<PAGE> 1
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------------------------------------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
--------------------------------------------------------------------------------
For the fiscal year ended September 30, 2000
SMARTSOURCES.COM, INC.
(formerly Innovest Capital Sources Corporation,
Telco Communications, Inc. and Cody Capital Corporation)
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C> <C>
CO 000-18232 84-1073083
(Incorporation) (Commission Number) (IRS Number)
2030 Marine Drive 604-986-0889 V7P 1V7
Suite 100 Telephone number (Postal Code)
North Vancouver
(Address of principal
executive offices)
</TABLE>
--------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par
Value
Yes [x] No [ ] (Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.)
No [ ] (indicate by check mark whether if disclosure of delinquent filers
(ss.229.405) is not and will not to the best of Registrant's knowledge be
contained herein, in definitive proxy or information statements incorporated
herein by reference or any amendment hereto.)
Issuers revenue for its most recent fiscal year was $1,477,300.
As of September 30, 2000, the aggregate number of shares held by non-affiliates
was approximately 6,056,214 shares. Due to the limited market for the Company
securities, no estimate is being supplied herewith of the market value for such
securities.
As of September 30, 2000, the number of shares outstanding of the Registrant's
Common Stock was 12,055,300.
Exhibit Index is found on page 23.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-KSB incorporates by reference
information from the Company's definitive Proxy Statement relating to its 2001
Annual Meeting of Stockholders.
This Annual Report on Form 10-KSB contains forward-looking statements that
involve risks and uncertainties. The statements contained herein that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended (the "1933 Act") and Section 21E
of the Securities Exchange Act of 1934, as amended, including, without
limitation, statements regarding the Company's expectations, beliefs, intentions
or strategies regarding the future. All forward-looking statements included in
this document or incorporated by reference herein are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. Actual results,
events, or performance could differ materially from those anticipated in these
forward-looking statements as a result of a variety of factors, including those
set forth in "Factors That May Materially Affect the Company," and elsewhere
herein.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY AND ORGANIZATION
Effective December 11, 1998, SmartSources.com, Inc. (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; accordingly, the transaction is
characterized as a reverse acquisition. As the Company 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.
The capital structure presented in the accompanying financial statements
reflects the capital structure of the Company subsequent to a 1 for 75
reverse stock split authorized on October 15, 1998 and the six million
shares issued in connection with the reverse acquisition.
Prior to the reverse acquisition described above, SmartSources.com, Inc.
was known as Innovest Capital Sources Corporation, which operated as a
development-stage company with no material amount of assets or liabilities.
The Company currently concentrates its activities in two lines of business:
Content Management and International Trade Software and Services, and
conducts its activities through four subsidiaries: SmartSources.com
Technologies Inc. ("Technologies"), IntelliTrade Inc., Origin Software
Corporation and Infer Technologies, Inc. Nifco Investments is essentially a
holding company with no business activity.
BUSINESS OF ISSUER
The Company has two distinct business segments:
1
<PAGE> 3
1) Provider of content management software for Web applications
2) Provider of international trade compliance software and international
trade consulting services
Historically, the Company's revenues were derived from the international
trade division, however, the Company has shifted its focus to provide
web-based content management software solutions to organizations and
businesses and expects the majority of future revenues to be derived from
this division.
CONTENT MANAGEMENT
The Company's primary business focus going forward is its internet-based
content management technology known as kServer(TM). The Company's mandate
is to develop and provide web-based solutions to communication and content
management needs by applying kServer(TM) and other best-of-breed
technologies.
The Company's implementation strategies for its Content Management business
include:
o Design of innovative web-based content management solutions using its
own and existing technology.
o Establishment of partnerships with key value chain participants to
enable the creation of a "complete solution".
o Identification of and focus on carefully selected vertical markets
combining industry attractiveness and the Company's ability to
execute. The market segments the Company focuses on include:
1. Travel and transportation
2. Government services
3. Professional and financial services
o Collaboration with customers to develop customized applications
uniquely suited to solve their content management problems.
o Continual development of its technology base to extend its source of
advantage.
o Creation of an open platform, publishing and training to build a
network of kServer(TM) specialists that will promote the use and
potential of the Company's core technology.
The kServer(TM) technology provides a powerful way for organizations to
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), organizations can manage relationships and
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, called
kSites, enable authorized users to create, assemble, publish, personalize
and manage vital business information easily, in 'real time' and without
any computer programming experience or knowledge.
2
<PAGE> 4
Industry and Competitive Environment
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,
leverage existing information technology investments and allow more
contributors to add content to a web site.
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.
The Company competes with third party, content management solution
providers, primarily Vignette, and, to a lesser extent, with workgroup
solutions and content publishing application providers. It 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 the Company's market. Although the
Company currently has partner relationships with a number of companies that
provide complementary products such as web tools, enterprise document
repositories and web servers, these partners may introduce competitive
products in the future. Other large software companies, such as Microsoft
and IBM, may also introduce competitive products. Many of the Company's
existing and potential competitors have greater technical, marketing and
financial resources than the Company.
Product Features
Multi-site
A big part of kServer(TM)'s power is the ability to create thousands of
different sites, called kSites, very quickly without writing any html and
xml codes. A template-based publishing environment 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.
3
<PAGE> 5
Knowledge Base structures
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 kSites and other kSites or external databases
or internet content. 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 site.
Sales, Marketing and Distribution
The Company markets and sells its kServer(TM) product primarily through a
direct sales force in North America. To date, it has licensed its software
to 4 customers: everdream Corporation, the NAFTA Institute, Uniglobe
Western Canada and Uniglobe United Kingdom and Ireland. The Company intends
to significantly increase its sales and marketing in the year 2001.
To extend its market reach and increase sales opportunities, the Company
intends to establish relationships with leading technology partners and IT
service providers.
INTERNATIONAL TRADE SOFTWARE AND SERVICES
Overview
The Company's trade division has historically focused on its proprietary
trade compliance technology called 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.
The Company is also able to provide a full-range of international trade
consulting services to companies operating under NAFTA and other trade
regulatory requirements. It provides consulting services to over 50 clients
such as Sun Microsystems, Mattel, Delco Remy, Lipton and LeviStrauss &
Company.
Clients of the trade division receive benefits such as:
-- Management of the complete NAFTA process,
-- Specific services such as classification of bills of materials,
-- Review and evaluation of internal NAFTA qualification processes to
determine if there are any weaknesses in the processes.
4
<PAGE> 6
Industry and Competitive Environment
NAFTA is by far one of the most comprehensive and complex trade agreements
in existence, with more than 1500 rules of origin regulating its
application. Companies 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, pay-per-use, to
monthly and annual subscription-based services.
Both producers of competing software products, and non-software producing
organizations maintain the capacity to compete with the Company 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
The ORIGIN(TM) product line is made up of ORIGIN(TM)Basic, ORIGIN(TM)Pro,
ORIGIN(TM)Supplier, ORIGIN(TM)Customer, ORIGIN(TM)Analyzer and
ORIGIN(TM)STP.
Sales, Marketing and Distribution
The Company's 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 one-on-one
sales calls to ensure understanding of the product and arrange real-time
online software demonstrations.
Sales associates offer real-time online software demonstrations to
potential customers presenting first hand the benefits and features of the
ORIGIN(TM) software. The presentations, accompanied with a conference call,
walk the client through each step of the software's function and illustrate
to the users how ORIGIN(TM) could streamline their specific trade
compliance process.
All current sales and marketing are handled directly by an in-house sales
and marketing team. The Company is currently reviewing partnership
opportunities.
The Company expects that revenues derived from International Trade Software
and Services will continue to grow in absolute terms in the future;
however, it anticipates that the relation of these revenues to total
Company sales will decrease in the coming years.
Based on present value analysis of expected future cash flows from the sale
of ORIGIN(TM) the Company recognized impairment on the value of the
ORIGIN(TM) software rights, as the carrying amount of the asset exceeded
fair value by $725,200. The remaining carrying value of ORIGIN(TM) is
approximately $400,000.
5
<PAGE> 7
RESEARCH AND DEVELOPMENT
The Company continues to invest in research and development to enhance the
kServer(TM) and ORIGIN(TM) products. Research and development costs, both
deferred and expensed, were $985,970 and $374,700 for 2000 and 1999,
respectively. Product development expenditures are expected to decrease in
fiscal 2001. As of September 30, 2000, approximately 14 employees were
engaged in research and development activities.
PERSONNEL
As of September 30, 2000 the Company employed 23 full time employees. The
Company considers its relationship with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
OFFICE PREMISES
The Company operates out of two offices located in North Vancouver, British
Columbia and Toronto, Ontario. The Company owns the North Vancouver office
space, which is approximately 3,400 square feet and rents 3,000 square feet of
additional office space in the same building. There are mortgages payable of
approximately $420,000 collateralized by the North Vancouver office. The Toronto
office space consists of 3,200 square feet of leased office space.
INTELLECTUAL PROPERTY
The Company's success depends on its ability to maintain the proprietary aspects
of its technology and operate without infringing the proprietary rights of
others. It relies on a combination of trademarks, trade secrets and copyright
law, and contractual restrictions, to protect the proprietary aspects of its
technology. The Company seeks to protect the source code for its software,
documentation and other written materials under trade secret and copyright laws.
The Company does not currently have any issued United States or foreign patents.
Its license agreements impose certain restrictions on its customers' ability to
utilize the Company's software. The Company also seeks to protect its
intellectual property by requiring employees and consultants with access to
proprietary information to execute confidentiality agreements with the Company
and by restricting access to its source code. There can be no assurance that all
employees or consultants have signed or could sign such agreements.
Due to rapid technological change, the Company believes that factors such as the
technological and creative skills of its personnel, new product developments and
enhancements to existing products are equally important as the various legal
protections of its technology to establish and maintain a technology leadership
position.
ITEM 3. LEGAL PROCEEDINGS
REPURCHASE OF ORIGIN SOFTWARE RIGHTS AND ISSUANCE OF PREFERRED SHARES
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 subsequently contended that the Company had not complied with the
Agreement because the shares to be delivered to Columbia upon completion of the
exchange are currently restricted from resale pursuant to applicable securities
laws. Based on its contention, Columbia withdrew its notice of exchange and has
requested that the Company amend the Agreement. Management believes the
possibility exists that the Company may negotiate an amendment to the Agreement
and, ultimately, issue additional shares to Columbia, though at present,
management is unable to determine what the terms of such an amendment might
entail or estimate how many additional shares may be issued.
Management has assessed the status of the pending exchange and Columbia's
contentions and believes that uncertainty exists about the ultimate outcome of
this matter. Accordingly, the $3,407,000 value of the Class B preferred stock of
Origin Software continues to be presented as minority interest.
No litigation regarding this transaction has started.
6
<PAGE> 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 21, 2000, the Company held an Annual Shareholders Meeting. The meeting
involved the election of Nathan Nifco, Charles Kelly, Norman Miller, Anna
Stylianides and Dr. David Walker as Directors of the Company.
Matters voted upon at the meeting were the election of Directors of the Company;
the ratification of the appointment of Moss Adams LLP as the Company's
independent auditors for the fiscal year ending September 30, 2000 and an
increase in the number of shares of common stock subject to the Company's stock
incentive compensation plan to 4,000,000 shares.
The numbers of votes cast for, against or withheld, as well as the number of
abstentions and broker non-votes for each such matter are summarized in the
following table.
<TABLE>
<CAPTION>
VOTES BROKER-NON
VOTES FOR VOTES AGAINST WITHHELD ABSTENTIONS BROKER VOTES
<S> <C> <C> <C> <C> <C>
Election of Nathan Nifco as a 6,075,619 300 None None None
Director
Election of Charles Kelly as a 6,075,619 300 None None None
Director
Election of Norman Miller as a 6,075,619 300 None None None
Director
Election of Anna Stylianides as a 6,075,619 300 None None None
Director
Election of Dr. David Walker as a 6,075,619 300 None None None
Director
Ratification of Moss Adams LLP as 6,075,919 None None None None
the Company's Auditors for the
fiscal year ending September 30, 2000
Increase in the number of shares of 6,075,919 None None None None
common stock subject to the
Company's stock incentive
compensation plan to 4,000,000 shares
</TABLE>
Mr. Miller resigned as a Director of the Company on December 31, 2000 and has
not been replaced.
7
<PAGE> 9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF COMMON STOCK
The Company's common stock is traded on the OTC Electronic 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 LOW
--------------------------------------------------------------------------------
<S> <C> <C>
December 11, 1998 to December 31, 1999 $5 $3
January 1, 1999 to March 31, 1999 $6 $4.50
April 1, 1999 to June 30, 1999 $6 1/2 $4 5/8
July 1, 1999 to September 30, 1999 $5 $3 5/8
October 1, 1999 to December 31, 1999 $5.50 $3.625
January 1, 2000 to March 31, 2000 $11.562 $5.25
April 1, 2000 to June 30, 2000 $6.875 $1.125
July 1, 2000 to September 30, 2000 $2.093 $0.510
</TABLE>
As of December 27, 2000 the approximate number of common stockholders of record
was 277. The closing bid and ask prices for common stock of the Company on
December 27, 2000 were 0.095 and 0.11 respectively.
