-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GpYTNrJDFQVoQxmeujchSIq2Q8g0PrBTOwtN2+/wuAp/E4TRKvYQLeQKe3xrCEpx 7Ta8/6wgoQEE1JVVAaawsA== 0001047469-98-009540.txt : 19980313 0001047469-98-009540.hdr.sgml : 19980313 ACCESSION NUMBER: 0001047469-98-009540 CONFORMED SUBMISSION TYPE: 10SB12G PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19980312 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSFORMATION PROCESSING INC CENTRAL INDEX KEY: 0001034694 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954583945 STATE OF INCORPORATION: NV FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10SB12G SEC ACT: SEC FILE NUMBER: 000-23903 FILM NUMBER: 98564225 BUSINESS ADDRESS: STREET 1: 2121 ARGENTIA RD STE 200 STREET 2: CANADA L5N 2X4 CITY: MISSISSAUGA STATE: A6 BUSINESS PHONE: 9058127907 MAIL ADDRESS: STREET 1: 2121 ARGENTIA RD STE 200 STREET 2: CANADA L5N 2X4 CITY: MISSISSAUGA STATE: A6 ZIP: 00000 10SB12G 1 FORM-10SB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------------ FORM 10-SB GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b) OR 12 (g) OF THE SECURITIES EXCHANGE ACT OF 1934 TRANSFORMATION PROCESSING INC. ---------------------------------------------------- (Name of Small Business Issuer its charter) NEVADA 95-4583945 --------------------- ------------------------- (State or other jurisdiction of (I.R.S. employer Incorporation or Organization) identification no.) 2121 ARGENTIA ROAD, SUITE 200 MISSISSAUGA, ONTARIO L5N 2X4 ------------------------------- ------------------------- (Address of principal executive offices) (Zip code) Registrant's Telephone number, including area code (905) 812-7907 Securities to be registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAMES OF EACH EXCHANGE ON WHICH TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED ------------------- -------------------------------- NONE N/A ------------------- -------------------------------- Securities to be registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.001 PER SHARE ---------------------------------------------------- (Title of Class) ITEM 1. DESCRIPTION OF BUSINESS (a) Business Development In April 1996, Messrs. Paul G. Mighton, Gary G. McCann and Vladamir Stepanoff (the "Founders") caused Transformation Processing Inc. ("TPI - -Ontario") to be incorporated under the laws of the Province of Ontario, Canada for the purpose of providing computer-related services utilizing computer software incorporating technology developed by Mr. Stepanoff. In July 1996, Mr. Stepanoff assigned his rights in such technology to TPI-Ontario. On August 20, 1996 (the "Closing Date"), the Founders, as the holders of the outstanding common shares of TPI-Ontario, entered into a transaction with Samuel Hamann Graphix, Inc., a corporation which had been incorporated under the laws of the State of Nevada ("SHG-Nevada") on August 7, 1996, whereby the Founders exchanged their common shares of TPI-Ontario for an aggregate of 5,901,050 shares of the outstanding common stock, par value $.001 per share ("Common Stock"), of SHG-Nevada. As a result of such transaction, which has been accounted for as a reverse acquisition (the "Reverse Acquisition"), TPI-Ontario became a wholly-owned subsidiary, and the Founders acquired control, of SHG-Nevada. On the Closing Date, Mr. Mighton was informed by certain financial consultants engaged by TPI-Ontario that Samuel Hamann Graphix, Inc., a California corporation ("SHG-California"), had been merged with and into SHG-Nevada (the "Merger"), with SHG-Nevada being the surviving corporation. Investigation by the Company subsequent to the Closing Date revealed that although (a) SHG-Nevada and SHG-California entered into an agreement and plan of merger dated August 14, 1996 (the "Merger Agreement"), providing for the Merger to be effective upon the approval of the Merger Agreement by the parties thereto and the filing of articles of merger with the Secretary of State of the State of Nevada (the "Nevada Secretary of State") and (b) articles of merger dated August 14, 1996 complying with Nevada law were executed by such parties (the "Nevada Merger Articles"), neither the Nevada Merger Articles nor articles of merger complying with California law were filed with the appropriate authorities of the States of Nevada and California prior to the Closing Date (which filings were necessary under applicable law to effect the Merger). In March 1997, SHG-Nevada amended its articles of incorporation to change its corporate name to Transformation Processing Inc. (hereinafter referred to as the "Company" or "TPI"). In July 1997, the Company caused the Nevada Articles of Merger to be filed with the Nevada Secretary of State. On February 19, 1998, the Company effected the merger of TPI-Ontario with and into the Company. The Company has submitted documents to the California Secretary of State to effect the Merger under California law and is awaiting acceptance of such documents for filing. (b) Business of the Issuer The Company is a development stage company. The Company's business consists of providing computer-related services to corporate customers in Canada and the United States. The 2 Company currently groups the services it offers as follows: client/server migration services, year 2000 ("Year 2000") remediation services and groupware services. This Form 10-SB Registration Statement contains certain forward-looking statements that are subject to significant risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from historical results and results anticipated by the forward looking statements contained in the following discussion. Such factors and risks include, but are not limited to, intense competition, price cutting and profit margins, dependence on key personnel, the economic environment, the ability to develop, market, support and acquire new computer-related services and products and the ability of the Company to manage its growth. CLIENT/SERVER MIGRATION SERVICES The Company has developed software for the automatic migration of "legacy" computer application source code and data used on past and current IBM "mid-range" computers (often referred to as "minicomputers," as compared to desktop or microcomputers) to a format compatible with a wide range of open "client/server" computing systems from various manufacturers. A client/server system is a network consisting of a "server" computer and one or more "client" computers in which processing, data storage and accessibility to data bases are shared among the individual computers comprising the network. The Company provides transformation services, utilizing the Company's migration software, and support services to end-users seeking to transform their closed proprietary systems to open client/server systems. BACKGROUND. Historically, the information technology ("IT") industry has lacked consistent industry standards. Major vendors of computer hardware and software products designed and sold proprietary products, which often were not compatible with those offered by other vendors. This had the effect of locking customers into a line of products offered by a single vendor controlled by a small number of specialized employees, which made changing to a competitive vendor, or the mixing and matching of products from a variety of vendors, extremely difficult or impossible. Over time, the inability of most computer manufacturers to provide all the software necessary to keep pace with the evolution of technology led to the adoption of cross-industry standard software and the advent of enterprise-wide "open" networks. These industry changes, combined with the demand for more competitive and cost effective systems, have caused a shift from the older proprietary systems (known as "legacy systems" in IT terminology) to open, client/server systems. The Company believes that the management of most large business organizations will migrate a substantial portion of their existing application software to client/server systems, because such systems are recognized as the best IT infrastructure for current business realities and objectives. International Data Corporation, an IT industry analyst, predicts that, in one form or another, 85% of application software will be client/server enabled by the Year 2000. The Company believes that most corporate information still resides on closed legacy systems, consisting of a centralized "mainframe" or mid-range computer and a group of remote "dumb" terminals (i.e., a keyboard and monitor, having no local processing power, used to enter 3 data into the central computer). Closed mainframe systems usually utilize MVS operating systems developed by IBM and "external binary coded decimal interchange code" computer languages to store and retrieve data. These types of older computer languages do not comply with the American Standard Code for Information Interchange ("ASCII," pronounced "Ask-Key"), a computer code which is the international standard for client/server systems. As compared to the newer open systems, legacy systems require a great deal of expertise to access, do not facilitate information sharing, are slow to access and are increasingly expensive to maintain. Users that decide to migrate to open client/server systems are faced with the problem that a significant percentage (the Company believes as much as 80%) of the proprietary code in existing application and data files is incompatible with the new open systems. Large organizations usually have many different types of computers utilizing many different operating systems and languages and different sets of data bases and files. The rapid deployment of client/server systems and desktop computers, which utilize Windows NT-Registered Trademark-, Windows 95-Registered Trademark-, Windows 3.x-Registered Trademark-, Novell NetWare -Registered Trademark- and OS/2-Registered Trademark- operating systems and languages, has created a communications barrier between mainframe computers operating on MVS and mid-range computers utilizing UNIX-Registered Trademark-, AS/400-Registered Trademark- and DEC operating systems, on the one hand, and client/server networks utilizing desktop computers, on the other. The Company believes that the ability of users to access mainframe and mid-range computer data and files has become a critical factor in an organization's daily operations. Different computing systems (and operating systems) must be able to communicate with each other. A complete re-write of legacy code for a mainframe computing system usually requires the transformation of millions of lines of code ("LOC"). A single computer programmer is generally capable of rewriting about 10 LOC per day, making this approach time-consuming, financially impracticable and uncertain of delivering a high-quality product. The Company believes that a large market has developed for software services which will enable mainframe and midrange computers to seamlessly connect to client/server systems. Existing applications and data that are important to an organization's operations must be transformed to a format that is compatible with the new open systems. Accordingly, there is a demand for transformation services that will automatically migrate a user's critical applications and data currently residing in legacy code, into code that is compatible with the new open client/servers systems. Traditional approaches to migration software have included "emulation" (sometimes called "re-hosting") and "conversion." Emulation moves application code and data to a new hardware system by simulating the original legacy environment by hardware or software means. Under the emulation approach, data is only accessible through legacy logic and, in essence, the new hardware simply mimics the old hardware. The conversion method essentially converts one legacy computer language to another (e.g. "RPG" to "COBOL") and runs in the same fashion as the original system with few architectural improvements or new benefits to the end-user. The Company believes that the emulation and conversion methods have been generally found to be unsatisfactory in meeting corporate objectives. 4 SERVICES OFFERED. The Company offers transformation services which enable companies to automatically migrate legacy application programs and data to any open system environment, using technology which the Company believes to be superior to that which is used in the emulation and conversion methods. The Company's software disassembles existing application source code at the operating system level, then automatically translates and reassembles the code so as to be useable in an open system environment. The Company's current migration software, the "TRANSFORM SERIES-TM-" suite, addresses the largest segment of the mid-range computer system market, the IBM mid-range computer market (having an "installed-base" of over 500,000 installations) and includes TRANSFORM/3X-TM-, which addresses the IBM System 34 and System 36 market, and the TRANSFORM/400-TM-, which addresses the IBM System 38 and IBM AS/400 market. Each of TPI's migration programs encompasses a battery of automatic code translators which transform legacy application source code into machine-independent code-components, except that certain application software functions originally coded for particular functions, such as telecommunications, graphics and office automation functions, may require manual adjustment and/or redesign of the program. Software that has been automatically transformed using the applicable Transform Series program and any software required to be manually transformed must be integrated to assure that the automatically converted software and the manually transformed software will function as a whole (the "Transformed Software"). The Transformed Software will only execute on a customer's client/server system in conjunction with the Company's software function support products, offered under the trademark ORB/400-TM- (also known as "Deployment Products"). The Deployment Products consist of software that permits Transformed Software to execute on the "server" computer ("Server Software") and software that permits users of the "client" computers to access Transformed Software available on the server computer ("Client Software"). The Company typically provides transformation and support services pursuant to a software conversion agreement. Such agreement provides that the Company will use its migration software to automatically transform the customer's legacy source code to a format that can be used by the customer's client/server system and, if necessary, will manually transform ("rewrite") any of the customer's legacy code that cannot be automatically transformed using the migration software. The customer has the option to separately perform manual transformation. If the customer elects this option, the Company disclaims responsibility for the integration of the automatically transformed software and the rewritten software. The pricing of software conversion agreements is dependent on the number of LOC to be converted. The median gross amount payable under a typical software conversion agreement for an IBM System 36 or AS/400 System would be approximately $500,000. Sales to smaller sites will range from $100,000 to $200,000 and larger agreements are expected to range from $700,000 to $1 million range. There can be no assurance that the Company will be able to price such agreements as anticipated. 