONG-TERM DEBT (CONTINUED)
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1999
-------
<S> <C>
Note payable to a Canadian bank in monthly installments of $4,400 plus
interest at prime plus 1.25%, collateralized by general assets of
Technologies, due August 2000. $ 44,400
Mortgage payable to a Canadian bank in monthly installments of $1,700
including interest at 8.75%, collateralized by real estate of
Technologies and assignment of rents, guaranteed by the majority
stockholder, due in 2011. 155,500
Mortgages payable to two Canadian finance companies in aggregate
monthly installments of $2,200, including interest at rates of 7% and
9%, collateralized by real estate of Technologies and guaranteed by the
majority stockholder, due January 2001 and June 2002. 273,600
--------
Total debt 473,500
Less current portion (58,700)
--------
Long-term portion $414,800
========
</TABLE>
Long-term debt matures as follows:
<TABLE>
<CAPTION>
Year Ending
September 30
------------
<S> <C>
2000 $ 58,700
2001 118,200
2002 165,900
2003 9,900
2004 10,800
Thereafter 110,000
---------
$ 473,500
=========
</TABLE>
The obligations identified above are denominated in Canadian currency.
Under the terms of its loan agreements with the bank, Technologies is
subject to various covenants. Subsequent to year end, the bank released
the Company from its requirement to maintain certain financial ratios
and reduced the frequency of certain financial reporting requirements.
F-13
<PAGE> 50
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Current benefit (expense)
U.S $ -- $ --
Canadian (24,000) (90,800)
Deferred benefit (expense)
U.S -- 90,200
Canadian (78,700) 784,200
Change in valuation allowance -- (90,200)
------------ ------------
$ (102,700) $ 693,400
============ ============
</TABLE>
Net income (loss) before income taxes consist of the following:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
U.S. operations $ -- $ (294,800)
Canadian operations 255,600 (1,071,400)
------------ ------------
$ 255,600 $ (1,366,200)
============ ============
</TABLE>
The total tax provision differs from the amount computed using the
U.S. federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Income tax at 34% statutory rate $ (86,900) $ 464,500
Nondeductible expenses -- (10,000)
Net losses of foreign subsidiaries -- (364,300)
Benefit of foreign tax settlement -- 778,000
Excess tax payable in foreign jurisdictions (15,800) (84,600)
Change in valuation allowance -- (90,200)
---------- ----------
$ (102,700) $ 693,400
========== ==========
</TABLE>
The benefit of foreign tax settlement for 1999 reflects the effects of
the proposed settlement described in Note 12. Under the settlement, the
Company's income tax liability associated with the purchase and sale
for certain software rights described in Notes 3 and 5 is limited to
the cash portion of those transactions. The benefit received represents
an adjustment to previously recorded deferred income tax liabilities
associated with those transactions.
F-14
<PAGE> 51
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES (CONTINUED)
Tax effects of temporary differences that give rise to deferred tax
assets (liabilities) are as follows:
<TABLE>
<CAPTION>
1999
------------
<S> <C>
Assets
Net operating loss carryforwards $ 370,800
Research and development costs 128,600
Other 5,800
------------
505,200
------------
Liabilities
Depreciation (78,600)
Foreign currency translation adjustment (64,200)
------------
(142,800)
------------
Valuation allowance (426,600)
------------
Net deferred tax liability $ (64,200)
============
</TABLE>
The Company believes uncertainty exists surrounding realization of
certain deferred tax assets. Accordingly, it has recorded a $426,600
valuation allowance to reduce deferred tax assets to an amount that
will more likely than not be realized.
For tax purposes the Company has unused U.S. and Canadian net operating
losses available for carryforward of $232,200 and $729,700,
respectively. The U.S. losses expire in 2019, and the Canadian losses
expire in 2006.
Under existing laws, undistributed earnings of foreign subsidiaries
are not subject to U.S. tax until distributed as dividends. Currently,
the Company's foreign subsidiaries have no undistributed earnings. In
the event such earnings exist, they would be considered indefinitely
reinvested, and the Company would provide no deferred income taxes on
such amounts.
NOTE 8 - EARNINGS PER SHARE
The numerators and denominators of basic and diluted earnings per share
are as follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Numerator - Net income (loss) as reported $ 152,900 $ (672,800)
============ ============
Denominator - Weighted average number of shares outstanding 6,688,300 10,084,200
Effect of dilutive securities -- --
------------ ------------
Diluted weighted average number of shares outstanding 6,688,300 10,084,200
============ ============
Basic earnings (loss) per share $ 0.02 $ (0.07)
============ ============
Diluted earnings (loss) per share $ 0.02 $ (0.07)
============ ============
</TABLE>
F-15
<PAGE> 52
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 8 - EARNINGS PER SHARE (CONTINUED)
As described in Note 10, during 1999 the Company granted stock options
and warrants to purchase up to 2,069,000 shares, and its subsidiaries
issued preferred shares with exchange rights for up to 5,011,400
common shares. These shares were not included in computing diluted
earnings per share because their effects were antidilutive. As
disclosed in Note 17, subsequent to September 30, 1999, the Company
issued various shares and share equivalents that will have a dilutive
or potentially dilutive effect on earnings per shares in future
periods.
NOTE 9 - MINORITY INTEREST
Minority interest represents the preferred stockholders' proportionate
share of equity of Origin Software Corporation and Infer Technologies,
Inc. as follows:
<TABLE>
<CAPTION>
1999
------------
<S> <C>
Class A preferred stock (Origin Software Corporation) $ --
Class B redeemable, exchangeable preferred stock
(Origin Software Corporation) 3,407,000
Class A convertible, exchangeable preferred stock
(Infer Technologies, Inc.) 34,100
------------
$ 3,441,100
============
</TABLE>
ORIGIN SOFTWARE CORPORATION (ORIGIN SOFTWARE) PREFERRED STOCK AND SHARE
EXCHANGE AGREEMENT
In connection with the repurchase of software rights discussed in Note
3, the board of directors of the Company's subsidiary, Origin Software,
authorized the creation of two classes of preferred stock.
Class A preferred stock has no par value, 20 million shares are
authorized and 11,670,400 shares have been issued for the sole purpose
of repurchase the software rights referred to above. The shares are
nonvoting, and holders of the shares are entitled to 3% cumulative
dividends. Effective October 1, 1999, all outstanding shares were
redeemed. As described in Note 3, no value was assigned to these
shares.
Class B preferred stock has a Cdn $1 par value, 20 million shares are
authorized and 5,000,000 shares have been issued. The shares are
nonvoting, are redeemable at the option of the holder for Cdn $1 per
share, and have a liquidation preference of Cdn $1 per share. In the
event the holder requires the Company to redeem all or a portion of the
shares, the Company may pay for the redemption by issuing a promissory
note. The terms of such a note are not specified and would be subject
to negotiation.