SALES OF UNREGISTERED SECURITIES
Sales of securities within the past three years without registration under the
1933 Act were as follows:
1. December 1998: 6,000,000 shares of common stock were exchanged for all of
the outstanding capital stock of Nifco Investments, a Canadian corporation,
which is now a wholly owned subsidiary of the Company. The former Nifco
Investments stockholders are the holders of those shares. No underwriter
was involved in the transaction. The sales were made in reliance upon the
exemption from registration afforded by Section 4(2) of the 1933 Act.
2. December 1998: 4,230,000 shares of common stock were sold for cash in the
aggregate amount of $42,300 without an underwriter to nine investors. The
sales were made in reliance upon the exemption from registration afforded
by Section 4(2) of the 1933 Act and Rule 504 of Regulation D thereunder.
3. May 1999: 500,000 shares of common stock were sold for cash in the
aggregate amount of $950,000 without underwriters to one investor. The sale
was made in reliance upon the exemption from registration afforded by
Section 4(2) of the 1933 Act and Rule 504 of Regulation D thereunder.
4. July 1999: 72,464 shares of common stock were sold for cash in the
aggregate amount of $250,000 without underwriters to one investor. The sale
was made in reliance upon the
8
<PAGE> 10
exemption from registration afforded by Section 4(2) of the 1933 Act and
Rule 504 of Regulation D thereunder.
5. September 1999: 72,464 shares of common stock were sold for cash in the
aggregate amount of $250,000 without underwriters to two private investors.
The sales were made in reliance upon the exemption from registration
afforded by Section 4(2) of the 1933 Act and Rule 506 of Regulation D
thereunder.
6. November 1999: 166,668 shares of common stock were sold for cash in the
aggregate amount of $575,000 without underwriters to six private investors.
The sales were made in reliance upon the exemption from registration
afforded by Section 4(2) of the 1933 Act and Rule 506 of Regulation D
thereunder.
7. December 1999: 25,432 shares of common stock were sold for cash in the
aggregate amount of $110,991 without underwriters to two private investors.
The sales were made in reliance upon the exemption from registration
afforded by Section 4(2) of the 1933 Act and Rule 506 of Regulation D
thereunder.
8. January 2000: 90,505 shares of common stock were sold for cash in the
aggregate amount of $452,525 without underwriters to four private
investors. The sales were made in reliance upon the exemption from
registration afforded by Section 4(2) of the 1933 Act and Rule 506 of
Regulation D thereunder.
9. March 2000: 9,100 shares of common stock were sold for cash in the
aggregate amount of $45,500 without underwriters to one private investor.
The sale was made in reliance upon the exemption from registration afforded
by Section 4(2) of the 1933 Act and Rule 506 of Regulation D thereunder.
Additionally, the Company has issued options, warrants, a debenture and a
promissory note with the following terms:
-- 1,685,000 shares issuable upon exercise of outstanding options at
September 30, 2000, at exercise prices ranging from $2.00 to $10.25.
-- 1,705,000 shares issuable upon exercise of outstanding warrants at
September 30, 2000, at exercise prices ranging from $4.00 to $11.10.
-- Convertible debenture in the principal amount of $5,000,000 at a
conversion price based on the applicable percentage of the average of
the closing bid prices of the Company's Common stock for any seven
trading days (which did not need to be consecutive) selected by the
holder from the 35 trading day period ending one trading day prior to
the date of notice of conversion of the debenture; and warrants to
purchase 330,000 shares at an exercise price of $11.10 per share at
any time until February 24, 2005. At the time of each conversion, the
holder of the debenture had investment options to purchase, at the
fixed conversion price of $9.7125, one additional share of Common
stock for each share issuable upon conversion of the debenture.
The debenture, warrants and investment options were cancelled on
January 12, 2001
-- Promissory note in the amount of $2,860,000.
In January 12, 2001, $1,300,000 of the debenture was redeemed and the
balance of the debenture, the warrants and the investment options were
exchanged for a non-convertible, non-redeemable 4 year, 11% promissory
note for $2,860,000, interest payments on which commence on January
12, 2002 at $20,000 per month.
9
<PAGE> 11
All of these securities were sold in reliance upon the exemption from
registration afforded by Section 4(2) of the 1933 Act and Rule 506 of Regulation
D thereunder.
DIVIDEND POLICY
Prior to the reverse acquisition of Nifco Investments by the Company on
December 11, 1998, a dividend of $142,400 was paid to Nifco Investments
shareholders. Subsequent to December 11, 1999, no dividends were paid by
the Company. We do not anticipate paying a cash dividend in the foreseeable
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
The following discussion and analysis should be read in conjunction with the
Company's financial statements for the year ended September 30, 2000 and the
notes thereto.
RESULTS OF OPERATIONS
During the year ended September 30, 2000, the Company had consolidated revenues
of $1,477,300, operating expenses of $4,158,400 and a net loss before interest,
depreciation, amortization and impairment of software rights of $4,252,200.
Revenues increased 205% from 1999 revenues of $721,100. The higher revenues are
primarily the result of new revenues generated by kServer(TM), launched during
the current fiscal year and an increased client base for the International Trade
products and services. A kServer(TM) contract entered into with the Government
of Canada was the most significant sole contributor to the increase in revenues.
Furthermore, the deployment of kServer(TM) to the Uniglobe Western Canada and
United Kingdom and Ireland regions took place during the year, contributing to
revenues derived from initial deployment and monthly customer support fees.
Operating expenses include research and development, sales and marketing, and
general and administrative expenses. The aggregate of these costs increased
considerably as compared to the previous period from $1,628,909 to $4,158,400.
The increase was due to a significant increase in staffing and activity levels
across all of the Company's departments.
Research and development costs for the year ended September 30, 2000 totaled
$986,000 as compared to $374,700 in the previous fiscal year. This was a direct
result of continued costs incurred in the development of the kServer(TM) line of
products, including higher payroll costs due to the increased number of
engineers and other technical personnel working on kServer(TM).
10
<PAGE> 12
Sales and marketing costs increased 126% during the year, from $335,280 to
$758,400 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 161%, from $918,929 to $2,414,000.
The increase was the result of higher payroll costs, travel expenses,
shareholder relations costs and professional fees as compared to the previous
year.
Amortization and depreciation costs increased from $272,500 to $548,200 as a
result of the increased asset base - particularly hardware and software - of the
Company to support the deployment of kServer(TM).
In fiscal 2000 the Company recognized impairment on the value of certain
software rights, in accordance with generally accepted accounting principles, as
a result of a reassessment of future cash flows expected to be generated by such
software rights. The carrying amount of the asset exceeded estimated value by
$725,200.
Interest expense for the fiscal year was $1,998,800, a significant increase as
compared to the same period in fiscal year 1999, in which interest expense was
$50,300. The increase is a direct result of the Company issuing $5 million of a
convertible debenture in February 2000, which bore interest at a rate of 7.0%
per annum. Due to the intrinsic value of the convertibility of the debenture,
the Company recognized over $1.5 million of interest expense during the second
quarter of fiscal 2000.
Net loss during the fiscal year was $6,100,400. In the year ended September
30, 1999, the Company reported a net loss of $672,800. The increase in the net
loss was primarily due to higher interest expense and an increase in operating
costs.
OTHER ITEMS
INCOME TAXES
As described in Note 3 to the financial statements, 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 Corp.,
repurchased these rights. As described in Note 8 to the financial statements,
during the same time frame, Technologies purchased and sold an interest in
certain other software rights. These transactions all included a significant
non-cash component that employed the issuance, receipt, and settlement of
long-term promissory notes. As described more fully in Notes 3 and 8, these
notes were deemed to have no value 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.
In fiscal 2000, the Company submitted a proposed settlement to the Canadian
Customs and Revenue Agency (CCRA) that limited the amount of tax payable 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. The CCRA agreed in substance to the
terms of the proposed settlement. No additional tax liability will be incurred
with respect to the transactions referred to above.
11
<PAGE> 13
INTEREST EXPENSE
On February 24, 2000, the Company issued $5 million of a convertible debenture
and detachable stock purchase warrants. The debenture would have matured in
February 2005 and bore interest at 7%, which was payable upon maturity, or upon
conversion or redemption. At the date of issue, the conversion price of the
debenture 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. The debenture,
warrants and investment options were cancelled on January 12, 2001.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended September 30, 2000, the Company's cash position increased
from $164,200 to $3,102,100. At September 30, 2000, the Company had a working
capital of $1,598,000 and a current ratio of 1.8 to 1. This is a significant
improvement as compared to September 30, 1999 when the Company had working
capital of $84,300 and a current ratio of 1.3 to 1. The improvement in the
Company's working capital is due to the issuance of additional share capital
during the year for gross proceeds of approximately $1,184,000 and the issuance
on February 24, 2000, of a convertible debenture in the aggregate principal
amount of
12
<PAGE> 14
$5,000,000. The debenture bore interest at a rate of 7% per annum commencing
February 24, 2000 and would have matured on February 24, 2005. The principal
amount of the debenture (plus all accrued interest and any additional amounts
owed) was convertible, in whole or in part, at the option of the holders, into
shares of Common stock. In connection with this issuance, the Company incurred
$448,000 of issue costs. The debenture, warrants and investment options were
cancelled on January 12, 2001. On January 12, 2001, $1,300,000 of the debenture
was redeemed for cash and the balance of the debenture, the warrants and the
investment options were exchanged for a non-convertible, non-redeemable 4 year,
11% promissory note for $2,850,000, interest payments on which commence on
January 12, 2002 at $20,000 per month. The note provides the Company with the
option to prepay all or any part of the note. A discount on the remaining
balance of the note will be given to the Company for prepayments of principal.
The discount will be calculated by multiplying 4% times a fraction, the
denominator of which will be 360 and the numerator of which will be the number
of days from the date of the prepayment to the maturity date. The maximum
discount available, as calculated on the date of the redemption and exchange
agreement, is $500,000.
After making the $1,300,000 payment described above, the Company estimates its
cash position to be $1,200,000 approximately.
The net loss for the year ended September 30, 2000 was $6,100,400. The Company's
primary source of liquidity and cash during the year was from the issuance of
share capital and the issuance of a convertible debenture. The number of common
shares issued during the year increased from 11,563,200 to 11,855,583. In July
2000, the holder of the debenture converted $250,000 of principal plus accrued
interest. As a result of the conversion, the Company issued an aggregate of
199,703 shares of common stock.
The Company seeks operating and financial stability by working on its
fundamentals and will concentrate its efforts in fiscal 2001 to sales and
marketing activities. The Company is currently working on securing a series of
contracts that will significantly contribute towards these goals and has
identified a series of cash-driven revenue goals to strengthen its working
capital position in fiscal 2001. Additionally, management has identified
opportunities for streamlining its operating activities and reducing overhead.
As a result, the Company expects that its working capital requirements will
decrease as compared to fiscal 2000 levels.
Notwithstanding the above, the Company may require additional funds to support
its working capital demand or for other purposes and may seek to raise
additional funds through public or private equity financings or from other
sources. There can be no assurance that additional financing will be available
on acceptable terms, if at all. If the Company is not able to increase its
revenues and effectively control costs and/or if adequate funds are not
available or are not available on acceptable terms, the Company may have to
curtail its operations and may be unable to develop or enhance its products,
take advantage of future opportunities, or respond to competitive pressures or
unanticipated requirements, all of which could have a material adverse effect on
its business, financial condition and operating results.
Investing activities during the year ended September 30, 2000 have consisted
primarily of purchases of property and equipment, principally computer hardware
and software. Capital expenditures, including those under capital leases,
totaled $139,500 in fiscal 1999 and $223,500 in fiscal 2000.
The Company has not undertaken any material commitments for expenditures as of
September 30, 2000.
One of the three outstanding mortgages on the Company's office in North
Vancouver expires in January 2001. The Company will pay the full amount on the
mortgage balance to the lender then, in the amount of $100,000, plus accrued
interest.
By notice of conversion dated October 25, 2000, the holder of the debenture
converted $100,000 of the Company's 7% convertible debenture dated February 24,
2000 into 506,257 shares of the Company's common stock. The average closing bid
price used in this conversion formula was $0.2069. Previously, by conversion
notice dated July 12, 2000, that debenture holder converted $250,000 of its
debenture into 199,703 shares of the Company's common stock.
13
<PAGE> 15
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. The
Company expects that, in the future, cash in excess of current requirements will
continue to be invested in high credit-quality, interest-bearing securities.