5 The Deployment Products are made available to a customer pursuant to the software conversion agreement with such customer, provided the customer has executed the Company's form of Deployment Product license agreement, which licenses the customer to install one copy of the Server Software on its server computer and to install a specified number of copies of the Client Software on its client computers. A customer may install the Deployment Products on more than one computer system provided it executes a separate license agreement for each such computer system. Each license agreement provides for the payment of a one-time license fee and annual maintenance fees. Software support services, consisting of advice and assistance in the use of the Transformed Software and the Deployment Products and the correction of defects in the execution of the such software, are available under each software conversion agreement by telephone without additional charge during the 90 days following delivery of the Transformed Software to the customer. Thereafter, support services are provided without additional charge so long as the annual maintenance fees under the applicable license agreement are current. Otherwise, customers requesting support services are charged TPI's applicable hourly rate for professional services. The Company also offers other professional services in connection with a customer's migration from a legacy system to a client/server system, including consulting services to assist in the selection of the optimum client/server environment and/or the implementation of a physical assets (computer hardware) management system; education as to client/server systems; and network and software skills training. These additional services are provided under the Company's form of professional services agreement either at the Company's applicable hourly rates for such services or a negotiated fee. Also, see "GROUPWARE SERVICES" below. BUSINESS STRATEGY. While the Company is offering its transformation and support services directly to end-users, the Company believes that the largest percentage of its revenues will be generated by providing transformation services to IT vendors in the hardware, database and application software sectors of the IT industry ("IT Vendors"). Such IT vendors have many strategic partners who can enhance their revenue potential by utilizing the Company's services to facilitate end-user migration to, and the installation of, their products. To implement this strategy, TPI plans to negotiate formal strategic alliances with important IT Vendors having a vested interest in the migration from IBM mid-range computer systems; to perform technology reviews with such IT Vendors; participate in the first migration project with each such IT Vendor; and gain access to, and acceptance from, strategic partners of such IT Vendors by seeking to successfully complete each such project. There can be no assurance that TPI will be able to successfully implement this strategy or that the implementation of such strategy will generate significant revenues or income. As discussed above, TPI's current transformation services address the IBM mid-range computing device marketplace. The Company expects this marketplace to be large enough to sustain TPI's business objectives for many years to come. However, to assure long-term growth, 6 TPI will have to enter the transformation processing market for mainframe computing systems. The offering of services to facilitate migration from mainframe systems would increase TPI's market. Currently, TPI plans to enter this market by identifying the best software migration toolsets developed by third parties and seeking to obtain licenses to either use such software to perform transformation services for mainframe customers and/or to customize and remarket such tool-sets to mainframe customers. The Company has not yet identified such software tools. MARKETING AND SALES. The Company believes that the following factors will assist it to implement its business strategy: (a) customer demand to move toward client/server systems appears to the Company to be strong and customer awareness of the Year 2000 problem has focused attention on the need to address problems inherent in legacy systems (see "YEAR 2000 REMEDIATION SERVICES," below); (b) the Company believes, based on its knowledge of the industry, that no competitor's migration software transforms legacy code to a client/server format in as rapid, comprehensive and effective a method as the Company's software; (c) the Company believes that if it positions itself as a provider of transformation services in the migration process and as a facilitator for strategic partners to sell their own products, the Company will not be perceived as a competitive threat to the major IT Vendors with whom the Company may desire to negotiate strategic alliances; and (d) the marketplace is easily identified and targeted in terms of end-users. Given these factors, TPI expects to generate revenues from services and software licenses as the result of service agreements with end-users and strategic alliances it expects to enter into with major IT Vendors. TPI hopes to generate awareness of its services through the efforts of its in-house sales force and outside sales representatives; implementation of its referral program (described below); direct mail, especially to independent software vendors; advertising in publications that are focused on TPI's market (e.g., NEWS/400); targeted advertising, broadcasting and corporate/services message delivery on the Internet. The amount of time required to close a software conversion agreement for a client/server migration project (from the time of submission of a proposal to the prospective customer to execution of the contracts) varies depending on the configuration of the customer's legacy system, the number of LOC to be transformed and the target client/server system. Typically, a large project takes longer to close than a smaller project. The Company anticipates that the sales cycle for most of its client/server migration projects will be from three to four months. 7 The Company anticipates that the sizes and volumes of its software conversion agreements will increase over time as initial projects are secured and completed and can serve as reference sites to validate the performance and functionality of the Company's services and software for prospective customers (the "Referral Program"). The Company anticipates that its Referral Program will result in shorter closing times for agreements and increased market penetration. To date, the Company has entered into five software conversion agreements, of which two have been completed and three are in the process of being performed or are awaiting performance. There can be no assurance that the Company will obtain any agreements through implementation of its Referral Program. See "YEAR 2000 REMEDIATION SERVICES - MARKETING AND SALES" as to Company's plan to use Year 2000 projects to cross-sell post-Year 2000 client/server migration projects. The Company's sales force currently consists of four sales persons who are employees and report to the Company's Vice-President-Sales. Such employees are compensated on a salary plus commission basis. To augment its sales force, the Company has entered into Referral Program agreements with MCW Business Systems Ltd. ("MCW"), a company that provides sales representation services in Canada, and Y2K Plus Inc. ("Y2K"), a company that provides sales representation services in the United States. Under such agreements, MCW and Y2K personnel will receive extensive training relating to TPI services. MCW and Y2K use an "account management team" approach to the provision of hardware, software and professional services and have committed to offering TPI services through account executives located throughout Canada and the United States. The Referral Program agreements provide that each of MCW and Y2K will be compensated based on a percentage of the fees charged for referrals of new customers that result in the execution of service agreements with such customers which are fully performed by TPI. YEAR 2000 REMEDIATION SERVICES The Company offers Year 2000 remediation consulting and training services to commercial and industrial end-users of mainframe and mid-range computing systems. Currently, the Company is targeting manufacturing companies and companies in the financial, insurance and healthcare industries. BACKGROUND. Adding impetus to the demand for transformation services has been the inability of many computer systems to properly interpret dates for the Year 2000 and beyond. This is a pervasive, time-critical problem confronting the computer user community as a whole. The essence of the problem is simple. System components that store the year within a date as a two-digit number (a standard even in client/server systems) are unable to properly process transactions with dates beyond 1999. Many application programs that use projected dates are failing at present, and without timely and apt management of this problem, entire computer systems could be adversely affected. Year 2000 remediation is, in essence, a mammoth project that has been avoided or ignored for the past 20 years. A mid-range computer utilizes one to two million LOC, while many mainframe computers utilize tens of millions of LOC. If such code is to be utilized in the Year 2000 8 and thereafter, it all must be scanned and date impacted LOC must be "repaired." The Securities and Exchange Commission ("SEC") has estimated that the cost to U.S. corporations to resolve the problem to be in excess of $600 billion. The entry of TPI into the Year 2000 remediation services business was a natural adjunct to its client/server migration software business. SERVICES OFFERED. In March 1997, the Company decided to offer Year 2000 remediation services. The Company initially decided to offer "scan and repair" services to companies requiring Year 2000 remediation services, as a subcontractor to IT Vendors providing Year 2000 project management remediation services. Such services were to be rendered commencing in September 1997 at a scan and repair "factory" to be located at the Company's facility in Mississauga, Ontario. The decision was also made not to develop a Year 2000 conversion tool set based on the Company's existing proprietary technology, but to continuously search for, and seek to license, the best available Year 2000 software remediation tools. More recently, the Company has observed that while there is no shortage of Year 2000 software conversion tools, there is a significant demand for the application of state-of-the-art project management methodologies that permit Year 2000 conversion projects to be performed in the shortest possible time, in some cases at a fixed cost, and with the least disruption to a customer's continuing operations. Accordingly, the Company decided to offer a full range of services, based largely on the project management methodology it employs in providing client/server transformation services. The Company now offers the following Year 2000 remediation services: Rapid Assessment and Delivery for Year 2000-SM- ("RAD/2000"), which involves the application of an accelerated project management methodology and the best available software tools (as determined by the Company) to assess, remediate, deliver and test Year 2000 compliant systems in 60 to 90 days cycles, using small groups or "cells" of software professionals working in parallel on desktop computers (rather than on the customer's mainframe or mid-range computing system) to achieve assessment and remediation of the application source code. This solution is "iterative" in that knowledge gained from each phase of remediation, delivery and testing will be continuously used to refine the assessment phase of a project plan. Mobile Lab/2000-SM-, which involves the establishment at a customer's premises, within a period of six weeks, for a fixed price, of a Year 2000 remediation facility specifically designed to meet the customer's Year 2000 requirements. The center can be connected to a customer's net work or established as an independent group, using the customer's newly acquired existing technology, and have the customer's staff support the project or have the Company manage the project. The Company believes that the fixed cost of this solution will be attractive to most customers because over the next two years the demand for Year 2000 remediation services will far exceed the supply and the price for such services will rise significantly as January 1, 2000 gets closer. In addition, the Mobile/Lab 2000 solution does not require the removal of application source code and data from the customer's premises. 