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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 June 7, 2000, the closing price
for our Common Stock as reported on the OTC Bulletin Board was $2.781 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 June 16, 2000.
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TABLE OF CONTENTS
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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
RECENT DEVELOPMENTS......................................................................15
BUSINESS ................................................................................16
MANAGEMENT...............................................................................22
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........................28
OFFERING SHAREHOLDERS....................................................................29
PLAN OF DISTRIBUTION.....................................................................30
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE..................................31
CERTAIN TRANSACTIONS.....................................................................32
DESCRIPTION OF SECURITIES................................................................33
SHARES ELIGIBLE FOR FUTURE SALE..........................................................33
LEGAL MATTERS............................................................................34
EXPERTS ................................................................................34
ADDITIONAL INFORMATION...................................................................34
INDEX TO FINANCIAL STATEMENTS...........................................................F-1
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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.
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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 kServerTM 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.
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THE OFFERING
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Shares offered by Offering Shareholders: 5,425,000
Shares offered by the Company: None
Shares outstanding as of March 1, 2000: 11,855,583
Use of proceeds from conversion of debentures We will receive no proceeds from the
and sale of Shares: conversion 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
options and warrants: investment 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
$3,365,000. 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
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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 March 31, 2000, we had an accumulated deficit of approximately
$6.49 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.
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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.
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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 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
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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.
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
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that compete with our products and services. Even if we succeed in establishing
these relationships, they may not result in additional customers or revenues.
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
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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
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
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<PAGE> 12
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 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 $5,000,000. 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. 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 $3.125 on
June 8, 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 2,444,801 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.
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<PAGE> 13
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.
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 $3,365,000. 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
</TABLE>
As of March 1, 2000, there were approximately 269 shareholders of
record of our Common Stock. The closing bid and asked prices on June 7, 2000
were $2.6875 and $2.7813, 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.
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<PAGE> 14
CAPITALIZATION
The table below sets forth, as of March 31, 2000, the following
information:
o our actual capitalization
<TABLE>
<CAPTION>
ACTUAL
-----------
<S> <C>
Debt and leases, current and long-term 3,833,000
-----------
Minority interest 3,407,000
Shareholders' equity:
Common Stock, no par value, 50,000,000 shares 6,238,000
authorized, 11,855,583 shares outstanding
Accumulated other comprehensive income 133,000
Accumulated deficit and deferred compensation (6,963,000)
-----------
Total shareholders' equity (592,000)
-----------
Total capitalization $ 6,648,000
===========
</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
MANAGEMENT'S 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.
RESULTS OF OPERATIONS
Six Months Ended March 31, 2000 Compared to Six Months Ended March 31,
1999. During the quarter ended March 31, 2000 we had consolidated revenues of
$427,200, operating expenses of $1,038,300 and a net loss before interest and
depreciation of $657,300.
For the six months ending March 31, 2000, revenues were $639,000,
operating expenses were $1,997,300 and the net loss before depreciation,
amortization and interest was $1,458,000.
Revenues for the three months ended March 31, 2000 increased 127% as
compared to 1999 revenues for the same period, which totaled $188,500. The
increase was a result of new revenues generated by kServerTM launched during the
current fiscal year and an increased client base for our International Trade
products and services. A kServerTM contract entered into with the Government of
Canada was the main contributor to the increase in revenues. We have not
recognized any revenue from the Uniglobe contract as of March 31, 2000.
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<PAGE> 15
Operating expenses included 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 of our
departments.
Research and development costs for the three months ended March 31,
2000 totaled $243,200 as compared to $62,000 for the same period in the previous
fiscal year. This was a direct result of continued costs incurred in the
development of our kServer(TM) line of products, including higher payroll costs
due to the increased number of engineers working on kServer(TM) and the
establishment of an engineering office in California.
Sales and marketing costs increased 130% during the quarter, from
$101,000 to $231,900, 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 134%, from $240,900 to
$563,200. The increase was partially due to higher payroll costs resulting from
the addition of three new senior managers in August 1999. Furthermore, travel
expenses, shareholder relations costs and professional fees all increased as
compared to the previous year.
Amortization and depreciation costs increased from $42,000 to $141,400,
mainly as a result of the amortization costs for the ORIGIN(TM) software
acquired in May 1999.
Interest expense for the three months ending March 31, 2000 was
$1,646,700, a significant increase as compared to the previous year's period.
