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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number: 0-24376
ClearLogic, Inc.
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(Name of small business issuer in its charter)
Delaware 33-0612125
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41 South Haddon Avenue, Haddonfield, New Jersey 08033
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(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code: (856) 547-7844
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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.
Yes . No X.
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Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $420,997.
The issuer has no active trading market for its Common Stock.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date: 14,827,226 shares of Common
Stock outstanding on March 31, 2000.
Transitional Small Business Disclosure: Yes . No X .
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DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I
Forward-Looking Statements
This Form 10-KSB annual report contains forward-looking statements that
address, among other things, our expectations with respect to the development of
our business and the market for our products. In addition to these statements,
trend analysis and other information, including words such as "seek,"
"anticipate," "believe," "plan," "estimate," "expect," "intend" and other
similar expressions, are forward looking statements. These statements may be
found in the sections of this Form 10-KSB entitled "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." Some or all of the results anticipated by the forward-looking
statements will not occur as a result of various factors including, but not
limited to, all of the risks discussed in "Risk Factors" and elsewhere in this
Form 10-KSB.
Item 1. Description of Business.
Introduction
We founded ClearLogic, the e-media solutions company (TM), in 1997 to
develop custom and off-the-shelf software and provide creative multimedia
services to address certain niches within the Internet business-to-business
environment. During the past three years, we have built a solid customer base
with our services and custom software, and are poised to take the next step
toward delivering not only customized products, but also off-the-shelf
repeatable solutions for electronic media-related uses, via shrink-wrap, online
delivery and Application Service Provider, or ASP, channels. We presently offer
e-business solutions in two general product or service categories:
o Software, both custom services and packaged. ClearLogic offers
NetProof(R), a platform-independent interactive digital image
and document proofing solution designed for businesses that
can use the Internet to enable them to proof, markup, approve
and manage pictures, graphics and text.
o NewMedia services and solutions. ClearLogic also offers
various NewMedia professional services, which include
electronic commerce web sites, database-to-web programming,
web site design, web site hosting, multimedia production,
digital video production, three dimensional modeling and
animation, and custom software development. The Company also
intends to use its NewMedia expertise to develop special
content Internet sites built and managed by ClearLogic that
will generate incremental revenue for the Company. The Company
also intends to package some of the software created for these
sites and remarket the components. We also provide Network
security services and solutions.
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Our Goal
Our goal is to be the vendor of choice for businesses that want to
fully exploit the power of creative design, the web as a delivery channel and
the web's underlying technology to succeed in their markets.
Our Strategy
We intend to seek to achieve our goal by:
o Developing a marketing program for NetProof that leverages the
Application Service Provider model, directed both at potential
end users and strategic partners, who can extend NetProof to
vertical industry channels.
o Expanding our Internet-based media services to provide a
broader range of services and related products.
o Leveraging the technology capabilities that we have developed
and demonstrated in NetProof to customers, our security
products and our other services as a first phase for the
development of new products. We intend to continue to offer
our custom software services to our clients and exploit those
solutions as a breeding ground for future products and
technologies.
o Seeking to extend our core technology and creative
capabilities.
o Entering into strategic alliances with other technology
companies.
o Acquiring companies to extend our delivery capabilities.
Our strategy is based on our belief that all of our principals have
extensive hands-on technology and creative backgrounds, and each major
management team member has first-hand knowledge of the necessity to continually
adjust the business to anticipate a rapidly changing market.
Our Organization
We are a Delaware corporation incorporated in June 1992 under the name
St. James Group, Inc. In November 1999:
o We acquired ClearLogic, Inc., a New Jersey corporation, which
was incorporated in January 1997, in exchange for 11,096,385
shares of our common stock.
o Concurrent with the merger, we effected a four-for-one stock
distribution.
o We sold our 8% convertible debentures in the principal amount
of $1,000,000.
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o We changed our corporate name from St. James Group, Inc. to
ClearLogic, Inc.
o Our sole business became the business of our operating
subsidiary, ClearLogic, which is described in this Form
10-KSB. St. James Group was organized to acquire another
business, never engaged in any business and did not own any
material assets.
The transaction by which we acquired ClearLogic is referred to as the
"ClearLogic acquisition."
Our address is 41 South Haddon Avenue, Haddonfield, NJ 08033. Our
telephone number is (856) 547-7844. Our website address is www.clearlogic.com.
Information contained on our website is not a part of this Form 10-KSB annual
report.
Risk Factors
Risk Factors Related to Our Business
We have not generated significant revenue and are likely to continue to
generate losses.
We have incurred operating losses since our organization, and we are
likely to continue to incur losses. We may never generate revenues sufficient to
allow us to operate profitably. For the year ended December 31, 1999, we had a
net loss of $1,120,067, or $.70 per share (basic and diluted), on revenue of
$420,997. For 1998, we had a loss of $211,392 on revenues of $249,569. Our
ability to generate revenues is dependent upon market acceptance of our products
and services, and we cannot assure you that the market will accept any of our
products.
We have substantial capital requirements, and we need to generate cash
from operations and additional financings to meet our financial
requirements.
At December 31, 1999, we had cash of $404,377 and a deficiency in
stockholders' equity of $1,060,078. Our principal source of funds was the sale
of $1,608,200 principal amount of our notes and debentures during 1999 and 1998.
As discussed in our consolidated financial statements included in this Form
10-KSB report, we have incurred significant operating losses, have a deficiency
in stockholders' equity and have significant future commitments and face intense
competition. We have yet to begin to generate cash flows from operations and are
reliant on outside financing to fund our operations, which raises substantial
doubt about our ability to continue as a going concern.
Our present working capital is not sufficient to enable us to meet more
than our immediate requirements, which include product development, marketing
and executive salaries. We do not have any bank credit facilities. As a result,
if we are unable to raise money, either from the sale of our equity or debt
securities or obtain a credit facility, we may be unable to continue in
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business. Furthermore, if we are able to raise funds, the terms on which any
funds are made available to us may result in substantial dilution to our
stockholders.
Our lack of working capital may inhibit our growth.
Because our working capital is not sufficient to meet more than our
immediate capital requirements, we will be unable to:
o Develop and implement a marketing program for our products and
services.
o Realize the market potential for our NetProof interactive
proofing and markup solution.
o Engage and retain qualified management and technical personnel
to complete the development of our products and expand our
business.
o Develop new technologies.
o Establish a distribution network.
o Manufacture or engage others to manufacture our products in
commercial quantities.
Because we are not established and are undercapitalized, businesses may
not purchase our products or services.
Businesses may never accept our products or services for a number of
reasons, including their reluctance to purchase equipment or services from a
new, undercapitalized company and their lack of confidence in our ability to
provide on-going service.
NetProof may not be accepted in the market and may never develop into a
significant source of revenue for us.
Although we initially developed NetProof as a system to be marketed to
printers, advertising agencies and similar businesses who could offer NetProof
to their clients, at December 31, 1999, only one client was using NetProof in
its business, and currently only two companies deploy NetProof. We have
redesigned NetProof as a system that we can run on our computer system and
intend by mid-third quarter 2000 to offer an online version to clients, who
would pay us for the use. We cannot assure you that NetProof will be accepted by
businesses, which already have methods of transmitting material for proofing
through the Internet. If NetProof is not accepted, we may have to discontinue
this product line and redirect our development and marketing efforts toward
other products and services, which could result in a significant charge to
earnings.
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Our lack of brand recognition for products and services may impair our
ability to grow.
Because neither the ClearLogic name nor the names of our products and
services are well recognized, businesses may be reluctant to use our products.
We do not have sufficient funds to develop a program to generate brand
recognition for either our products or us.
We may never complete the development of our products.
Two of our three computer security products are presently being
developed. We may not complete the development of these products either because
of the lack of funds or technical problems relating to the products. The failure
to develop both of these products could have a material adverse effect upon our
ability to market any of the computer security products and services. We cannot
assure you that we will be able to develop these products.
We presently have very limited marketing capability and may have to
rely on others for marketing.
We have only one senior-level marketing person and do not have the
funds to develop a significant marketing program. We believe that an intensive
marketing program must be implemented in order for us to sell our products and
services. We cannot assure you that we will be able to market our products and
services effectively.
Our revenues may be generated from a small number of clients, and the
loss of a significant client or several smaller clients would have a
material adverse effect on our business.
Our projects vary in size and scope. Therefore, a client that accounts
for a significant portion of our revenues in one period may not generate a
similar amount of revenue in subsequent periods. For the years ended December
31, 1999 and 1998, two customers accounted for 30% and 58%, respectively, of our
sales. There is a risk that the source of our revenues in the future may be
generated from a small number of clients. These clients may not retain us in the
future. Any cancellation, deferral or significant reduction in work performed
for these principal clients or a significant number of smaller clients could
have a material adverse affect on our business, financial condition and results
of operations.
Our results may fluctuate from quarter to quarter.
Our quarter-to-quarter operating results may fluctuate in the future as
a result of many factors, some of which are beyond our control, including:
o changes in the number of client engagements undertaken or
completed;
o a change in the scope of ongoing client engagements;
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o a shift from fixed-fee to time and materials-based contracts;
o utilization rates of employees;
o marketing and business development expenses;
o charges relating to strategic acquisitions;
o pricing changes in the information technology services market;
and
o economic conditions generally or in the information technology
services market.
We expect these trends to continue.
We may be unable to respond to the rapid technological change in our
industry.