9 Boot Camp/2000-SM- is a five week training course offered by the Company, that can be conducted at the Company's facility in Mississauga, Ontario or at a customer's premises, for the purpose of training the customer's existing IT personnel to support the customer's Year 2000 project. The course involves four weeks of classroom training and one week of apprenticeship training in the application of the Company's RAD/2000-SM- methodology and licensed software tools to the customer's Year 2000 project. The Company believes that this is the appropriate solution for customers that cannot recruit a sufficient number of already qualified personnel to staff its Year 2000 project. Mobile Lab/2000-SM- and Boot Camp/2000-SM- are based on the concept that, wherever possible, existing technology and personnel should be deployed while maintaining a reasonable cost structure. The Company has entered into a strategic affiliation arrangement with Allegiant Legacy Solutions, Inc. ("ALS") pursuant to which the Company licenses the right to use and sublicense the use of Adapt 2000-TM- software remediation tools developed by ALS. The Company is authorized under its agreements with ALS to use the Adapt 2000 software to perform Year 2000 remediation services and to relicense the software to end-users at such license fees as the Company may determine. If the Company utilizes Adapt 2000 to perform Year 2000 remediation services it is obligated to process a minimum of two million LOC per year for a three year period at each site at which it performs remediation services and to make quarterly royalty payments to ALS based on the number of LOC processed. If the Company sublicenses the Adapt 2000 software it is required to pay ALS 50% of the scheduled LOC fee and 50% of ALS's listed one-time license fee of $12,900. The Company has also entered into an informal strategic alliance with Deevan Computer Services Inc. ("Deevan"), an IT consulting company that provides asset management services to end-users, to offer hardware evaluation and procurement services under the name Asset/2000-SM-. Deevan has informed the Company that 60% of the computer hardware currently in use is not Year 2000 compliant and must be either replaced or repaired and that 10% of existing hardware cannot be repaired. Deevan will offer Year 2000 computer hardware evaluation, procurement and installation services in conjunction with the software remediation services offered by the Company. BUSINESS STRATEGY. The Company's strategy is to successfully position itself as a provider of Year 2000 remediation services over the next 24 months so as to take advantage of what the Company deems to be a significant opportunity to attain accelerated growth, which would be difficult to attain under normal IT industry conditions. Over such period, the Company estimates that revenues generated by Year 2000 remediation services will represent in excess of 50% of gross revenues. There can be no assurance, however, that the Company will be able to successfully implement this business strategy or, if it is able to gain a share of the Year 2000 services market, that it will realize the anticipated growth in revenues. 10 MARKETING AND SALES. The Company intends to implement substantially the same marketing and sales plan described under "CLIENT/SERVER MIGRATION SERVICES - MARKETING AND SALES" above to access the market for Year 2000 remediation services, e.g., the Company will seek to utilize strategic business relationships with IT Vendors and the implementation of its Referral Program to access the market. The Company believes also, that to the extent it is selected to perform major Year 2000 remediation projects and successfully completes such projects, it will be in a preferred position to be selected to perform post-Year 2000 client/server migration projects by the same customers, by reason of knowledge of the computer systems and businesses of such customers gained by the Company in performing such projects, and by prospective customers, based on the Company's demonstrated ability to successfully implement major conversion projects. However, there can be no assurance that the Company will be selected to perform any major Year 2000 remediation projects or, if selected, that it will be able to successfully implement such projects. Moreover, there can be no assurance that the Company will be selected to perform any major post-Year 2000 projects. GROUPWARE SERVICES Groupware is a type of software designed to allow users on a client/server network to use the same software and work on the same project at the same time. Notes-Registered Trademark- ("Notes") is a groupware product of Lotus Development Corporation, an IBM subsidiary ("Lotus"), that, among other applications, allows users to work on the same document and exchange electronic mail. Notes permits the integration of information from desktop computer applications, relational databases, legacy systems and the World Wide Web. Notes contains an application development environment, a document database and sophisticated messaging system which permit the development of custom applications for improving business processes in areas such as product development, customer service, sales and account management. The Company has entered a "business partner" agreement with Lotus, pursuant to which the Company has been designated a "Consultant." As a Consultant, the Company undertakes to promote the sale of Lotus products and is authorized to provide business process or technology consulting and custom application development services using Lotus technologies. As a business partner, the Company is required, among other things, to be using Lotus products internally, be connected to Lotus electronically via the Lotus Notes Network/Partner Information Network and have a "certified Lotus professional" on staff. Lotus provides the Company with software development tools, information, marketing services and support . The Company has also entered into a value-added reseller agreement with IntellAgent Control Corporation ("ICC"), a provider of sales force automation software, which has appointed the Company as a non-exclusive distributor in the United States for such software, which runs on Lotus Notes. Such software includes artificial intelligence-like features which enables the marketing and sales personnel of an organization to obtain the latest data concerning a customer or sales prospect stored in any database on the organization's enterprise-wide computer system. The Company has acquired a license for such software product from ICC and the right to grant 11 sublicenses of the product, and provide custom application development and support services with respect to such product to end-users. Groupware services consist of consulting, analysis, custom application software development and implementation of Notes software solutions and specific application programs which operate in the Notes environment and the training of customer personnel in the use of such software. In this connection, the Company has entered into a professional services subcontracting agreement with GE IT Solutions/Universal Data Consultants ("UDC") pursuant to which the Company has agreed to provide classroom instruction and related professional services, as a subcontractor of UDC, to end-users with whom UDC has prime groupware development contracts. The services to be provided by the Company under a particular prime contract are to be specified in a statement of work to be executed by UDC and the Company, which statement of work will specify the amounts or rates of compensation for the Company's performance of such services as well as other specific terms and conditions applicable to the Company's performance of the services. Each subcontracting agreement is terminable by either party on 30 days prior written notice and UDC may terminate the services to be performed by the Company at any time upon written notice to the Company. To date, the Company has completed 14 subcontracts under the subcontract agreement and is in the process of performing nine subcontracts. Groupware services are rendered under the Company's form of professional services agreement at fees based on time and materials estimated to be expended by the Company in the performance of such services plus a reasonable profit. BUSINESS STRATEGY. Since the Company's core business is to assist customers to migrate to open client/server systems, the Company believes it can enhance its ability to attract customers for its core business and increase its revenues by assisting such customers with the development of application software that can greatly enhance the use and productivity of their client/server systems. The Company believes that the rights it has obtained under its agreements with Lotus and ICC will enable it to implement such strategy. MARKETING AND SALES. The Company intends to implement substantially the same marketing and sales plan described under "CLIENT/SERVER MIGRATION SERVICES -- MARKETING AND SALES" above. TPI is currently developing a sales strategy and partnering plan with ICC which the Company believes will increase its Notes sales force automation software business. The Company anticipates that sales referrals will come from both ICC, the Toronto offices of Lotus and the implementation of its Referral Program. In addition, the Company intends to sponsor information seminars to create interest and generate sales leads. BACKLOG Since the Company is primarily a provider of services, it does not deem purchase order backlog to be material to its operations. 12 COMPETITION The market in which the Company competes is characterized by intense competition. The Company faces competition from other providers of computer-related services, most of which have significantly greater financial, technological, marketing and personnel resources than the Company. In addition, the Company believes that the significant size of the market for legacy code transformation services and Year 2000 remediation services will lead to the emergence of a number of additional competitors. The Company's competitors include Keane Computer, IBM, Cap Gemini, Viasoft Solutions, LGS Group and many others. There are currently over one hundred companies providing Year 2000 remediation services in the United States and Canada. Most do not offer the range of services which the Company offers but only one or two discrete services. Moreover, there is a consensus in the IT industry that the demand for Year 2000 remediation services is so great, and the available remediation resources are so limited, that all of the necessary remediation cannot be completed by January 1, 2000. The markets for computer-related services are characterized by rapidly changing technology and evolving industry standards, often resulting in the obsolence of software and related services or short life cycles for software and related services. While the Company is not currently aware of any competitor offering client/server migration services that transforms legacy codes to a format usable in client/server systems as rapidly and comprehensively as the Company's software, the development of technologies that might adversely affect the market for client/server systems or that permit the development of software that outperforms the Company's software could have a material effect on the Company's potential market share and revenues. The Company believes that it competes on the basis of the value to its markets of its proprietary software and project management methodology and its comprehensive offering of computer-related services. Furthermore, the Company is constantly seeking to acquire and develop new services and products and to further develop and enhance its existing software. The Company's success will depend on its continued ability to provide needed information technology and to successfully market its services. INTELLECTUAL PROPERTY In July 1996, TPI-Ontario acquired the intellectual property rights for "IBM midrange migration tools" software from Vladimir Stepanoff, Vice President - Technology and a director of the Company. All enhancements of such software are wholly owned by the Company. Prior to April 1, 1996, the Company's date of incorporation, Mr. Stepanoff entered into an agreement with Raconix Corporation ("Raconix") pursuant to which he granted certain rights in such technology. To obtain clear title to such technology, as of the Closing Date, the Company issued 455,000 shares of Common Stock to Jaford Holdings Ltd. and 100,000 shares of Common Stock and a promissory note in the principal amount of $72,500 to Innovations Ontario Corp. (which companies had liens on such marketing rights) and 150,000 shares of Common Stock and a promissory note in the principal amount of $116,000 to Ronald Content as successor in interest to Raconix. See Notes 1 and 4 of the Notes to the Audited Financial Statements. The Company does not have any patents or registered copyrights to protect its proprietary technology. In addition, none of the trade or service marks utilized by the Company are registered with any United States or foreign trademark registry. The Company employs various methods to protect its technology and the associated documentation including confidentiality agreements with its employees and license agreements with its customers and strategic partners. Such methods may not afford adequate 13 protection and there can be no assurance that others will not independently develop such technology or software incorporating technology that significantly out performs the Company's software. EMPLOYEES The Company has 30 employees, all of whom are full-time, of which five are executive officers, four are engaged in marketing and sales, three are engaged in administration and the balance are technical personnel engaged in providing the Company's computer-related services. The Company considers its relations with its employees to be satisfactory. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion should be read in conjunction with the Company's audited financial statements as of July 31, 1997 and for the period from April 1, 1996 (date of incorporation) to July 31, 1997 (the "1997 Fiscal Period") and the notes thereto and the Company's unaudited financial statements as of October 31, 1997 and for the three month periods ended October 31, 1996 and October 31, 1997 and the notes thereto, all of which financial statements are included elsewhere in this Form 10-SB. RESULTS OF OPERATIONS Results of operations for the period April 1, 1996 to July 31, 1996 were not material. Accordingly, the Company has reported results of operations for the 16 month period from April 1, 1996 to July 31, 1997 (the "1997 Fiscal Period"). Operations actually commenced in October 1996, when the Company moved into the facility it currently occupies. See Item 3, "Description of Property." 