There are no legal or practical restrictions on the ability of the subsidiaries
to transfer funds to the parent company (SmartSources.com Inc.).
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. The Company has adopted SFAS No. 133 in
the quarter ending December 31, 2000 and does not expect its adoption to have an
impact on our results of operations, financial position or cash flows. In
December 1999, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition In Financial
Statements. SAB 101 establishes guidelines in applying generally accepted
accounting principles to the recognition of revenue in financial statements
based on the following four criteria: (1) persuasive e evidence of an
arrangement exists, (2) delivery has occurred or services have been rendered,
(3) the seller's price to the buyer is fixed or determinable, and (4)
collectibility is reasonably assured. SAB 101, as amended by SAB 101A is
effective no later than the first fiscal quarter of fiscal years beginning after
December 15, 1999. Accordingly, the Company will adopt the new guidance in the
first quarter of fiscal 2001. The Company does not believe that the adoption of
SAB 101 will have a material effect on its financial position or result of
operations.
FACTORS THAT MAY MATERIALLY AFFECT THE COMPANY
The following factors may materially affect the Company and its business and
operations:
THE COMPANY MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE ON
FAVORABLE TERMS,IF AT ALL.
The Company may need to raise additional capital, and it cannot be certain that
it will be able to obtain additional financing on favorable terms, if at all. If
it cannot raise additional capital on acceptable terms, the Company may have to
significantly curtail its operations, may not be able to develop or enhance its
products and services and may not be able to take advantage of future
opportunities or respond to competitive pressures or other capital requirements.
To realize its business objectives and potential, the Company will require
significant additional financing in the short term. If the Company cannot raise
additional capital, it is doubtful that it will be able to continue as a going
concern. The Company cannot be sure that it will be able to obtain the financing
it will require, or that it will be available on favorable terms. Additional
financing may be debt, equity or a combination of debt and equity. If equity, it
could result in significant dilution to existing shareholders.
The Company's need for additional capital and its ability to raise capital are
impacted by its redeeming $1,300,000 of a convertible debenture for cash and
exchanging the remainder of the debenture, warrants and investment options for a
non-convertible, non-redeemable 4 year, 11% promissory note for $2,860,000,
interest payments on which commence on January 12, 2002 at $20,000 per month.
14
<PAGE> 16
THE COMPANY HAS A LIMITED OPERATING HISTORY. IT WILL BE DIFFICULT TO EVALUATE
OUR BUSINESS IN MAKING AN INVESTMENT DECISION.
The Company is in the early stages of its development, which makes the
evaluation of its business operations and prospects difficult. 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, should be considered. These risks and difficulties, as they apply to
the Company in particular, are:
-- Potential fluctuations in operating results and uncertain growth rates
-- Limited market acceptance of its products
-- Dependence on a small number of orders for most of its revenue
-- Its need to expand its direct sales force and indirect sales channels
-- Its need to manage rapidly expanding operations
-- Its need to attract, train and retain qualified personnel
THE COMPANY HAS A HISTORY OF LOSSES AND EXPECTS LOSSES IN THE FUTURE. IF IT DOES
NOT ACHIEVE OR SUSTAIN PROFITABILITY IN THE FUTURE, ITS VIABILITY WILL BE IN
DOUBT AND ITS STOCK PRICE WILL DECLINE.
The Company incurred operating losses and had negative cash flows from
operations in 1999 and 2000. As of September 30, 2000, the Company had an
accumulated deficit of approximately $9.3 million, and expects to incur losses
for the foreseeable future. To date, the Company has funded operations from the
sale of equity and convertible securities and has marginally generated cash from
operations. It expects to continue to incur significant costs developing and
introducing enhancements to the kServer(TM) Internet solutions and expanding its
direct sales and marketing activities. The Company's losses could impede its
ability to compete effectively by creating doubt among our potential customers
as to its long-term viability and cause a decrease in the market price of its
Common stock. If the Company is to achieve profitability, it will need to
increase its revenues significantly. Management cannot predict when the will
Company become profitable, if at all.
OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT, AND IF THE COMPANY
FAILS TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE
MARKET PRICE OF ITS COMMON STOCK MAY DECREASE SIGNIFICANTLY.
The Company's quarterly operating results have varied in the past and may vary
significantly in the future. Because the Company's business is evolving rapidly
and it has a limited operating history, the Company has limited experience in
forecasting its revenues. Since its operating results are volatile and difficult
to predict, the Company believes that period-to-period comparisons of its
operating results are not a reliable indication of its future performance.
Future quarterly operating results may be below the expectations of public
market analysts and investors. In this event, the market price of the Company's
Common stock may decrease significantly.
THE COMPANY'S QUARTERLY RESULTS DEPEND ON A SMALL NUMBER OF LARGE CONTRACTS, SO
THE LOSS OF ANY SINGLE CONTRACT COULD HARM THOSE RESULTS AND CAUSE ITS STOCK
PRICE TO DROP.
Each quarter, the Company derives a significant portion of its revenues from a
small number of relatively large contracts or orders. As a result, its operating
results could suffer if any large orders or contracts are delayed or canceled in
any future period. The Company expects it will continue to depend upon a small
number of large orders and/or contracts for a significant portion of its
revenues.
15
<PAGE> 17
REVENUES DEPEND TO GREAT EXTENT ON THE KSERVER(TM) PRODUCT LINE, WHICH IS IN AN
EARLY STAGE OF COMMERCIALIZATION.
A material amount of the Company's revenues are 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:
-- Broad standards for conducting e-business emerge and become widely
adopted, thus reducing the need for the Company's infrastructure
products.
-- 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.
-- Competitors develop products, technologies or capabilities that render
kServer(TM) products and related services obsolete or noncompetitive
or that shorten the life cycles of these products and services.
-- kServer(TM) products do not meet customer performance needs or fail to
remain free of significant software defects or bugs.
-- The Company is unable to recruit and retain the additional sales
personnel needed to effectively market its products.
Furthermore, to remain competitive, software products such as the ones offered
by the Company typically require frequent updates that add new features. There
can be no assurance that the Company will succeed in creating and selling
updated or new versions of its products. A decline in the demand for, or in the
average selling price of, its products would have a direct negative effect on
its primary source of revenues and could cause its stock price to fall.
THE COMPANY EXTENDS CREDIT TO ITS CUSTOMERS.
The Company extends 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. Three customers
accounted for 37% of accounts receivable at September 30, 2000.
THE MARKET FOR E-BUSINESS PORTALS IS NEW AND EMERGING, AND IF IT DOES NOT GROW
AS RAPIDLY AS THE COMPANY ANTICIPATES OR FAILS TO EMERGE AT ALL, PLANNED GROWTH
AND FINANCIAL OBJECTIVES WILL NOT BE MET.
The Company's success is dependent on the emergence of the market for e-business
portals. This is a new and rapidly evolving market. The Company plans to
dedicate most of our sales, marketing and product development efforts toward
e-business portals. If this market does not develop as rapidly as expected,
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:
-- The unwillingness of customers to change their traditional method of
conducting commerce.
-- The failure of the Internet network infrastructure to keep pace with
substantial growth.
-- Adverse publicity and consumer concern about the security of
electronic commerce transactions.
16
<PAGE> 18
THE COMPANY'S 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 the Company's sales cycles could cause revenues to
fluctuate widely from period to period. To date, the average sales cycle for
kServer(TM) products has been six months and has required pre-purchase
evaluation by a significant number of decision makers, including senior
management. The Company's sales cycles can be much longer for larger
opportunities with new customers. Since a number of factors influence the sales
process, the period between the initial contact with a new customer and the time
we recognize revenues from that customer varies widely. The Company spends
significant time educating and providing information to prospective customers
regarding the use and benefits of its products. Even after purchase, the
Company's customers tend to deploy the 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.
THE COMPANY FACES COMPETITION PRIMARILY FROM COMPANIES DEVELOPING THEIR OWN
INTERNAL E-BUSINESS INFRASTRUCTURE SYSTEMS AND OTHER PROVIDERS OF E-BUSINESS
INFRASTRUCTURE SOLUTIONS, AND IF IT IS UNABLE TO COMPETE SUCCESSFULLY, IT WILL
NOT ACHIEVE ITS FINANCIAL OBJECTIVES.
The market for e-business infrastructure applications and services is intensely
competitive, evolving and susceptible to rapid technological change. The Company
expects the intensity of competition to increase in the future. Many of the
Company's competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources, significantly greater name
recognition and a larger installed base of customers. 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 the Company can. In addition, many of
the Company's 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 the Company's ability to sell its products at the price
levels required to support its continuing operations.
THE COMPANY NEEDS TO EFFECTIVELY MANAGE ITS SALES OPERATIONS IF IT IS TO
INCREASE MARKET AWARENESS OF AND REVENUES DERIVED FROM ITS PRODUCTS AND RELATED
SERVICES.
If the Company fails to effectively manage its sales efforts, its prospects for
revenue growth will be diminished. The Company's products and related services
require sophisticated sales efforts targeted at senior management of prospective
customers. If the Company does not develop indirect sales channels, it may miss
sales opportunities that might be available through these other channels.
Although it is currently investing and plans to continue to invest significant
resources to develop these indirect sales channels, it may not succeed in
establishing a channel that can market its products effectively and provide
timely and cost-effective customer support and services. In addition, it may not
be able to manage conflicts across its various sales channels, and the focus on
increasing sales through indirect channels may divert management resources and
attention from direct sales.
17
<PAGE> 19
OPERATIONS AND GROWTH PROSPECTS MAY BE SIGNIFICANTLY IMPEDED IF THE COMPANY IS
UNABLE TO RETAIN ITS 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. The Company's success depends on its
ability to attract, hire, train and retain personnel. The Company has
experienced difficulties with hiring and retention in the past, and certain of
its key personnel may terminate their employment with the Company to work for
one of our competitors at any time for any reason. Certain members of management
have employment or consulting agreements. There can be no assurance that the
Company will be successful in attracting and retaining key personnel. The loss
of services of one or more key personnel could have a material adverse effect on
the Company and would materially impede the operation and growth of its
business.
IF THE COMPANY FAILS TO EFFECTIVELY MANAGE ITS OPERATIONS, ITS GROWTH PROSPECTS
WILL BE DIMINISHED AND OPERATING EXPENSES COULD EXCEED BUDGETED AMOUNTS.
The Company's ability to offer its products and related services in a quickly
evolving market requires an effective planning and management process. The
Company has expanded its operations rapidly since inception, and needs to
effectively manage them in support of its business goals. The Company has a
significant number of relatively recently hired employees. To manage its
operations effectively, the Company must:
-- Implement and improve its operational, financial and other systems,
procedures and controls on a timely basis
-- Train and manage its workforce.
The Company cannot be certain that its systems, procedures or controls will be
adequate to support its current or future operations or that its management will
be able to manage business growth and still achieve the rapid execution
necessary to meet its expectations. Failure to manage operations effectively
could diminish business prospects and could result in lost opportunities as well
as operating expenses exceeding the amount budgeted.
THE COMPANY HAS NO SIGNIFICANT EXPERIENCE CONDUCTING OPERATIONS INTERNATIONALLY,
WHICH MAY MAKE IT MORE DIFFICULT THAN EXPECTED TO EXPAND OVERSEAS AND MAY
INCREASE THE COSTS OF DOING SO.
To date, the Company has derived all of its revenues from sales in the United
States and Canada. It plans to expand its international operations in the
future. There are many barriers to competing successfully in the international
arena, including:
-- cost of customizing products for foreign countries
-- restrictions on the use of software encryption technology
-- dependence on local vendors
-- compliance with multiple conflicting and changing governmental laws
and regulations
-- longer sales cycles
-- import and export restrictions and tariffs
18
<PAGE> 20
IF THE COMPANY FAILS TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS, THE
MARKET ACCEPTANCE OF ITS PRODUCTS, AND ITS PROFITABILITY MAY SUFFER.
To offer products and services to a larger customer base, the Company depends on
strategic partnerships and marketing alliances to obtain customer leads,
referrals and distribution. If it is unable to maintain its existing strategic
relationships or fails to enter into additional strategic relationships, it will
have to devote substantially more resources to the marketing of its products and
services. It would also lose anticipated customer introductions and co-marketing
benefits. The Company's success depends in part on the success of its strategic
partners and their ability to market the Company's products and services
successfully. In addition, strategic partners may not regard the Company as
significant for their own businesses. Therefore, they could reduce their
commitment to the Company or terminate their respective relationships with it,
pursue other partnerships or relationships, or attempt to develop or acquire
products or services that compete with the Company's products and services. Even
if the Company succeeds in establishing these relationships, these may not
result in additional customers or revenues.