The increase was primarily due to the fact that, at the date of issue of the
convertible debentures, the conversion price of the debentures was less than the
fair value of our Common Stock. The intrinsic value of this conversion feature
was determined to be $1,575,800 and was recorded as a charge to interest expense
and an increase to Common Stock.
Net loss during the quarter was $2,324,100. In the quarter ended March
31, 1999, we reported a net loss of $369,200. The increase in the net loss was
primarily due to higher interest expense and an increase in operating costs.
Year Ended September 30, 1999 Compared to Year Ended September 30,
1998. During the year ended September 30, 1999, we had consolidated revenues of
$721,000, operating expenses of $2,023,900 and a net loss of $672,800.
Revenues decreased 54% from 1998 revenues of $1,571,100. The lower
revenues were primarily the result of our shift in focus away from trade
compliance software and to the development of kServerTM, our web-based content-
management technology. Revenues for the trade division were down due to the
non-recurrence of one-time software development contracts that took place in
fiscal 1998 with Tradespace Technologies Corp. (Tradespace) and PMG Project
Management Groupware Inc. (PMG). In 1998, revenues from Tradespace and PMG
accounted for a total of $722,700, or 46% of 1998 revenues, and $89,700, or 12%
of 1999 revenues. Tradespace, PMG and SmartSources.com are companies with common
ownership.
Operating expenses increased 74% as compared to operating expenses for
1998 of $1,164,800. The increase in operating expenses was a result of continued
research and development costs for the kServer(TM) line of products, higher
payroll costs due to the increased number of employees in all areas of the
Company and hiring of senior management during the year. Also, we incurred
higher professional fees (mainly legal and accounting) subsequent to the Reverse
Acquisition. In 1999, research and development costs were $374,700 and in 1998,
they were $38,400.
Net capitalized software costs and purchased software rights increased
to $1,550,000 as of September 30, 1999 compared to $111,400 at September 30,
1998. The increase was due primarily to the repurchase of the ORIGIN(TM)
software rights in May 1999. The terms of the purchase are described further in
Note 3 to the September 30, 1999 financial statements.
In 1999, our interest expense decreased by $13,000 due to our reduced
long-term debt levels.
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<PAGE> 16
As a result of the decrease in revenues and increase in operating costs
outlined above, we had a net loss of $672,800 in 1999. In 1998, we reported net
income of $152,900. The net loss for 1999 was funded from proceeds from the
issuance of additional equity capital.
LIQUIDITY
On March 31, 2000, our cash and cash equivalent balance totaled
$4,326,000. This is a significant increase in cash as compared to our September
30, 1999 cash position of $164,200. The increase resulted from our 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 paid a placement fee of
$325,000 and issued 25,000 warrants.
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 warrants issued 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 our 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.
On March 31, 2000, we had a working capital of $4,374,000 and a current
ratio of 13.3 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 six months
ended March 31, 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 six months ended March 31, 2000 have
consisted primarily of purchases of property and equipment, principally computer
hardware and software. Capital expenditures, including those under capital
leases, totaled $46,600 in 1998, $139,500 in 1999 and $162,900 in the six months
ended March 31, 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 requirements 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.)
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<PAGE> 17
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.
RECENT DEVELOPMENTS
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. Any redemptions for cash in
lieu of shares could significantly impair our working capital.
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
registration statement is not declared effective by June 24, 2000; (ii) the
holders of the
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<PAGE> 18
debentures cannot make sales pursuant to the registration after it has been
declared effective; or (iii) 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 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
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<PAGE> 19
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.
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
17
<PAGE> 20
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 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
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<PAGE> 21
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.
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.
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<PAGE> 22
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.
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.
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<PAGE> 23
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.
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
21
<PAGE> 24
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.
PROPERTIES
We operate out of three offices, located in Sunnyvale, California;
Vancouver, British Columbia; and Toronto, Ontario. The Sunnyvale offices consist
of approximately 2,200 square feet of leased office space. We own the 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 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 December 31,1999, we employed 27 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, Chief Executive Officer and Director 1991
Michael J. Forster 35 President, Chief Operating Officer and Director 1999
Dr. Gerald J. Wittenberg 47 Surgeon; Director 1998
Charles K. Kelly 51 Chairman of Canadian Public Affairs Consulting Group, 1999
Vista Strategic Management, Inc., North American
Institute - Canada and The Cascadia Institute; Director
Norman R. Miller 52 Attorney; Director 1999
</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 from 1991-1999, 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
22
<PAGE> 25
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 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.