14 NET LOSSES. For the three months ended October 31, 1997 and 1996, the Company incurred net losses of $352,831 and $1,771,550, respectively. For the 1997 Fiscal Period, the Company incurred a net loss of $2,784,536. Cumulative losses for the period April 1, 1996 through October 31, 1997 (the "Development Period") were $3,058,133. A discussion of these results follows. The Company expects to continue to incur operating losses until such time, if ever, as it generates substantial revenues from the performance of its service offerings. REVENUE. For the three months ended October 31, 1997, the Company's revenue was $88,820, as compared to $20,335 for the same period in 1996. Of the $88,820 of revenue, $44,772, or 50%, was derived from the performance of groupware services and $43,084, or 49%, was derived from the performance of transformation services. Revenue for the 1997 Fiscal Period was $47,317. While no revenue was derived from the performance of Year 2000 remediation services during such periods, the Company expects, during the balance of the fiscal year ending July 31, 1998 ("Fiscal 1998"), to generate revenue from the performance of Year 2000 remediation services and to increase revenues from the performance of transformation services. There can be no assurance that the Company's expectations will be realized. The Company expects to generate revenue from (a) the performance of (i) transformation services for end-users of IBM midrange computing systems and application software development services related to client/server migration; (ii) Year 2000 consulting, analysis, remediation and training services; and (iii) groupware services, consisting primarily of the performance of application software development services relating to Lotus Notes and ICC products and related instructional services; and (b) the licensing of the Company's proprietary software and ICC software products. During the autumn of 1996, the Company positioned itself to market transformation services utilizing the Company's client/server migration software, targeting the IBM mid-range computer market. In this connection, the Company planned to enhance its client/server migration software in the 1997 Fiscal Period. Such plan received less attention during such period, however, as the Company directed its attention to the opportunity presented by the demand for Year 2000 remediation services. Because of the scope of the Year 2000 problem and the significant dollar volumes expected to be expended by users of IT to remediate the problem, the Company has shifted its marketing and sales efforts to promoting Year 2000 remediation services. The Company has negotiated relationships with a vendor of Year 2000 software conversion tools and a company providing computer hardware assessment services to support these efforts. By April 1997, the Company was offering Year 2000 remediation services. The Company has entered into agreements with Canadian and United States sales representation companies to implement the Company's marketing and sales strategies. Currently, the Company is bidding on Year 2000 remediation projects ranging in size from $100,000 to $1,000,000. There can be no assurance that the Company will enter into firm contracts with respect to any of such projects. EXPENSES. The Company is in the development stage and since April 1, 1996 has incurred costs relating to the startup of operations, such as the costs of raising capital, establishing a facility, 15 recruiting personnel, acquiring and installing furniture and equipment, acquiring development and accounting software, developing its client/server migration software and marketing and sales efforts. For the three months ended October 31, 1997 and 1996 and for the 1997 Fiscal Period, total costs and expenses were $441,164, $1,792,113 and $2,832,978, respectively. Cumulative costs and expenses for the Development Period were $3,193,531. For the three months ended October 31, 1997 and 1996 and for the 1997 Fiscal Period, costs of consulting services were $22,631, $6,891 and $11,271, respectively. The cumulative cost of consulting services during the Development Period accounted for $33,311, or 1%, of cumulative costs and expenses during the Development Period. The Company expects managed growth in the provision of consulting services as personnel are added to provide such services to the Company's customers. For the three months ended October 31, 1997 and 1996 and for the 1997 Fiscal Period, costs of software transformation services were $93,753, $64,293 and $192,729, respectively. Cumulative cost of software transformation services during the Development Period accounted for $280,998, or 9%, of cumulative costs and expenses during the Development Period. The Company hired five employees to provide transformation services during the three months ended October 31, 1997 and anticipates hiring another 10 to 15 employees by July 31, 1998, the end of Fiscal 1998. The rate of growth will depend on the volume of transformation services and Year 2000 remediation services being provided by the Company. The costs of software development for the three months ended October 31, 1997 and 1996 and for the 1997 Fiscal Period were $50,242, $18,518 and $218,212, respectively. The cumulative cost of software development during the Development Period has accounted for $262,245, or 8% of cumulative costs and expenses during the Development Period. The Company intends to continue to incur software development costs to enable it to offer client/server migration services which targets a broad range of client/server systems. The cost of software development is expected to increase as the Company seeks to further develop and enhance its client/server software. The Company believes that the development of translators to transform application source code from any type of machine language to a format useable on any client/server system will serve as the benchmark of the Company's ability to respond effectively to end-user requirements. The Company relates the variable costs of consulting services, transformation services and software developments to revenues. The Company believes that, as a percentage of revenues, these costs will vary due to the nature of the project and the specific services required to satisfy customer requirements. The Company anticipates that revenues based on a mature service offering (e.g. client/server migration services) will yield a higher profit margin, while Year 2000 remediation and groupware development projects may require a higher degree of manpower and travel costs. Transformation services and Year 2000 remediation services are based on the number of LOC to be processed or repaired, while consulting and application software development services are provided on time and materials basis to assure profitability. 16 For the three months ended October 31, 1997 and 1996 and for the 1997 Fiscal Period, general and administrative expense were $274,808, $204,293 and $874,425, respectively. Cumulative general and administrative expense during the Development Period accounted for $1,118,859, or 35%, of cumulative costs and expenses during the Development Period. General and administrative expenses consisted primarily of salaries and benefits, consulting fees, travel, investor and public relations, office and equipment rents, professional services, office and telephone expense. The Company believes that it may incur significant costs related to the registration of its Common Stock under Section 12 of the Securities Exchange Act of 1934, as amended. Such status may increase professional fees significantly and the cost of investor relations may increase as reports and other investor information are required to be filed with the SEC or otherwise made publicly available. The Company anticipates that general and administrative expenses (as a percentage of total costs and expenses) will decline as the Company's operations expand. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its activities through October 31, 1997 primarily from the net proceeds of private placements of its securities and, to a lesser extent, from cash flow from operations and the proceeds of two bank loans. The outstanding principal balance of the loans is currently approximately $35,500 and the loans bear interest at an annual rate equal to 2.5% over the bank's prime rate of interest in effect from time to time (currently 4.25%). The loans are payable in monthly installments aggregating $2,959 and mature on January 30, 1999. Repayment of the loans, together with interest thereon, is secured by a lien on substantially all of the assets of the Company and repayment of the loan is guaranteed by the Company's executive officers and directors. As of October 31, 1997, the Company had a deficit accumulated during the development stage of $(3,137,365), working capital of $301,460 and available cash of $95,866. In addition, the Company's auditors, in their report on the Company's financial statements as of July 31, 1997 and for the 16 months then ended, have expressed substantial doubt as to the Company's ability to continue as a going concern if the Company is unsuccessful in obtaining additional financing. The Company expects to expend approximately $600,000 during the next nine months related to the recruitment of additional personnel, the leasing of additional space, the acquisition of additional computer hardware, the implementation of a marketing and sales program for Year 2000 remediation and groupware services and software development. The Company plans to apply cash flow from operations and the net proceeds of private placements of the Company's securities to fund such expenditures until such time, if ever, as cash flow is sufficient to fund the Company's operating capital requirements. The Company may, if necessary, seek to obtain a credit facility to finance its expansion plans. In addition, implementation of the Company's business plan subsequent to such nine month period will require capital resources substantially greater than those currently available to the Company. The Company may determine, depending upon the opportunities available to it, to seek additional debt or equity financing to fund the cost of continuing expansion. To the extent that the Company finances expansion through the issuance of additional equity securities, any such issuance would result in dilution of the interests of the Company's stockholders. Additionally, to the extent that the Company incurs indebtedness or issues debt securities to finance expansion activities, it will be subject to all of the risks associated with incurring substantial indebtedness, including the risks 17 that interest rates may fluctuate and cash flow may be insufficient to pay the principal of, and interest on, any such indebtedness. The Company has no current arrangements with respect to, or sources of, additional financing, and it is not contemplated that its existing stockholders will provide any portion of the Company's future financing requirements. There can be no assurance that any additional financing will be available to the Company on acceptable terms, or at all. The inability of the Company to obtain financing when needed will have a material adverse effect on the Company, including possibly requiring the Company to significantly curtail or cease its operations. INFLATION The Company believes that the impact of inflation and changing prices on its operations since commencement of operations has been negligible. SEASONALITY The Company does not deem its revenues to be seasonal. Nevertheless revenues may be affected by the budgeting practices of corporate end-users of IT. Such companies tend to make IT expenditures early in their fiscal year, when new budgets have been approved, or late in their fiscal year, to protect previously budgeted expenditures. In addition, the performance of Year 2000 remediation services may reduce the amount of revenues the Company would otherwise generate from the performance of client/server migration services and affect the Company's ability to service such business. The Company believes that the potential reduction of client/server migration revenues will be more than offset by revenues generated by the performance of Year 2000 remediation services and the opportunity to cross-sell other services to consumers of Year 2000 remediation services. ITEM 3. DESCRIPTION OF PROPERTY The Company leases approximately 5,477 square feet of office and production space (the "Leased Premises") in Mississauga, Ontario under a lease expiring on September 30, 2001 at an annual base rental of approximately $23,000 plus additional rent equal to real estate taxes, utility and operating costs allocable to the Leased Premises. The Company has the option to extend the lease for an additional 60 month term upon written notice to the landlord given at least six months' prior to the expiration of the current term of lease at a rental equal to the greater of the annual base rent for the original term and the market rent for the Leased Premises prevailing at the time the option is exercised. The Company has the right to terminate the lease at any time after the 36th month of the original term by giving the landlord at least nine months' prior written notice and paying the landlord approximately $18,000. 18 ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of February 20, 1998, with respect to the beneficial ownership of the Company's outstanding Common Stock by (i) each person known by the Company to be the owner of the more than 5% of such outstanding Common Stock; (ii) each director; (iii) the executive officer named in the Summary Compensation Table (see Item 6, "Executive Compensation"); and (iv) all directors and executive officers as a group:
NAME AND ADDRESS AMOUNT AND NATURE OF OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP PERCENTAGE OF CLASS (2) - ---------------- --------------------- ------------------- Joter Holdings 4,936,050(3) 32.0 Diversified Technologies Ltd. 965,000(3) 6.3 Vladimir Stepanoff 1,633,683(3) 10.6 Paul G. Mighton 1,633,683(3) 10.6 Gary G. McCann 1,633,684(3) 10.6 John G. McGee 1,000,000(3) 6.5 All directors and executive officers as a group (5 persons) 5,901,050(3) 38.3
- -------------------- (1) Unless otherwise noted, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. Each such person is deemed to be the beneficial owner of shares of Common Stock held by such person (but not held by any other person) on February 20, 1998, and any shares of Common Stock which such person has the right to acquire pursuant to securities exercisable or exchangeable for, or convertible into, Common Stock, within 60 days from such date. At such date, none of such persons held any options, or warrants to purchase Common Stock or securities exchangeble for or convertible into Shares of Common Stock. The address of each beneficial owner is in care of the Company, Suite 200, 2121 Argentia Road, Mississauga, Ontario, Canada. (2) Based on 15,418,505 shares of Common Stock outstanding at the close of business on February 20, 1998. (3) Joter Holdings ("Joter") is a proprietorship, of which Gary G. McCann is the proprietor. Joter holds the following shares of Common Stock as nominee for Paul G. Mighton, Gary G. McCann, Vladimir Stepanoff and John G. McGee, executive officers and directors of the Company: 1,392,433 shares, 1,392,434 shares, 1,392,433 shares, and 758,750 shares, respectively. The shareholders of Diversified Technologies Ltd., a British Virgin Islands corporation ("DTL"), are Paul G. Mighton, Gary G. McCann, Vladimir Stepanoff and John G. McGee. DTL holds the following shares of Common Stock as nominee for Messrs. Mighton, McCann, Stepanoff and McGee: 241,250 shares, 241,250 shares, 241,250 shares and 241,250 shares, respectively. 19 ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS Set forth below are the names of all directors and executive officers of the Company along with certain information relating to the business experience of each of the listed directors and officers.