The computer and Internet industries are characterized by rapidly
changing technologies, frequent new product and service introductions and
evolving industry standards. Our future success will depend on our ability to
adapt to rapidly changing technologies by continually improving the performance,
features and reliability of our services. The changing nature of technology is
most evident in the computer security market as hackers and others develop
increasingly sophisticated methods of breaching computer security. In addition,
other software and hardware companies may have the market power to impose
technologies on the marketplace that are not compatible with our products, and
we may not have access to those technologies. Our failure to offer the most
current or widely accepted technologies could have a material adverse effect
upon our business.
Because of our small size, we may have difficulty in competing with
major computer, consulting, software and Internet companies.
All aspects of the Internet and computer markets are new, rapidly
evolving and intensely competitive, and we expect competition to intensify in
the future. Other major companies have the financial and technical ability to
compete aggressively in the market for both proofing systems and computer
security products and systems. Many, if not most, of these companies have longer
operating histories, larger customer bases, greater brand recognition in other
business and Internet markets and significantly greater financial, marketing,
technical and other resources than we have. As a result, we cannot assure you
that we will be able to compete successfully with these companies.
We do not have any patent protection for our products, which may
infringe upon proprietary rights of others.
Since we do not have any patent protection for our products, we rely
primarily on our trademarks, copyrights and nondisclosure agreements with our
employees and others to whom we have provided technical proprietary information
for protection of our software code. However, the steps we have taken may not
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protect our intellectual property rights, and it is possible that third parties
may infringe upon our proprietary rights. Furthermore, we have not performed any
patent search or intellectual property analysis to determine whether our
products infringe upon the patent or other proprietary rights of others. If our
products infringe on the rights of others, we may be precluded from marketing or
selling the infringing products and we may have liability to others for damages.
Any patent litigation will result in substantial cost to us, will require
significant management time and effort and will disrupt our business, regardless
of whether we prevail in the action.
We are dependent upon our management.
We are dependent upon the services of our executive officers, Messrs.
Sina Khelil, our Chairman and Chief Executive Officer; Philip Burnham, our Chief
Operating Officer and General Counsel; Ronaldo Nascimento, our Chief Research
Officer; Diane Parks, our Chief Marketing Officer; and Steven Ferri, our Vice
President of NewMedia Services. The loss of any of these persons' services would
have a materially adverse effect on our business and future prospects.
We may need to develop relationships with strategic partners, and we
may not derive the anticipated benefits from such a relationship.
We may need to establish a strategic relationship with one or more
major companies that can assist us in our development or marketing efforts for
one or more of our products and services. We cannot give you any assurance that
we will be able to enter into agreements with one or more such strategic
partners. If we do not enter into such agreements, our cash resources may be
inadequate and result in either an acceleration of our need for additional
funding or a need to reduce the scale of our operations. We may never enter into
any agreement with a strategic partner.
If we enter into an agreement with a strategic partner, we will be
dependent upon the ability and willingness of our strategic partner to perform
its obligations under the agreement in a timely manner. We cannot control or
predict the amount and timing of resources that any strategic partner may devote
to our products and services. The amount and timing of the allocation of
resources by any strategic partner to its project with us may be affected by
numerous factors not within our control. These factors include, but are not
limited to:
o A change in management or direction by the strategic partner.
o The introduction or development by the strategic partner or
one of its affiliates of products that may compete with our
products.
o The strategic partner's perception of both the market for our
products and services and the relative ability of our products
and services to meet the market needs as they may change from
time to time.
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If any future strategic partner were to breach or terminate its
agreement with us or not perform its obligations in the manner contemplated by
us or otherwise fail to conduct its collaborative activities with us in a timely
manner, the development or marketing of our products could be delayed or
terminated. Any such delay or termination could have a materially adverse effect
upon our business.
If we enter into agreements with one or more strategic partners,
conflicts of interest could arise between us and one or more of our strategic
partners that, depending upon the nature of the conflict, could have a material
adverse effect upon our business, prospects and financial condition. We
anticipate that any of our strategic partners may have other interests in
related fields. Our strategic partners or their affiliates may develop, either
alone or with others, products in this field or in related fields that are
competitive or have applications that are competitive with our products. The
competing products could affect the support provided to our products and
services and may result in a withdrawal of support for our products and
services, which could substantially impair our business, prospects and financial
condition.
Our growth may be limited if we cannot make acquisitions.
Our growth strategy includes the acquisition of other businesses that
are related to our current business. Such acquisitions may be made with cash or
our securities or a combination of cash and securities. We do not presently have
sufficient cash to make any acquisitions. If we require cash, we will have to
borrow the funds or issue equity. We have no commitments from any financing
source and we may not be able to raise any cash necessary to complete an
acquisition. If we fail to make any acquisitions, our future growth may be
limited. As of the date of this Form 10-KSB annual report, we do not have any
agreement or understanding, either formal or informal, as to any acquisition.
If we make any acquisitions, they may disrupt or have a negative impact
on our business.
If we make acquisitions, we could have difficulty integrating the
acquired companies' personnel and operations with our own. In addition, the key
personnel of the acquired business may not be willing to work for us. We cannot
predict the affect expansion may have on our core business. Regardless of
whether we are successful in making an acquisition, the negotiations could
disrupt our ongoing business, distract our management and employees and increase
our expenses.
Risks Relating to the Internet
NetProof is dependent upon the use by businesses of the Internet as a
mean of transmitting documents for proofing.
Our ability to market NetProof is dependent upon the willingness of the
printing, advertising and other businesses to use the Internet or Internet
technology, such as an intranet or extranet, to transmit confidential material.
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If these businesses are unwilling to use such technology to transmit their
media, our ability to sell NetProof will be adversely affected.
Government regulation and legal uncertainties could add additional
costs to doing business on the Internet.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, in the future, laws and
regulations may be adopted and existing laws and regulations may be interpreted
in a manner that address issues such as user privacy, pricing, defamation,
taxation and the characteristics and quality of products and services that may
have an adverse effect on the number of users of our products.
Risks Relating to Our Common Stock
There is no market for our common stock and we cannot assure you that
there will ever be a market for our common stock.
Our common stock is not listed on any stock exchange or market or the
OTC Bulletin Board. As a result, if you own or acquire any shares you may not be
able to sell your stock. We have never registered an offering of our common
stock or other securities under the Securities Act of 1933, as amended.
If there is ever a market for our common stock, any sales or purchases
of our stock may be subject to the penny-stock rules, which may impair the
market and market price of our common stock. Our common stock may become subject
to the Securities and Exchange Commission's penny-stock rules, which impose
additional sales practice requirements on broker-dealers that sell our stock to
persons other than established customers and institutional accredited investors.
The rules may affect the ability of broker-dealers to sell our common stock and
may affect your ability to sell any common stock you purchase in the open
market.
If our common stock is ever publicly traded, it is likely to be highly
volatile.
There is no public float for our common stock. As a result, there is no
significant trading activity in our stock, and a regular and established market
may never be developed or maintained. In addition, we cannot give you any
assurance as to the liquidity of any market for our common stock or the prices
at which you may be able to sell common stock. The market price of our common
stock is likely to be highly volatile as the stock market in general, and the
market for Internet-related and technology companies in particular, has been
highly volatile. A shareholder may not be able to sell shares of our common
stock following periods of volatility because of the market's adverse reaction
to the volatility. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted. Litigation could result in substantial costs and a diversion of
management's attention and resources. We cannot assure you that our stock will
trade at the same levels as other Internet stocks or that Internet stocks in
general will sustain their current market prices. Factors that could cause
volatility may include actual or anticipated fluctuations in our quarterly
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operating results, announcements of technological innovations, changes in
financial estimates by securities analysts, conditions or trends in the Internet
industry and changes in the market valuations of other Internet companies.
We are unlikely to pay dividends on our common stock in the foreseeable
future.
We have not paid any dividends on our common stock since our inception
and we do not anticipate paying any dividends in the foreseeable future. We plan
to retain earnings, if any, to finance the development and expansion of our
business.
Shares of common stock becoming available for public sale may affect
our stock price.
The holders of our debentures have demand registration rights with
respect to the shares of common stock issuable upon conversion of the
debentures, and we have agreed to file a registration statement in order that
they may sell the shares issuable upon conversion of the debentures. We also
intend to include in the registration statement the shares of common stock held
by all of our other stockholders. The debentures are convertible at a conversion
price equal to the lower of the market price on the first day of trading or 75%
of the market price averaged over the five trading days prior to the date of the
conversion. As a result, the sale or potential sale of these shares, as well as
sales by others pursuant to a registration statement, may have a downward effect
upon the price of our stock.
We may issue preferred stock without approval of our stockholders,
which could make it more difficult for a third party to acquire us and
depress our stock price.
We have the authority to issue preferred stock without a vote of our
stockholders. In the future, our board of directors may issue one or more series
of preferred stock that has more than one vote per share or which give the
holders other preferential rights, which may dilute or impair the rights of the
holders of common stock. This could permit our board of directors to issue such
stock to investors who support our management and give effective control of our
business to our management.
We are controlled by our management, which means that management can
stop a third party from acquiring us even if it is in the best interest
of our stockholders.
Our executive officers and directors together own approximately 70% of
our outstanding common stock. As a result, they may be able to exercise control
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. Their voting
control could have the effect of delaying or preventing a change of control,
which might not benefit our stockholders.
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Products
Our products are designed to provide Internet-based applications and
services that can meet the needs of clients in most applications of networked
business-to-business systems. Our initial software product, NetProof, has been
our main research and development focus to date. We also offer network security
services and are developing related products to meet the security needs of users
of CheckPoint Systems' security products. These services and proposed products
are complimentary to NetProof, but can also be offered separately as well. We
also provide clients with electronic commerce websites, database-to-web
programming, website design, website hosting, multimedia production, digital
video production, three dimensional modeling and animation, and custom software
development.