Michael J. Forster
Michael Forster has served as our President and Chief Operating Officer
since August 1, 1999. On August 25, 1999, Mr. Forster was named a Director of
the Company. From 1997 to 1999, Mr. Forster was Chairman of the Board, Chief
Executive Officer and President of Mercury Scheduling Systems, Inc., a
publicly-owned airline operation software company based in Vancouver, Canada.
From 1996 to 1997, Mr. Forster was a business consultant to various airline
companies. From February 1995 to April 1996, Mr. Forster served as the President
and Chief Executive Officer of Sierra Expressway Airlines, a regional commuter
airline company. Subsequently, Sierra Expressway Airlines filed for bankruptcy
on October 4, 1996. From January 1994 to February 1995, Mr. Forster was the
General Manager and Chief Operations Executive for American Airlines and its
wholly-owned subsidiary, American Eagle. Mr. Forster currently serves as a
director of the following public companies: Royal Holdings Services, Ltd. and
Mercury Scheduling Systems, Inc. Mr. Forster received his B.S. degree in
aeronautical engineering from California Polytechnic State University in 1991.
Dr. Gerald J. Wittenberg
Dr. Gerald Wittenberg is an oral and maxillofacial surgeon and received
his degree from the University of British Columbia in 1977. In 1981, Dr.
Wittenberg obtained a Masters of Science degree with emphasis on Anatomy and
Physiology from the University of Minnesota. Dr. Wittenberg has a private
practice in Vancouver and Richmond, British Columbia, teaches at the University
of British Columbia, and is on staff at several hospitals.
Charles K. Kelly
Charles Kelly is 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 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.
Directors are elected for a term of one year and serve until their
successors are elected.
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.
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<PAGE> 26
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
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.
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<PAGE> 27
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>
Sokhie S. Puar 36 Vice President, Corporate Development
Darryl Cardey 32 Chief Financial Officer
Carol Beaul 47 President, Intelli Trade, Inc., a wholly-owned
subsidiary
Peter Rive 25 Chief Engineer, Infer Technologies, Inc., a
wholly-owned subsidiary
</TABLE>
Sokhie S. Puar, Vice President, Corporate Development
Sokhie Puar has been Vice President of Corporate Development of the
Company since February 1999. From 1987 to January 1999, Mr. Puar was a
Registered Representative at Canaccord Capital Corporation (Canada) and Noram
Investments (United States of America). A licensed securities professional in
both the United States and Canada, Mr. Puar received his training at the British
Columbia Institute of Technology obtaining both an advanced Diploma in
Mechanical Engineering (1985) and Business Administration (1986).
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.
Peter Rive, Acting President, Chief Engineer and Director, Infer Technologies,
Inc.
Peter Rive has served as the Acting President, Chief Engineer and a
Director of Infer Technologies since August 1999. Mr. Rive will serve as the
Acting President until a suitable candidate is found for the position. Mr. Rive
will then serve as a Vice President, Chief Engineer and Director of the
subsidiary.
There are no family relationships among any of our directors, officers
or key employees.
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<PAGE> 28
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information concerning
compensation paid and accrued to Nathan Nifco the Chairman and Chief Executive
Officer of the Company for the two fiscal years ended September 30, 1999. Mr.
Nifco was the only Executive Officer from 1999 that exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation Awards
-----------------------------
Securities
Name and Principal Other Annual Restricted Underlying All Other
Position Year Salary($) Bonus($) Compensation Stock Award Options Compensation
<S> <C> <C> <C> <C> <C> <C> <C>
Nathan Nifco, Chief Executive 1998 57,951 -0- $ 92,049(1) -0- -0- -0-
Officer, Chairman and Director(2) 1999 109,280 -0- 142,395 -0- 200,000 -0-
</TABLE>
---------------------------
*All figures are shown in U.S. dollars using an exchange rate of $0.6623
effective September 30, 1999.
(1) Nathan Nifco received 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.
CONSULTING AND EMPLOYMENT AGREEMENTS
We have entered into management consulting and employment agreements
with the executive officers and significant employees as set forth below:
<TABLE>
<CAPTION>
NAME DATE COMPENSATION EXPIRATION DATE
---- ---- ------------ ---------------
<S> <C> <C> <C>
Nathan Nifco (Nifco Investment November 30, 1998 $145,706 2003
Ltd.)(1)
Michael J. Forster July 26, 1999 $140,000 2001
Darryl Cardey September 1, 1999 $ 72,853 90-day notice
Sokhie S. Puar(2) September 1, 1999 $ 72,853 2001
Carol Beaul(3) January 1, 1996 $ 55,633 Open
Peter Rive(4) August 1, 1999 $ 72,000 2001
</TABLE>
----------------
*All figures are shown in U.S. dollars using an exchange rate of $0.6623
effective September 30, 1999.