NAME AGE POSITION - --------------------------- ------- ------------------------------ PAUL G. MIGHTON 45 CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER DOUGLAS WOOLRIDGE 39 PRESIDENT AND CHIEF OPERATING OFFICER GARY G. MCCANN 46 EXECUTIVE PRESIDENT, SECRETARY AND A DIRECTOR VLADIMIR STEPANOFF 56 VICE PRESIDENT - TECHNOLOGY AND A DIRECTOR JOHN G. MCGEE 47 VICE PRESIDENT - FINANCE AND CHIEF FINANCIAL OFFICER
PAUL G. MIGHTON served as Chairman of the Board of Directors and Chief Executive Officer of TPI-Ontario from its date of incorporation in April 1996 until TPI-Ontario was merged into the Company in February 1998 and has served in the same positions with the Company since August 1996. From February 1995 to June 1996, Mr. Mighton served as Executive Vice President and Chief Operating Officer of Agensys Canada Limited ("ACL"), an IT company. From April 1993 to February 1995, he served as a Vice President of Co-Operators Data Services Canada Ltd., a provider of IT services, in its Systems Services Division. From 1991 to April 1993, Mr. Mighton was National Director of the Healthcare Systems Division of Information Systems Management Corporation, a provider of data processing services to health care organizations. DOUGLAS WOOLRIDGE has served as President and Chief Operating Officer of the Company since September 1997. From July 1994 to July 1997, he served as Chief Information Officer for The R-M Trust Company, a Canadian financial services provider. From August 1992 to June 1994, Mr. Woolridge served as the director of IE Consulting Inc., an independent management consulting firm ("IE"). From August 1989 to August 1992, he served as a consulting manager for the IT consulting practice of IE. GARY G. MCCANN has Served as Executive Vice President of the Company since September 1997 and as a director since August 1996. From August 1996 to September 1997, he served as President and Chief Operating Officer of the Company . From February 1996 to August 1996, Mccann was involved in the founding and organization of TPI- Ontario. From July 1995 to February 1996, he served as President and a director of Mantis Information Technology Ltd., a privately held provider of IT consulting and support services. From December, 1994 to April 1996, Mr. Mccann Served as Vice President, Technology and Business Development of ACL. From July 1991 to December 1994, Mr. Mccann served as a general manager of Sykes Enterprises Inc. of Canada, the Toronto-based subsidiary of a United States company engaged in providing computing 20 systems integration services ("SEIC") and from July 1992 to December 1994, he also served as a Vice President of Sykes Enterprises, Inc., the parent of SEIC. Mr. Mccann holds a Bachelor of Commerce degree in finance and accounting from the University of Windsor, Ontario, Canada. VLADIMIR STEPANOFF has served as Vice President-Technology and a director of the Company since August 1996 and held the same positions with TPI-Ontario from April 1996 until it was merged into the Company in February 1998. From April 1994 to August 1996, he served as President and director of Cyberplan Inc., a Canadian-based company engaged in the development and licensing of automatic transformation software. Mr. Stepanoff was the founder of Cyberplan, Inc., which was the successor to Cyberplan Enrg., a firm of which Mr. Stepanoff was the sole proprietor from 1984 to April 1994. Cyberplan Enrg. developed the transformation software which Cyberplan Inc. continued to develop and license. Mr. Stepanoff has a Bachelor of Science Degree (with Honors) in mathematics and physics from the University of British Columbia. JOHN G. MCGEE has served as Vice President-Finance and Chief Financial Officer of the Company since October 1996. From May 1991 to October 1996, he served as President and Chief Executive officer and was the principal stockholder of Equitable Lease Corporation, an Ontario, Canada equipment leasing company. All directors hold office until the next annual meeting of stockholders of the company and the election and qualification of their respective successors. Directors currently receive no cash compensation for serving on the Board of Directors. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. ITEM 6. EXECUTIVE COMPENSATION The following table sets forth all compensation for all services rendered to the Company during the Company's fiscal year ended July 31, 1997 by the Company's Chief Executive Officer. No other executive officer of the Company received annual salary and bonuses in excess of $100,000 during Fiscal 1997.
ANNUAL COMPENSATION ---------------------------- NAME AND OTHER ANNUAL PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION - ------------------ ---- ------ ----- ------------ Paul G. Mighton, Chairman of the Board 1997 $79,264 -0- -0-* and Chief Executive Officer
* The cost to the Company of personal benefits, including premiums for life insurance and any other perquisites, to such executive does not exceed 10% of such executive's annual salary and bonus. 21 COMPENSATION OF DIRECTORS No compensation is paid by the Company to any of its directors for services in such capacity. Currently, all of the Company's directors are executive officers of the Company. EMPLOYMENT CONTRACTS On January 1, 1997, the Company entered into employment agreements with each of Messrs. Paul G. Mighton, Gary G. McCann, Vladimir Stepanoff and John G. McGee, the Company's executive officers. Such agreements do not provide for a fixed period of employment and provide that an employee's employment may be terminated at any time, without notice, for "cause" (as defined in each agreement), or at any time, upon at least 30 days prior notice, the Company or the employee may terminate such employment, and, without notice upon payment of six months base salary and certain other amounts to the employee, the Company may terminate such employee's employment. The agreements provide for participation in employee benefit programs, vacation and reimbursement of expenses, including for use of the employee's vehicle. Each of the agreements contains provisions prohibiting the employee from competing with the Company for a period of six months following termination of employment and from disclosing confidential information of the Company while employed by the Company and thereafter. Mr. Mighton's employment agreement provides that he will be paid an annual salary of approximately $110,000; Mr. McCann's employment agreement provides that he will be paid in annual salary of approximately $95,000; Mr. Stepanoff's employment agreement provides that he will be paid an annual salary of approximately $66,000; and Mr. McGee's employment agreement that he will be paid an annual salary of approximately $88,000. Douglas Woolridge, the Company's President and Chief Operating Officer, has entered into an agreement with the Company pursuant to which he currently receives an annual salary of approximately $62,000. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In consideration for the transfer to the Company of the ownership interest in certain technology and certain services provided to the Company, the Company issued 4,936,050 and 965,000 shares of Common Stock to Joter and DTC(1), respectively, which hold such shares as nominees for the benefit of the following executive officers and directors of the Company: Paul Mighton, Gary G. McCann, Vladimir Stepanoff and John McGee. See Item 4, "Security Ownership of Certain Beneficial Owners and Management." From August 1, 1996 through July 11, 1997, the Company made advances to Messrs. Paul G. Mighton, Gary G. McCann and Vladimir Stepanoff, executive officers, directors and principal stockholders of the Company aggregating $115,227. On July 31, 1997, Messrs. Mighton, McCann and Stepanoff executed demand promissory notes payable to the Company in the respective principal amounts of $61,452, $37,829 and $15,946, representing the aggregate amounts borrowed by such persons from the Company. The notes bear interest at the annual rate of 4%. The Company has paid for the account of Mantis Information Technology Ltd ("Mantis"), a corporation of which Gary G. McCann is the sole stockholder, certain obligations for consulting services incurred by Mantis and has rendered invoices to Mantis in the aggregate amount of approximately $12,000 for funds advanced. As of the date hereof, such invoices remain outstanding. Messrs. Mighton, McCann, Stepanoff and McGee have personally guaranteed the payment to a bank of certain purchase money equipment loans made to the Company by such bank. The outstanding principal balance of the loans is currently approximately $80,000. The loans bear interest at 2.5% over the bank's prime rate in effect from time to time (currently 4.25% per annum). See Item 2, "Management's Discussion and Analysis or Plan of Operations -- Liquidity and Capital Resources." - ----------- (1) Such shares were issued in exchange for shares of TPI-Ontario on August 20, 1996. 22 The officers of the Company have executed employment agreement with the Company. See Item 6, "Executive Compensation--Employment Contracts." ITEM 8. DESCRIPTION OF SECURITIES GENERAL The Company is authorized to issue 50,000,000 shares of common stock, par value $0.001 per share (the "Common Stock"), and 5,000,000 shares of preferred stock, par value $0.001 per share (the "Preferred Stock"). As of February 20, 1998, there were 15,418,505 shares of Common Stock outstanding held by approximately 200 holders of record. No shares of Preferred Stock are issued or outstanding. COMMON STOCK Holders of shares of Common Stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. There are no preemptive, subscription, conversion or redemption rights pertaining to the Common Stock. Holders of shares of Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors from funds legally available therefor and to share ratably in the assets of the Company available upon liquidation, dissolution or winding up, subject to any superior rights of the holders of Preferred Stock, if issued. PREFERRED STOCK The Company's Articles of Incorporation authorize the issuance of the shares of Preferred Stock in one or more series, with each series to have such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without any action by the stockholders, to issue shares of Preferred Stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Common Stock. In addition, the issuance of shares of Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although the Company does not currently intend to issue any shares of Preferred Stock, there can be no assurance that the Company will not do so in the future. 23 PART II ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock has been traded in the over-the-counter market and quoted on the Over-the-Counter Electronic Bulletin Board ("OTCBB") under the symbol "TPII" since August 21, 1996. The following table sets forth the high and low bid prices of the Common Stock as reported by the OTCBB for the periods indicated. The prices indicate inter-dealer quotations, without retail mark-up, mark-down or commission, and may not represent actual transactions.