Concurrent with the authorization and issuance of the Class B preferred
stock, Origin Software and the Company entered into a Share Exchange
Agreement (the Agreement) with Columbia Diversified Software Fund
Limited Partnership (Columbia), the holder of the shares and seller of
the software rights discussed n Note 3. Under the Agreement, subsequent
to October 1, 1999, Columbia has the right to exchange all or part of
the Class B preferred shares for an amount of common shares of the
Company with market value of Cdn $5 million (not to exceed 5 million
common shares reserved for the exchange), based on average trading
price during the fourteen-day period immediately prior to exercise.
Common shares issued are to be freely tradable, but 80% of the shares
will be held in trust and released ratably to Columbia over the
following four years.
F-16
<PAGE> 53
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 9 - MINORITY INTEREST (CONTINUED)
INFER TECHNOLOGIES, INC. (INFER TECHNOLOGIES) PREFERRED STOCK AND
STOCK-BASED COMPENSATION
Effective July 15, 1999, the board of directors of the Company's
subsidiary, Infer Technologies, authorized the issuance of 7,500
shares of $0.01 par value Class A preferred stock. The shares are
nonvoting and have a liquidation preference of $100 per share. Holders
have the right to convert each preferred share into 100 common shares
of Infer Technologies. Holders also have the right to exchange each
preferred share for approximately 18 shares of the Company's common
stock.
Concurrent with authorization of the preferred stock, Infer
Technologies entered into a subscription agreement to sell to its
chief engineer all Class A shares for $0.01 per share. The
subscription rights accrue ratably over 24 months at 312.5 shares per
month. As the rights accrue, the Company recognizes stock-based
compensation using the intrinsic value method, based on the difference
between the $0.01 sales price and the market value of the 18 shares of
common stock of the Company for which each preferred share can be
exchanged. During 1999, the Company recognized $34,100 of stock-based
compensation related to this arrangement.
NOTE 10- CAPITAL STOCK
COMMON STOCK
The Company has a single class of no par value common stock.
Authorized shares total 50 million. The capital structure presented in
the accompanying financial statements reflects the capital structure
of the Company subsequent to a one for 75 stock split authorized on
October 15, 1998 and the six million shares issued in connection with
the acquisition discussed in Note 1. Prior to completion of the
acquisition in the first quarter of fiscal 1999, Nifco Investments,
Inc. paid $142,400 of cash dividends to its majority stockholder. The
dividends paid in both 1998 and 1999 were based on equity as reported
under accounting principles generally acceptable in Canada, which
differs substantially from equity as reported under U.S. generally
accepted accounting principles.
During fiscal 1999, the Company issued or was committed to issue
4,874,900 shares for total proceeds received of $1.5 million.
Subsequent to year end, the Company was in the process of raising
capital through issuance of additional shares.
At September 30, 1999, a total of 5,000,000 common shares are reserved
to honor the exchange rights of holders of the Class B preferred
shares of Origin Software, through the number of shares that will
ultimately be issued to honor such rights may be significantly less
than the total shares reserved. Another 2,080,400 common shares are
reserved to honor outstanding stock warrants, grants made under the
Company's stock incentive compensation plan, and the exchange rights
of holders of the Class A preferred shares of Infer Technologies.
STOCK WARRANTS
Effective August 24, 1999, the Company issued one million stock
purchase warrants that entitle holders to purchase an equal number of
common shares at prices ranging from $4.00 to $6.00 per share. The
warrants expire August 2002. The warrants were issued at no cost in
connection with the Company entering into a sales representation
agreement with First City Partners Group, Inc. (First City). Under the
agreement, First City will represent the Company as a sales and
marketing agent for its line of software products and facilitate
mergers and acquisitions with compatible enterprises.
F-17
<PAGE> 54
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 10 - CAPITAL STOCK (CONTINUED)
Effective September 29, 1999, the Company issued another 150,000
warrants that entitle holders to purchase an equal number of shares at
$5.00 per share. The warrants expire August 2001. The warrants were
issued at no cost in connection with the Company entering into a
consulting agreement with Level Jump Asset Management, Inc. (Level
Jump). Under the agreement, Level Jump will assist and advise the
Company with respect to mergers and acquisitions, capital structuring,
and the placement of new debt and equity issues.
As required by SFAS No. 123, Accounting for Stock-Based Compensation,
the Company has applied the fair value method to account for the
issuance of the warrants. The Company used the Black-Scholes option
pricing model to compute estimated fair value of the warrants, based
on the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate 6.0%
Price volatility 27.7%
Average expected life of warrants - First City 2.0 years
Average expected life of warrants - Level Jump 1.3 years
</TABLE>
Total compensation cost computed for the warrants issued to First City
is $247,500. The cost is being recognized ratably over the three-year
term of the warrants. A total of $82,500 of the deferred compensation
was previously reported as a prepaid expense and $165,000 as an other
asset. The 1999 financial statements have been restated to report the
total amount as a deduction from stockholders' equity. Total cost
computed for the warrants issued to Level Jump is $29,600. As the term
of the agreement with Level Jump is only six months and uncertainty
exists surrounding the amount and timing of future issuances or
mergers and acquisitions arising from the agreement, the cost has been
recognized currently.
STOCK OPTION INCENTIVE COMPENSATION PLAN
Effective June 21, 1999, the Company adopted the 1999 Stock Incentive
Compensation Plan (the Plan). Under the Plan, as amended, subject to
shareholder approval, the Company may make grants of incentive stock
options, nonqualified stock options, and stock awards to employees,
officers, directors and consultants of the Company and its
subsidiaries for an amount of common shares not to exceed four million
shares. The exercise price of incentive stock options and nonqualified
stock options can be no less than the fair value of the Company's
common stock on the date of grant. The maximum term of options is ten
years; and, unless otherwise modified by the Plan administrator, they
vest over four years. Options granted to senior management during 1999
vest over two years.
A summary of the status of the Plan during 1999 is as follows:
<TABLE>
<CAPTION>
Weighted-
Number Average
of Options Exercise Price
-------------- --------------
<S> <C> <C>
Options outstanding at September 30, 1998 -- $ --
Granted 929,000 5.50
Exercised -- --
Forfeited (10,000) 5.50
-------------- --------------
Options outstanding at September 30, 1999 919,000 $ 5.50
============== ==============
Options exercisable at September 30, 1999 -- $ --
============== ==============
</TABLE>
F-18
<PAGE> 55
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 10 - CAPITAL STOCK (CONTINUED)
A summary of stock options outstanding at September 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$5.50 919,000 4.75 years $5.50 - $ -
</TABLE>
The Company applies the provision of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations to account
for its stock-based awards. Accordingly, costs for employee stock
options or issuance of shares is measured as the excess, if any, of
the fair value of the Company's common stock at the measurement date
over the amount the employee must pay to acquire the stock. No
compensation expense was recognized for grants of awards under the
Plan in 1999.