(1) In addition to Mr. Nifco's fixed salary, he is entitled to a bonus to
be determined at the discretion of the Board of Directors, but which
shall not be less than ten percent (10%) of Mr. Nifco's base salary.
(2) On April 17, 2000, the Company accepted the resignation of Sokhie
Puar.
(3) Ms. Beaul is President of Intelli Trade.
(4) Mr. Rive is Chief Engineer, a Director and Officer of Infer
Technologies.
STOCK INCENTIVE COMPENSATION PLAN
Our 1999 Stock Incentive Compensation Plan (the "1999 Stock Plan")
provides for the grant of incentive stock options, non-qualified stock options
and stock awards to employees, directors and consultants. Subject to shareholder
approval, a total of 4,000,000 shares of Common Stock will be reserved for
issuance under the 1999 Stock Plan. As of May 1, 2000, 1,604,000 options had
been granted to employees, officers and directors under the 1999 Stock Plan.
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<PAGE> 29
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.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE ALTERNATE TO (f)
APPRECIATION FOR AND (g): GRANT
INDIVIDUAL GRANTS OPTION TERM DATE VALUE
--------------------------------------------------------------------------- ------------------------ ----------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED EXERCISE OR GRANT DATE
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION 5% 10% PRESENT
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE ($) ($) VALUE $
(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, 0.71
2004
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.
27
<PAGE> 30
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.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP (1)
--------------------------------
PERCENT OF
BENEFICIAL OWNER NUMBER OF SHARES TOTAL
---------------- ---------------- -----------
<S> <C> <C>
Nathan Nifco (3) ................................................ 3,003,070(2)* 25.33%
Michael J. Forster .............................................. 100,000* **
Dr. Gerald J. Wittenberg ........................................ 0* **
Charles K. Kelly ................................................ 0* **
Norman R. Miller ................................................ 0* **
Darryl Cardey ................................................... 50,000* **
Sokhie S. Puar .................................................. 50,000* **
Carol Beaul ..................................................... 0* **
Dina Nifco (3) .................................................. 2,991,355(2) 25.23%
All executive officers and directors as a group (9 persons) ..... 6,194,425* 52.25%
</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 11,855,583 shares of Common
Stock outstanding on March 1, 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.
28
<PAGE> 31
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.
<TABLE>
<CAPTION>
Shares Beneficially Owned
Aggregate Number After Offering
Shares Beneficially of Shares to be Sold -------------------------
Owned Prior to Offering in Offering Number Percent
----------------------- -------------------- ------ -------
<S> <C> <C> <C> <C>
RGC International Investors, LDC 4,900,000 4,900,000 0 --
("RGC")
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.
29
<PAGE> 32
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 are exercisable at $5.50 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
30
<PAGE> 33
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.
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
TRANSACTIONS
NO. OF LATE NOT REPORTED
INDIVIDUAL REPORTS 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>
31
<PAGE> 34
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.
CERTAIN TRANSACTIONS
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. 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. It develops and markets software applications to assist school
districts with centralized purchasing and inventory control.
SYNERGY STRATEGY INC. (SYNERGY STRATEGY)
Synergy Strategy is a British Columbia corporation organized to
contract with a U.S. company to market financial information services technology
in Mexico.
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, we sold 200,000 shares
of Common Stock for cash, at a price of $3.45 per share, to certain of our
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 J. Forster President, Director 100,000 $3.45 $345,000
Sokhie S. Puar Vice President, Corporate 50,000 $3.45 $172,500
Development
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, we acquired our Vancouver, Canada office space. There are
mortgage payables to a Canadian bank in the amount of $156,000, due in 2011, and
two to 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.
32
<PAGE> 35
Norman R. Miller serves on our 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.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 shares of Common
Stock. As of March 1, 2000, 11,855,583 shares of Common Stock were outstanding,
4,000,000 shares were reserved for issuance upon exercise of outstanding stock
options, and 1,475,000 shares were reserved for issuance upon conversion or
exercise of other outstanding options and warrants. 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 increases from time to time in accordance with the terms of the
debentures and the warrants.