BID PRICES ---------- PERIOD LOW HIGH ------ -- ---- FISCAL 1997 ----------- First Quarter (August 21, 1996 to October 31, 1996) $2.63 $4.78 Second Quarter (November 1, 1996 to January 31, 1997) 0.56 3.19 Third Quarter (February 1, 1997 to April 30, 1997) 0.63 1.06 Fourth Quarter (May 1, 1997 to July 31, 1997) 0.69 1.22 FISCAL 1998 ----------- First Quarter (August 1, 1997 to October 31, 1997) 0.30 0.75 Second Quarter (November 1, 1997 to January 31, 1998) 0.38 0.75
As of February 20, 1998, there were approximately 200 holders of record of the Common Stock. The Company reasonably believes that there are approximately an additional 300 beneficial holders of its Common Stock. The Company has never paid any cash dividends on its Common Stock and has no present intention to do so. The Company intends to retain all earnings for use in its business. 24 ITEM 2. LEGAL PROCEEDINGS On December 23, 1997, IBS Conversions, Inc., an Illinois corporation ("IBSC"), commenced an action against the Company in the United States District Court for the Northern District of Illinois, Eastern Division (Docket No. 97C8892), seeking to permanently enjoin the Company from using and disclosing certain information and software alleged to be trade secrets of IBSC and seeking to recover compensatory damages of at least $290,000 and punitive damages and attorneys' fees in amounts to be determined by the court. The complaint alleges, among other things, that: (a) IBSC entered into a "North American Strategic Affiliation Agreement" with the Company in or about February 1997, pursuant to which IBSC granted a license to the Company to use certain software development tools and a related project management methodology in connection with the Company's plan to offer Year 2000 remediation services; (b) in consideration for such license, the Company agreed to pay IBSC the sum of $100,000 per year for a period of three years; and (c) the Company breached such agreement and misappropriated the software development tools and methodology, which IBSC deems to be trade secrets, by failing to make such payments to IBSC; failing to use its best efforts to market IBSC products; and marketing the products of competitors of IBSC. The Company has moved to dismiss one of the causes of action set forth in the complaint and has denied the other material allegations of the complaint. The court has not yet rendered a decision on the Company's motion. ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS NOT APPLICABLE Item 4. Recent Sales of Unregistered Securities The following discussion includes certain information as to transactions which occurred prior to the current Management's assumption of control of the Company on the Closing Date and is based on information which Management believes to be reasonably accurate, but not all of which does it have direct knowledge. On the Closing Date, the Company issued 4,936,050 shares of Common Stock to Joter and 965,000 shares of Common Stock to DTL, in exchange for common shares of TPI-Ontario, which common shares were issued as of April 1, 1996. Joter and DTL, which are controlled by Messrs. Mighton, McCann and Stepanoff, executive officers and directors of the Company, acquired the common shares of TPI-Ontario in consideration for certain rights in technology transferred to, and certain services rendered to, TPI-Ontario prior to the Closing Date, which shares, for accounting purposes are deemed to have been issued in exchange for nominal consideration as "founder's shares". Such shares were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the "Act"). As of the Closing Date, in satisfaction of gross proceeds of $155,000 received by, and certain services rendered, to TPI-Ontario, in the period April 11 to July 25, 1996, the Company issued 160,000 shares of Common Stock to 15 investors. TPI-Ontario received such gross proceeds pursuant to a private offering prior to the Closing Date. The 160,000 shares of Common Stock were issued in reliance on the exemption from registration provided by Rule 504 of Regulation D promulgated under the Act. Prior to the Closing Date (from August 9 through August 19, 1996), the Company issued, pursuant to a private offering, an aggregate of 1,465,000 shares of Common Stock in consideration for gross proceeds of $14,654 received by the Company from investors. These transactions were not disclosed to current management of the Company prior to or on the Closing Date. Current management believes that the Company relied on Rule 504 of Regulation D under the Act in issuing such securities. 25 Prior to the Closing Date, the Company issued 740,469 shares of Common Stock. The Company has no records concerning the transactions in which such shares were issued or the consideration received by the Company in respect of such issuances. On the Closing Date, the Company issued 1,888,000 shares of Common Stock to certain consultants in consideration for certain services rendered in connection with the reverse acquisition. These shares were issued in reliance on the exemption from registration provided by Section 4(2) of the Act. As of the Closing Date, the Company issued 455,000 shares of Common Stock to Jaford Holdings Ltd., 100,000 shares of Common Stock to Innovations Ontario Corp. and 150,000 shares of Common Stock to Ronald Content, in consideration for the release by such companies and individual of certain claims with respect to marketing rights as to the technology previously transferred to the Company by Vladimir Stepanoff, an executive officer and director of the Company. Prior to the incorporation of TPI-Ontario, Mr. Stepanoff had granted marketing rights with respect to such technology to Raconix, of which Mr. Content was the sole shareholder. The shares were issued in reliance on the exemption from registration provided by Section 4(2) of the Act. See Item 1, "Description of Business -- Intellectual Property." On November 25, 1996, the Company issued options to purchase 15,000 shares of Common Stock at an exercise price of $1.99 expiring on November 27, 1997, to a public relations firm, in consideration for certain services. The options were issued in reliance on the exemption from registration provided by Section 4(2) of the Act. On August 23, 1996, TPI issued 500,000 units to Mayfair Advisory Group Limited in consideration for gross proceeds of $500,000. Each unit consisted of one share of Common Stock and a Common Stock purchase warrant (the "Warrants"). When issued, the Warrants had a per share exercise price of $1.00, were exercisable for a period of two years, commencing 30 days after the closing of the offering, and were redeemable on 20 days prior written notice at a redemption price of $.005 per Warrant. The Warrants were amended on July 8, 1997, to provide that they may be exercised until July 8, 1998, at a price of $1.50 and are redeemable commencing January 8, 1998 on 20 days prior written notice at a redemption price of $.50 per Warrant. The Common Stock and the Warrants were issued in reliance on the exemption from registration provided by Rule 504 of Regulation D under the Act. On January 27, 1997, TPI issued 208,333 shares of Common Stock to Olive Investments, in consideration for gross proceeds of $150,000. These shares were issued in reliance on the exemption from registration provided by Rule 504 of Regulation D under the Act. On March 6, 1997, TPI issued 501,030 shares of Common Stock to Thomson Kernaghan & Co., Ltd. ("Thomson Kernaghan") in consideration for gross proceeds of $375,000. These shares were issued in reliance on the exemption from registration provided by Rule 504 of Regulation D under the Act. 26 On June 27, 1997, TPI issued 100,000 units to Pinetree Capital Corp. ("Pinetree") in consideration for gross proceeds of $70,000. Each unit consisted of one share of Common Stock and a common stock purchase warrant expiring two years from the date of issuance, and exercisable at $1.00 per share during the first year and $1.50 per share during the second year. These securities were issued in reliance on the exemption from registration provided by Rule 506 of Regulation D under the Act. On August 1, 1997, TPI sold to Thomson Kernaghan an 8% convertible subordinated debenture due July 31, 1998 in the principal amount of $108,750 the "Debenture" for a gross purchase price of $108,750. The Debenture was converted, on August 28, 1997, into 198,000 shares of Common Stock at the conversion rate of $0.55 per share. The Debenture was issued in reliance on the exemption from registration provided by Rule 504 of Regulation D, under the Act and the shares of Common Stock issued on conversion of the Debenture were issued in reliance on the exemption from registration provided by Section 3(a)(9) of the Act. On September 4, 1997, TPI issued 589,000 shares of Common Stock to Thomson Kernaghan in consideration for gross proceeds of $125,000. These shares were issued in reliance on the exemption from registration provided by Rule 504 of Regulation D under the Act. On September 26, 1997, TPI issued 400,000 shares of Common Stock to Thomson Kernaghan in consideration for gross proceeds of $200,000. These shares were issued in reliance on the exemption from registration provided by Rule 504 of Regulation D under the Act. On November 5, 1997, TPI issued 500,000 shares of Common Stock to Thomson Kernaghan in consideration for gross proceeds of $250,000. These shares were issued in reliance on the exemption from registration provided by Rule 504 of Regulation D under the Act. On December 10, 1997, TPI issued 997,778 shares of Common Stock to Thomson Kernaghan in consideration for gross proceeds of $220,000. These shares were issued in reliance on the exemption from registration provided by Rule 504 of Regulation D under the Act. On January 26, 1998, TPI issued 444,445 shares of Common Stock to Thomson Kernaghan in consideration for gross proceeds of $100,000. These shares were issued in reliance on the exemption from registration provided by Rule 504 of Regulation D under the Act. ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's By-Laws provide for indemnification of officers and directors to the fullest extent permitted by Nevada law. In addition, under the Company's Articles of Incorporation, no director or officer is to be personally liable to the Company or its stockholders for damages for breach of fiduciary duty as a director or officer, except for damages for breach of fiduciary duty resulting from (a) acts or omissions which involve intentional misconduct, fraud or a knowing violation of law, or (b) the illegal payment of certain dividends and certain stock redemptions or repurchases. Insofar as indemnification for liabilities arising under the Act may be permitted to directors and officers of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemification is against public policy as expressed in the Act and is therefore unenforceable. 27 PART F/S INDEX TO FINANCIAL STATEMENTS ----------------------------- PERIOD FROM APRIL 1, 1996 (DATE OF INCORPORATION) TO JULY 31, 1997 ------------------------
PAGE --------- Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . F-1 Financial Statements: Balance Sheet as of July 31, 1997 . . . . . . . . . . . . . . . . . F-2 Statement of Operations for the period from April 1, 1996 (date of incorporation) to July 31, 1997 . . . . F-3 Statement of Stockholders' Equity for the period from April 1, 1996 (date of incorporation) to July 31, 1997 . . . . F-4 Statement of Cash Flows for the period from April 1, 1996 (date of incorporation) to July 31, 1997 . . . . F-5 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F-6 THREE MONTHS ENDED OCTOBER 31, 1997 AND OCTOBER 31, 1996 (UNAUDITED) ----------------------------------- Financial Statements: Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11 Statement of Operations . . . . . . . . . . . . . . . . . . . . . . F-12 Statement of Stockholders' Equity . . . . . . . . . . . . . . . . . F-13 Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . F-14 Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F-15
28 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Transformation Processing Inc. We have audited the accompanying balance sheet of Transformation Processing Inc. (a development stage company) as of July 31, 1997, and the related statements of operations, stockholders' equity, and cash flows for the period from April 1, 1996 (date of incorporation) to July 31, 1997. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Transformation Processing Inc. as of July 31, 1997, and the results of its operations and its cash flows for the period from April 1, 1996 (date of incorporation) to July 31, 1997 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 10 to the financial statements, the Company has had limited operations, has a working capital deficiency and has a deficit accumulated during the development stage that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 10. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. GOLDSTEIN GOLUB KESSLER & COMPANY, P.C. New York, New York September 4, 1997, except for the second paragraph of Note 11, as to which the date is September 26, 1997, the last two paragraphs of Note 7, as to which the date is November 18, 1997, and the first paragraph of Note 1, as to which the date is February 19, 1998 F-1 TRANSFORMATION PROCESSING INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET
===================================================================================================== JULY 31, 1997 - ----------------------------------------------------------------------------------------------------- ASSETS (Note 3) Current Assets: Cash $ 16,431 Time deposits (Note 1) 23,368 Accounts receivable 3,674 Due from related parties (Note 4) 127,405 Prepaid expenses and other current assets 3,399 - ----------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 174,277 Property and Equipment, net (Notes 1 and 2) 109,077 Software Marketing Rights, net (Notes 1 and 4) 606,340 Other Assets 4,684 ===================================================================================================== TOTAL ASSETS $ 894,378 ===================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 25,904 Accrued expenses and other current liabilities 88,582 Current maturities of loan payable - bank (Note 3) 36,259 Current maturities of notes payable - stockholders (Note 5) 85,793 - ----------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 236,538 Loan Payable - bank, net of current maturities (Note 3) 21,137 Notes Payable - stockholders, net of current maturities (Note 5) 28,195 - ----------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 285,870 - ----------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 6) Stockholders' Equity (Notes 1, 7, 8 and 11): Preferred stock - $.001 par value; authorized 5,000,000 shares, none issued Common stock - $.001 par value; authorized 50,000,000 shares, issued and outstanding 12,169,282 shares 12,169 Additional paid-in capital 3,358,020 Deficit accumulated during the development stage (2,784,536) Cumulative foreign currency translation adjustments (Note 1) 22,855 - ----------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY 608,508 ===================================================================================================== TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 894,378 =====================================================================================================
The accompanying notes and independent auditor's report should be read in conjunction with the financial statements F-2 TRANSFORMATION PROCESSING INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF OPERATIONS
=============================================================================================== PERIOD FROM APRIL 1, 1996 (DATE OF INCORPORATION) TO JULY 31, 1997 - ----------------------------------------------------------------------------------------------- Revenue - consulting services (Note 1) $ 47,317 - ----------------------------------------------------------------------------------------------- Costs and expenses: Cost of consulting services 11,271 Cost of software transformation services (Note 1) 192,729 Software development 218,212 General and administrative 874,425 Noncash consulting costs (Notes 1 and 7) 1,536,341 - ----------------------------------------------------------------------------------------------- 2,832,978 - ----------------------------------------------------------------------------------------------- Loss from operations (2,785,661) Interest income, net of interest expense of $2,419 1,125 =============================================================================================== Net loss $ (2,784,536) =============================================================================================== Net loss per common share (Note 1) $ (.27) =============================================================================================== Weighted average number of common shares outstanding (Note 1) $ 10,161,665 ===============================================================================================
The accompanying notes and independent auditor's report should be read in conjunction with the financial statements F-3 TRANSFORMATION PROCESSING INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY
====================================================================================================================== PERIOD FROM APRIL 1, 1996 (DATE OF INCORPORATION) TO JULY 31, 1997 - ---------------------------------------------------------------------------------------------------------------------- DEFICIT ACCUMULATED FOREIGN ADDITIONAL DURING THE CURRENCY STOCK- COMMON STOCK PAID-IN DEVELOPMENT TRANSLATION HOLDERS' SHARES AMOUNT CAPITAL STAGE ADJUSTMENTS EQUITY - ---------------------------------------------------------------------------------------------------------------------- Issuance of common stock to founders (Note 7) 5,901,050 $ 5,901 $ (5,901) - - - Issuance of common stock for cash (Note 7) 1,469,363 1,469 1,215,657 - - $1,217,126 Issuance of options to purchase common stock issued for services (Note 8) - - 27,362 - - 27,362 Issuance of common stock in reverse acquisition (Notes 1 and 7) 2,205,869 2,206 13,484 - - 15,690 Issuance of common stock for services in reverse acquisition (Notes 1 and 7) 1,888,000 1,888 1,534,453 - - 1,536,341 Issuance of common stock for intangible asset (Notes 1 and 4) 705,000 705 572,965 - - 573,670 Net loss - - - $(2,784,536) - (2,784,536) Cumulative foreign currency translation adjustments (Note 1) - - - - $22,855 22,855 - ---------------------------------------------------------------------------------------------------------------------- Balance at July 31, 1997 12,169,282 $12,169 $3,358,020 $(2,784,536) $22,855 $ 608,508 ======================================================================================================================
The accompanying notes and independent auditor's report should be read in conjunction with the financial statements F-4 TRANSFORMATION PROCESSING INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CASH FLOWS
================================================================================================= PERIOD FROM APRIL 1, 1996 (DATE OF INCORPORATION) TO JULY 31, 1997 - ------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss from development stage operations $(2,784,536) Adjustments to reconcile net loss from development stage operations to net cash used in operating activities: Depreciation and amortization 197,483 Issuance of options to purchase common stock for services 27,588 Issuance of common stock for services in reverse acquisition 1,549,056 Changes in operating assets and liabilities: Increase in accounts receivable (3,705) Increase in time deposits (23,561) Increase in prepaid expenses and other current assets (3,426) Increase in other assets (4,723) Increase in accounts payable 26,116 Increase in accrued expenses and other current liabilities 89,317 - ------------------------------------------------------------------------------------------------ NET CASH USED IN OPERATING ACTIVITIES (930,391) - ------------------------------------------------------------------------------------------------ Cash flows from investing activities: Purchase of property and equipment (124,733) Purchase of intangible assets (24,156) Advances to related parties (129,621) - ------------------------------------------------------------------------------------------------ CASH USED IN INVESTING ACTIVITIES (278,510) - ------------------------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from loan payable - bank 73,158 Repayments of loan payable - bank (15,054) Repayment of notes payable - stockholders (74,924) Net proceeds from issuance of common stock 1,240,109 - ------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 1,223,289 - ------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash 2,043 - ------------------------------------------------------------------------------------------------ Net increase in cash and cash at end of period $ 16,431 ================================================================================================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 2,419 ================================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITY: The Company issued 705,000 shares of common stock (valued at $573,670) and promissory notes in exchange for an intangible asset. =============================================================================== The accompanying notes and independent auditor's report should be read in conjunction with the financial statements F-5 TRANSFORMATION PROCESSING INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS =============================================================================== 1. PRINCIPAL BUSINESS On August 20, 1996, Samuel Hamann Graphix, Inc. ACTIVITY AND acquired all of the outstanding common stock of SIGNIFICANT Transformation Processing Inc. ("Ontario"), a ACCOUNTING Canadian corporation. For accounting purposes the POLICIES: acquisition has been treated as a recapitalization of Ontario with Ontario as the acquirer (reverse acquisition) (see Note 7). Samuel Hamann Graphix, Inc. changed its name to Transformation Processing Inc. (the "Company"). On February 19, 1998, Ontario merged into the Company. The accompanying financial statements reflect this merger as if it had occurred on July 31, 1997. The Company is an information technology company that develops and markets software and services that enable companies worldwide to automatically migrate their application programs and data from legacy systems to open systems and client/server environments. The Company has expanded its operations from providing legacy code migration services to three lines of business: client/server migration, year 2000, and groupware services. The Company is targeting customers located throughout Canada and the United States. For the period ended July 31, 1997, all operations of the Company were conducted in Canada. At July 31, 1997, all of the Company's assets are located in Canada. The statement of operations includes the results of operations of the Company for the 16-month period from April 1, 1996 to July 31, 1997. The results of operations for the period from April 1, 1996 to July 31, 1996 were not material. Revenue from fixed-price contracts is recognized ratably over the period of performance in accordance with the American Institute of Certified Public Accountants' Statement of Position 91-1, SOFTWARE REVENUE RECOGNITION. Revenue from customer training, technical support and other services is recognized as the service is performed. The Company provides technical support at no charge for the first 90 days and, under certain circumstances, at no charge if certain other fees are current. Revenue from the sale of deployment product licenses is recognized after installation of the product. Property and equipment is recorded at cost. Depreciation is provided for by the straight-line method over the estimated useful lives of the related assets. The cost of software marketing rights of approximately $780,000 (which includes approximately $207,000 of notes payable plus approximately $573,000 in common stock issued) included in the accompanying balance sheet is being amortized by the straight-line method over four years. Amortization expense charged to operations in the period ended July 31, 1997 and included in cost of software transformation services in the accompanying statement of operations was approximately $180,000. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates by management affecting reported amounts of assets and liabilities and revenue and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Loss per share is based on the weighted-average number of shares of common stock outstanding during the year. F-6 TRANSFORMATION PROCESSING INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS =============================================================================== Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements. The Company's functional currency is the Canadian dollar. Balance sheet accounts are translated into U.S. dollars using current exchange rates in effect at the balance sheet date and revenue and expense accounts are translated using an average exchange rate for the period. The gains and losses resulting from translation are included in stockholders' equity. The Company is required to maintain, as a compensating balance, an amount equal to the amount available to the Company under a standby letter of credit which expires September 30, 1997. The estimated fair value of the Company's loan from the bank approximates its carrying amount due principally to its short-term maturity. It is not practicable to estimate the fair value of the Company's loans from stockholders due to the Company's inability to estimate interest rates without incurring excessive costs. 2. PROPERTY AND EQUIPMENT: Property and equipment, at cost, consists of the following:
Estimated Useful Life --------------------------------------------------------------------- Machinery and equipment $ 18,098 5 years Computer equipment 66,258 5 years Furniture and fixtures 40,833 7 years --------------------------------------------------------------------- 125,189 Less accumulated depreciation 16,112 --------------------------------------------------------------------- $109,077 =====================================================================
3. LOAN PAYABLE - BANK: The Company is obligated under an installment loan with a bank payable in monthly installments of $3,021 plus interest through February 1, 1999. The loan bears interest at the bank's prime rate (4.75% at July 31, 1997) plus 2.5%. The loan is collateralized by substantially all of the Company's assets. Future maturities of the loan payable are as follows:
Year ending July 31, 1998 $36,259 1999 21,137 ------------------------------------------------------------------- 57,396 Less current maturities 36,259 ------------------------------------------------------------------- $21,137 ===================================================================
F-7 TRANSFORMATION PROCESSING INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS =============================================================================== 4. RELATED PARTY Amounts due from officers of approximately TRANSACTIONS: $115,000 represent advances made to the officers. These loans which were noninterest-bearing through July 31, 1997, but bear interest at 4% per annum subsequent to July 31, 1997, are payable on demand. Amounts due from an affiliate of approximately $12,000 represent advances made to a company that has a stockholder who is a stockholder and officer of the Company. The Company acquired the software marketing rights, from a company whose stockholder is a stockholder of the Company, in exchange for 705,000 shares of common stock and notes payable. The rights have been valued at the fair value of the shares of common stock ($.81 per common share) and notes payable at the date of issue. 5. NOTES PAYABLE - Notes payable - stockholders consist of the STOCKHOLDERS: following:
Note payable - noninterest-bearing, payable in monthly installments of $5,639 through December 1, 1998. $ 95,863 Note payable - noninterest-bearing, due on demand. 18,125 ------------------------------------------------------------------- 113,988 Less current maturities 85,793 ------------------------------------------------------------------- $ 28,195 ===================================================================