NetProof(R)
We believe that NetProof is the first fully visualized
platform-independent interactive digital image and document-proofing software
equipped with advanced document management/auditing capabilities. Through the
use of an ordinary web browser, NetProof allows multiple parties located
anywhere in the world to collaboratively proof virtually any content or media
over the Internet or internal networks. Through its document control functions,
NetProof enables the client to collect and integrate comments from various
sources and generate a revised document or image that reflects the comments.
These media include advertising material, legal copy, storyboards, video and any
other web-embeddable media.
NetProof's support of streaming video allows us to target industries,
such as video production and editing companies and the motion picture industry
as a whole, that require this function, which to our knowledge is not yet
commercially available.
NetProof also allows the user to accomplish online proof markup and
editing capabilities, using NP-MarkUp(TM), a feature-rich embedded Java applet.
All markups are saved as a part of its document management/auditing
functionality and can be archived for future reference.
We believe that NetProof provides our clients with the means of
improving their operations and efficiency.
Custom Software and Packaged Applications
ClearLogic's technology base consists of a differentiated web-based
collaborative software product, NetProof, an online markup, review, revision,
control and reporting tool for any type media. NetProof will be packaged and
sold as a non-customized online tool with a minimal monthly fee and limited
functionality. We expect to deploy an online version to clients in mid-third
quarter of this year. NetProof will be packaged as an original equipment
manufacturer-like semi-customized product delivered via the Application Service
Provider model, which is rapidly gaining viability in the Internet world.
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In addition, ClearLogic's technology depth enables it to offer complex
custom software development and consulting services in disciplines such as:
o Enterprise-wide software solutions;
o Business-to-business e-commerce software;
o Front office/back office e-business information management;
and,
o Custom bid projects.
We are preparing to deploy several shrink-wrapped Internet software
tools for web-delivery through online distributors.
We also offer Internet and intranet computer security services under
the name SafeLogic. In performing this service, we scan a client's computer
network to determine where the network is vulnerable to unauthorized access from
both external and internal sources. In performing these services, we seek to
obtain access to the computer system from outside the system as if we were an
unauthorized user seeking access from the Internet, and from within, as if we
were an unauthorized user who has access to some, but not all, information and
data which is on the system. We then advise the client on steps the client can
take to improve security and can provide software, services and hardware to
address the client's specific security deficiencies and weaknesses.
e-Commerce and NewMedia Solutions
We offer e-commerce solutions to clients who seek to capitalize on
Internet-related opportunities to improve and expand their businesses. We
provide the strategy, design, development and support of websites and other
e-commerce solutions that facilitate electronic commerce. Through December 31,
1999, we have provided these services to more than 70 clients in various
industries, including the banking and technology industries.
In performing these services, we provide a comprehensive range of
integrated services to assist our clients in the development of e-commerce
solutions. Our services include design of systems architectures, creation,
customization and implementation of Internet applications and end-user
interfaces. In addition, we work with our clients to analyze their business
challenges, diagnose infrastructure shortcomings of their existing systems and
then design and implement e-commerce solutions that enhance their business,
operations and communications, including integrating back-office support
software such as credit card processing.
Examples of e-commerce solutions that we developed for clients to date
include:
o The development of an interactive website for a software
development company. One client desired to build a web site
showcasing their own enterprise in internet software and
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extending its capability via an easy to maintain, attractive,
and easy to navigate web presence. ClearLogic delivered both
on schedule and on budget.
o An on-line bidding system for certificates of deposit that we
developed for a bank.
o A data base management system that operates over the Internet,
which we developed for an industrial cooperative.
o An auction website for printer cartridges that we developed
for a used cartridge distributor.
Marketing and Sales
To date, we have not engaged in any significant marketing or sales
activities. Most of our revenue resulted from personal contact by our officers
and referrals from our clients. We recently hired our first marketing officer
and our first sales person. Our initial marketing and sales efforts are focused
on leveraging our relationships with our current clients, extending our
e-commerce capabilities and promoting network security solutions.
We also anticipate shipping packaged software products through our
direct and partner channels. These products, ClearGL(TM) and The Unified
Advertisement and Information Delivery(TM) server, are software products that
were developed while creating solutions for their clients. Our philosophy is to
further capitalize on custom solutions by providing them to the marketplace as
generic software applications. The Company's marketing plan for these packages
does not require a sales force. Instead we will place the packages in the
distribution channel, primarily by means of electronic sales through the
Internet, and follow up with Internet banner advertising. We believe that this
lowers the cost of goods sold, while increasing profit margins for the Company.
We have packaged several network security solutions which consist of
pre-configured open systems servers, CheckPoint software and our consulting and
customization services, and are working with CheckPoint to market these
packages. In addition, assuming we are able to obtain additional financing, as
to which there can be no assurance, we are planning direct marketing campaigns
for the second half of 2000 to generate leads, and will also be evaluating
potential strategic alliances.
Competition
Competition for Internet-based software and services is intense and is
increasing. As software is developed to meet niche markets, other companies seek
to develop competing products.
NetProof competes with a number of other products, including those
marketed by Scitex and Instinctive.com, both of which are larger and better
known and capitalized. In addition, commercial printers have their own products
that they use to transmit documents through the Internet for proofreading. Since
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only one client is presently using NetProof, we cannot assure you that we will
be successful in meeting competition.
A number of companies offer Internet computer security services or
products. There are many competitors in this business ranging from small one-man
shops to major information technology consultants and full service consulting
firms such as Andersen Consulting and PricewaterhouseCoopers. In addition, major
software firms have the capability of developing security products. Since some
of our products are designed to be integrated with CheckPoint Systems' products,
we cannot offer those products to companies that use other security systems. If
CheckPoint believes that there is a significant market for products such as our
Threat Analyzer and Threat Sentry, it has the ability to develop security
products that include the functions performed by our products.
The market for NewMedia and e-commerce solutions is subject to rapid
technological change and availability of appropriate skills and is significantly
affected by new product introduction and other activities of industry
participants. While the market for e-commerce solutions is relatively new, it is
already highly competitive and characterized by an increasing number of entrants
that have introduced or developed services similar to those we offer. We believe
that competition will intensify in the future. We compete on the basis of a
number of factors, including intensive customer involvement in the early stages
of the engagement, quality, pricing, speed of service delivery and industry
knowledge.
Our competitors may be better positioned to address these developments
or may react more favorably to these changes, which could have a material
adverse effect on our business, results of operations and financial condition.
Many of these businesses have longer operating histories and significantly
greater financial, technical, marketing and managerial resources than we do.
Where other developers provide software products, ClearLogic provides
comprehensive solutions. For example, we believe that it is all too common for a
client who approaches a software developer for assistance in designing a
proposed NewMedia product to find itself faced with the difficult proposition of
having to separately source all or many of the other elements of the overall
solution: hardware acquisition, web design, graphics, 3D and video creation. In
such a vendor situation, the client finds that it is left with all of the
responsibility and risk of administering and integrating these components into a
working solution. We provide a "one-stop shopping" approach to e-media
technology and creative needs.
Proprietary Rights
Our success will depend, in part, on our ability to develop proprietary
products and e-commerce solutions without infringing on the proprietary rights
of others. We do not have any patents, and we rely on a combination of
trademark, trade secret and copyright law and contractual restrictions to
protect our software, documentation and other written materials and other
proprietary rights. These legal protections afford only limited protection. We
15
<PAGE>
also seek to require employees and consultants with access to our proprietary
information to execute confidentiality agreements, and we restrict access to our
source code.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our rights, applications and
methodologies or to obtain and use information that we regard as proprietary.
Policing unauthorized use of these is difficult and, while we are unable to
determine the extent to which piracy of our software exists, software piracy is
likely to persist. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement or invalidity. Any such resulting litigation could result
in substantial costs and diversion of resources and could have a material
adverse effect on our business, operating results and financial condition.
Moreover, if we expand internationally, laws of many countries do not protect
our proprietary rights to the same extent as do the laws of the United States.
There can be no assurance that our means of protecting our proprietary rights
will be adequate or that our competitors will not independently develop similar
technology. Any failure by us to meaningfully protect our property could have a
material adverse effect on our business, operating results and financial
condition.
Government Regulations
We believe that no government approval is necessary for our principal
products or services and that there are no government regulations that currently
have a material effect on our operations. As Internet commerce evolves, we
expect that federal and state agencies may adopt legislation and regulations
covering issues such as user privacy, pricing, defamation, taxation, content and
quality of products and services and courts may interpret existing laws and
regulations in a manner which affects the Internet and e-commerce. Although many
of these regulations may not apply to our business directly, we expect that
future legislation and regulation could expose companies providing e-commerce
solutions and Internet security products and services to liability, which could
hurt our business.
Research and Development
We spent approximately $241,800 on research and development during
1999, approximately $9,800 in 1998. Most of our research and development
activities related to NetProof, although a small percentage supported new
product development for our Internet security products. Any investment in the
e-commerce business in this research and development period was focused on
maintaining current skills in our technical staff in a rapidly changing market.
We internally funded all of our research and development activities.
Future Acquisition Strategies
To the extent that we believe that our business can meet its goals
faster through acquisitions, we may acquire other companies for a combination of
cash, notes or equity. In addition, we may enter into joint ventures or other
relationships, including joint marketing agreements, which we believe would
accelerate our growth.
16
<PAGE>
Although we anticipate that any acquisitions will be related to our
present business activities, we may acquire companies in unrelated businesses.
We may not generate net income from any future acquisition or agreement. We have
not identified any particular business that we may acquire in the future, and we
may not be able to make any acquisitions.