IF THE COMPANY FAILS TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGES, ITS
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 the Company's products obsolete and unmarketable. The Company
believes that to succeed, it must enhance its products, develop new products on
a timely basis to keep pace with technological developments, and satisfy the
increasingly sophisticated requirements of its customers. Therefore, the Company
cannot be certain that it will respond successfully to technological change,
evolving industry standards or customer requirements. If it is unable to
adequately respond to these changes, revenues and market share could rapidly
decline. In connection with the introduction of new products and enhancements,
the Company has experienced development delays and related cost overruns, which
are not unusual in the software industry. It 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 the Company. Its 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 customers
use. The Company must constantly modify and improve its 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 its business. If the Company fails to modify or improve its
products in response to evolving industry standards, they could rapidly become
obsolete or unmarketable, which would have a direct negative effect on the
Company's revenues.
IF THE COMPANY'S PRODUCTS CONTAIN ERRORS, REVENUES AND NET OPERATING RESULTS
WILL BE NEGATIVELY IMPACTED AND THE COMPANY'S REPUTATION AND THE MARKET
ACCEPTANCE OF THESE PRODUCTS WILL BE JEOPARDIZED.
The Company's 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 its current or future product offerings after commencement of commercial
shipments. The Company has discovered software defects in its new products after
their introduction. The implementation of its products typically involves
working with sophisticated software, computing and communications systems. If
the Company's software contains undetected errors or fails to meet customers'
expectations in a timely manner, the Company 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 the Company, and increased insurance costs.
19
<PAGE> 21
DEFECTS OR ERRORS IN THE COMPANY'S PRODUCTS MAY RESULT IN PRODUCT LIABILITY
CLAIMS.
Because customers rely on the Company's products for critical business
processes, any significant defects or errors in its products or services might
result in tort or warranty claims. Errors or defects in or other performance
problems associated with the Company's products could result in financial or
other damages to its customers. Customers may then seek damages from the Company
for their losses. The Company has not experienced any product liability claims
to date. However, a product liability claim brought against the Company, even if
not successful, would likely be time-consuming and costly and could harm its
reputation. The Company's licenses with customers generally contain provisions
designed to limit its exposure to potential product liability claims such as
disclaimers of warranties and limitations on liability for special,
consequential and incidental damages. In addition, its license agreements
generally limit the amounts recoverable for damages to the amounts paid by
customers to the Company for the products or services giving rise to the
damages. The Company cannot be certain that the limitations of liability
included in its 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 the Company's liability could have a significant
negative impact on its results of operations and cause our stock price to fall.
IF THE COMPANY FAILS TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY RIGHTS, ITS
ABILITY TO COMPETE COULD BE SERIOUSLY HARMED, AND IF OTHER COMPANIES BRING
LAWSUITS CLAIMING THAT THE COMPANY INFRINGES THEIR INTELLECTUAL PROPERTY RIGHTS,
THE COMPANY COULD BE LIABLE FOR SIGNIFICANT DAMAGES.
The Company's success depends in large part on its ability to adequately protect
its intellectual property rights. It seeks to protect its source code,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. The Company requires its customers to
enter into license agreements, which impose restrictions on our customers'
ability to utilize our products. In addition, it seeks to avoid disclosure of
its trade secrets by, among other methods, restricting access to its source code
and requiring those persons with access to its proprietary information to sign
confidentiality agreements with the Company. However, some of these
confidentiality agreements contain provisions that may permit these persons, in
some circumstances, to develop products based on the Company's proprietary
information as a result of their access to the source code. If these persons
develop products based on the Company's proprietary information, the value of
this proprietary information will be adversely impacted. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of its technology or to obtain and use information that the Company
regards as proprietary. Policing unauthorized use of the Company's technology is
difficult, and while the Company is unable to determine the extent to which
piracy of its products exists, software piracy can be a persistent problem. In
addition, as it expands operations, the Company becomes increasingly exposed to
intellectual property infringement because laws of some foreign countries do not
protect its proprietary rights to as great an extent as the laws of the United
States and Canada. The Company's means of protecting its proprietary rights may
not be adequate and competitors may copy the Company's products, independently
develop similar technology, or design around its intellectual property. If the
Company fails to adequately protect its intellectual property, its 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 the Company's
current or future products infringe their intellectual property. The Company
expects that software developers will increasingly be susceptible to
infringement claims as the number of products and competitors in its 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
the Company to enter into royalty or
20
<PAGE> 22
licensing agreements. Any royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company, or may not be available at all,
which could jeopardize the viability of the Company's business.
THERE IS SUBSTANTIAL RISK THAT FUTURE REGULATIONS COULD BE ENACTED THAT EITHER
DIRECTLY RESTRICT THE COMPANY'S BUSINESS OR INDIRECTLY IMPACT ITS BUSINESS BY
LIMITING THE GROWTH OF INTERNET COMMERCE.
As Internet commerce evolves, the Company expects 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 the Company's products and
related services, which could adversely affect its business prospects and
operating results. Although many of these regulations may not apply to the
Company's business directly, it expects that laws regulating the solicitation,
collection or processing of personal/consumer information could indirectly
affect its 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, the Company is
unsure whether similar legislation will be enacted and upheld in the future. It
is possible that legislation could expose companies involved in Internet
commerce to liability, which could limit the growth of Internet commerce
generally. Legislation like the Telecommunications Act and the Communications
Decency Act could dampen the growth of Internet usage and decrease its
acceptance as a commercial medium. Moreover, the applicability to the Internet
of existing laws in various jurisdictions governing issues such as property
ownership, sales tax, libel and personal privacy is uncertain and may take years
to resolve. The Company's costs could increase and 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 its business, or the
application of existing laws and regulations to the Internet and on-line
businesses.
21
<PAGE> 23
EXISTING SHAREHOLDERS CONTROL A MAJORITY OF THE COMPANY'S STOCK.
As of September 30, 2000 approximately 49.77% of the Company's outstanding
capital stock was owned by 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 THE COMPANY'S COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK
PRICE.
If shareholders sell substantial amounts of the Company's Common stock in the
public market, the market price of its Common stock could be adversely affected.
In addition, the sale of these shares could impair the Company's ability to
raise capital through the sale of additional equity securities.
THE COMPANY IS LISTED ON THE OTC ELECTRONIC BULLETIN BOARD, WHICH CAN BE A
VOLATILE MARKET.
The Company's Common stock is quoted on the OTC Electronic 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. One 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.
THE COMPANY MAY BE SUBJECT TO EXCHANGE RATE FLUCTUATIONS.
A substantial portion of the Company's revenues are received and a substantial
portion of its operating costs are incurred in Canadian dollars. Because its
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 the Company's reported results of operations. The Company does not
currently engage in currency-hedging transactions.
ITEM 7. FINANCIAL STATEMENTS
The following is a list of the consolidated financial statements for the year
ended September 30, 2000, that are filed as part of this Form 10KSB and are
included immediately following the signature page:
Independent Auditor's Report
Balance Sheet
Statement of Operations
Statement of Stockholders' Deficit
Statement of Cash Flows
Notes to Consolidated Financial Statements
22
<PAGE> 24
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Pursuant to Instruction E.3. to Form 10-KSB, the information in Items 9-12 is
incorporated by reference from the Company's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A.
ITEM 13. EXHIBITS AND REPORTS
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION LOCATION
------ ----------- --------
<S> <C> <C>
3.01 Articles of Incorporation. Filed as Exhibit 3.01 to the Company's
Annual Report on Form 10-KSB for fiscal
year ended September 30, 1999, and
incorporated herein by reference.
3.02 Bylaws. Filed as Exhibit 3.02 to the Company's
Annual Report on Form 10-KSB for fiscal
year ended September 30, 1999, and
incorporated herein by reference.
3.03 Amended and Restated Bylaws. Filed as Exhibit 3.03 to the Company's
SB-2/A filed on March 20, 2000, and
incorporated herein by reference.
4.01 Securities Purchase Agreement by and among SmartSources.com, Filed as Exhibit 10.01 to the Company's
Inc. and RGC International Investors LDC, dated as of Current Report on Form 8-K, dated
February 24, 2000. February 24, 2000, and incorporated
herein by reference.
4.02 Convertible Debenture issued to RGC International Investors Filed as Exhibit 10.02 to the Company's
LDC or its registered assigns by SmartSources.com, Inc., Current Report on Form 8-K, dated
dated as of February 24, 2000. February 24, 2000, and incorporated
herein by reference.
4.03 Stock Purchase Warrant issued to RGC International Investors Filed as Exhibit 10.03 to the Company's
LDC or its registered assigns by SmartSources.com, Inc., Current Report on Form 8-K, dated
dated as of February 24, 2000. February 24, 2000, and incorporated
herein by reference.
4.04 Registration Rights Agreement by and among SmartSources.com, Filed as Exhibit 10.04 to the Company's
Inc. and RGC International Investors LDC, dated as of Current Report on Form 8-K, dated
February 24, 2000. February 24, 2000, and incorporated
herein by reference.
4.05 Redemption and Exchange Agreement by and among Filed herewith
SmartSources.com Inc. and RGC International, LDC, dated as
of January 12, 2001.
4.06 Promissory Note from SmartSources.com, Inc, to RGC Filed herewith
International Investors, LDC, dated as of January 12, 2001.
4.07 Subsidiary Guarantee made by Subsidiaries of Filed herewith
SmartSources.com, Inc. in favor of RGC International
Investors, LDC, dated as of January 12, 2001.
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
NUMBER DESCRIPTION LOCATION
------ ----------- --------
<S> <C> <C>
10.01 Share Exchange Agreement dated December 11, 1998 among Filed as Exhibit 1 to the Company's
Nathan Nifco and Dina Nifco, residents of West Vancouver, Current Report on Form 8-K, dated
British Columbia, Canada and the Nifco Family Trust, a December 11, 1998, and incorporated
British Columbia, Canada trust (collectively, the herein by reference.
"Exchanging Shareholders"), Nifco Investments Ltd., a
British Columbia corporation ("Nifco"), and
SmartSources.com, Inc., a Colorado corporation formerly
known as Innovest Capital Sources Corporation.
10.02 Employment Agreement between Nathan Nifco and Filed as Exhibit 10.01 to the Company's
SmartSources.com, Inc., dated November 30, 1998. Annual Report on Form 10-KSB for fiscal
year ended September 30, 1999, and
incorporated herein by reference.
10.03 Management Consulting Agreement between Michael Forster and Filed as Exhibit 10.02 to the Company's
SmartSources.com, Inc., dated July 20, 1999. Annual Report on Form 10-KSB for fiscal
year ended September 30, 1999, and
incorporated herein by reference.
10.04 Management Consulting Agreement between Darryl Cardey and Filed as Exhibit 10.03 to the Company's
SmartSources.com Technologies Inc., dated September 1, 1999. Annual Report on Form 10-KSB for fiscal
year ended September 30, 1999, and
incorporated herein by reference.
10.05 Subscription Agreement between Peter Rive and Infer Filed as Exhibit 10.04 to the Company's
Technologies, Inc., dated July 15, 1999. Annual Report on Form 10-KSB for fiscal
year ended September 30, 1999, and
incorporated herein by reference.
10.06 Sales Representation Agreement between First City Partners Filed as Exhibit 10.05 to the Company's
Group, Inc. and SmartSources.com, Inc., dated August 24, Annual Report on Form 10-KSB for fiscal
1999. year ended September 30, 1999, and
incorporated herein by reference.
10.07 Warrants to First City Partners dated August 24,1999. Filed as Exhibit 10.06 to the Company's
Annual Report on Form 10-KSB for fiscal
year ended September 30, 1999, and
incorporated herein by reference.
10.08 Joint Venture Agreement between Familyware Products Inc. and Filed as Exhibit 10.07 to the Company's
Nifco Synergy Ltd., dated April 29, 1996. Annual Report on Form 10-KSB for fiscal
year ended September 30, 1999, and
incorporated herein by reference.
10.09 Registered Copy of Mortgage for Strata Lot 1, LMS2241, Filed as Exhibit 10.08 to the Company's
between the Royal Bank of Canada and Nifco Synergy Ltd., Annual Report on Form 10-KSB for fiscal
dated January 1, 1996. year ended September 30, 1999, and
incorporated herein by reference.
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
NUMBER DESCRIPTION LOCATION
------ ----------- --------
<S> <C> <C>
10.10 Registered Copy of Mortgage for Strata Lot 1, LMS2241, Filed as Exhibit 10.09 to the Company's
between Lock Investments Ltd. and Nifco Synergy Ltd., dated Annual Report on Form 10-KSB for fiscal
February 26, 1996. year ended September 30, 1999, and
incorporated herein by reference.
10.11 Registered Copy of Mortgage of Strata Lot 6, LMS2241, Filed as Exhibit 10.10 to the Company's
between Guild Properties, Inc. and Nifco Synergy Ltd., dated Annual Report on Form 10-KSB for fiscal
June 9, 1997. year ended September 30, 1999, and
incorporated herein by reference.