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 March 1, 2000, 11,855,583 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 May 1, 2000, 1,604,000 shares of Common Stock were subject to
outstanding options for employees, officers and directors under our 1999 Stock
Plan, none of which 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.
33
<PAGE> 36
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."
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 incorporated herein by
reference, and are included in reliance upon such report given upon the
authority of said firm as experts in auditing and accounting.
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>
Independent Auditor's Report....................................................................................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 Stockholder's Deficit 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
Unaudited Consolidated Balance Sheet as of March 31, 2000......................................................F-28
Unaudited Consolidated Statement of Operations for the Quarter and six months
ended March 31, 1999 and 2000.........................................................................F-29
Unaudited Consolidated Statement of Cash Flows for the six months
ended March 31, 1999 and 2000.........................................................................F-30
Notes to Unaudited Consolidated Financial Statements for the six months
ended March 31, 1999 and 2000.........................................................................F-31
</TABLE>
F-1
<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 primarily 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
========= ========= =========
</TABLE>
<TABLE>
<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, 1999 -- $ --
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
</TABLE>
<TABLE>
<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 and 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.
F-26
<PAGE> 63
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
--------------------------------------------------------------------------------
NOTE 17 - SUBSEQUENT EVENTS (CONTINUED)
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-27
<PAGE> 64
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2000 AND SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 2000
SEPT. 30, 1999 UNAUDITED
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ................................................................ $ 164,200 $ 4,326,000
Trade accounts receivable, net ........................................................... 184,800 369,000
Prepaid expenses ......................................................................... 12,300 35,000
----------- -----------
Total current assets .................................................. 361,300 4,730,000
CAPITALIZED SOFTWARE COSTS AND PURCHASED
SOFTWARE RIGHTS, net ................................................................ 1,550,500 1,386,000
PROPERTY AND EQUIPMENT, net .............................................................. 764,300 808,000
OTHER ASSETS ............................................................................. 33,300 154,000
----------- -----------
TOTAL ASSETS .......................................................... $ 2,709,400 $ 7,078,000
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued liabilities ................................................. $ 140,000 $ 230,000
Income tax payable ....................................................................... 78,300 79,000
Current portion of long-term debt ........................................................ 58,700 47,000
----------- -----------
Total current liabilities ............................................. 277,000 356,000
LONG-TERM LIABILITIES
Due to stockholder ....................................................................... 24,700 19,000
Interest payable ......................................................................... -- 33,000
Long-term debt, net of current portion ................................................... 414,800 3,786,000
Deferred tax liability ................................................................... 64,200 69,000
----------- -----------
Total liabilities ..................................................... 780,700 4,263,000
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST ........................................................................ 3,441,100 3,407,000
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, 11,563,200 and 50 million shares
Authorized, 11,855,600 shares outstanding at
September 30, 1999 and March 31, 2000 respectively .................................. 1,821,300 6,238,000
Accumulated other comprehensive income ................................................... 124,500 133,000
Accumulated deficit ...................................................................... (3,210,700) (6,488,700)
Deferred compensation .................................................................... (247,500) (474,300)
----------- -----------
Total stockholders' equity (deficit) .................................. (1,512,400) (592,000)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ..................................... $ 2,709,400 $ 7,078,000
</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 SIX MONTHS ENDED MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
----------------------------------- -----------------------------------
MARCH 31, 1999 MARCH 31, 2000 MARCH 31, 1999 MARCH 31, 2000
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES EARNED .................................. $ 188,500 $ 427,200 $ 350,100 $ 639,000
COST OF SALES .................................... 20,200 46,200 49,500 99,700
------------ ------------ ------------ ------------
GROSS PROFIT ..................................... 168,300 381,000 300,600 539,300
OTHER EXPENSES, EXCLUSIVE OF
DEPRECIATION AND AMORTIZATION
Research & Development ...................... 62,000 243,200 85,200 497,000
Sales and Marketing ......................... 101,000 231,900 156,300 372,600
General and Administrative .................. 240,900 563,200 352,500 1,127,700
------------ ------------ ------------ ------------
403,900 1,038,300 594,000 1,997,300
------------ ------------ ------------ ------------
OPERATING LOSS BEFORE DEPRECIATION
AND AMORTIZATION ............................ (235,600) (657,300) (293,400) (1,458,000)
Depreciation and amortization .................... 42,000 141,400 72,900 283,700
------------ ------------ ------------ ------------
OPERATING EARNINGS (LOSS) ........................ (277,600) (798,700) (366,300) (1,741,700)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Realized gain (loss) on investments ......... -- -- (48,800) --
Interest income ............................. -- 35,600 -- 35,600
Interest expense ............................ (11,400) (1,646,700) (23,800) (1,657,600)
------------ ------------ ------------ ------------
(11,400) (1,611,100) (72,600) (1,622,000)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES ................................ (289,000) (2,409,800) (438,900) (3,363,700)
PROVISION FOR (BENEFIT FROM) INCOME
TAXES ....................................... 80,200 (85,700) 20,200 (85,700)
------------ ------------ ------------ ------------
NET INCOME (LOSS) ................................ $ (369,200) $ (2,324,100) $ (459,100) $ (3,278,000)
------------ ------------ ------------ ------------
Basic earnings (loss) per share .................. $ (0.05) $ (0.20) $ (0.07) $ (0.28)
Diluted earnings (loss) per share ................ $ (0.05) $ (0.20) $ (0.07) $ (0.28)
Weighted average common share outstanding
(Basic and diluted) ......................... 6,688,300 11,838,500 6,688,300 11,746,000
</TABLE>
See accompanying notes to these consolidated financial statements.