Employees
As of June 30, 2000, we had approximately 25 full-time employees,
including our four officers, and no part-time employees.
Item 2. Description of Property.
We lease approximately 6,500 square feet of office space at 41 South
Haddon Ave., Haddonfield, New Jersey 08033, where our offices are located,
pursuant to a lease that expires in May 2002. Our current monthly rent under
this lease is approximately $5,750 and is subject to annual escalations. We
believe that our present facilities are adequate for our present needs and that
any space we may require will be available on reasonable terms.
Item 3. Legal Proceedings.
From time to time, we are a defendant in various lawsuits incident to
the ordinary course of business. It is not possible to determine with any
precision the probable outcome or the amount of liability, if any, under these
lawsuits; however, we believe that the disposition of these lawsuits will not
have a material adverse effect on our financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to our stockholders during the fourth quarter
of 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
There is no market for our common stock or other securities.
Item 6. Management's Discussion and Analysis or Plan of Operation.
You should read the following discussion and analysis in conjunction
with ClearLogic's consolidated financial statements and notes thereto included
elsewhere in this Form 10-KSB. This Form 10-KSB contains forward-looking
statements relating to future events and ClearLogic's future financial
performance. Actual results could be significantly different than those
discussed in this Form 10-KSB. Factors that could cause or contribute to such
differences include those set forth in the section entitled "Risk Factors," as
well as those discussed elsewhere in this Form 10-KSB.
17
<PAGE>
Unless otherwise indicated, all references to ClearLogic refer to
ClearLogic, and subsequent to their acquisition or formation, its subsidiaries.
Overview
ClearLogic, the e-media solutions company (TM) was founded in 1997 to
develop custom and off the shelf software and provide creative multimedia
services to address certain niches within the Internet business-to-business
space. During the past three years, ClearLogic has built a solid customer base
with our services and custom software, and is poised to take the next step into
delivering not only customized products, but also off-the-shelf repeatable
solutions for electronic media-related uses, via shrink-wrap, online delivery
and Application Service Provider channels.
If we are able to obtain sufficient capital to fulfill our strategic
goals, of which we cannot assure you, we will transition to a specialty in
customized Application Service Provider-model-based software. Today, however, in
the absence of capital with which to acquire additional technology or delivery
capacity and in the absence of sufficient capital with which to invest solely in
research and development expansion, we maintain and grow our operations through
a balanced offering of custom software, commodity mid-to-high-end e-commerce web
development and multimedia services.
We derive substantially all of our revenues from fees for services
generated on a project-by-project basis. ClearLogic's services are provided on
both a fixed-time, fixed-price basis and on a time and materials basis.
Historically, ClearLogic has not operated on a retainer basis; however, in the
future, ClearLogic may utilize such arrangements.
Acquisition
In November 1999, we merged with St. James Group, Inc. pursuant to an
Agreement and Plan of Reorganization dated November 13, 1999. Under the
agreement, ClearLogic Acquisition Corporation, a wholly owned subsidiary of St.
James, merged into ClearLogic, Inc., the New Jersey corporation. In
consideration of the merger, 11,096,385 shares of common stock of St. James were
issued to the shareholders of ClearLogic, Inc. ClearLogic, Inc. employee stock
options to purchase 905,000 shares were converted in the merger to options to
purchase 1,635,542 shares of St. James at a price of $.027666 per share. Upon
consummation of the merger, St. James changed its name to ClearLogic, Inc., and
the operating company became our wholly owned subsidiary. Officers and directors
of ClearLogic, Inc., the New Jersey corporation, were elected as the new
directors and officers. Prior to the closing, St. James had no affiliation with
ClearLogic. Immediately prior to the closing of the merger, we issued 137,900
shares on conversion of a promissory note and effected a four-for-one stock
split.
18
<PAGE>
Plan of Operation, Liquidity and Capital Resources
A major objective of the Company is to maintain sufficient liquidity to
fund growth and meet all cash requirements with cash and short-term equivalents
plus funds generated from operating cash flows.
The Company used net cash in operating activities of $790,465 in 1999,
which was primarily attributable to losses in 1999. The Company does not
anticipate that future cash used or provided from operations will include
amounts related to the merger.
Operating expenses of approximately $1.3 million in 1999 increased from
approximately $256,000 in 1998 primarily due to higher expenses resulting from
employee and recruiting expenses, recapitalization expenses of approximately
$444,277 and higher general operations. We anticipate that as we continue to
increase our products and services that operating expenses will increase during
2000. We also anticipate that we will incur approximately $2 million in
operating expenses in 2000.
General and administrative expenses of approximately $589,000 in 1999
increased from approximately $202,000 in 1998 due primarily to employee and
recruiting expenses relating to the increase in our administrative and executive
staff. The increase was also due to professional fees and overhead expense.
General and administrative expenses include executive management, accounting,
legal and human resource personnel and expenditures for applicable overhead
costs. The Company anticipates that the costs will again increase in 2000.
Prior to the merger, in 1999 and 1998 we relied on borrowings under
private placements from private investors in the amount of $608,200, for which
the Company issued 8% convertible notes with warrants. In addition, in September
1998, ClearLogic entered into a line of credit with a bank, which provided
ClearLogic with a line of credit of up to $30,000 for working capital purposes.
That line of credit was repaid and canceled in December 1999. Also, in 1999,
ClearLogic issued 8% convertible debentures in the amount of $1.0 million, the
net proceeds of which were used for working capital and other general purposes.
The notes and debentures bear interest at 8% per annum, which is due at maturity
that ranges from 18 to 37 months from the date of issuance. With the exception
of the $1,000,000, the notes and any accrued interest are convertible at the
holder's option, in their entirety, into common stock at a conversion price
determined at the time the Company sells such stock in an equity offering of at
least $500,000. The debentures are convertible at a conversion price equal to
the lower of the market price on the first day of trading or 75% of the market
price averaged over the five trading days prior to the date of the conversion.
Interest expense on the notes for years ended December 31, 1999, and 1998
amounted to $37,870 and $6,972, respectively.
We believe that cash generated by operations combined with additional
equity or debt financing will be necessary to enable us to fund future
operations and continue to implement our current business strategies. Through
June 30, 2000, we have recorded revenues totaling approximately $920,000. In
addition, we have a backlog of orders to be fulfilled through the end of 2000
totaling approximately $1.3 million. However, we have a working capital
deficiency as of June 30, 2000. Currently the Company is in discussions with
investment bankers and other parties to arrange additional equity or debt
financing. If we are unable to secure additional financing acceptable to us,
19
<PAGE>
then we would have to reduce future operations and modify our business
strategies, including curtailing our operations or seeking other remedies.
We also cannot assure you, however, that additional financing will be
available on terms acceptable to us and our stockholders or at all.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
ClearLogic's revenues increased $171,428 to $420,997 for the year ended
December 31, 1999 from $249,569 for the year ended December 31, 1998. This
increase in revenues was attributable to an increased volume of projects from
new customers, the leveraging of existing client relationships to obtain repeat
business and increases in ClearLogic's billing rates.
General and Administrative Costs
ClearLogic's general and administrative costs increased $386,704 to
$589,048 for 1999 from $202,344 for 1998. The increase in costs in absolute
dollar terms was a result of the hiring of additional and more experienced
personnel required to deliver ClearLogic's services.
Additionally, the increase in general and administrative expenses was
attributable to an increase in general and administrative personnel and
increases in facilities and infrastructure costs required due to ClearLogic's
rapid growth.
Recapitalization Charges
ClearLogic completed its merger with St. James Group, Inc. in November
1999. Costs directly associated with this merger totaling $444,277 were charged
to operations upon consummation of the merger. The majority of the costs
consisted of an acquisition fee of $250,000 paid to a former principal of St.
James Group, Jehu Hand.
Product Development Costs
We spent approximately $241,800 on research and development during
1999, compared with approximately $9,800 in 1998. Most of our research and
development activities related to NetProof, although a small percentage
supported new product development for our Internet security products. Any
investment in the e-commerce business in this research and development period
was focused on maintaining current skills in our technical staff in a rapidly
changing market. We internally funded all of our research and development
activities.
Net Cash Provided by (Used in) Operating Activities
ClearLogic's net cash used in operating activities was $790,465 for
1999 compared to net cash used by operating activities of $92,081 for 1998. Cash
used in operating activities was mainly due to the loss from operations of
20
<PAGE>
$1,120,067 for the year, an add-back of $102,590 for depreciation, non-cash
compensation expense of $216,277 for options and warrants and an increase in
accounts receivable of $10,533 which was offset by an increase in accounts
payable of $2,526 and accrued expenses of $47,844. Net cash used in operating
activities in 1998 was primarily due to net loss of $211,392, an add-back of
$64,021 for depreciation and amortization and non-cash compensation expense, as
well as an increase in accounts payable of $43,595 and accrued expenses of
$21,476.
Capital Expenditures and Rent Expenses
ClearLogic's capital expenditures for 1999 were $93,392 compared to
approximately $92,499 for 1998. During 1999, the Company entered into capital
lease obligations totaling $79,829 to purchase computer hardware and video
equipment. ClearLogic does not have any material commitments for capital
expenditures for the foreseeable future. The Company leases its offices and an
automobile under a non-cancelable operating lease agreement. The rent expense
under the office and the automobile leases amounted to $50,500 and $26,750 in
1999 and 1998, respectively.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivatives and
Hedging Activities" which establishes accounting and reporting standards of
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the FASB approved SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of
the Effective Date of FASB Statement No. 133", which amends SFAS No. 133 to be
effective for all fiscal quarters beginning after June 15, 2000. ClearLogic does
not expect the adoption of this standard to have a material effect on its
operations, financial position or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements,
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. SAB 101 was effective the first fiscal
quarter of fiscal years beginning after December 15, 1999 and requires companies
to report any changes in revenue recognition as a cumulative change in
accounting principle at the time of implementation in accordance with Accounting
Principles Board Opinion 20, "Accounting Changes". In March 2000, the SEC issued
SAB 101A, "Amendment: Revenue Recognition in Financial Statements," which delays
implementation of SAB 101 until ClearLogic's fourth fiscal quarter of 2000.