SFAS No. 123, Accounting for Stock-Based Compensation, requires
disclosure of the pro forma effect of applying the fair value method
of accounting for stock options. For disclosure purposes, the Company
uses the Black- Scholes option-pricing model to compute estimated fair
value, based on the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate 6.0%
Dividend yield rate --%
Price volatility 27.7%
Average expected life of options 4.5 years
</TABLE>
Total estimated compensation expense calculated using the
Black-Scholes option-pricing model for 1999 is $416,900, net of tax,
of which $30,800 has been allocated to 1999 and the balance of which
will be allocated to future years. Pro forma net loss and earnings
(loss) per share amounts for 1999 are as follows:
<TABLE>
<CAPTION>
1999
------------
<S> <C>
Pro forma net loss $ (703,600)
============
PRO FORMA BASIC EARNINGS (LOSS) PER SHARE $ (0.07)
============
PRO FORMA DILUTED EARNINGS (LOSS) PER SHARE $ (0.07)
============
</TABLE>
NOTE 11 - NON-CASH TRANSACTIONS
As described in Note 3, during 1999, the Company's subsidiary, Origin
Software Corporation, issued five million shares of Class B preferred
stock valued at $3,407,000 to repurchase certain software rights. The
capitalized cost of the software rights was reduced by $2,540,900 of
deferred revenue related to the previous sale of the rights in 1995
and 1996, and increased by $748,500 of deferred income tax assets, net
of a valuation allowance, related to the deferred revenue.
As described in Note 10, in August 1999, the Company issued one
million stock warrants in connection with its entering into a sales
representation agreement. As a result of the issuance, the Company
recorded $247,500 of deferred sales commission expense.
F-19
<PAGE> 56
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 11 - NON-CASH TRANSACTIONS (CONTINUED)
As described in Note 5, during 1999, the Company sold its interest in
software rights and recognized a $98,300 sale deposit received in 1998
in computing the gain or loss on the sale.
During 1999, the Company's majority stockholder forgave a $44,100
obligation for advances made and compensation accrued in prior years.
The forgiveness was credited to common stock.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
GOING CONCERN, LIQUIDITY AND OPERATIONS
The Company incurred an operating loss and had negative cash flows
from operations in 1999. At September 30, 1999, it had a stockholders'
deficit of $1,512,400.
During 1999, the Company continued its plan to diversify its revenue
base and reposition its operations to take advantage of expected
lucrative software markets, particularly the knowledge management
segment. It also hired a new chief operating officer and chief
financial officer, as well as other vital management personnel. In
order to provide working capital in 1999, the Company raised a $1.5
million of equity capital. The Company plans to raise additional
equity capital in fiscal 2000 sufficient to meet cash flow
requirements, consistent with its business plan, which is currently
under development. As described in Note 17, through March 14, 2000,
the Company had issued common shares in private placements for total
proceeds of $1,184,000. It also placed 7% convertible debentures with
investors for $4,552,000 of net proceeds.
CANADIAN TAX IMPLICATIONS OF SALE AND PURCHASE OF SOFTWARE RIGHTS
As described in Note 3, during 1995 and 1996, the Company's
subsidiary, Technologies, sold the rights to its primary software
product to Columbia Diversified Software Fund Limited Partnership
(Columbia). During 1999, another of the Company's subsidiaries, Origin
Software, repurchased these rights. As described in Note 5, during the
same time frame, Technologies purchased and sold an interest in
certain other software rights. These transactions all included a
significant noncash component that employed the issuance, receipt, and
settlement of long-term promissory notes. As described more fully in
Notes 3 and 5, these notes were not recognized for financial reporting
purposes. However, the notes increased significantly the value
assigned to the software rights in question for tax reporting purposes
in Canada.
Under Canadian tax law, the cost of software acquired can be written
off in the year of acquisition. Gains on sales of capital assets,
including software rights, are recognized over a maximum of five
years, in annual increments equal to the greater of the amount of cash
received during the year or one-fifth of the gain. Assigning a value
to the software sales and purchases that includes the promissory notes
referred to above increases significantly both the tax deductions
taken by those purchasing the software and the gains recognized by
those selling.
Revenue Canada is currently reviewing various software transactions,
including those to which Technologies was a party. The Company has
submitted a proposed settlement that would limit the amount of tax it
must pay on the net gain from these transactions to the net amount of
cash received. Under the proposed settlement, the Company would incur
no additional tax liability beyond that which was reported in prior
years. Effective January 7, 2000, Revenue Canada agreed in substance
to the terms of the proposed settlement; and, accordingly, management
estimates that no additional tax liability will be incurred with
respect to the transactions referred to above.
F-20
<PAGE> 57
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES
The Company obtains the use of certain office facilities and equipment
under terms of operating lease agreements. Future minimum lease
payments are as follows:
<TABLE>
<CAPTION>
Year Ending
September 30,
-------------
<S> <C>
2000 $29,100
2001 21,100
2002 10,900
-------
$61,100
=======
</TABLE>
Intelli Trade leases its office under an annual renewable lease
currently requiring monthly payments of $3,200. Total lease expense
was $58,300 and $73,000 in 1998 and 1999, respectively.
COST SHARING AND ROYALTY AGREEMENT
During fiscal 1996, Technologies 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, Technologies is reimbursed for a
portion of costs incurred to develop advanced network technologies and
applications. At September 30, 1999, the project was complete and a
total of $236,400 had been received from the Organization.
Subsequent to completion of the project, Technologies is obligated to
pay a 3% royalty to the Organization based on sales of 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 accruing during the period
September 1997 through March 2001. At September 30, 1999, no material
revenues had been generated from the related products and no liability
for royalties was accrued.
SALES REPRESENTATION AGREEMENT
As discussed in Note 10, in August 1999, the Company issued one
million stock purchase warrants in connection with entering into a
sales representation agreement with First City Partners Group, Inc.
(First City). Under the agreement, First City will represent the
Company as a sales and marketing agent for its line of software
products and facilitate mergers and acquisitions with compatible
enterprises. The term of the agreement is five years, with four
automatic renewal terms of five years each. In addition to the
issuance of warrants mentioned above, the Company is required to pay a
10% commission on the value of each contract entered into with a
candidate provided by First City. Commissions are due at the time of
execution of each contract and payable under terms of the contract.
F-21
<PAGE> 58
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
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. In
January 1999, the Company's majority shareholder sold his interest in
PMG.
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.
Sales to affiliates in 1998 and 1999 totaled $722,700 and $89,700,
respectively.
NOTE 14 - CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, and accounts receivable. The Company places its temporary
cash investments with major financial institutions. Balances may at
times exceed federally insured limits. 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. Three customers accounted for
56% of accounts receivable at September 30, 1999.
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.