F-29
<PAGE> 66
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
SIX MONTHS ENDED MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, 1999 MARCH 31, 2000
-------------- --------------
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES
Net Income (Loss) ................................................. $ (459,100) $(3,278,000)
Adjustments to reconcile net income (loss) to
net cash from operating activities
Depreciation and amortization ..................................... 72,900 283,700
Loss on disposal of assets ........................................ 48,800 --
Stock-based compensation .......................................... -- 144,700
Realized gains (losses) on sale of investments .................... (7,200) --
Accrued interest expense from long-term debt ...................... -- 30,200
Accrued interest expense from intrinsic value of conversion
feature of long-term debt .................................... -- 1,604,300
Changes in operating assets and liabilities
Trade accounts receivable ......................................... 226,900 (181,200)
Other assets ...................................................... (14,100) (126,000)
Accounts payable and other current liabilities .................... 64,800 94,200
Administrative fees payable ....................................... 39,000 --
Income taxes payable and refundable ............................... (7,000) --
Sale deposit ...................................................... (98,700) --
----------- -----------
Net cash flows from operating activities ..................... (133,700) (1,428,100)
CASH FROM INVESTING ACTIVITIES
Purchase of property and equipment ................................ (39,500) (50,700)
Purchase of capitalized software .................................. -- (60,700)
Refund of deposit on property and equipment ....................... -- 16,000
Proceeds from sale of Familyware .................................. 163,200 --
Proceeds from sale of investments ................................. 17,400 --
----------- -----------
Net cash flows from investing activities ..................... 141,100 (95,400)
CASH FROM FINANCING ACTIVITIES
Repayment of note payable, net .................................... (13,800) --
Principal repayments of long-term debt ............................ (32,000) (34,000)
Principal repayments of capital lease obligations ................. -- (5,400)
Repayment of advances from stockholder ............................ (97,300) (5,500)
Proceeds from long-term debt and stock warrants ................... 4,552,000
Proceeds from issuance of common stock ............................ 300,000 1,184,200
Dividends ......................................................... (140,300) --
----------- -----------
Net cash flows from financing activities ..................... 16,600 5,691,300
EFFECT OF CHANGES IN EXCHANGE RATES .................................... (500) (6,000)
----------- -----------
NET CHANGE IN CASH ..................................................... 23,500 4,161,800
CASH AND CASH EQUIVALENTS, beginning of period ......................... 1,700 164,200
----------- -----------
CASH AND CASH EQUIVALENTS, end of period ............................... $ 25,200 $ 4,326,000
Supplemental disclosure of Cash Flow information:
Interest paid ................................................ $ 23,800 $ 23,200
Income taxes paid (received) ................................. $ 19,000 $ (85,700)
</TABLE>
See accompanying notes to these consolidated financial statements.
F-30
<PAGE> 67
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
QUARTER AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION, REVERSE ACQUISITION, AND OPERATIONS (CONTINUED)
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 primarily on international trade compliance applications, which
help businesses qualify for preferential tariff treatment under the
North American Free Trade Agreement (NAFTA).
Intelli Trade is a British Columbia corporation organized in 1994.
Operations are located in Toronto, Ontario, where it provides
international trade consulting services.
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 - 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.
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-31
<PAGE> 68
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
QUARTER AND SIX MONTHS ENDED MARCH 31, 2000 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.
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.
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.