ClearLogic will adopt SAB 101 and is currently in the process of evaluating the
impact, if any, SAB 101 will have on its financial position or results of
operations.
In March 2000, the Emerging Issues Task Force ("EITF") reached
consensus positions in EITF Issue No. 00-2, "Accounting for Website Development
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<PAGE>
Costs." This pronouncement provides guidance in accounting for such costs. We
believe that the adoption of EITF No. 00-2 will have no impact on our financial
position or results of operations.
Quantitative and Qualitative Disclosures About Market Risk
The convertible debentures outstanding at December 31, 1999 are fixed
rate obligations and would not be exposed to the impact of interest rate
fluctuations. To the extent that the Company seeks to refinance those
instruments, the prevailing market interest rates on the replacement debt could
exceed rates currently paid, thereby increasing expense and increasing net loss.
Item 7. Financial Statements.
The financial statements begin on Page F-1.
Financial Statement Index
Page
Independent Auditors' Report F-1
Consolidated financial statements
Balance sheet F-2 to F-3
Statements of operations F-4
Statements of changes in stockholders' (deficiency) F-5
Statements of cash flows F-6 to F-7
Notes to consolidated financial statements F-8 to F-21
Item 8. Changes in and Disagreements with Accountants on Auditing and
Financial Disclosure.
None.
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<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Our executive officers and directors and their ages and positions are
set forth below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Sina Khelil 32 Chairman of the Board, Chief Executive Officer and
Director
Philip S. Burnham, II, Esq. 35 Chief Operating Officer, General Counsel, Secretary and
Director
Ronaldo Nascimento 32 Chief Research Officer and Director
Elisabeth Diane Parks 53 Chief Marketing Officer
Steven Ferri 40 Vice President - NewMedia Services
Douglas Schwarzwaelder 48 Director
</TABLE>
Mr. Sina Khelil has been our Chairman and Chief Executive Officer and a
director since our organization in 1997. From 1994 until 1997, Mr. Khelil was
the technical director at North Park Studio, a full service creative media
services company. He earned the prestigious 1995 Gamelan, Java Applet of the
Year Award, for his pioneering work with interactive NewMedia programming. He
attended Drexel University and the University of Maryland, studying information
systems management and business management.
Philip S. Burnham, II, Esq. has been our Chief Operating Officer,
General Counsel and Secretary and a director since June 1999. Mr. Burnham was an
assistant prosecutor in New Jersey from August 1998 until June 1999. For more
than nine years prior thereto, he was an attorney in private practice
specializing in corporate and technology law. In 1990 Mr. Burnham served as a
law clerk for a superior court judge in New Jersey, and from 1986 to 1987 he was
a computer programmer/analyst for Unisys Corporation. He holds a B.S. degree in
computer science from Beaver College and received his law degree from Widener
University School of Law.
Mr. Ronaldo Nascimento has been our Chief Research Officer and a
director since 1997. From 1996 to 1997, Mr. Nascimento was a software developer
with North Park Studios, where he and Mr. Khelil collaborated on e-media
engagements. He has also worked with Zeta-Tech, an applied technology company,
from 1990 until 1996 where he served in technical, technical management and
quality management roles. He attended Temple University and studied computer
science at Rutgers University.
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<PAGE>
Ms. Elisabeth Diane Parks has been our Chief Marketing Officer since
January 2000. During 1999, she was vice president, marketing and communications
for IMI Systems, Inc., an information technology services and consulting
company. From 1986 until 1999, she served in a variety of corporate and product
marketing roles in the U.S. and Asia at Unisys Corporation. She has earned three
international IABC Gold Quill awards for excellence in Internet and intranet
business-to-business sites, and majored in industrial psychology at the
University of Houston.
Mr. Steven Ferri has been Vice President - NewMedia Services since
January 2000. Prior to joining ClearLogic in 2000, he worked as a creative
consultant with media agencies, such as Signature Card Services, NEON/Convoy,
NEON, SMPL Solutions, West Const. Industries. From 1996 to 1997 he worked at
GraphicalPlanet, from 1996 to 1997 he worked at North Park Studios, and from
1995 to 1996 he worked at Video Active Studios, in corporate design and graphics
as well as meeting client needs for advanced computer gaming and web interface
design. Mr. Ferri's education includes a BFA from George Mason University, and
graduate and specialized studies in interactive media, animation, film
production, and Java programming.
Mr. Douglas Schwarzwaelder has been a director since 1999. He is a
private investor, and he serves as an advisor to us on financial, marketing and
sales matters. Mr. Schwarzwaelder, founded Roster Financial, Inc. a wholesale
insurance agency, which he sold in 1993. In addition, he is a private investor
and principal in several privately held companies. Mr. Schwarzwaelder holds a
B.S degree in economics from Albright College.
Directors are elected for a period of one year. Officers serve at the
discretion of the board of directors. We have no arrangements or understandings
regarding the election of any person as a director. There are no family
relationship between our directors and executive officers.
Item 10. Executive Compensation.
The following table sets forth information regarding compensation
earned by our Chairman and Chief Executive Officer, Sina Khelil. No officer
received compensation of $100,000 or more in 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation(1) Compensation Awards
---------------------------------------------------- -------------------
Other Securities
Name and Annual Underlying All Other
Principal Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation($)
------------------ ---- --------- -------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Sina Khelil, Chairman and 1999 $ 67,644 $ 0 $ 0 $ 0 $ 0
Chief Executive Officer(1)
Jehu Hand, Chief Executive
Officer(1)
</TABLE>
24
<PAGE>
-----------
(1) Mr. Khelil became our Chairman and Chief Executive Officer on November 23,
1999, the closing date of the merger. Prior to that date, Mr. Jehu Hand
served as the Company's Chief Executive Officer, and no services were
provided by Mr. Hand during 1999, 1998 or 1997.
We did not grant any options to purchase shares of our common stock to
Mr. Khelil in 1999, and he did not hold any options to purchase shares of our
common stock as of December 31, 1999.
Stock Option Plan
In August 1999, we adopted our 1998 stock option plan, pursuant to
which we are authorized to grant options to purchase up to 2,000,000 shares of
common stock to our key employees, officers, directors, consultants, and other
agents and advisors. Awards under the Plan may be either nonqualified stock
options or incentive stock options, as defined in Section 422 of the Internal
Revenue Code of 1986, as amended, restricted stock awards, deferred stock
awards, stock appreciation rights and other stock-based awards, as described in
the plan.
The plan is administered by a committee of our board of directors,
which will determine who will receive awards, the number of awards to be granted
and the specific terms of each grant, including vesting schedules, subject to
the provisions of our plan. If a committee is not appointed, the board of
directors performs the functions of the committee. Our Board of Directors
currently administers the plan.
We cannot grant incentive stock options under the plan unless the
exercise price is at least equal to the fair market value of our common stock on
the date of grant. However, if the option holder owns more than 10% of our
outstanding stock, the exercise price of any incentive stock option granted to
him or her must be at least 110% of the fair market value on the date of grant.
As a result of the merger with St. James Group, all options granted
prior to November 23, 1999 vested, except that Ronaldo Nascimento holds options
that vest in installments beginning on November 5, 2000. In April 2000, we
granted options to purchase 200,000 shares of our common stock to Elisabeth
Diane Parks and options to purchase 185,000 shares of our common stock to Steven
Ferri. These options have an exercise price of $.05 per share. In February 2000,
we granted to Mr. Ferri 15,000 shares of our common stock as compensation for
services.
Section 16(a) Beneficial Ownership Reporting Compliance
Sina Khelil, Philip S. Burnham, II, Ronaldo Nascimento, Elisabeth Diane
Parks, Steven Ferri and Douglas Scharzwaelder each filed late his or her
respective Form 3 Initial Statement of Beneficial Ownership.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table and discussion provides information as to the
shares of common stock beneficially owned as of June 30, 2000 by:
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<PAGE>
o each director;
o the officer named in the summary compensation table;
o each person owning of record or known by us, based on
information provided to us by the persons named below, to own
beneficially at least 5% of our common stock; and
o all officers and directors as a group.
Name and Address Shares Percent
---------------- ------ -------
Sina Khelil 7,969,880 54%
41 South Haddon Avenue
Haddonfield, NJ 08033
Philip S. Burnham, II 359,595 3%
Ronaldo Nascimento 361,446 3%
Douglas Schwarzwaelder 1,626,506 11%
Najat Khelil 1,084,337 7.6%
41 South Haddon Avenue
Haddonfield, NJ 08033
All present directors and officers as a
group (five individuals) 11,410,764 71.0%
The shares of our common stock set forth in the above table represent
shares issued and outstanding. None of the persons listed in the above table
hold options or other rights to purchase shares that are or become exercisable
by September 30, 2000.
Item 12. Certain Relationships and Related Transactions.
Throughout 1999 and 1998, the Company issued several convertible notes
amounting to $152,000 and $116,200, respectively, to Douglas Schwarzwaelder, a
director of the Company, for operating purposes. The notes mature at various
times during 2001.