F-22
<PAGE> 59
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 15 - SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
Software Sales
and Development
---------------------------- International
International Trade
Trade kServer Consulting Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
External revenues $ 1,219,200 $ -- $ 351,900 $ 1,571,100
Intersegment revenues 9,300 -- 16,200 25,500
Interest expense 62,200 -- 1,100 63,300
Depreciation and amortization 147,600 -- 2,500 150,100
Segment income before tax 190,900 -- 64,700 255,600
Income tax expense 90,700 -- 12,000 102,700
Segment income 100,200 -- 52,700 152,900
Expenditures for segment assets 38,500 -- 8,100 46,600
<CAPTION>
1999
----------------------------------------------------------
Software Sales
and Development
---------------------------- International
International Trade
Trade kServer Consulting Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
External revenues $ 222,900 $ 119,200 $ 378,900 $ 721,000
Intersegment revenues 134,500 -- 6,200 140,700
Interest expense 48,600 200 1,100 49,900
Depreciation and amortization 265,300 200 7,000 272,500
Segment income (loss) before tax (982,000) (97,900) (52,100) (1,132,000)
Income tax expense (benefit) (693,400) -- -- (693,400)
Segment income (loss) (288,600) (97,900) (52,100) (438,600)
Segment assets 2,593,500 6,300 132,200 2,732,000
Expenditures for segment assets 137,100 1,400 1,000 139,500
Software rights acquired for stock 1,614,600 -- -- 1,614,600
</TABLE>
F-23
<PAGE> 60
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 15 - SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Total revenues for reportable segments $ 1,596,600 $ 861,700
Less intersegment revenues (25,500) (140,700)
------------ ------------
Consolidated total $ 1,571,100 $ 721,000
============ ============
Total income (loss) before tax for reportable segments $ 255,600 $ (1,132,000)
Corporate headquarters expenses -- (234,200)
------------ ------------
Consolidated total $ 255,600 $ (1,366,200)
============ ============
Total assets for reportable segments $ 2,732,000
Corporate headquarters assets 120,900
Elimination of intersegment receivables (143,500)
------------
Consolidated total $ 2,709,400
============
</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 1999
------------ -------------------------------
Long-Lived
Revenues Revenues Assets
------------ ------------ ------------
<S> <C> <C> <C>
Canada $ 636,100 $ 418,200 $ 2,313,600
United States 935,100 302,800 1,200
------------ ------------ ------------
Total $ 1,571,100 $ 721,000 $ 2,314,800
============ ============ ============
</TABLE>
MAJOR CUSTOMERS
In 1998, revenues from two related parties, Tradespace Technologies
Corporation and PMG Project Management Groupware, Inc. (PMG),
accounted for 20% and 26% of the Company's consolidated revenues,
respectively. In 1999, PMG and Delco Remy America, Inc. (Delco Remy)
each accounted for 12% of consolidated revenues. Revenues from these
customers were earned in the Company's software sales and development
segment, with the exception of Delco Remy, for which revenues were
earned in the international trade consulting segment.
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 the amount due to stockholder approximates
its carrying amount because of the short-term nature of the financial
instrument. The fair value of long-term debt approximate their
carrying amount because the instruments bear interest at rates similar
to the Company's incremental borrowing rate.
F-24
<PAGE> 61
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 17 - SUBSEQUENT EVENTS
PRIVATE PLACEMENT OF COMMON SHARES
From November 3, 1999 through March 2, 2000, the Company issued
approximately 292,000 common shares to investors in private placements
for total proceeds of $1,184,000.
EXCHANGE OF CLASS B REDEEMABLE, EXCHANGEABLE PREFERRED STOCK OF ORIGIN
SOFTWARE CORPORATION
Effective January 26, 2000, Columbia Diversified Software Fund Limited
Partnership (Columbia) notified the Company that it wished to exercise
rights associated with the 5 million outstanding shares of Class B
preferred stock of Origin Software Corporation (Note 9). On January
27, 2000 the Company accepted the notice. The exchange ratio was based
on a $7.60 share price of the Company's common stock, and on February
15, 2000, the Company issued 457,400 shares of common stock in the
name of Columbia to be exchanged for the Class B preferred shares.
Columbia has not yet tendered the Class B shares to the Company, and
the Company has not yet delivered the 457,400 shares of common stock.
Pursuant to the terms of the Share Exchange Agreement (the Agreement)
only 20% or 91,480 shares of common stock would be delivered directly
to Columbia. The remaining 80% or 365,920 shares would be held in
trust.
Columbia has subsequently contended that the Company has not performed
in accordance with the Agreement because the shares of common stock
issued in Columbia's name are currently restricted from resale
pursuant to applicable securities laws. Based on its contention,
Columbia has indicated that it is withdrawing its notice of exchange
and has requested that the Company amend the Agreement. Management
believes the possibility exists that the Company may negotiate an
amendment to the Agreement and ultimately issue additional shares,
though at present, management is unable to determine what the terms of
such an amendment might entail or estimate how many additional shares
may be issued.
APPLICATION FOR NASDAQ SMALL CAP MARKET LISTING
On February 17, 2000, the Company filed an application with the
National Association of Securities Dealers to have its common stock
listed on the Nasdaq SmallCap Market.
PRIVATE PLACEMENT OF CONVERTIBLE DEBENTURES AND WARRANTS
On February 24, 2000, the Company issued $5 million of 7% convertible
debentures and warrants to purchase 330,000 shares of common stock. In
connection with placing the debentures and warrants, the Company paid
$325,000 of placement fees, $93,000 of legal costs issued warrants in
lieu of placement fees to purchase 25,000 shares of common stock at a
share price of $11.10, and paid $30,000 to the holders of the
debentures for reimbursement of a portion of their legal costs. The
term of the 25,000 warrants is two years.
Concurrent with placing the debentures and warrants, the Company
entered into a Registration Rights Agreement (the Registration
Agreement) with the holders of the debentures. The Registration
Agreement requires that the Company file a registration statement with
the Securities and Exchange Commission by March 24, 2000 to register
the shares of common stock that may be acquired upon conversion of the
debentures.
The 330,000 warrants are exercisable over a five-year term at an
exercise price of $11.10 per share. The debentures mature in five
years and are convertible in whole or in part into common stock at any
time before maturity at a conversion price that floats with the market
price of the stock, not to exceed a fixed conversion price of $9.71.
After August 24, 2000, if the debentures are submitted for conversion
and the conversion price is below $9.71, the Company has the right to
redeem the debentures for cash at an amount equal to the value
F-25
<PAGE> 62
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
of the converted shares. For each share of common stock issued upon
conversion, the holders of the debentures have the option to purchase
one additional share at the fixed conversion price of $9.71. The number
of shares issued upon conversion of the debentures and exercise of the
additional purchase option is limited in that the total number of
shares beneficially owned by the holders of the debentures and their
affiliates may not exceed 4.9% of outstanding common shares. Any
issuance of shares in excess in of this limitation must be approved by
a majority of the Company's common stockholders.
The number of shares issued upon conversion of the debentures and
exercise of the additional purchase option is limited in that the total number
of shares beneficially owned by the holders of the debentures and their
affiliates may not exceed 4.9% of outstanding common shares. Any issuance of
shares in excess in of this limitation must be approved by a majority of the
Company's common stockholders.
In the event that certain circumstances pertain, including without
limitation the following, the conversion price will be adjusted
downward:
1. The Company's common stock is not listed on the American Stock
Exchange or the Nasdaq SmallCap Market by October 24, 2000 or
the Nasdaq National Market by February 24, 2001.