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.
F-32
<PAGE> 69
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
QUARTER AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
NOTE 3 - LONG-TERM DEBT AND PRIVATE PLACEMENT
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, March 31,
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 ........................ $ -- $ 3,326,300
Capital lease obligations payable in aggregate monthly installments of
$4,580, including imputed interest at rates ranging from 9.7% to 11.94%,
due at dates from November 1999 to March 2003 ....................................... -- 63,500
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 18,000
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 ............ 155,500 153,500
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 ......................................... 273,600 271,700
----------- -----------
Total debt .......................................................................... 473,500 3,833,000
Less current portion ................................................................ (58,700) (47,000)
----------- -----------
Long-term portion ................................................................... $ 414,800 $ 3,786,000
=========== ===========
</TABLE>
Long-term debt matures as follows:
<TABLE>
<CAPTION>
Year Ending
September 30
--------------------
<S> <C>
2000 ............... $ 47,000
2001 ............... 51,600
2002 ............... 55,700
2003 ............... 60,200
2004 ............... 65,800
Thereafter ......... 3,505,700
----------
$3,786,000
</TABLE>
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.
F-33
<PAGE> 70
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
QUARTER AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
NOTE 3 - LONG-TERM DEBT AND PRIVATE PLACEMENT (CONTINUED)
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. 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 required 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 SmallCap 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.
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 issued 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 4 - CAPITAL STOCK
COMMON STOCK - The Company has a single class of common stock.
Authorized shares total 50 million. During the three months ended March
31, 2000, the Company issued 100,300 shares for total proceeds of
$498,200. During the remainder of the six months ended March 31, 2000,
the Company issued another 192,100 shares for total proceeds of
$686,000.
F-34
<PAGE> 71
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
QUARTER AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
NOTE 4 - CAPITAL STOCK (CONTINUED)
At March 31, 2000, a total of 3,732,700 common shares are reserved to
honor the conversion rights, investment options, and stock purchase
warrants issued in connection with the private placement described in
Note 3. Another 5,475,000 common shares are reserved to honor other
outstanding stock 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.
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, 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.
Based on Columbia's issuing and the Company's accepting the notice of
exchange, management believed that both parties were legally bound to
complete the exchange, and the transaction was reported as occurring
during the three-month period ended March 31, 2000. As a result,
minority interest decreased by $3,407,000 and common stock increased by
the same amount. Management has subsequently reassessed the status of
the pending exchange and Columbia's contentions and believes that
uncertainty exist about the ultimate outcome of this matter.
Accordingly, the March 31, 2000 financial statements have been
restated, and the $3,407,000 amount continues to be presented as
minority interest.
ACQUISITION OF CLASS A PREFERRED STOCK OF INFER TECHNOLOGIES, INC.
In July 1999, the Company's subsidiary, Infer Technologies, entered
into a subscription agreement to sell its chief engineer all shares of
Infer Technologies' Class A preferred stock for $0.01 per share.
Holders of the shares have the right to exchange each preferred share
for approximately 18 shares of the Company's common stock. The
subscription rights accrued 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. Through December 31, 1999, the Company recognized $113,000
of stock-based compensation related to this arrangement.
Effective January 1, 2000, the Company and the employee canceled the
agreement and the Company acquired all outstanding Class A preferred
shares of its subsidiary in exchange for agreeing to issue the employee
150,000 stock options. The exercise price of the options committed to
be awarded will approximate the fair value of the Company's shares on
the grant date. As a result of the cancellation of the agreement and
acquisition of the subsidiary's preferred shares, minority interest
decreased by $113,000 and common stock
F-35
<PAGE> 72
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
QUARTER AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
NOTE 4 - CAPITAL STOCK (CONTINUED)
increased by the same amount. No gain or loss was recognized as a
result of the Company acquiring the subsidiary's preferred shares.
STOCK WARRANTS
During the three months ended March 31, 2000, in conjunction with the
private placement of convertible debentures described in Note 3, the
Company issued detachable stock purchase warrants that allow holders to
purchase 330,000 of the Company's common stock for $11.10 per share.
The term of the warrants is five years. A total of $1,330,000 for the
$5,000,000 gross proceeds from the private placement was allocated to
the detachable stock warrants, based on 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.
In connection with the private placement, the Company issued additional
warrants, in lieu of finder's fees, to purchase another 25,000 shares
of common stock at $11.10 per share. The term of the warrants is five
years. The fair value of the stock warrants was allocated between the
convertible debentures and detachable stock warrants and recorded as an
offset against the gross proceeds received for the securities.