ClearLogic completed its merger with St. James Group, Inc. in November
1999. Costs directly associated with this merger totaling $444,277 were charged
to operations upon consummation of the merger. The majority of the costs
consisted of an acquisition fee of $250,000 paid to a former principal of St.
James Group, Jehu Hand.
26
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Exhibit Description
----------- --------------------
3.1 Certificate of Incorporation, as amended.
3.2 Bylaws, as amended.
10.1 Agreement and Plan of Reorganization dated November 13, 1999
by and between St. James Group, Inc., ClearLogic Acquisition
Corp. and ClearLogic, Inc. (Incorporated by reference to the
like-described exhibit in the Company's Form 8-K current
report dated November 30, 1999.)
10.2 Lease Agreement dated March 3, 1999 between Levco Enterprises,
L.L.C. and ClearLogic, Inc., a New Jersey corporation.
10.3 Form of Convertible Note.
10.4 Form of Convertible Debenture.
10.5 ClearLogic, Inc. 1998 Stock Option Plan
10.6 Warrant to Purchase Common Stock dated August 19, 1999 issued
to Douglas Schwarzwaelder.
10.7 Form of Securities Purchase Agreement.
21.1 Subsidiaries of the registrant.
(b) Reports on Form 8-K.
The Company filed with the Securities and Exchange Commission on
February 17, 2000 a Form 8-K Current Report dated February 7, 2000 to report
under Item 8 that on February 7, 2000, the Company changed its fiscal year to
the calendar year, commencing with the period ended December 31, 1999.
The Company filed with the Commission on November 29, 1999 a Form 8-K
Current Report dated November 13, 1999, as amended November 30, 1999, to report
under Item 1 and Item 2 that effective November 23, 1999 a wholly owned
subsidiary of the St. James Group merged into ClearLogic, Inc., a New Jersey
corporation.
27
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ClearLogic, Inc.
Dated: July 24, 2000 By: /s/ Philip S. Burnham, II
---------------------------
Title: Chief Operating Officer
------------------------
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Sina Khelil
--------------------------
Sina Khelil Chairman of the Board, July 24, 2000
Chief Executive Officer
and Director (Principal
Executive Officer)
/s/ Philip S. Burnham, II
--------------------------
Philip S. Burnham, II Chief Operating Officer July 24, 2000
General Counsel and Director
(Principal Financial
and Accounting Officer)
/s/ Ronaldo Nascimento
--------------------------
Ronaldo Nascimento Vice President - Research July 24, 2000
and Development and Director
/s/ Douglas Schwarzwaelder
--------------------------
Douglas Schwarzwaelder Director July 24, 2000
</TABLE>
28
<PAGE>
Independent Auditors' Report
ClearLogic, Inc.
Haddonfield, New Jersey
We have audited the accompanying consolidated balance sheet of ClearLogic, Inc.
and subsidiary (the "Company") as of December 31, 1999, and the related
consolidated statements of operations, changes in stockholders' (deficiency),
and cash flows for each of the two years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe 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
ClearLogic, Inc. and subsidiary as of December 31, 1999, and the related
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 4 to the
consolidated financial statements, the Company has incurred significant
operating losses, has a deficiency in stockholders' equity, has significant
future debt commitments and faces intense competition. Additionally, the Company
has yet to begin to generate cash flows from operations and is reliant on
outside financing to fund its operations which raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding these
matters are also described in Note 4. The consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
Philadelphia, Pennsylvania
May 16, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Current assets
Cash and cash equivalents $404,377
Accounts receivable, net of allowance for doubtful accounts of $7,263 15,963
Prepaid expenses 18,667
Other current assets 14,250
-----------------------------------------------------------------------------------------------------------
Total current assets 453,257
-----------------------------------------------------------------------------------------------------------
Property, equipment and software, net of accumulated
depreciation and amortization of $127,039 182,901
-----------------------------------------------------------------------------------------------------------
Other assets
Due from officer 8,073
Investment in unconsolidated affiliate, at equity 10,000
Unamortized software costs, net of accumulated amortization of $48,500 23,500
Deferred financing costs, net of accumulated amortization of $710 24,285
Other 2,553
-----------------------------------------------------------------------------------------------------------
Total other assets 68,411
-----------------------------------------------------------------------------------------------------------
Total assets $704,569
-----------------------------------------------------------------------------------------------------------
</TABLE>
F-2
<PAGE>
ClearLogic, Inc. and Subsidiary
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------------------------------------------------
<S> <C>
Liabilities and Stockholders' (Deficiency)
Current liabilities
Accounts payable $ 50,453
Accrued expenses 69,320
Notes payable, net of discount 208,729
Capital lease obligations 50,920
Other current liabilities 2,550
--------------------------------------------------------------------------------------------------
Total current liabilities 381,972
Notes payable, net of current maturities and discount 1,381,399
Capital lease obligations, net of current maturities 1,276
--------------------------------------------------------------------------------------------------
Total liabilities 1,764,647
--------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' (deficiency)
Preferred stock, no par value
Authorized 5,000,000 shares
Issued and outstanding - none --
Common stock, $.001 par value
Authorized 20,000,000 shares
Issued and outstanding 14,806,535 shares 14,806
Additional paid-in capital 332,451
Accumulated (deficit) (1,407,335)
--------------------------------------------------------------------------------------------------
Total stockholders' (deficiency) (1,060,078)
--------------------------------------------------------------------------------------------------
Total liabilities and stockholders' (deficiency) $ 704,569
--------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ClearLogic, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998
---------------------------------------------------------------------------------------------
<S> <C> <C>
Net revenues $ 420,997 $ 249,569
Cost of revenues 139,784 198,079
---------------------------------------------------------------------------------------------
Gross profit 281,213 51,490
---------------------------------------------------------------------------------------------
Operating expenses
General and administrative 589,048 202,344
Product development 241,812 9,752
Depreciation and amortization 62,383 43,404
Recapitalization charges 444,277 --
---------------------------------------------------------------------------------------------
Total operating expenses 1,337,520 255,500
---------------------------------------------------------------------------------------------
Operating (loss) (1,056,307) (204,010)
Interest expense (67,736) (19,922)
Other income, net 3,976 12,540
---------------------------------------------------------------------------------------------
Net (loss) $ (1,120,067) $ (211,392)
---------------------------------------------------------------------------------------------
(Loss) per share of common stock (basic and diluted) $ (.08) $ (.02)
---------------------------------------------------------------------------------------------
Weighted average common shares outstanding used in
computing loss per share (basic and diluted) 13,513,937 13,346,385
---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ClearLogic, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' (Deficiency)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock
-------------------- --------------------
Number Number Additional
of of Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital (Deficit) (Deficiency)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ -- 250 $ -- $ 70,000 $ (75,876) $ (5,876)
Capital contribution from stockholders 750 1 30,069 30,070
Warrants issued in conjunction with notes
payable 5,810 5,810
Net (loss) (211,392) (211,392)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 -- 1,000 1 105,879 (287,268) (181,388)
Shares returned and canceled in connection
with recapitalization (1,000) (1) (1)
Shares issued in connection with
recapitalization 11,096,385 11,096 (11,096) --
Shares issued to original stockholders 2,250,000 2,250 110,250 112,500
Warrants issued as compensation for
services rendered by nonemployees 17,000 17,000
Reissuance of options upon recapitalization 81,778 81,778
Exercise of stock options 18,072 18 482 500
Cashless exercise of options 1,442,078 1,442 3,558 5,000
Warrants issued in conjunction with notes
payable 24,600 24,600
Net (loss) (1,120,067) (1,120,067)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ -- 14,806,535 $ 14,806 $332,451 $(1,407,335) $ (1,060,078)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ClearLogic, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net (loss) $ (1,120,067) $ (211,392)
Adjustments to reconcile net (loss) to net cash (used in)
operating activities
Depreciation and amortization 102,590 64,021
Allowance for doubtful accounts 1,773 5,490
Compensation related to issuance of options and
warrants 216,277 --
(Gain) on sale of property -- (5,930)
Changes in assets and liabilities
(Increase) decrease in assets
Accounts receivable (10,533) 2,602
Prepaid expenses (18,667) 8,322
Other current assets (12,000) --
Other (2,553) --
Increase (decrease) in liabilities
Accounts payable 2,526 43,595
Accrued expenses 47,844 21,476
Other current liabilities 2,345 (20,265)
----------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (790,465) (92,081)
----------------------------------------------------------------------------------------------------
Cash flows from investing activities
Investment in unconsolidated affiliate (10,000) --
Proceeds from sale of asset -- 6,000
Purchases of property, equipment and software (93,392) (92,499)
Due from officer (8,073) --
----------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (111,465) (86,499)
----------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
ClearLogic, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities
Exercise of stock options $ 500 $ --
Capital contribution -- 30,070
Net line of credit activity (30,000) 30,000
Net proceeds from sales of convertible notes 1,492,000 116,200
Proceeds from issuance of notes payable -- 27,931
Payments on notes payable (82,868) (7,223)
Principal payments on capital leases (50,683) (13,489)
Deferred financing costs (24,995) --
----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,303,954 183,489
----------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 402,024 4,909
Cash and cash equivalent (deficiency) at beginning of year 2,353 (2,556)
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 404,377 $ 2,353
----------------------------------------------------------------------------------------------------
Supplemental schedule of noncash investing and financing
activities
Equipment purchased under capital leases $ 79,829 $ --
----------------------------------------------------------------------------------------------------
Other supplemental disclosures
Interest paid $ 17,435 $ 11,115
----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
ClearLogic, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
1. The Company ClearLogic, Inc. ("ClearLogic" or the "Company"), incorporated in the state of
New Jersey in January 1997, is an e-media solutions company which develops
custom-made software and provides creative multimedia services for Internet
business-to-business. ClearLogic also offers various "New Media" professional
services, which include e-commerce websites, database-to-internet programming,
website design and hosting, multimedia and digital video production and three
dimensional modeling and animation.