10.12 Warrant Agreement with Level Jump Asset Management, Inc., Filed as Exhibit 10.11 to the Company's
dated September 29, 1999. Annual Report on Form 10-KSB for fiscal
year ended September 30, 1999, and
incorporated herein by reference.
10.13 Software Acquisition Agreement between Nifco Synergy Ltd. Filed as Exhibit 10.12 to the Company's
and EMC Communications, dated October 1, 1998. Annual Report on Form 10-KSB for fiscal
year ended September 30, 1999, and
incorporated herein by reference.
10.14 Share Exchange Agreement by and among Columbia Software Fund Filed as Exhibit 1 to the Company's
Limited Partnership and SmartSources.com, Inc. and Origin Current Report on Form 8-K dated
Software Corporation, dated May 19,1999. May 19, 1999, and incorporated herein
by reference.
10.15 Software Acquisition Agreement by and among Columbia Filed as Exhibit 2 to the Company's
Diversified Software Fund Limited Partnership and Origin Current Report on Form 8-K dated
Software Corp. and Nifco Synergy Ltd., dated January 1, 1999. May 19, 1999, and incorporated herein
by reference.
10.16 1999 Stock Incentive Compensation Plan. Filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB for the
quarterly period ended June 30, 1999,
and incorporated herein by reference.
10.17 Intellectual Property Agreement between the Company and Filed as Exhibit 10.17 to the Company's
Industry Canada, dated February 4, 2000. SB-2/A filed on March 20, 2000, and
incorporated herein by reference.
10.18 Master Relationship Agreement between SmartSources.com Filed as Exhibit 10.18 to the Company's
Technologies, Inc. and kTravel Solutions, Inc. and UniGlobe SB-2/A filed on March 20, 2000, and
Travel (Western Canada) Inc., dated February 18, 2000. incorporated herein by reference.
10.19 Management Employment Agreement between Sokhie Puar and the Filed as Exhibit 10.19 to the Company's
Company, dated September 1, 1999. SB-2/A filed on March 20, 2000, and
incorporated herein by reference.
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
NUMBER DESCRIPTION LOCATION
------ ----------- --------
<S> <C> <C>
10.20 Waiver of Objection Rights between the Company and the Filed as Exhibit 10.20 to the Company's
Canada Customs and Revenue Agency, dated January 13, 2000. SB-2/A filed on March 20, 2000, and
incorporated herein by reference.
10.25 UniGlobe Memorandum of Understanding between UniGlobe Travel Filed as Exhibit 10.25 to the Company's
and SmartSources.com, Inc., dated February 18, 2000. SB-2/A filed on March 20, 2000, and
incorporated herein by reference.
10.26 Consulting Agreement among the Company and Level Jump Asset Filed as Exhibit 10.26 to the Company's
Management, Inc., dated September 29, 1999. SB-2/A filed on March 20, 2000, and
incorporated herein by reference.
10.27 Client Service Agreement among the Company and Continental Filed as Exhibit 10.27 to the Company's
Capital & Equity Corporation, dated December 7, 1999. SB-2/A filed on March 20, 2000, and
incorporated herein by reference.
10.28 Registration Rights Agreement among the Company and Filed as Exhibit 10.28 to the Company's
Continental Capital & Equity Corporation, dated SB-2/A filed on March 20, 2000, and
December 3, 1999. incorporated herein by reference.
10.29 Letter of Understanding between the Company and Continental Filed as Exhibit 10.29 to the Company's
Capital & Equity Corporation, dated December 15, 1999. SB-2/A filed on March 20, 2000, and
incorporated herein by reference.
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
NUMBER DESCRIPTION LOCATION
------ ----------- --------
<S> <C> <C>
10.30 Registration Rights Agreement among the Company and Peter Filed as Exhibit 10.30 to the Company's
Sanders, dated January 4, 2000. SB-2/A filed on March 20, 2000, and
incorporated herein by reference.
10.31 Joint Venture Agreement between the Company and Cable Print Filed as Exhibit 10.31 to the Company's
Network Marketing, dated February 16, 1999. SB-2/A filed on March 20, 2000, and
incorporated herein by reference.
10.32 Property Lease Agreement between Guild Properties, Inc. and Filed as Exhibit 10.32 to the Company's
SmartSources.com Technologies, Inc., dated May 15, 1999. SB-2/A filed on March 20, 2000, and
incorporated herein by reference.
10.33 Consulting Agreement between Volsan Business Consultant and Filed as Exhibit 10.33 to the Company's
SmartSources.com, Inc., dated January 1, 2000. SB-2/A filed on March 20, 2000, and
incorporated herein by reference.
10.34 Consulting Agreement between the Company and AB Phoenix, Filed as Exhibit 10.34 to the Company's
Inc. and G. Kopolow & Associates, Inc., dated February 16, SB-2/A filed on March 20, 2000, and
2000. incorporated herein by reference.
10.35 Consulting Agreement between Murdock Capital Partners Corp. Filed as Exhibit 10.35 to the Company's
and SmartSources.com, Inc., dated April 5, 2000. SB-2/A filed on June 13, 2000, and
incorporated herein by reference.
10.36 Consulting Agreement between Murdock Capital Partners Corp. Filed as Exhibit 10.36 to the Company's
and SmartSources.com, Inc., dated March 30, 2000. SB-2/A filed on June 13, 2000, and
incorporated herein by reference.
10.37 Partnership Agreement between SmartSources.com, Inc., and Filed as Exhibit 10.37 to the Company's
Unilogik Computer Systems, Inc. dated February 4, 2000. SB-2/A filed on June 13, 2000, and
incorporated herein by reference.
10.38 Agreement for the Sale of Origin Professional between Filed as Exhibit 10.1 to the Company's
SmartSources.com Technologies Inc. and The Eureka Company. Quarterly Report on Form 10-QSB for the
quarterly period ended June 30, 2000,
and incorporated herein by reference.
10.39 Licensing Agreement between SmartSources.com Technologies Filed as Exhibit 10.2 to the Company's
Inc. and Everdream Corporation. Quarterly Report on Form 10-QSB for the
quarterly period ended June 30, 2000,
and incorporated herein by reference.
10.40 Value-Added Reseller Agreement between SmartSources.com Filed as Exhibit 10.3 to the Company's
Technologies Inc. and Ultraseek Corporation. Quarterly Report on Form 10-QSB for the
quarterly period ended June 30, 2000,
and incorporated herein by reference.
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
NUMBER DESCRIPTION LOCATION
------ ----------- --------
<S> <C> <C>
10.41 Distribution Agreement between SmartSources.com Technologies Filed herewith.
Inc. and kTravel Solutions Inc.
10.42 Release and Resignation Agreement of Michael Forster dated Filed as Exhibit 10.42 to the Company's
June 20, 2000. SB-2/A filed on August 15, 2000, and
incorporated herein by reference.
10.43 Employment Agreement between Jack Michaan and Filed herewith.
SmartSources.com Technologies, Inc., dated September 5, 2000.
10.44 Employment Agreement between Aurora Davidson and Filed herewith.
SmartSources.com Technologies, Inc., dated July 21, 2000.
11.01 Statement of Computation of Per Share Earnings. Filed herewith.
16.01 Letter response of Green & McElreath. Filed as Exhibit 16 to the Company's
Current Report on Form 8-K, dated
January 28, 1999, and incorporated
herein by reference.
21.01 Subsidiaries of the Company. Filed herewith.
23.01 Consent of Wolin, Ridley & Miller LLP (included in its Filed as Exhibit 23.01 to the Company's
opinion filed as Exhibit 5.01). SB-2/A filed on August 15, 2000, and
incorporated herein by reference.
23.02 Consent of Moss Adams LLP. Filed as Exhibit 23.02 to the Company's
SB-2/A filed on August 15, 2000, and
incorporated herein by reference.
23.03 Acknowledgment of Moss Adams LLP. Filed as Exhibit 23.03 to the Company's
SB-2/A filed on August 15, 2000, and
incorporated herein by reference.
27.01 Financial Data Schedule. Filed herewith.
</TABLE>
28
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SMARTSOURCES.COM INC.
By: /s/ NATHAN NIFCO January 12, 2001
----------------------------------------------------
Nathan Nifco, President, Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated below.
By: /s/ NATHAN NIFCO January 12, 2001
----------------------------------------------------
Nathan Nifco, President, Chief Executive Officer and
Chairman of the Board
By: /s/ ANNA STYLIANIDES January 12, 2001
----------------------------------------------------
Anna Stylianides, Executive Vice President,
and Director
By: /s/ AURORA DAVIDSON January 12, 2001
----------------------------------------------------
Aurora Davidson, Controller, Secretary and Treasurer
(Principal Financial and Accounting Officer)
By: /s/ CHARLES K. KELLY January 12, 2001
----------------------------------------------------
Charles K. Kelly, Director
By: /s/ DAVID C. WALKER January 12, 2001
-----------------------------------------------------
David C. Walker, Director
<PAGE> 31
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
<PAGE> 32
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITOR'S REPORT .............................................. 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet......................................................... 2
Statement of Operations............................................... 3
Statement of Stockholders' Deficit.................................... 4
Statement of Cash Flows............................................... 5
Notes to Consolidated Financial Statements............................ 6-24
</TABLE>
<PAGE> 33
[LETTERHEAD - MOSS ADAMS LLP]
--------------------------------------------------------------------------------
Certified Public Accountants
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 (the "Company") as of September 30, 2000, 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, 2000, 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
November 16, 2000, except for Note 5, paragraph 13, Note 11,
and Note 16, paragraph 5,
as to which the date is January 12, 2001
1
<PAGE> 34
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30,
2000
-------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,102,100
Trade accounts receivable, net of allowance
for doubtful accounts of $27,000 402,100
Prepaid expenses 40,000
-----------
Total current assets 3,544,200
CAPITALIZED SOFTWARE COSTS AND
PURCHASED SOFTWARE RIGHTS, NET 457,700
PROPERTY AND EQUIPMENT, NET 867,600
OTHER ASSETS 38,400
-----------
TOTAL ASSETS $ 4,907,900
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 259,100
Interest payable 197,900
Income tax payable 186,900
Deferred revenue 42,900
Current portion of long-term debt 1,259,400
-----------
Total current liabilities 1,946,200
LONG-TERM LIABILITIES
Long-term debt, net of current portion 2,551,800
Deferred tax liability 72,500
-----------
Total liabilities 4,570,500
-----------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
MINORITY INTEREST 3,407,000
-----------
STOCKHOLDERS' DEFICIT
Common stock, no par value, 50 million shares
authorized, 12,055,300 shares outstanding 6,871,300
Accumulated other comprehensive income 106,900
Accumulated deficit (9,311,100)
Deferred compensation (736,700)
-----------
Total stockholders' deficit (3,069,600)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,907,900
===========
</TABLE>
See accompanying notes to these consolidated financial statements. 2
--------------------------------------------------------------------------------
<PAGE> 35
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, September 30,
1999 2000
--------------- ----------------
<S> <C> <C>
REVENUES EARNED $ 721,000 $ 1,477,300
COST OF SALES 122,500 297,700
----------- -----------
GROSS PROFIT 598,500 1,179,600
----------- -----------
OPERATING EXPENSES, EXCLUSIVE OF DEPRECIATION AND
AMORTIZATION AND IMPAIRMENT LOSS ON SOFTWARE RIGHTS
Research and development 374,700 986,000
Sales and marketing 335,300 758,400
General and administrative 918,900 2,414,000
----------- -----------
1,628,900 4,158,400
OPERATING LOSS, BEFORE DEPRECIATION AND AMORTIZATION
AND IMPAIRMENT LOSS ON SOFTWARE RIGHTS (1,030,400) (2,978,800)
Depreciation and amortization 272,500 548,200
Impairment loss on software rights -- 725,200
----------- -----------
OPERATING LOSS (1,302,900) (4,252,200)
----------- -----------
OTHER INCOME (EXPENSE)
Interest and financing costs (50,300) (1,998,800)
Other income (expense) (13,000) 160,800
----------- -----------
(63,300) (1,838,000)
----------- -----------
LOSS BEFORE INCOME TAXES (1,366,200) (6,090,200)
BENEFIT FROM (PROVISION FOR) INCOME TAXES 693,400 (10,200)
----------- -----------
NET LOSS $ (672,800) $(6,100,400)
=========== ===========
BASIC EARNINGS (LOSS) PER SHARE $(0.07) $(0.52)
====== ======
DILUTED EARNINGS (LOSS) PER SHARE $(0.07) $(0.52)
====== ======
</TABLE>
See accompanying notes to these consolidated financial statements. 3
--------------------------------------------------------------------------------
<PAGE> 36
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
YEARS ENDED SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
<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, 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 -----------
loss -- -- -- -- -- $ (718,000) --
===========
Common stock issued 4,874,900 1,500,000 -- -- -- 1,500,000
Forgiveness of related
party debt -- 44,100 -- -- -- 44,100
Stock warrants awarded
for compensation -- 277,100 -- -- -- 277,100
Stock warrants awarded for
deferred compensation -- -- -- -- (247,500) (247,500)
Special distribution -- -- -- (142,400) -- (142,400)
---------- ---------- -------- ----------- --------- -----------
BALANCE, September 30, 1999 11,563,200 1,821,300 124,500 (3,210,700) (247,500) (1,512,400)
Net loss -- -- -- (6,100,400) -- $(6,100,400) (6,100,400)
Foreign currency
translation adjustment -- -- (26,700) -- -- (26,700) (26,700)
Income tax effect -- -- 9,100 -- -- 9,100 9,100
-----------
Total comprehensive loss -- -- -- -- -- $(6,118,000) --
===========
Common stock issued 292,400 1,184,200 -- -- -- 1,184,200
Stock warrants awarded for
deferred compensation -- 748,700 -- -- (748,700) --
Amortization of deferred
compensation -- -- -- -- 259,500 259,500
Acquisition of preferred
shares of subsidiary -- 113,000 -- -- -- 113,000
Allocation of proceeds from
convertible debenture to