2. The Company is in default of the requirements of the
Registration Agreement.
In the event the Company fails to comply with certain terms of the
debentures, holders may elect for the debentures to be redeemed for
cash at an amount equal to 120% of the conversion price that would
otherwise apply, plus interest and default payments. If the rules of
the National Association of Securities Dealers apply, in the event the
number of shares to be issued upon conversion exceeds 20% of shares
outstanding at the time the debentures were issued, the Company must
obtain stockholder approval to issue shares in excess of this limit.
If stockholder approval is not obtained, the debentures underlying the
shares in excess of the 20% limit would become redeemable for cash.
STOCK OPTIONS AND STOCK PURCHASE WARRANTS
In addition to the warrants issued in connection with the convertible
debentures discussed above, subsequent to September 30, 1999, the
Company issued another 1,190,000 stock options and warrants to
employees, directors, and consultants.
F-26
<PAGE> 63
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
SmartSources.com, Inc.
We have reviewed the consolidated condensed financial statements of
SmartSources.com, Inc. and Subsidiaries as of June 30, 2000 and for the three
and nine months then ended. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of September 30, 1999 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended (not presented herein), and in our report dated
March 14, 2000, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of September 30, 1999 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ MOSS ADAMS LLP
----------------------------
Bellingham, Washington
August 2, 2000
F-27
<PAGE> 64
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000 AND SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 June 30, 2000 - Unaudited
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 164,200 $ 3,829,600
Trade accounts receivable, net 184,800 285,300
Prepaid expenses 12,300 27,000
------------------------ ------------------------
Total current assets 361,300 4,141,900
CAPITALIZED SOFTWARE COSTS and PURCHASED
SOFTWARE RIGHTS, net 1,550,500 1,273,600
PROPERTY and EQUIPMENT, net 764,300 835,500
OTHER ASSETS 33,300 70,200
------------------------ ------------------------
TOTAL ASSETS $ 2,709,400 $ 6,321,200
======================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 140,000 $ 291,700
Unearned revenue 3,300
Income tax payable 78,300 77,500
Current portion of long-term debt 58,700 298,700
------------------------ ------------------------
Total current liabilities 277,000 671,200
LONG-TERM LIABILITIES
Due to stockholder 24,700 --
Interest payable -- 120,500
Long-term debt, net of current portion 414,800 3,626,100
Deferred tax liability 64,200 60,800
------------------------ ------------------------
Total liabilities 780,700 3,807,400
COMMITMENTS and CONTINGENCIES
MINORITY INTEREST 3,441,100 3,407,000
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, 50 million shares authorized, 11,563,200 and 1,821,300 6,693,800
11,855,600 shares outstanding at September 30, 1999 and June 30,
2000 respectively
Accumulated other comprehensive income 124,500 91,300
Accumulated deficit (3,210,700) (7,506,500)
Deferred compensation (247,500) (843,000)
------------------------ ------------------------
Total stockholders' equity (1,512,400) (1,564,400)
------------------------ ------------------------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 2,709,400 $ 6,321,200
======================== ========================
</TABLE>
See accompanying notes to these consolidated financial statements.
F-28
<PAGE> 65
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS - UNAUDITED
QUARTER AND NINE MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000
<S> <C> <C> <C> <C>
REVENUES EARNED $ 145,500 $ 499,000 $ 495,700 $ 1,137,600
COST OF SALES 26,300 145,000 75,700 244,400
------------- ------------- ------------- -------------
GROSS PROFIT 119,200 354,000 420,000 893,200
OTHER EXPENSES, exclusive of depreciation
and amortization
Research & Development 72,800 262,600 158,000 759,500
SALES AND MARKETING 110,200 239,000 266,600 611,500
GENERAL AND ADMINISTRATIVE 279,300 625,500 639,300 1,753,300
------------- ------------- ------------- -------------
462,300 1,127,100 1,063,900 3,124,300
------------- ------------- ------------- -------------
OPERATING EARNINGS (LOSS) BEFORE (343,100) (773,100) (643,900) (2,231,100)
DEPRECIATION AND AMORTIZATION
Depreciation and amortization 56,000 136,600 128,800 420,300
------------- ------------- ------------- -------------
OPERATING EARNINGS (LOSS) (399,100) (909,700) (772,700) (2,651,400)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Realized gain (loss) on investments 2,700 -- (38,800) --
Interest income 59,700 -- 95,200
Interest expense (12,700) (173,800) (36,500) (1,831,400)
------------- ------------- -------------- -------------
(10,000) (114,100) (75,300) (1,736,200)
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE PROVISION FOR (409,100) (1,023,800) (848,000) (4,387,600)
INCOME TAXES
PROVISION FOR (BENEFIT FROM) INCOME 8,900 (6,100) 29,100 (91,800)
TAXES
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (418,000) $ (1,017,700) $ (877,100) $ (4,295,800)
============= ============= ============= =============
Basic earnings (loss) per share $ (0.05) $ (0.09) $ (0.11) $ (0.36)
Diluted earnings (loss) per share $ (0.05) $ (0.09) $ (0.11) $ (0.36)
Weighted average common shares outstanding 9,176,300 11,855,600 7,636,400 11,782,600
(basic and diluted)
</TABLE>
See accompanying notes to these consolidated financial statements.
F-29
<PAGE> 66
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
NINE MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
9 months ended June 30, 1999 9 months ended June 30, 2000
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES
Net Income (Loss) $ (877,100) (4,295,800)
Adjustments to reconcile net income (loss) to net cash from
operating activities
Depreciation and amortization 128,800 420,300
Loss on disposal of assets 49,200 --
Stock-based compensation -- 232,000
Realized gains(losses) on sale of investments (7,300) --
Accrued interest expense on long-term debt -- 120,500
Accrued interest expense from intrinsic value of conversion
feature of long-term debt and accretion of debt discount -- 1,676,000
Changes in operating assets and liabilities
Trade accounts receivable 269,200 (102,900)
Other assets (38,400) (29,300)
Accounts payable and other current liabilities 111,800 162,900
Administrative fees payable (118,000) --
Income taxes payable and refundable (4,900) --
Sale deposit (99,500) --
---------------------------- ----------------------------
Net cash flows from operating activities (586,200) (1,816,300)
---------------------------- ----------------------------
CASH FROM INVESTING ACTIVITIES
Purchase of property and equipment (123,600) (81,300)
Purchase of capitalized software -- (80,200)
Refund of deposit on property and equipment -- 16,100
Proceeds from sale of Familyware 165,800 --
Proceeds from sale of investments 17,600
---------------------------- ----------------------------
Net cash flows from investing activities 59,800 (145,400)
---------------------------- ----------------------------
CASH FROM FINANCING ACTIVITIES
Repayment of note payable, net (53,700) --
Principal repayments of long-term debt (48,600) (50,400)
Principal repayments of capital lease obligations -- (14,600)
Repayment of advances from stockholder (102,200) (24,600)
Proceeds from long-term debt and stock warrants (102,200) 4,552,000
Proceeds from issuance of common stock 1,000,000 1,184,200
Dividends (142,700)
---------------------------- ----------------------------
Net cash flows from financing activities 652,800 5,646,600
---------------------------- ----------------------------
EFFECT OF CHANGES IN EXCHANGE RATES 1,300 (19,500)
---------------------------- ----------------------------
NET CHANGES IN CASH 127,700 3,665,400
CASH and CASH EQUIVALENTS, beginning of period 1,700 164,200
---------------------------- ----------------------------
CASH and CASH EQUIVALENTS, end of period $ 129,400 $ 3,829,600
============================ ============================
Supplemental disclosure of Cash Flow information:
Interest paid 36,300 35,000
Income taxes paid (received) 34,000 (91,800)
</TABLE>
See accompanying notes to these consolidated financial statements.