2. Summary of Principles of Consolidation
Significant
Accounting The consolidated financial statements include the accounts of the Company and its
Policies wholly owned subsidiary. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues, expenses, assets and liabilities and
disclosure of contingencies. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. The Company maintains its cash accounts at
one commercial bank. Cash accounts at the bank often exceed amounts that are
insured by the Federal Deposit Insurance Corporation.
Unamortized Software Costs
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed", the process of creating a computer software product includes a working
model. The costs of producing product masters incurred subsequent to
</TABLE>
F-8
<PAGE>
ClearLogic, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
technological feasibility shall be capitalized. The capitalization of such costs
cease when the product is available for general release to customers and are
being amortized on a straight-line basis over an 18-month period. The
amortization expense associated with these costs amounted to $28,500 and $20,000
for 1999 and 1998, respectively. Maintenance and customer support costs are
expensed when incurred.
Property, Equipment and Software
All property, equipment and software is stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are computed using
the double-declining balance method, an accelerated method of depreciation, over
the estimated useful lives of the assets. Expenditures for repairs and
maintenance are charged to operations as incurred. Upon sale or retirement, the
cost of the asset and the related accumulated depreciation and amortization are
removed from the accounts and the resulting gain or loss, if any, is included in
operations.
Deferred Financing Costs
Financing costs incurred in connection with issuing convertible notes are being
amortized over the life of the underlying indebtedness which is three years.
Software Development Costs
In accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") No. 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use", internal and external
costs incurred to develop internal-use computer software are expensed during the
preliminary project stage and capitalized during the application development
stage. Capitalized software costs, which are included in property, equipment and
software, are being amortized over three years.
</TABLE>
F-9
<PAGE>
ClearLogic, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Revenue Recognition
Revenues are derived primarily from sales of the Company's online proofing
software and website development. In accordance with the AICPA SOP No. 97-2,
"Software Revenue Recognition", revenue has been recognized when all of the
following criteria are met: 1) persuasive evidence of an arrangement exists; 2)
delivery has occurred; 3) vendors' fee is fixed or determinable; and 4)
collectibility is probable. The Company's revenues are recognized based on these
criteria.
Product Development Costs
Product development costs include expenses incurred by the Company to develop,
enhance, manage, monitor and operate the Company's internet platforms. Product
development costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes". As such, deferred
tax liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse.
Net Loss per Common Share
Net loss per share is computed in accordance with the provisions of SFAS No. 128,
"Earnings Per Share". Basic earnings per share includes no dilution and is
computed by dividing net income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
</TABLE>
F-10
<PAGE>
ClearLogic, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
share reflects the potential dilution of securities that could share in the
earnings of an entity and is computed by dividing the net income available to
common stockholders by the weighted average number of common and common
equivalent shares outstanding during the period. Equivalents, including warrants,
stock options and preferred stock, were anti-dilutive for both periods presented.
See Note 3 for additional information.
Impairment of Long-Lived Assets
The Company reviews the carrying values of its long-lived and identifiable
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable based on undiscounted estimated future operating cash flows. As of
December 31, 1999, the Company has determined that no impairment has occurred.
Stock-Based Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
which has recognition provisions that establish a fair value based method of
accounting for stock-based employee compensation plans and established fair value
as the measurement basis for transactions in which an entity acquires goods or
services from nonemployees in exchange for equity instruments. SFAS 123 also has
certain disclosure provisions. The recognition provision with regard to the fair
value based method of accounting for stock-based employee compensation plans is
optional. Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees" uses what is referred to as an intrinsic value based
method of accounting. The Company has decided to apply APB 25 for its stock-based
employee compensation arrangements.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist of cash, cash equivalents and accounts receivable. Cash and
cash equivalents are deposited with high credit, quality financial institutions,
which may exceed federally insured limits. The Company has not experienced any
losses on cash deposits or temporary cash investments maintained in this manner.
</TABLE>
F-11
<PAGE>
ClearLogic, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
The Company's accounts receivable are derived from revenue earned from a broad
range of customers located throughout the United States. For the year ended
December 31, 1999, two customers accounted for 18% and 12% of net sales,
respectively. For the year ended December 31, 1998, two customers accounted for
47% and 11% of net sales, respectively. To date, the credit risk associated with
accounts receivable is minimal due to the immaterial dollar value of revenue
producing transactions. However, the Company has established an allowance for
doubtful accounts which amounted to $7,263 at December 31, 1999.
Fair Value of Financial Instruments
In assessing the fair value of financial instruments, the Company has used a
variety of methods and assumptions, which were based on estimates of market
conditions and loan risks existing at that time. For certain instruments,
including accounts receivable, accounts payable and short-term debt, it was
estimated that the carrying amount approximated fair value for these instruments
because of their short-term maturity. Estimated discounted value of future cash
flows has been used to determine fair value for long-term debt. The carrying
amounts of long-term debt approximate fair value since the Company's interest
rates approximate current interest rates.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 was amended in June 1999, with the
issuance of SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133". SFAS 137
makes SFAS 133 effective for all fiscal quarters of the fiscal years beginning
after June 15, 2000, and establishes accounting and reporting standards for
derivative instruments and for hedging activities. SFAS 133 requires that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair market value. Under certain circumstances, a portion of
the derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
Presently, the Company does not use derivative instruments either in hedging
activities or as investments. Accordingly, the Company believes that the adoption
of SFAS 133 will have no impact on its financial position or results of
operations.
</TABLE>
F-12
<PAGE>
ClearLogic, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". This pronouncement provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. The Company
believes that the adoption of SAB No. 101 in the fourth quarter of 2000 will have
no impact on its financial position or results of operations.
In March 2000, the Emerging Issues Task Force ("EITF") reached consensus
positions in EITF Issue No. 00-2, "Accounting for Website Development Costs".
This pronouncement provides guidance in accounting for such costs. The Company
believes that the adoption of EITF No. 00-2 will have no impact on its financial
position or results of operations.
3. Acquisition of
St. James Group On November 23, 1999, the Company and St. James Group, Inc. ("St. James") entered
into a merger agreement. Under the terms of the agreement, ClearLogic was merged
with and into ClearLogic Acquisition Corporation ("Acquisition"), a wholly owned
subsidiary of St. James. In consideration of the merger, 11,096,385 shares of
common stock of St. James were issued to the stockholders of ClearLogic.
Concurrent with the merger, 2,250,000 shares of common stock of St. James were
issued to its original stockholders valued at $112,500 which has been reflected
as recapitalization charges. St. James then changed its name to ClearLogic, Inc.
</TABLE>
F-13
<PAGE>
ClearLogic, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
As a result of the merger, the shareholders of ClearLogic obtained voting, board
and management control of the merged company. As a result, the merger constitutes
a recapitalization and will be accounted for as a reverse acquisition in
accordance with Generally Accepted Accounting Principles.
ClearLogic also issued options to purchase common stock, which replaced the
905,000 options that were outstanding prior to the merger at a rate of 1.807:1,
resulting in 1,635,543 options. The options became fully vested upon completion
of the merger. As a result, a charge of $81,778 was recorded upon the
recapitalization of ClearLogic. The Company also paid $250,000 as a finder's fee
which was expensed as incurred. The value of the shares issued to the original
stockholders, $112,500, and the above amounts have been reflected as
recapitalization charges during 1999.
Loss per share has been restated to reflect the shares issued in the
recapitalization as if they were outstanding for all of the periods presented.
4. Losses and Uncertainties The Company has accumulated losses of approximately $1,407,000, a stockholders'
deficiency of $1,060,078 and has incurred costs to develop and enhance its
technology and to create and introduce its products and services to its
customers. The Company has had negative operating cash flow since inception which
likely will continue as it continues to develop and market its products.
The Company faces intense competition as there are many current competitors
already established in this business and new competitors can establish themselves
quickly as barriers to entry and the costs of entry are relatively low.
The Company has not yet begun to generate income and cash flow from operations
sufficient to maintain its operations or satisfy its future commitments and is
reliant on its continuing ability to secure capital from a variety of outside
financing sources.
</TABLE>
F-14
<PAGE>
ClearLogic, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
The emerging nature of the Company's products and services and their rapid
evolution will require the Company to continually improve the performance,
features and reliability of its services. The Company's success will depend, in
part, on its ability to enhance its existing services, to develop new services
and technology that address the increasingly sophisticated and varied needs of
its customers and to respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis. If the Company is
unable, for technical, legal, financial or other reasons, to adapt in a timely
manner in response to changing market conditions or customer demands, its
business, operating results and financial condition could be materially adversely
affected.
During 1999, ClearLogic raised approximately $1,492,000 through the issuance of
convertible notes. The net proceeds have been used for its working capital and
other general corporate purposes. The Company believes that it can secure
additional financing sufficient to fully develop its technologies into
commercially viable products and services. If adequate funds are not available,
the Company may be required to curtail its operations or seek other remedies such
as the sale of its operations. There can be no assurance that the Company will be
successful in such endeavors.
The Company's plan of operation and prospects must be considered in light of the
risks, expenses, difficulties and problems frequently encountered in the
establishment of a new business.