detachable stock warrants,
net of issue costs -- 1,196,400 -- -- -- 1,196,400
Stock warrants awarded for
issue costs -- 54,300 -- -- -- 54,300
Ascribed value of beneficial
conversion feature -- 1,575,800 -- -- -- 1,575,800
Conversion of debenture
to common stock 199,700 177,600 -- -- -- 177,600
---------- ---------- -------- ----------- --------- -----------
BALANCE, September 30, 2000 12,055,300 $6,871,300 $106,900 $(9,311,100) $(736,700) $(3,069,600)
========== ========== ======== =========== ========= ===========
</TABLE>
See accompanying notes to these consolidated financial statements. 4
--------------------------------------------------------------------------------
<PAGE> 37
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
September 30, September 30,
1999 2000
--------------- ----------------
<S> <C> <C>
CASH FROM OPERATING ACTIVITIES
Net income (loss) $ (672,800) $(6,100,400)
Adjustments to reconcile net income (loss) to
net cash from operating activities
Depreciation and amortization 272,500 548,200
Impairment loss on software rights -- 725,200
Loss on disposal of assets 40,500 --
Stock-based compensation 63,700 338,400
Realized gains on sale of investments (10,400) --
Deferred income taxes (784,200) --
Noncash interest and financing costs -- 1,947,800
Changes in operating assets and liabilities
Trade accounts receivable 229,400 (211,200)
Other assets (39,000) (8,800)
Accounts payable and other current liabilities (63,700) 164,700
Income taxes payable/refundable 65,500 105,800
---------- -----------
Net cash flows from operating activities (898,500) (2,490,300)
---------- -----------
CASH FROM INVESTING ACTIVITIES
Purchase of property and equipment (139,500) (101,700)
Proceeds from sale of software rights 86,900 --
Purchase of software rights -- (90,200)
Proceeds from disposal of assets -- 12,000
---------- -----------
Net cash flows from investing activities (52,600) (179,900)
---------- -----------
CASH FROM FINANCING ACTIVITIES
Repayment of note payable, net (53,600) --
Principal repayments of long-term debt (64,800) (86,800)
Repayment of advances from stockholder (102,000) (24,600)
Proceeds from issuance of convertible
debenture and stock warrants -- 4,552,000
Proceeds from issuance of common stock 1,500,000 1,184,200
Dividends (142,400) --
---------- -----------
Net cash flows from financing activities 1,137,200 5,624,800
---------- -----------
EFFECT OF CHANGES IN EXCHANGE RATES (23,600) (16,700)
---------- -----------
NET CHANGE IN CASH 162,500 2,937,900
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,700 164,200
---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 164,200 $ 3,102,100
========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid $ 50,300 $ 51,000
========== ===========
Income taxes paid (refunds received) $ 32,300 $ (95,500)
========== ===========
</TABLE>
See Note 10 for supplemental disclosure of non-cash investing and financing
transactions.
See accompanying notes to these consolidated financial statements. 5
--------------------------------------------------------------------------------
<PAGE> 38
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
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 engages
in developing and marketing Internet-based content-management technology
known as kServer(TM). Although Technologies currently focuses on this
new product, historically, Technologies efforts were concentrated on its
trade compliance technology know as ORIGIN(TM).
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 content-management technology. It operated for a
time in Silicon Valley but is currently inactive.
Origin Software is a British Columbia corporation organized in September
1998 to hold the rights to certain software products (Note 3).
BASIS OF PRESENTATION - The accompanying financial statements are
presented in accordance with U.S. generally accepted accounting
principles.
6
--------------------------------------------------------------------------------
<PAGE> 39
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. 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
and purchased software rights, 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.
SOFTWARE DEVELOPMENT COSTS AND PURCHASED SOFTWARE RIGHTS - 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 1999 and 2000 was $374,700
and $986,000, 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 and purchased software rights may be reduced
materially in the near term.
7
--------------------------------------------------------------------------------
<PAGE> 40
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The cost of acquiring the rights to technology that is sold to others is
capitalized and amortized over four years.
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. Amortization expense for 1999 and 2000 were $1,400 and
$1,900, respectively.
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.
FINANCING COSTS - Direct costs associated with obtaining equity
financing are charged to common stock as the related funds are raised.
Direct costs associated with obtaining debt financing are recorded as a
debt discount and amortized over the term of the debt using the
effective interest method.
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.
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.
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue
Recognition In Financial Statements. SAB 101 establishes guidelines in
applying generally accepted accounting principles to the recognition of
revenue in financial statements based on the following four criteria:
(1) persuasive evidence of an arrangement exists, (2) delivery has
occurred or services have been rendered, (3) the seller's price to the
buyer is fixed or determinable, and (4) collectibility is reasonably
assured. SAB 101, as amended by SAB 101A, is effective no later than the
first fiscal quarter of fiscal years beginning after December 15, 1999.
Accordingly, the Company will adopt the new guidance in the first
quarter of fiscal 2001. The Company does not believe that the adoption
of SAB 101 will have a material effect on its financial position or
result of operations.
8
--------------------------------------------------------------------------------
<PAGE> 41
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 3 - CAPITALIZED SOFTWARE COSTS AND PURCHASED SOFTWARE RIGHTS
Information related to capitalized software costs and purchased software
rights is as follows:
<TABLE>
<CAPTION>
Capitalized Purchased
Software Software
Costs Rights Totals
----------- ---------- ----------
<S> <C> <C> <C>
Balance, September 30, 1998 $ 111,400 $ -- $ 111,400
Costs capitalized -- 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, September 30, 1999 31,100 1,519,400 1,550,500
Costs capitalized -- 91,700 91,700
Amortization expense (30,900) (418,700) (449,600)
Write-down of impaired assets -- (725,200) (725,200)
Disposal -- (10,000) (10,000)
Effect of changes in foreign currency
exchange rates (200) 500 300
--------- ---------- ----------
Balance, September 30, 2000 $ -- $ 457,700 $ 457,700
========= ========== ==========
Cost $ 257,500 $ 984,200 $1,241,700
Less accumulated amortization (257,500) (526,500) (784,000)
--------- ---------- ----------
$ -- $ 457,700 $ 457,700
========= ========== ==========
</TABLE>
REPURCHASE AND IMPAIRMENT 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 of cash and
$7,774,400 of notes receivable. 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.
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 a May 1999 agreement, the rights to Origin Software sold by
Technologies to Columbia were reacquired by one of the Company's
subsidiaries, Origin Software Corporation. The end result of this
transaction was that
(a) a subsidiary of the Company, Origin Software Corporation, owns
the rights to the software
(b) 5,000,000 shares of Origin Software Corporation's class B
preferred shares are held by Columbia (Note 8) and,
(c) Origin Software now owes SmartSources.com, Inc., the parent
company, $7,774,400.
In addition, this transaction was effected through the issuance in May
1999 of 11,670,400 shares of Origin Software Corporation's Class A
preferred stock, which were exchanged for a $7,774,400 note payable to
Columbia. This note payable was exchanged for the $7,774,400 in notes
receivable held by Technologies.
9
--------------------------------------------------------------------------------
<PAGE> 42
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 3 - CAPITALIZED SOFTWARE COSTS AND PURCHASED SOFTWARE RIGHTS (Continued)
The May 1999 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 in 1999 were accounted for
using the $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 $2.5 million of deferred
gain, net of $.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.
During 2000, the repurchased software rights were deemed to be impaired
and were written down to fair value. Fair value was determined based on
the present value of the estimated future cash inflows from the software
using a 9.5% discount rate. The carrying amount of the asset exceeded
fair value by $725,200. An impairment loss of that amount has been
charged to loss from operations in the fourth quarter of 2000. The loss
was incurred in the international trade division of the Company's
software sales and development segment.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
2000
----------
<S> <C>
Land $ 213,600
Buildings and improvements 412,800
Computer equipment and software 380,600
Furniture and fixtures 185,000
----------
1,192,000
Less accumulated depreciation (324,400)
----------
$ 867,600
==========
</TABLE>
Depreciation expense in 1999 and 2000 was $90,100 and $96,800,
respectively.
Included in property and equipment is $121,800 of equipment acquired
during fiscal 2000 under capital lease agreements. Accumulated and
current amortization of the leased equipment is $16,200 as of and for
the period ended September 30, 2000.
10
--------------------------------------------------------------------------------
<PAGE> 43
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 5 - LONG-TERM DEBT
LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
2000
----------
<S> <C>
Unsecured convertible debenture, interest at 7% payable at maturity or
upon conversion or redemption, due February 2005, see further
description below, and subsequent events footnote (Note 16). $3,297,800
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. 270,400
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 2002. 149,900
Capital lease obligations payable in aggregate monthly installments of
$3,882, including imputed interest at rates ranging from 9.7% to 11.9%,
due at dates from October 2002 to March 2003, collateralized
by the leased equipment. 93,100
----------
Total debt 3,811,200
Less current portion (1,259,100)
----------
Long-term portion $2,551,800
==========
</TABLE>
Long-term debt matures as follows:
<TABLE>
<CAPTION>
Year Ending
September 30,
-------------
<S> <C>
2001 $1,259,100
2002 344,500
2003 11,600
2004 --
2005 --
Thereafter 2,196,000
----------
$3,811,200
==========
</TABLE>
PRIVATE PLACEMENT OF CONVERTIBLE DEBENTURE AND STOCK PURCHASE WARRANTS
On February 24, 2000, the Company issued a convertible debenture and
detachable stock purchase warrants for gross proceeds of $5 million. The
debenture matured in February 2005 and bore interest at 7%, which was
payable upon maturity, or upon conversion or redemption. The detachable
warrants entitled holder to purchase 330,000 shares of the Company's
common stock over a five-year term at an exercise price of $11.10 per
share.
In connection with issuing the debenture and warrants, the Company paid
$325,000 of placement fees, $93,000 of legal costs, and $30,000 to the
holder of the debenture for reimbursement of a portion of their legal
costs. The Company also issued 25,000 stock warrants valued at $54,300
in lieu of placement fees. The term of the 25,000 warrants was two
years.
11
--------------------------------------------------------------------------------
<PAGE> 44
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 5 - LONG-TERM DEBT (Continued)
The debenture was convertible in whole or in part into common stock any
time before maturity at a conversion price that floated with the market
price of the stock, not to exceed a fixed conversion price of $9.71. For
each share of common stock issued upon conversion, the holder of the
debenture had the option to purchase one additional share at the fixed
conversion price of $9.71.
The number of shares issued upon conversion of the debenture and
exercise of the additional investment option were limited in that the
total number of shares beneficially owned by the holder of the debenture
and its affiliates may not exceed 4.9% of outstanding common shares. Any
issuance of shares in excess of this limitation must have been approved
by a majority of the Company's common stockholders.
After August 24, 2000, if the debenture was submitted for conversion and
the conversion price was below $9.71, the Company had the right to
redeem the debenture for cash at an amount equal to the value of the
converted shares.
Concurrent with placing the debenture, the Company entered into a
Registration Rights Agreement (the Registration Agreement) with the
holder of the debenture. Pursuant to the Registration Agreement, the
Company filed a registration statement with the Securities and Exchange
Commission to register 4.9 million shares of common stock that may have
been acquired upon conversion of the debenture and exercise of the
detachable warrants and additional investment options.
In the event that certain circumstances pertained, including without
limitation the following, the conversion price would have been adjusted
downward (Note 16):
1. The Company's common stock was not listed on the American Stock
Exchange or the NASDAQ Small Cap Market by October 24, 2000 or on
the NASDAQ National Market by February 24, 2001.
2. The Company was in default of the requirements of the Registration
Agreement.