F-30
<PAGE> 67
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial reporting and in accordance with the
instructions for Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and disclosures
normally required by generally accepted accounting principles for
complete financial statements or those normally reflected in the
Company's Annual Report on Form 10-KSB. The financial information
included herein reflects all adjustments (consisting of normal
recurring adjustments) that are, in the opinion of management,
necessary for a fair presentation of results for interim periods.
Results of interim periods are not necessarily indicative of the
results to be expected for a full year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of SmartSources.com, Inc. and
Subsidiaries include the accounts of its direct and indirect
wholly-owned subsidiaries: Nifco Investments, Inc.; SmartSources.com
Technologies, Inc.; Intelli Trade, Inc.; Infer Technologies, Inc.; and
Origin Software Corporation. All material intercompany accounts and
transactions have been eliminated in consolidation.
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. Revenue from service contracts that
are based on time incurred is recognized as work is performed.
F-31
<PAGE> 68
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
NOTE 2 - LONG-TERM DEBT AND PRIVATE PLACEMENT
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1999 2000
<S> <C> <C>
Convertible debentures, interest at 7% payable at maturity or upon conversion or
redemption, due February 2005, see further description below $ -- $ 3,401,200
Capital lease obligations payable in aggregate monthly installments of $3,882,
including imputed interest at rates ranging from 9.7% to 11.94%, due at dates
from October 2002 to March 2003 collateralized by the leased equipment -- 104,600
Note payable to a Canadian bank in monthly installments of $4,400 plus interest
at prime plus 1.25%, collateralized by general assets of Technologies, due August
2000 44,400 4,500
Mortgage payable to a Canadian bank in monthly installments of $1,700
including interest at 8.75%, collateralized by real estate of Technologies and
assignment of rents, guaranteed by the majority stockholder, due in 2011 155,500 148,500
Mortgages payable to two Canadian finance companies in aggregate monthly
installments of $2,200, including interest at rates of 7% and 9%, collateralized by
real estate of Technologies and guaranteed by the majority stockholder, due in
January 2001 and June 2002 273,600 266,000
------------ ------------
Total debt 473,500 3,924,800
------------ ------------
Less current portion (58,700) (298,700)
------------ ------------
Long-term portion $ 414,800 $ 3,626,100
------------ ------------
</TABLE>
Long-term debt matures as follows:
<TABLE>
<CAPTION>
12 Months Ending
June 30,
<S> <C>
2001 $ 298,700
2002 199,100
2003 25,800
2004 0
2005 0
Thereafter 3,401,200
----------
$3,924,800
</TABLE>
Although two of the outstanding mortgages held by the Company mature in
2001 and a third mortgage matures in 2002. Management intends to
refinance such instruments with the current lenders and does not
anticipate any problems in doing so.
F-32
<PAGE> 69
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
NOTE 2 - LONG-TERM DEBT AND PRIVATE PLACEMENT (CONTINUED)
PRIVATE PLACEMENT OF CONVERTIBLE DEBENTURES AND WARRANTS
On February 24, 2000, the Company issued $5 million of convertible
debentures and detachable stock purchase warrants. The debentures
mature in February 2005 and bear interest at 7%, which is payable upon
maturity, or upon conversion or redemption. The detachable warrants
entitle holders to purchase 330,000 shares of the Company's common
stock over a five-year term at an exercise price of $11.10 per share.
In connection with issuing the debentures and warrants, the Company
paid $325,000 of placement fees, $93,000 of legal costs, and $30,000 to
the holders of the debentures for reimbursement of a portion of their
legal costs. The Company also issued 25,000 warrants in lieu of
placement fees. The warrants entitle the holders to purchase an equal
number of shares of common stock at a price of $11.10 per share. The
term of the 25,000 warrants is two years.
Concurrent with placing the debentures and warrants, the Company
entered into a Registration Rights Agreement (the Registration
Agreement) with the holders of the debentures. Pursuant to the
Registration Agreement the Company filed a registration statement with
the Securities and Exchange Commission by to register the shares of
common stock that may be acquired upon conversion of the debentures.
The debentures are convertible in whole or in part into common stock
any time before maturity at a conversion price that floats with the
market price of the stock, not to exceed a fixed conversion price of
$9.71. After August 24, 2000, if the debentures are submitted for
conversion and the conversion price is below $9.71, the Company has the
right to redeem the debentures for cash at an amount equal to the value
of the converted shares. For each share of common stock issued upon
conversion, the holders of the debentures have the option to purchase
one additional share at the fixed conversion price of $9.71. The number
of shares issued upon conversion of the debentures and exercise of the
additional purchase option is limited in that the total number of
shares beneficially owned by the holders of the debentures and their
affiliates may not exceed 4.9% of outstanding common shares. Any
issuance of shares in excess of this limitation must be approved by a
majority of the Company's common stockholders.
In the event that certain circumstances pertain, including without
limitation the following, the conversion price will be adjusted
downward:
1. The Company's common stock is not listed on the American Stock
Exchange or the Nasdaq Small Cap Market by October 24, 2000 or
on the Nasdaq National Market by February 24, 2001.
2. The Company is in default of the requirements of the
Registration Agreement.
In the event the Company fails to comply with certain terms of the
debentures, holders may elect for the debentures to be redeemed for
cash at an amount equal to 120% of the conversion price that would
otherwise apply, plus interest and default payments. If the rules of
the National Association of Securities Dealers (NASD) apply, in the
event the number of shares to be issued upon conversion exceeds 20% of
shares outstanding at the time the debentures were issued, the Company
must obtain stockholder approval to issue shares in excess of this
limit. If stockholder approval is not obtained, the debentures
underlying the shares in excess of the 20% limit would become
redeemable for cash.
F-33
<PAGE> 70
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
NOTE 2 - LONG-TERM DEBT AND PRIVATE PLACEMENT (CONTINUED)
A total of $1,330,000 of the $5,000,000 gross proceeds from the private
placement was allocated to the detachable stock warrants, based upon
the relative fair value of the warrants and the debentures. The value
ascribed to the warrants was recorded as a debt discount and an
increase in common stock. The debt discount is recognized as interest
expense over the five-year term of the debentures using the effective
interest method.