5. Investment in During 1999, the Company made an investment in JAM Musical Industries, LLC, d/b/a
Unconsolidated radiotakeover ("JAM"). Radiotakeover is an internet-based independent music web
Affiliate site, which allows users to listen to various musical selections over the
internet. Based on the provisions of the operating agreement, the Company has
influence on the operating and financial decisions of JAM. The Company's share of
the profits and losses of JAM is approximately 33%, including its right to
receive distributions from JAM. JAM had no significant operations during 1999.
</TABLE>
F-15
<PAGE>
ClearLogic, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
6. Property, Property, equipment and software consisted of the following:
Equipment
and Software
Estimated
Useful December 31,
Lives 1999
-------------------------------------------------------------------------------
Computer equipment and
software 3-5 years $ 194,025
Video equipment 5 years 92,710
Furniture and fixtures 5-7 years 23,205
-------------------------------------------------------------------------------
Total 309,940
Less accumulated depreciation
and amortization 127,039
-------------------------------------------------------------------------------
$ 182,901
-------------------------------------------------------------------------------
Depreciation and amortization expense for 1999 and 1998 was $61,659 and $43,404,
respectively.
7. Capital Lease During 1999, the Company entered into capital lease obligations totaling $79,829
Obligations for the purchase of computer and video equipment. The net book value of equipment
under capital leases at December 31, 1999 amounted to $62,947.
</TABLE>
F-16
<PAGE>
ClearLogic, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
The future minimum lease payments under capital leases as of December 31, 1999,
are as follows:
Year ending December 31, Amount
--------------------------------------------------------------------------------
2000 $ 55,870
2001 6,165
--------------------------------------------------------------------------------
Total minimum lease payments 62,035
Less amount representing interest (8.5%) 9,839
--------------------------------------------------------------------------------
Present value of net minimum lease payments $ 52,196
--------------------------------------------------------------------------------
8. Notes Payable During 1999 and 1998, the Company sold $492,000 and $116,200, respectively, of
convertible notes of which $152,000 and $116,200 were issued to an officer of the
Company. (See Note 12). In addition, the purchasers of the notes received one
warrant for each dollar invested to purchase one share of common stock. The notes
bear interest at 8% per annum and are due at maturity which is 24 months from the
date of issuance. The notes and any accrued interest are convertible at the
holder's option at any time, in their entirety, into common stock at a conversion
price equal to the price as determined in an equity offering of at least $500,000.
Interest expense on the notes for the years ended December 31, 1999 and 1998
amounted to $30,856 and $6,972, respectively.
Holders of the notes received a total of 1,099,157 warrants. The warrants are
exercisable at $.51 per share and expire four years from the date of issuance. As
a result, the Company recorded discounts amounting to $24,600 and $5,810 for the
years ended December 31, 1999 and 1998, respectively, which represents the fair
value of the warrants. This amount will be amortized to interest expense over the
term of the related notes. The amortization expense amounted to $11,721 and $617
for the years ended December 31, 1999 and 1998, respectively.
</TABLE>
F-17
<PAGE>
ClearLogic, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
During 1999, the Company sold $1,000,000 of convertible notes, bearing interest
at 8% per annum which is due at maturity, 37 months from the date of issuance.
The principal amount of these notes is convertible at the holder's option into
common stock at a conversion price equal to the lower of the market price on the
first day of trading or 75% of the market price averaged over the five trading
days prior to the date of conversion. Interest expense on the notes for the year
ended December 31, 1999 amounted to $7,014.
Upon conversion of the notes into common stock, any remaining unamortized
discount will be charged immediately to interest expense.
Maturities of long-term debt, net of discount, are as follows:
Year ending December 31, Amount
----------------------------------------------------------------------------------
2000 $ 208,729
2001 381,399
2002 1,000,000
----------------------------------------------------------------------------------
$ 1,590,128
----------------------------------------------------------------------------------
9. Income Taxes During 1999, the Company elected to change its tax status from an S Corporation
to a C Corporation. As such, the Company had no net operating loss carryforwards
("NOL's") at December 31, 1998. However, the Company had NOL's of $906,000 at
December 31, 1999, which will expire during 2014. Accordingly, a deferred tax
asset approximating $362,400 has been recognized. Because of the uncertainty that
the Company will generate income in the future sufficient to fully or partially
utilize these carryforwards, the deferred tax asset is offset by a 100% valuation
allowance. Therefore, no deferred tax asset is reflected in these financial
statements. Additionally, the annual utilization of the otherwise available net
operating loss carryforward may be limited by the provisions of Section 382 of
the Internal Revenue Code, as amended.
</TABLE>
F-18
<PAGE>
ClearLogic, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
10. Stockholders' Preferred Stock
Equity
The Company's Articles of Incorporation, as amended, authorize the Company to
provide for the issuance of up to 5,000,000 shares of preferred stock. The Board
of Directors may divide the shares of preferred stock into series and shall fix
and determine the designations, preferences, privileges, and ratify powers, if
any, and the restrictions and qualifications of the share of each series as
established.
Common Stock
The Company's Articles of Incorporation, as amended, authorize the Company to
provide for the issuance of up to 20,000,000 shares of common stock. The
outstanding shares of common stock, regardless of class, shall be entitled to one
vote per share and shall share equally in dividends, whether paid in cash or by
the issuance of additional shares of common stock, declared from time to time by
the Board of Directors. Additionally, most of the common shares issued and
outstanding are restricted as to tradability under the Securities Act.
Employee Stock Option Plan
1998 Stock Option Plan
On August 16, 1999, the Company's Board of Directors and stockholders adopted and
approved the 1998 Stock Option Plan ("1998 Plan"). The 1998 Plan permits the
grant of options to purchase up to 2,000,000 shares of common stock, at a price
per share no less than 100% of the fair market value of the common stock on the
date the option is granted. The price would be no less than 110% of fair market
value in the case of a stock option granted to any individual who owns more than
10% of the Company's outstanding common stock. The 1998 Plan is designed to
assist the Company in attracting and retaining highly qualified persons as
employees of the Company in order to provide such key employees with incentives
to contribute to the growth and development of the business of the Company. The
1998 Plan also provides for the granting of both incentive stock options intended
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F-19
<PAGE>
ClearLogic, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
to qualify under Section 422 of the Internal Revenue Code, and nonqualified stock
options, which do not qualify. Each option shall expire no later than ten years
after the date on which it shall have been granted, but the Board in its
discretion may prescribe a shorter period for any individual option or options.
However, the term is limited to five years in the case of an option granted to a
10% or greater stockholder of the Company. Options under the 1998 Plan are
nontransferable, except: (1) by will or by the laws of descent and distribution;
(2) in the event an optionee is permanently and totally disabled. The 1998 Plan
also states that if at any time the Company becomes involved in any proposed
consolidation, merger or the sale of substantially all of the Company's assets,
the Company shall give written notice to the holder of any option that all of the
outstanding options may be exercised only within thirty days after the date of
the notice, but not thereafter. Unless the 1998 Plan is terminated earlier by the
Board, the 1998 Plan will terminate in August 2010.
During 1999, the Company granted options to purchase 1,653,615 shares of common
stock at exercise prices ranging from $.02766 to $.05 per share. As discussed in
Note 3, options to purchase 1,635,543 shares were issued as part of the
recapitalization and became fully vested as of that date. The remainder of the
options vest in installments over the course of four years from the date of
grant.
During 1999, 18,072 options were exercised for cash at a price of $.02766.
Additionally, 1,442,078 options were exercised by reason of a cashless exercise
resulting in the forfeiture of 12,741 options. The fair value of the options
were recorded as recapitalization charges (see note 3). As of December 31, 1999,
180,723 options were outstanding, none of which are exercisable.
</TABLE>
F-20
<PAGE>
ClearLogic, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
11. Commitments Operating Leases
and
Contingencies The Company leases its office and equipment under noncancelable operating lease
agreements.
The future minimum lease payments are as
follows:
Year ending December 31, Amount
------------------------------------------------------------------------------
2000 $ 69,000
2001 78,000
2002 35,250
Rent expense under the office and equipment leases amounted to $50,500 and
$26,750 in 1999 and 1998, respectively.
Legal Proceedings
From time to time, the Company is a defendant in various lawsuits incident to the
ordinary course of business. It is not possible to determine with any precision
the probable outcome or the amount of liability, if any, under these lawsuits;
however, in the opinion of the Company and its attorneys, the disposition of
these lawsuits will not have a material adverse effect on the Company's financial
position.
12. Related Party Throughout 1999 and 1998, the Company issued several convertible notes amounting
Transactions to $152,000 and $116,200, respectively, to an officer of the Company for
operating purposes (See Note 8). The notes mature at various times during 2001.
The Company issued a note receivable approximating $8,000 to an officer during
1999. The balance, together with accrued interest at 8% per annum, is due
November 2001.
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F-21
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Description
----------- --------------------
3.1 Certificate of Incorporation, as amended.
3.2 Bylaws, as amended.
10.1 Agreement and Plan of Reorganization dated November 13, 1999
by and between St. James Group, Inc., ClearLogic Acquisition
Corp. and ClearLogic, Inc. (Incorporated by reference to the
like-described exhibit in the Company's Form 8-K current
report dated November 30, 1999.)
10.2 Lease Agreement dated March 3, 1999 between Levco Enterprises,
L.L.C. and ClearLogic, Inc., a New Jersey corporation.
10.3 Form of Convertible Note.
10.4 Form of Convertible Debenture.
10.5 ClearLogic, Inc. 1998 Stock Option Plan
10.6 Warrant to Purchase Common Stock dated August 19, 1999 issued
to Douglas Schwarzwaelder.
10.7 Form of Securities Purchase Agreement.
21.1 Subsidiaries of the registrant.