In the event the Company failed to comply with certain terms of the
debenture, the holder may have elected for the debenture 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) applied, in the event
the number of shares to be issued upon conversion exceeded 20% of shares
outstanding at the time the debenture was issued, the Company must have
obtained stockholder approval to issue shares in excess of this limit.
If stockholder approval was not obtained, the amount of the debenture
underlying the shares in excess of the 20% limit would have become
redeemable for cash.
A total of $1,330,000 of the $5,000,000 gross proceeds from the
placement was allocated to the detachable stock warrants, based upon the
relative fair value of the warrants and the debenture. The value
ascribed to the warrants was recorded as a debt discount and an increase
in common stock. The discount was being amortized over the five-year
term of the debenture using the effective interest method. At September
30, 2000 the balance of the discount was $1,140,000.
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 debenture and $133,600 was allocated to the detachable warrants. The
portion of the issue costs attributed to the debenture was recorded as a
debt discount and was being amortized over the five-year term of the
debenture using the effective interest method. The balance of the
discount at September 30, 2000 was $312,200. The portion of the issue
costs attributed to the warrants was recorded as a reduction of the
gross proceeds allocated to the warrants.
12
--------------------------------------------------------------------------------
<PAGE> 45
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 5 - LONG-TERM DEBT (Continued)
At the February 24, 2000 issue date, the fair value of common shares
issuable upon conversion exceeded the gross proceeds received from
issuance of the debentures by over $2 million. Because the total number
of shares that may be beneficially owned by the holder of the debenture
and its affiliates may not have exceeded 4.9% of outstanding common
shares, the total amount of the debenture could not have been converted
at that date. Accordingly, only $1,575,800 of the total $2 million
excess was ascribed to this beneficial conversion feature. This amount
was reported as an increase in common stock and, because the debenture
could be immediately converted, as a charge to interest expense.
On July 12, 2000, the holder elected to convert $250,000 of the
debenture plus accrued interest into common stock. As a result of the
conversion, $170,800 of the carrying amount of the debenture and $6,800
of accrued interest was reclassified to common stock, and the Company
issued 199,700 common shares (Notes 11 and 16).
As described in Note 16, the Company received a mandatory redemption
notice from the holder of the convertible debenture, based upon claims
of default of the obligation. The Company and the holder negotiated a
new redemption and exchange agreement (New Agreement) to resolve the
claims created in the mandatory redemption notice. Under the terms of
the New Agreement the warrants for 330,000 shares referred to earlier in
this footnote, and the convertible debenture together with the rights
thereon were cancelled in exchange for new consideration paid by the
Company, consisting of $1,300,000 in cash and a promissory note in the
face amount of $2,860,000. The note provides for interest at 11% per
annum, compounded annually and calls for minimum monthly payments of
$20,000 beginning January 2002 through maturity. It is understood that
such payments may not be sufficient to pay all accrued interest. The
amount of long-term debt, associated with this obligation reported as
currently due in the accompanying balance sheet is based upon the New
Agreement entered into on January 12, 2001.
NOTE 6 - INCOME TAXES
The benefit from (provision for) income taxes consists of the following:
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Current benefit (expense)
U.S. $ -- $ --
Canadian (90,800) (10,200)
Deferred benefit (expense)
U.S. 90,200 406,300
Canadian 784,200 824,000
Change in valuation allowance (90,200) (1,230,300)
-------- -----------
$693,400 $ (10,200)
======== ===========
</TABLE>
Net income (loss) before income taxes consists of the following:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
U.S. operations $ (294,800) $(2,769,900)
Canadian operations (1,071,400) (3,320,300)
----------- -----------
$(1,366,200) $(6,090,200)
=========== ===========
</TABLE>
The total tax provision differs from the amount computed using the U.S.
federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
1999 2000
--------- -----------
<S> <C> <C>
Income tax benefit at 34% statutory rate $ 464,500 $ 2,070,700
Nondeductible expenses (10,000) (535,500)
Net losses of foreign subsidiaries (364,300) (1,128,900)
Benefit of foreign tax settlement 778,000 --
Excess tax payable in foreign jurisdictions (84,600) 813,800
Change in valuation allowance (90,200) 1,230,300
--------- -----------
$ 693,400 $ (10,200)
========= ===========
</TABLE>
13
--------------------------------------------------------------------------------
<PAGE> 46
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES (Continued)
The benefit of foreign tax settlement for 1999 reflects the effects of
the 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.
Tax effects of temporary differences that give rise to deferred tax
assets (liabilities) are as follows:
<TABLE>
<CAPTION>
2000
-----------
<S> <C>
Assets
Net operating loss carryforwards $ 1,473,900
Research and development costs 128,100
Other 126,600
-----------
1,728,600
-----------
Liabilities
Depreciation (67,300)
Other (5,800)
Foreign currency translation adjustment (72,500)
-----------
(145,600)
-----------
Valuation allowance (1,655,500)
-----------
Net deferred tax liability $ (72,500)
===========
</TABLE>
The Company believes uncertainty exists surrounding realization of
certain deferred tax assets. Accordingly, it has recorded a $1,655,500
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 $1,425,500 and $2,760,600,
respectively. The U.S. losses begin to expire in 2019, and the Canadian
losses begin to 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 7 - EARNINGS PER SHARE
The numerators and denominators of basic and diluted earnings per share
are as follows:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Numerator - Net income (loss) as reported $ (672,800) $(6,100,400)
=========== ===========
Denominator - Weighted average number of shares outstanding 10,084,200 11,842,400
Effect of dilutive securities -- --
----------- -----------
Diluted weighted average number of shares outstanding 10,084,200 11,842,400
=========== ===========
Basic earnings (loss) per share $(0.07) $(0.52)
====== ======
Diluted earnings (loss) per share $(0.07) $(0.52)
====== ======
</TABLE>
14
--------------------------------------------------------------------------------
<PAGE> 47
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 7 - EARNINGS PER SHARE (Continued)
As described in Note 5, during 2000, the Company issued a convertible
debenture with detachable stock warrants and other investment options.
The number of shares issuable upon conversion of the debenture and
exercise of the warrants and other investment options varies because the
conversion price floats with the market price of the stock, subject to a
fixed-priced ceiling. At September 30, 2000, the number of shares
potentially issuable under the terms of these instruments is estimated
to be in excess of 18 million shares. This agreement was terminated on
January 12, 2001. As described in Note 9, during 1999 and 2000, the
Company granted stock options and warrants, net of forfeitures, to
purchase up to 2,069,000 and 966,000 shares, respectively. In 1999 its
subsidiaries issued preferred shares with exchange rights for up to
5,011,400 common shares. None of these shares were included in computing
diluted earnings per share because their effects were antidilutive. See
Note 16 for subsequent events.
NOTE 8 - 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 2000
---------- ----------
<S> <C> <C>
Class A preferred stock (Origin Software Corporation) $ -- $ --
Class B redeemable, exchangeable preferred stock
(Origin Software Corporation) 3,407,000 3,407,000
Class A convertible, exchangeable preferred stock
(Infer Technologies, Inc.) 34,100 --
---------- ----------
$3,441,100 $3,407,000
========== ==========
</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 repurchasing 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 in 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.
15
--------------------------------------------------------------------------------
<PAGE> 48
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 8 - MINORITY INTEREST (Continued)
Effective January 26, 2000, Columbia notified the Company that it wished
to exercise its exchange rights, and on January 27, 2000 the Company
accepted the notice. The exchange ratio was based on a $7.60 share price
of the Company's common stock, and on February 15, 2000 the Company
issued 457,400 shares of common stock in the name of Columbia to be
exchanged for the 5 million Class B preferred shares of Origin Software
Corporation. However, as of November 17, 2000 Columbia had not yet
tendered the Class B shares to the Company, and the Company had not
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 is contending that the Company has not performed in accordance
with the Agreement, because the shares of common stock issued in
Columbia's name are currently restricted from resale pursuant to
applicable securities laws. Based on its contention, Columbia has
indicated that it is withdrawing its notice of exchange and has
requested that the Company amend the Agreement. Management believes the
possibility exists that the Company may negotiate an amendment to the
Agreement and ultimately issue additional shares to Columbia, though at
present, management is unable to determine what the terms of such an
amendment might entail or estimate how many additional shares may be
issued.
Management has assessed the status of the pending exchange and
Columbia's contentions and believes that uncertainty exists about the
ultimate outcome of this matter. Accordingly, the $3,407,000 carrying
amount of the Class B preferred stock of Origin software continues to be
presented as minority interest.
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 an employee all Class A
shares for $0.01 per share. The subscription rights accrued ratably over
24 months at 312.5 shares per month. As the rights accrued, the Company
recognized 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 could be exchanged. During 1999 and 2000, respectively,
the Company recognized $34,100 and $78,900 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 for nominal value and granted the employee 150,000 stock options
with an exercise price that approximated fair value of the Company's
stock on the grant date. As a result of the cancellation of the
agreement and acquisition of the preferred shares, minority interest
decreased by $113,000 and common stock increased by the same amount. No
gain or loss was recognized as a result of the Company acquiring the
subsidiary's preferred shares.
16
--------------------------------------------------------------------------------
<PAGE> 49
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 9 - 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 special distribution to its majority stockholder. The
dividends paid in 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 of $1.5 million. During fiscal 2000,
the Company issued 492,100 shares for total proceeds of $1,184,200.
At September 30, 2000, 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, though the number of shares that will ultimately be
issued to honor such rights may be significantly less than the total
shares reserved. Another 3,035,000 common shares are reserved to honor
outstanding stock options and warrants. A large number of shares is
reserved to honor the rights of the holder of the convertible debenture,
detachable stock warrants and other investment options described in Note
5. The exact number of shares issuable in connection with these rights
is indeterminate, as the conversion price fluctuates with the market
price of the stock, subject to a fixed-price ceiling. At September 30,
2000, the total number of shares issuable upon exercise of these rights
is estimated to exceed 18 million shares (see Note 16).
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 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. Certain options granted to senior management
during 1999 vest over two years.
A summary of Plan activity is as follows:
<TABLE>
<CAPTION>
1999 2000
------------------------ --------------------------
Weighted- Weighted-
Average Average
Number Exercise Number Exercise
Of Options Price Of Options Price
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year -- $ -- 919,000 $5.50
Granted 929,000 5.50 1,705,000 5.54
Exercised -- -- -- --
Forfeited (10,000) 5.50 (1,239,000) 6.22
------- ----- ---------- -----
Options outstanding, end of year 919,000 $5.50 1,385,000 $5.02
======= ===== ========== =====
</TABLE>
17
--------------------------------------------------------------------------------
<PAGE> 50
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 9 - CAPITAL STOCK (Continued)
A summary of stock options outstanding at September 30, 2000 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
---------------- ----------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 2.00 to $10.25 1,385,000 4 years $ 5.02 100,000 $5.00
</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 options awarded to
employees and non-employee directors elected by stockholders 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 holder must pay to acquire
the stock. No compensation expense was recognized for grants of awards
under the Plan in 1999 and 2000.
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>
<CAPTION>
1999 2000
--------- ---------
<S> <C> <C>
Risk-free interest rate 6.0% 6.0%
Dividend yield rate --% --%
Price volatility 27.7% 211.4%
Weighted average expected life of options 4.5 years 4.7 years
</TABLE>
Had compensation cost been determined using the fair value method, pro
forma net loss and earnings (loss) per share amounts would be as
follows:
<TABLE>
<CAPTION>
1999 2000
-------- -----------
<S> <C> <C>
Pro forma net loss $703,600 $(6,189,900)
======== ===========
PRO FORMA BASIC EARNINGS (LOSS) PER SHARE $(0.07) $(0.52)
====== ======
PRO FORMA DILUTED EARNINGS (LOSS) PER SHARE $(0.07) $(0.52)
====== ======
</TABLE>
OTHER STOCK-BASED COMPENSATION - 1999
During 1999, the Company granted stock purchase warrants to two
non-employees that allow holders to purchase a total of 1,150,000 shares
of common stock. The warrants were granted in connection with the
Company's entering into a sales representation agreement and a
consulting agreement that provides for assistance with mergers and
acquisitions, capital structuring, and placement of new debt and equity
issues. Information about the options and warrants is as follows:
<TABLE>
<CAPTION>
Number of Exercise
Warrants Prices Term
---------- -------------- -------
<S> <C> <C>
1,000,000 $4.00 - $6.00 3 years
150,000 $5.00 1 year
</TABLE>
18
--------------------------------------------------------------------------------
<PAGE> 51
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 9 - CAPITAL STOCK (Continued)
As required by SFAS No. 123 and related interpretations, the Company has
applied the fair value method to account for issuance of the warrants.
The Company used the Black-Scholes option-pricing model to compute
estimated fair value of the warrants, 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 warrants 1.3 years
</TABLE>
Total compensation cost computed for the warrants is $524,600. The cost
is being recognized ratably over periods ranging from one to three
years. Cost recognized in 1999 for stock-based compensation to
non-employees was $277,100.