Total issue costs, including the fair value of stock warrants issue in
lieu of finder's fees, were $502,300, of which $368,700 was allocated
to the debentures and $133,600 was allocated to the detachable
warrants. The portion of the issue costs attributable to the debentures
was recorded as an offset against the gross proceeds allocated to the
debentures and is being amortized over the five-year term of the debt
using the effective interest method. The portion of the costs
attributable to the warrants was recorded as an offset against the
gross proceeds allocated to the warrants.
At the date of issue, the conversion price of the debentures was less
than the fair value of the Company's common stock. The intrinsic value
of this conversion feature was $1,575,800, which was recorded as a
charge to interest expense and an increase to common stock.
NOTE 3 - CAPITAL STOCK
COMMON STOCK
The Company has a single class of common stock. Authorized shares total
50 million. During the three months ended June 30, 2000, the Company
issued no shares of common stock. During the remainder of the nine
months ended June 30, 2000, the Company issued 292,400 shares for total
proceeds of $1,184,200.
At June 30, 2000, a total of 3,732,700 common shares are reserved to
honor the conversion rights, investments options, and stock purchase
warrants issued in connection with the private placement described in
Note 2.
Another 5,675,000 common shares are reserved to honor other outstanding
stock options and warrants and grants made under the Company's stock
incentive compensation plan.
EXCHANGE OF CLASS B REDEEMABLE, EXCHANGEABLE PREFERRED STOCK OF ORIGIN
SOFTWARE CORPORATION
In connection with the repurchase of certain software rights from
Columbia Diversified Software Fund Limited Partnership (Columbia), the
Company's subsidiary, Origin Software, issued 5 million shares of Class
B preferred stock. Concurrent with the issuance of the preferred
shares, Origin Software and the Company entered into a Share Exchange
Agreement (the Agreement) with Columbia. Under the Agreement,
subsequent to October 1, 1999, Columbia has the right to exchange all
or part of the Class B preferred shares for an amount of common shares
of the Company with market value of Cdn $5 million (not to exceed 5
million common shares reserved for the exchange), based on average
trading price during the fourteen-day period immediately prior to
exercise. Common shares issued are to be "freely tradable" but 80% of
the shares will be held in trust and released ratably to Columbia over
the following four years.
F-34
<PAGE> 71
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
NOTE 3 - CAPITAL STOCK (CONTINUED)
Effective January 26, 2000, Columbia notified the Company that it
wished to exercise its exchange rights, and on January 27, 2000 the
Company accepted the notice. The exchange ratio was based on a $7.60
share price of the Company's common stock, and on February 15, 2000,
the Company issued 457,400 shares of common stock in the name of
Columbia to be exchanged for the 5 million Class B preferred shares of
Origin Software Corporation. Columbia has not yet tendered the Class B
shares to the Company, and the Company has not yet delivered the
457,400 shares of common stock. Pursuant to the Agreement only 20% or
91,480 shares of common stock would be delivered directly to Columbia.
The remaining 80% or 365,920 shares would be held in trust and released
ratably to Columbia over the following four years. The Company and
Columbia have not yet entered into a definitive escrow agreement for
the shares that would be held in trust.
Columbia has subsequently contended that the Company has not performed
in accordance with the Agreement because the shares of common stock
issued in Columbia's name are currently restricted from resale pursuant
to applicable securities laws. Based on its contention, Columbia has
indicated that it is withdrawing its notice of exchange and has
requested that the Company amend the Agreement. Management believes the
possibility exists that the Company may negotiate an amendment to the
Agreement and ultimately issue additional shares to Columbia, though at
present, management is unable to determine what the terms of such an
amendment might entail or estimate how many additional shares may be
issued.
Management has assessed the status of the pending exchange and
Columbia's contentions and believes that uncertainty exists about the
ultimate outcome of this matter. Accordingly, the $3,407,000 value of
the Class B preferred stock of Origin software continues to be
presented as minority interest.
STOCK OPTION INCENTIVE COMPENSATION PLAN
Effective June 21, 1999, the Company adopted the 1999 Stock Incentive
Compensation Plan (the Plan). Under the Plan, the Company may make
grants of incentive stock options, nonqualified stock options, and
stock awards to employees, officers, directors and consultants of the
Company and its subsidiaries for an amount of common shares equal to
10% of issued and outstanding shares, not to exceed 4,000,000 shares.
The exercise price of incentive stock options and nonqualified stock
options can be no less than the fair value of the Company's common
stock on the date of grant. The maximum term of options is ten years;
and, unless otherwise modified by the Plan administrator, they vest
over four years. Options granted to senior management during 1999 vest
over two years.
A summary of the status of the Plan at June 30, 2000 is as follows:
<TABLE>
<CAPTION>
Weighted-
Number Average
Of Shares Exercise Price
<S> <C> <C>
Options outstanding at September 30, 1999 919,000 $ 5.50
Granted 1,155,000 $ 6.38
Exercised -- --
Forfeited (289,000) $ 5.63
Options outstanding at June 30, 2000 1,785,000 $ 5.88
Options exercisable at June 30, 2000 160,000 $ 5.50
</TABLE>
F-35
<PAGE> 72
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
NOTE 3 - CAPITAL STOCK (CONTINUED)
A summary of stock options outstanding at June 30, 2000 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.65 to $10.25 1,785,000 4.4 years $5.88 440,000 $5.50
</TABLE>
The Company applies the provision of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations to account for
its stock-based awards. Accordingly, costs for employee stock options
or issuance of shares is measured as the excess, if any, of the fair
value of the Company's common stock at the measurement date over the
amount the employee must pay to acquire the stock. No compensation
expense was recognized for grants of awards under the Plan in the
quarter and nine months ended June 30, 2000.
OTHER STOCK-BASED COMPENSATION
1. During the nine months ended June 30, 2000 the Company issued
200,000 options to purchase the same number of the Company's
common shares as follows: 50,000 shares at an exercise price
of $5.25, 50,000 shares at an exercise price of $6.00, 50,000
shares at an exercise price of $7.50 and 50,000 shares at an
exercise price of $8.00. The options expire on December 14,
2002. The options were issued at no cost in connection with
the Company entering into a consulting agreement with
Continental Capital & Equity Corporation (Continental). Under
the agreement, Continental will assist and advise the Company
with respect to investor relations professional services.
As required by SFAS No. 123, Accounting for Stock-Based Compensation,
the Company has applied the fair value method to account for issuance
of the options. The Company used the Black-Scholes option pricing model
to compute estimated fair value of the warrants, based on the following
assumptions:
<TABLE>
<S> <C>
Risk-free interest rate 6.0%
Price volatility 52.5%
Average expected life of options 1.5 years
</TABLE>
Total compensation cost computed for the options issued to Continental
is $188,000. The cost is being recognized ratably over the three-year
term of the options.
2. In January 2000 the Company issued 100,000 options to
purchase the same number of the Company's common shares at an
exercise price of $5.50. The options expire on January 2002
and were issued at no cost in connection with the Company
entering into a consulting agreement with Peter Sanders under
which Mr. Sanders will assist and advise the Company in
respect to investor relations professional services.