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 Company has granted 1,819,000 options. 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 March 31, 2000 is as follows:
<TABLE>
<CAPTION>
Weighted-
Number Average
of Options Exercise Price
---------- --------------
<S> <C> <C>
Options outstanding at September 30, 1999 919,000 $5.50
Granted 890,000 $7.09
Exercised -- --
Forfeited (105,000) 5.86
---------- -----
Options outstanding at March 31, 2000 1,704,000 $6.51
========== =====
Options exercisable at March 31, 2000 -- $ --
========== =====
</TABLE>
A summary of stock options outstanding at March 31, 2000 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options
------------------------------------------------- -----------
Weighted-
Average Weighted-
Range of Remaining Average
Exercise Number Contractual Exercise Number
Prices Outstanding Life Price Exercisable
--------------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
$5.50 to $10.25 1,704,000 4.3 years $6.51 --
</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 ended March 31, 2000.
F-36
<PAGE> 73
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
QUARTER AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
NOTE 4 - CAPITAL STOCK (CONTINUED)
STOCK OPTIONS - OTHER
1. During the six months ending March 31, 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-37
<PAGE> 74
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
QUARTER AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
NOTE 4 - 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 the 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.
NOTE 5 - NON-CASH TRANSACTIONS
As described in Note 4, 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 six months ended March 31, 2000, the Company also acquired
$62,500 of equipment under capital lease agreements. In connection with
its entering into the lease agreements, the Company refinanced $6,000
of trade accounts payable.
NOTE 6 - 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.
F-38
<PAGE> 75
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
QUARTER AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
NOTE 6 - SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Software Sales
and Development
---------------------------- International
International Trade
Trade kServer Consulting Total
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Three months ended March 31, 1999
External revenues ...................... $ 30,800 $ 71,700 $ 86,000 $ 188,500
Intersegment revenues .................. -- -- -- --
Segment income (loss) before tax ....... (251,800) -- (29,200) (222,600)
Segment assets ......................... 726,600 -- 96,000 822,600
2000
External revenues ...................... 26,900 258,000 142,300 427,200
Intersegment revenues .................. -- -- -- --
Segment income (loss) before tax ....... (184,100) (25,000) 36,000 (173,100)
Segment assets ......................... 1,872,500 542,500 148,500 2,563,500
Six months ended March 31, 1999
External revenues ...................... 62,400 71,700 184,500 318,600
Intersegment revenues .................. 31,500 31,500
Segment income (loss) before tax ....... (423,200) -- 50,700 (372,500)
Segment assets ......................... 726,600 -- 96,000 822,600
2000
External revenues ...................... 91,000 292,000 256,000 639,000
Intersegment revenues .................. -- -- -- --
Segment income (loss) before tax ....... (322,800) (305,000) 68,700 (559,100)
Segment assets ......................... 1,872,500 542,500 148,500 2,563,500
</TABLE>
Three months ended March 31,
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Total income (loss) before tax for reportable segments ..... $ (222,600) $ (173,100)
Corporate headquarters expenses ............................ (66,400) (2,236,700)
----------- -----------
Consolidated total ......................................... $ (289,000) $(2,409,800)
=========== ===========
</TABLE>
Six months ended March 31,
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Total income (loss) before tax for reportable segments ..... $ (372,500) $ (559,100)
Corporate headquarters expenses ............................ (66,400) (2,804,600)
----------- -----------
Consolidated total ......................................... $ (438,900) $(3,363,700)
=========== ===========
</TABLE>
F-39
<PAGE> 76
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
QUARTER AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
--------------------------------------------------------------------------------
NOTE 7 - 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; and, as a
result, during the three months ended March 31, 2000, the Company
received an $85,700 Canadian federal income tax refund.
EXCHANGE OF CLASS B PREFERRED SHARES OF ORIGIN SOFTWARE
As described in Note 4, effective January 26, 2000, Columbia
Diversified Software Fund Limited Partnership (Columbia) notified the
Company that it wished to exercise the exchange rights associated with
the 5 million outstanding shares of Class B preferred of Origin
Software Corporation. On February 15, 2000, the Company issued 457,000
shares of common stock in the name of Columbia to be exchanged for the
Class B shares of stock. Columbia has not yet tendered the Class B
shares to the Company, and the Company has not yet delivered the
457,000 shares of common stock. Only 20% or 91,480 shares of the 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, 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-40