OTHER STOCK-BASED COMPENSATION - 2000
During 2000, the Company granted stock options and stock purchase
warrants to three non-employees that allow holders to purchase a total
of 500,000 shares of common stock. The options and warrants were granted
in connection with the Company's entering into agreements that provide
for assistance with investor relations. Information about the options
and warrants is as follows:
<TABLE>
<CAPTION>
Number of Exercise
Options/Warrants Prices Term
---------------- ------------- -------
<S> <C> <C>
100,000 $5.50 2 years
200,000 $5.25 - $8.00 3 years
200,000 $6.00 5 years
</TABLE>
As required by SFAS No. 123 and related interpretations, the Company has
applied the fair value method to account for issuance of the options and
warrants. The Company used the Black-Scholes option-pricing model to
compute estimated fair value of the options and warrants, based on the
following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate 6.0%
Dividend yield rate --%
Price volatility 33.7% - 62.3%
Average expected life of options/warrants 1.5 - 2.0 years
</TABLE>
Total compensation cost computed for the options and warrants is
$748,700. The cost is being recognized ratably over periods ranging from
two to three years. Cost recognized in 2000 for stock-based compensation
to non-employees was $259,500.
NOTE 10 - NON-CASH TRANSACTIONS
1999
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.
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.
19
--------------------------------------------------------------------------------
<PAGE> 52
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 10 - NON-CASH TRANSACTIONS (Continued)
2000
During 2000, a credit of $1,575,800 was recognized in the statement of
stockholders deficit along with a corresponding interest charge with the
consolidated statement of operations for the estimated value of the
beneficial conversion feature associated with the issuance of the
convertible debenture (Note 5).
On July 12, 2000, the holder of the convertible debenture described in
Note 5 elected to convert a portion of the debenture. As a result of the
conversion, $170,800 of long-term debt and $6,800 of accrued interest
were reclassified as common stock, with 199,700 shares of common stock
issued.
During 2000, the Company acquired 1,600 shares of Class A preferred
stock of its subsidiary, Infer Technologies, Inc., in connection with an
employee compensation arrangement. As a result of the acquisition,
$113,000 of minority interests was reclassified as common stock
(Note 8).
During 2000, the Company acquired $121,800 of equipment under capital
lease agreements (Note 4).
NOTE 11 - COMMITMENTS AND CONTINGENCIES
LIQUIDITY AND OPERATIONS
The Company incurred operating losses and had negative cash flows from
operations in 1999 and 2000. At September 30, 2000, it had a
stockholders' deficit of $3,069,600. To date, operations have been
funded primarily through the issuance of debt and equity securities,
proceeds from which totaled $5.7 and $1.5 million in 2000 and 1999,
respectively.
As of September 30, 2000, the Company had $3,102,100 of cash and cash
equivalents, which management estimates will be sufficient to allow it
to meet its operating cash requirements through September 30, 2001. As
described in Notes 5 and 16, on January 12, 2001 the Company entered
into a new redemption and exchange agreement to reacquire certain common
stock warrants and convertible debentures, along with related rights.
Under the terms of the agreement, the Company will pay $1,300,000 in a
single payment due immediately and then commence paying $20,000 per
month beginning January 2002 through maturity on January 12, 2005. The
Company has prepared an operating plan using forecasted sales and
related operating expenses, derived from an analysis of its business
plan and through discussions with its significant customers which
management believes will enable the Company to effectively manage
operating cash flows. However, delays in forecasted revenues or
contracts not consummated because of factors outside the Company's
control and unexpected or unplanned costs and expenses may require the
Company to seek additional debt or equity financing prior to the end of
fiscal 2001. The Company cannot guarantee that additional debt or equity
financing, should the funds be required, will be available to the
Company.
20
--------------------------------------------------------------------------------
<PAGE> 53
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued)
PENDING SHARE EXCHANGE
As described in Note 8, the Company and its subsidiary, Origin Software
Corporation, have entered into a Share Exchange Agreement (the
Agreement) with Columbia Diversified Software Fund Limited Partnership
(Columbia). During 2000, Columbia gave notice of its intention to
exercise its exchange rights under the Agreement. However, as further
described in Note 8, the exchange was not completed as contemplated, and
Columbia subsequently contended that the Company had not complied with
the terms of the Agreement, because the shares to be delivered to
Columbia upon completion of the exchange were restricted from resale
under applicable securities laws.
Management believes the possibility exists that the Company may
negotiate an amendment to the Agreement and ultimately issue additional
shares to Columbia, though at present, management is unable to determine
what the terms of such an amendment might entail or estimate how many
additional shares may be issued.
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>
2001 $128,000
2002 91,000
2003 85,000
2004 85,000
2005 85,000
--------
$474,000
========
</TABLE>
Intelli Trade leases its office under an annual renewable lease
currently requiring monthly payments of $3,200. Total lease expense was
$73,000 and $125,900 in 1999 and 2000, 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. At September 30, 2000, the Company had accrued $13,600 of
royalties payable under the Project Agreement.
21
--------------------------------------------------------------------------------
<PAGE> 54
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 12 - RELATED PARTIES
The Company is affiliated through common ownership with the following
entities:
kTRAVEL SOLUTIONS INC. (kTRAVEL)
kTravel is a British Columbia corporation owned by an officer of the
Company. During 2000, the Company and kTravel entered into a
distribution and support and maintenance agreement whereby kTravel
receives 50% of deployment fees for certain customer contracts and
receives additional fees for helping provide software support and
maintenance to these customers. During 2000, a total of $81,600 of fees
were incurred to kTravel. There were accounts payable due to kTravel
of $8,718 at September 30, 2000.
VISTA STRATEGIC MANAGEMENT, INC. (VISTA)
Vista is an Ontario corporation partially owned by a Director of the
Company. During 2000, Vista provided strategic marketing services to the
Company and was paid a total of $79,400 in professional fees. There were
accounts payable due to Vista of $19,538 at September 30, 2000.
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. It is currently inactive.
Sales to affiliates in 1999 totaled $89,700. There were no sales to
affiliates in 2000.
NOTE 13 - 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 37% of
accounts receivable at September 30, 2000.
NOTE 14 - SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
SEGMENT INFORMATION
The Company's primary operations consist of the development and sale of
trade compliance software products to entities subject to the North
American Free Trade Agreement. Other services include international
trade consulting and software engineering contracts. Management assesses
the operations of its software sales and engineering activities and its
consulting activities as separate segments. The following tables and
schedules summarize certain information about these segments.
<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 benefit (expense) 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>
22
--------------------------------------------------------------------------------
<PAGE> 55
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 14 - SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS (Continued)
<TABLE>
<CAPTION>
2000
------------------------------------------------------------
Software Sales
and Development
--------------------------- International
International Trade
Trade kServer Consulting Total
------------- --------- ------------- -----------
<S> <C> <C> <C> <C>
External revenues $ 210,900 $ 687,900 $578,500 $ 1,477,300
Intersegment revenues -- -- -- --
Interest expense -- 1,300 1,200 2,500
Depreciation and amortization 432,000 86,000 1,800 519,800
Segment income (loss) before tax (1,303,200) (748,900) 147,500 (1,904,600)
Income tax benefit (expense) (20,900) -- 10,700 (10,200)
Segment income (loss) (1,324,100) (748,900) 136,800 (1,914,800)
Segment assets 601,400 695,100 188,900 1,485,400
Expenditures for segment assets -- 211,800 7,000 218,800
</TABLE>
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Total revenues for reportable segments $ 861,700 $ 1,477,300
Less intersegment revenues (140,700) --
----------- -----------
Consolidated total $ 721,000 $ 1,477,300
=========== ===========
Total income (loss) before tax for reportable segments $(1,132,000) (1,904,600)
Corporate headquarters expenses (234,200) (4,185,600)
----------- -----------
Consolidated total $(1,366,200) $(6,090,200)
=========== ===========
Total assets for reportable segments $ 1,485,400
Corporate headquarters assets 3,550,100
Elimination of intersegment receivables (127,600)
-----------
Consolidated total $ 4,907,900
===========
</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>
1999 2000
-------- ------------------------
Long-Lived
Revenues Revenues Assets
-------- ---------- ----------
<S> <C> <C> <C>
Canada $418,200 $ 869,800 $1,321,300
United States 302,800 607,500 4,000
-------- ---------- ----------
Total $721,000 $1,477,300 $1,325,300
======== ========== ==========
</TABLE>
MAJOR CUSTOMERS
During 1999, Project Management Groupware, Inc. (PMG) and Delco Remy
America, Inc. (Delco Remy) each accounted for 12% of consolidated
revenues. Revenues from PMG were earned in the Company's software sales
and development segment, and revenues from Delco Remy, were earned in
the international trade consulting segment. During 2000, PEI Business
Development, Inc. accounted for 30% of consolidated revenue. The revenue
was earned in the software sales and development segment.
23
--------------------------------------------------------------------------------
<PAGE> 56
SMARTSOURCES.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
--------------------------------------------------------------------------------
NOTE 15 - 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 convertible debenture described in Note 5, with a carrying amount of
$3,299,400, has an estimated fair value of $4,000,000, based on current
rates at which the Company could borrow funds with similar remaining
maturities. The fair value of other long-term debt is not materially
different than the debt's carrying amount.
NOTE 16 - SUBSEQUENT EVENTS
CONTINGENTLY ADJUSTABLE BENEFICIAL CONVERSION FEATURES
Under the terms of the convertible debenture described in Note 5, if, by
October 24, 2000, the Company did not obtain a listing on the NASDAQ
Small Cap Market or the American Stock Exchange, the conversion price of
the debenture would be reduced to 80% of the price that would otherwise
apply. The Company did not obtain either listing by the required date.
As a result of the resolution of this contingency, the Company
re-measured the conversion price of the debentures as of the February
24, 2000 issue date; and, on October 24, 2000, it recorded a $768,000
charge to interest expense and increase in common stock for the
intrinsic value of this contingently adjustable conversion feature.
Because the Company had not obtained the listings noted above, the
conversion price was further reduced by 2.5% of the price that would
otherwise apply for each "default period," as that term was defined in
the Registration Rights Agreement described in Note 5. A default period
was defined, in part, as each month (or partial month) during which the
number of shares issuable under terms of the debenture, warrants and
other investment options exceeded the number of shares that would have
been registered to honor the holder's conversion and exercise rights.
Because the reduction of the conversion price may be cured (1) through
an increase in the trading price of the Company's stock and, by
extension, a reduction in the number of shares that needed to be
registered or (2) by the Company registering additional shares, this
conversion feature remained contingent, and the Company recognized no
change to income for this feature.
PARTIAL CONVERSION OF DEBENTURE
On October 25, 2000, the holder of the convertible debenture described
in Note 5 elected to convert $100,000 of the debenture plus accrued
interest into common stock. As a result of the conversion, $69,900 of
long-term debt and $4,700 of accrued interest were reclassified to
common stock, and the Company issued 506,200 shares.
MANDATORY REDEMPTION NOTICE
As described in Note 5, if the Company failed to comply with certain
terms of the convertible debenture issued during 2000, the holder may
have elected for the debenture to be redeemed for cash at an amount
equal to 120% of the conversion price that would otherwise apply, plus
interest and default payments. On November 10, 2000, the Company
received a mandatory redemption notice from the holder, who claimed the
Company failed to obtain an effective registration statement for the
shares to be issued upon conversion within 60 days after a "Registration
Trigger Date," as that term is defined in the related Registration
Rights Agreement. The holder claimed the amount due upon redemption was
over $22 million. No payment was made.
PROMISSORY NOTE
On January 12, 2001 the Company and the holder entered into a redemption
and exchange agreement whereby the mandatory redemption notice was
withdrawn, and warrants for 330,000 shares of the Company's common stock
and the amounts payable under the convertible debenture together with
the rights thereon were cancelled in exchange for consideration tendered
by the Company. Such consideration will included a single payment of
$1,300,000 and the issuance of a note in the face amount of $2,860,000.
The note is due and payable on January 12, 2005, including all accrued
but unpaid interest. The note provides for interest at 11% per annum,
compounded annually and calls for minimum monthly payments of $20,000
beginning on January 12, 2002 through maturity. It is understood that
such payments may not be sufficient to pay all accrued interest. The
projected amount due at maturity is approximately $3.6 million. The note
provides the Company with the option to prepay all or any part of the
note. A discount on the remaining balance of the note will be given to
the Company for prepayments of principal. The discount will be
calculated by multiplying 4% times a fraction the denominator of which
will be 360 and the numerator of which will be the number of days from
the date of the prepayment to the maturity date. The maximum discount
available, as calculated on the date of the redemption and exchange
agreement is $500,000. The note also provides for both positive and
negative covenants and identifies specific events which could create a
default situation that would accelerate the required payments on the
note.
24
--------------------------------------------------------------------------------