F-36
<PAGE> 73
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
NOTE 3 - CAPITAL STOCK (CONTINUED)
As required by SFAS No. 123, Accounting for Stock-Based Compensation,
the Company has applied the fair value method to account for issuance
of the options. The Company used the Black-Scholes option pricing
model to compute estimated fair value of the warrants, based on the
following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate 6.0%
Price volatility 33.7%
Average expected life of options 1.5 years
</TABLE>
Total compensation cost computed for the options issued to Peter
Sanders is $105,000. The cost is being recognized ratably over the
two-year term of the options.
3. In April, 2000, the Company issued 200,000 warrants that
entitle holders to purchase an equal number of common shares
at $6.00 per share. The warrants expire in April 2005. The
warrants were issued at no cost in connection with the
Company entering into a consulting agreement with Murdock
Capital Partners Corp. (Murdock). Under the agreement,
Murdock will provide investor relations services to the
Company.
As required by SFAS No. 123, Accounting for Stock-Based Compensation,
the Company has applied the fair value method to account for issuance
of the warrants. The Company used the Black-Scholes option pricing
model to compute the estimated fair value of the warrants, based on
the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate 6.0%
Price volatility 62.3%
Average expected life of the warrants 2 years
</TABLE>
Total compensation cost computed for the warrants is $455,600. The
cost is being recognized ratably over a two-year period.
NOTE 4 - NON-CASH TRANSACTIONS
During the nine months ended June 30, 2000, $1,196,400 of the net
proceeds from the convertible debentures described in Note 2 was
allocated to detachable stock warrants and credited to additional paid
in capital.
During the nine months ended June 30, 2000, the Company acquired 1,600
shares of Class A preferred stock of its subsidiary, Infer
Technologies, Inc., in connection with an employee compensation
arrangement. As a result of this transaction, a total of $113,000 of
minority interests was reclassified as common stock.
During the nine months ended June 30, 2000, the Company acquired
$98,000 of equipment under capital lease agreements.
During the nine months ended June 30, 1999, the Company's subsidiary,
Origin Software Corporation, issued preferred shares valued at
$3,407,000 in exchange for certain software rights. During the same
period, it offset $1,792,400 if deferred gain, net of tax, against the
value of the software rights acquired.
F-37
<PAGE> 74
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
NOTE 5 - SEGMENT INFORMATION
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 and the development and implementation
of internet-based content management software. Other services include
international trade consulting. Management assesses the operations of
its software sales and development activities and its consulting
activities as separate segments. The following tables and schedules
summarize certain information about these segments.
<TABLE>
<CAPTION>
SOFTWARE SALES AND DEVELOPMENT
INTERNATIONAL TRADE K-Server International Trade Total
Consulting
<S> <C> <C> <C> <C>
Three months ended June 30,
1999
External revenues 52,000 5,000 82,300 139,300
Inter-segment revenues - - 6,200 6,200
Segment income (loss) before
tax (335,000) (27,000) 22,000 (340,000)
Segment assets 1,984,000 554,500 119,000 2,657,500
Three months ended June 30,
2000
External revenues 91,000 240,000 168,000 499,000
Inter-segment revenues - - - -
Segment income (loss) before
tax (90,700) (198,000) 81,200 (207,500)
Segment assets 1,633,500 659,000 195,000 2,487,500
Nine months ended June 30,
1999
External revenues 114,400 76,800 266,800 458,000
Inter-segment revenues 31,500 0 6,200 37,700
Segment income (loss) before
tax (758,500) (27,000) 73,000 (712,500)
Segment assets 1,984,000 554,500 119,000 2,657,500
Nine months ended June 30,
2000
External revenues 182,000 531,500 424,100 1,137,600
Inter-segment revenues - - - -
Segment income (loss) before
tax (413,500) (503,000) 150,000 (766,500)
Segment assets 1,633,500 659,000 195,000 2,487,500
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30,
1999 2000
<S> <C> <C>
Total income (loss) before tax for reportable segments (340,000) (207,500)
Corporate headquarters expenses (69,100) (816,300)
Consolidated totals (409,100) (1,023,800)
</TABLE>
<TABLE>
<CAPTION>
Nine months ended June 30,
1999 2000
<S> <C> <C>
Total income (loss) before tax for reportable segments (712,500) (766,500)
Corporate headquarters expenses (135,500) (3,621,100)
Consolidated totals (848,000) (4,387,600)
</TABLE>
F-38
<PAGE> 75
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
NOTE 6 - CONTINGENCIES
CANADIAN TAX IMPLICATIONS OF SALE AND PURCHASE OF SOFTWARE RIGHTS
During 1995 and 1996, the Company's subsidiary, Technologies, sold the
rights to its primary software product to Columbia Diversified
Software Fund Limited Partnership (Columbia). During 1999, another of
the Company's subsidiaries, Origin Software, repurchased these rights.
During the same time frame, Technologies purchased and sold an
interest in certain other software rights. These transactions all
included a significant noncash component that employed the issuance,
receipt, and settlement of long-term promissory notes. Although these
notes were not recognized for financial reporting purposes, they did
increase significantly the value assigned to the software rights in
question for tax reporting purposes in Canada.
Revenue Canada has been reviewing various software transactions,
including those to which Technologies was a party. In October 1999,
the Company submitted a proposed settlement to Revenue Canada that
would limit the amount of tax it must pay on the net gain from these
transactions to the net amount of cash received. Effective January 7,
2000, Revenue Canada agreed to the terms of the settlement.
EXCHANGE OF CLASS B PREFERRED SHARES OF ORIGIN SOFTWARE
As described in Note 3, effective January 26, 2000, Columbia
Diversified Software Fund Limited Partnership (Columbia) notified the
Company that it wished to exercise the exchange rights associates with
the 5 million outstanding shares of Class B preferred stock of Origin
Software Corporation. On February 15, 2000, the Company issued 457,400
shares of common stock in the name of Columbia to be exchanged for the
Class B shares stock. Columbia has not yet tendered the Class B shares
to the Company, and the Company has not yet delivered the 457,400
shares of common stock. Only 20% or 91,480 shares of the shares of
common stock would be delivered directly to Columbia. The remaining
80% or 365,920 shares would be held in trust pursuant to the terms of
the Share Exchange Agreement (the "Agreement") and be released ratably
to Columbia over the following four years. The Company and Columbia
have not yet entered into a definitive escrow agreement for the shares
that would be held in trust.
Columbia has subsequently contended that the Company has not performed
in accordance with the Agreement because the shares of common stock
issued in Columbia's name are currently restricted from resale
pursuant to applicable securities laws. Based on its contention,
Columbia has indicated that it is withdrawing its notice of exchange
and has requested that the Company amend the Agreement. Management
believes the possibility exists that the Company may negotiate an
amendment to the Agreement and ultimately issue additional shares to
Columbia, though at present, management is unable to determine what
the terms of such an amendment might entail or estimate how many
additional shares may be issued.
F-39