Future maturities of notes payable are as follows:
Year ending July 31, 1998 $ 85,793 1999 28,195 ------------------------------------------------------------------- $ 113,988 ===================================================================
6. COMMITMENTS AND The Company is obligated under a noncancelable CONTINGENCIES: operating lease for office space expiring September 30, 2001. Approximate minimum future payments under this lease are payable as follows:
Year ending July 31, 1998 $23,000 1999 23,000 2000 23,000 2001 23,000 2002 4,000 ------------------------------------------------------------------ $96,000 ==================================================================
F-8 TRANSFORMATION PROCESSING INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS =============================================================================== The lease is subject to escalation for the Company's proportionate share of increases in real estate taxes and other operating expenses. The lease has an option to renew for five years at a base rent, as defined. Rent expense for the period ended July 31, 1997 amounted to $37,522. The Company's lease commitment is guaranteed with a standby letter of credit which expires September 30, 1997. The Company is involved in litigation whereby it is alleged that the Company breached a license agreement by failing to pay sums due under the license agreement. The Plaintiff seeks compensatory damages of at least $290,000 and punitive damages in an unspecified amount. The Company has moved to dismiss one of the causes of action in the complaint and has denied the other material allegations of the complaint. The financial statements do not include any adjustments that may result from the outcome of this litigation. 7. STOCKHOLDERS' EQUITY: The Company is authorized to issue 5,000,000 shares of preferred stock, with rights and preferences to be determined by the Company's board of directors. As of July 31, 1997, no shares of preferred stock had been issued. The Company issued shares of common stock for cash as follows:
Additional Common Stock Paid-in Stockholders' Shares Amount Capital Equity ---------------------------------------------------------------------------------------- April 20, 1996 160,000 $ 160 $ 136,196 $ 136,356 August 23, 1996 500,000 500 493,155 493,655 January 27, 1997 208,333 208 147,998 148,206 March 6, 1997 219,780 220 123,039 123,259 March 6, 1997 281,250 281 246,237 246,518 June 27, 1997 100,000 100 69,032 69,132 ---------------------------------------------------------------------------------------- 1,469,363 $1,469 $1,215,657 $1,217,126 ========================================================================================
On April 1, 1996, the Company issued 5,901,050 shares of common stock to its founders for certain technology and services, which were valued at a nominal amount. On August 20, 1996, the Company issued 2,205,869 shares of common stock to the stockholders of Samuel Hamann Graphix, Inc. in a transaction accounted for as a reverse acquisition (see Note 1). As part of the reverse acquisition (see Note 1) the Company issued 1,888,000 shares of common stock to certain consultants for services. These shares have been valued at the fair value at the date of issuance ($.81 per common share). Accordingly, the Company recorded a charge to operations at the time of issuance of $1,536,341. Certain share issuances prior to the reverse acquisition were made by Samuel Hamann Graphix, Inc. and the details of consideration for the issuances were not known by the Company. The Company has addressed the situation by initiating an audit of issued and outstanding shares of common stock. The Company is auditing records received from prior management reflecting shares issued, transferred or sold, apparently without fair consideration to the Company. The Company issued stop transfer instructions as of November 18, 1997 concerning approximately 1,844,000 shares of common stock. These shares are part of the 1,888,000 shares of common stock issued to the consultants discussed in the preceding paragraph. The stop order transfers will remain until the holders of the shares of common stock are able to satisfy the Company's concerns. F-9 8. STOCK OPTIONS AND At July 31, 1997, options to purchase 15,000 STOCK WARRANTS: shares of common stock at an exercise price of $1.99 per share are outstanding and are exercisable through November 27, 1997. The Company valued these options at $1.88 per option. The Company recorded a charge to operations of approximately $27,500 at the time of issuance. At July 31, 1997, warrants to purchase 600,000 shares of common stock at prices ranging from $1.00 to $1.50 per share are outstanding and exercisable. The warrants expire at various dates through June 23, 1999. 9. INCOME TAXES: The Company recorded a deferred income tax asset for the tax effect of net operating loss carryforwards and the temporary difference between the carrying amount and tax bases of certain intangible assets, aggregating approximately $562,000. In recognition of the uncertainty regarding the ultimate amount of income tax benefits to be derived, the Company has recorded a valuation allowance of $562,000 at July 31, 1997. The Company has a net operating loss carryforward of approximately $1,103,000 available to offset taxable income through the year 2012. 10. GOING CONCERN: The Company is in the development stage, has a limited operating history, has not generated significant revenue through July 31, 1997, has a working capital deficiency and has a deficit accumulated during the development stage at July 31, 1997. The Company's financial statements have been prepared on the assumption that the Company will continue as a going concern. Management believes that the development, marketing and initial sales of certain of its technologies will occur before July 31, 1998, thus generating working capital. The Company is also considering other financing alternatives which will allow the Company to continue as a going concern. If there is no or insufficient revenue from the commercial applications of the Company's technologies during the year ending July 31, 1998 or additional financing cannot be obtained, there is substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. 11. SUBSEQUENT EVENTS: On August 1, 1997, the Company issued a $108,750 8% convertible subordinated debenture. The debenture was converted into 198,000 shares of common stock in August 1997. At the date of the issuance of the debenture the value of the underlying common shares was approximately $160,000. Accordingly, the Company recorded a charge to operations at the time of issuance of the debenture of approximately $52,000. On September 4, 1997 and September 26, 1997, the Company received proceeds of $325,000 related to the issuance of 989,000 shares of common stock. F-10 TRANSFORMATION PROCESSING INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET
(Unaudited) - --------------------------------------------------------------------------------------------------- October 31, 1997 - --------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash $ 95,886 Accounts receivable 25,792 Stock subscriptions receivable 250,000 Due from related parties 124,803 Prepaid expenses and other current assets 22,514 - -------------------------------------------------------------------------------------------------- Total current assets 518,995 Property and Equipment, net 148,317 Software Marketing Rights, net 545,906 - --------------------------------------------------------------------------------------------------- Total Assets $ 1,213,218 - --------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 105,108 Accrued expenses and other current liabilities 10,632 Current maturities of loan payable - bank 35,510 Current maturities of notes payable - stockholders 66,285 - --------------------------------------------------------------------------------------------------- Total current liabilities 217,535 Loan Payable - bank, net of current maturities 11,837 Notes Payable - stockholders, net of current maturities 11,048 - --------------------------------------------------------------------------------------------------- Total liabilities 240,420 - --------------------------------------------------------------------------------------------------- Stockholders' Equity (Notes 1 and 2) Preferred stock - $.001 par value; authorized 5,000,000 shares, none issued Common stock - $.001 par value; authorized 50,000,000 shares, issued and oustanding 13,856,282 shares 13,856 Additional paid-in capital 4,013,245 Deficit accumulated during the development stage (3,137,367) Cumulative foreign currency translation adjustments 83,064 - --------------------------------------------------------------------------------------------------- Stockholders' equity 972,798 - --------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 1,213,218 - ---------------------------------------------------------------------------------------------------
See notes to financial statements F-11 TRANSFORMATION PROCESSING INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF OPERATIONS
(Unaudited) - ----------------------------------------------------------------------------------------------------------------------------------- Period from April 1, 1996 (date of Three-month Cumulative incorporation) to Period ended amounts from October 31,1996 October 31,1997 inception - ----------------------------------------------------------------------------------------------------------------------------------- REVENUE $ 20,335 $ 88,820 $ 136,137 - ----------------------------------------------------------------------------------------------------------------------------------- EXPENSES Cost of consulting services 6,891 22,361 33,632 Cost of software transformation services 64,293 93,753 286,482 Software development 18,518 50,242 268,454 General and administrative 204,293 274,808 1,149,233 Noncash consulting costs 1,498,118 1,536,341 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL EXPENSES 1,792,113 441,164 3,274,142 - ----------------------------------------------------------------------------------------------------------------------------------- LOSS FROM OPERATIONS (1,771,778) (352,344) (3,138,000) INTEREST INCOME (EXPENSE) NET 228 (487) 638 - ----------------------------------------------------------------------------------------------------------------------------------- NET LOSS $ (1,771,550) $ (352,831) $ (3,137,367) - ----------------------------------------------------------------------------------------------------------------------------------- NET LOSS PER COMMON SHARE $ (0.16) (0.03) - ------------------------------------------------------------------------------------------------------------ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 11,359,919 12,854,554 - ------------------------------------------------------------------------------------------------------------
See notes to financial statements F-12 TRANSFORMATION PROCESSING INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited) - ------------------------------------------------------------------------------------------------------------------------------ Three month period ended October 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------ Deficit Accumulated Foreign Additional During the Currency Stock- Common Stock Paid-in Development Translation holders' Shares Amount Capital Stage Adjustments Equity - ------------------------------------------------------------------------------------------------------------------------------ Balance at July 31, 1997 12,169,282 $ 12,169 $ 3,358,020 $ (2,784,536) $ 22,855 $ 608,508 - ------------------------------------------------------------------------------------------------------------------------- Issuance of common stock 1,687,000 $ 1,687 $ 655,225 $ 656,912 Net loss $ (352,831) (352,831) Cumulative foreign currency 60,209 60,209 translation adjustment - ------------------------------------------------------------------------------------------------------------------------- Balance at October 31, 1997 13,856,282 $ 13,856 $ 4,013,245 $ (3,137,367) $ 83,064 $ 972,798 - -------------------------------------------------------------------------------------------------------------------------
See notes to financial statements F-13 TRANSFORMATION PROCESSING INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF CASH FLOWS
(Unaudited) - ---------------------------------------------------------------------------------------------------------------------------------- Period from April 1, 1996 (date of Three-month incorporation) to Period ended Cumulative amounts October 31,1996 October 31, 1997 from inception - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss from development stage operations (1,771,550) (352,831) (3,137,367) Adjustments to reconcile net loss from development stage operations to net cash used in operating activities Depreciation and amortization 45,342 54,821 251,044 Issuance of options to purchase common stock for services 27,343 Issuance of common stock for services in reverse acquisition 1,546,639 1,535,281 Changes in operating assets and liabilities: Increase in accounts receivable (20,132) (22,438) (26,312) Decrease in time deposits 23,142 Increase in prepaid expenses and other current assets (6,161) (19,396) (22,967) (Increase) decrease in other assets (5,849) 4,638 Increase in accounts payable 80,609 107,223 Increase (decrease) in accrued expenses and other current liabilities (76,980) 10,846 - ---------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN OPERATING ACTIVITIES (211,711) (308,435) (1,254,909) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of property and equipment (56,542) (47,640) (172,373) Purchase of intangible assets (9,900) (24,156) Advances to related parties (88,920) (129,621) - ---------------------------------------------------------------------------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES (155,362) (47,640) (326,150) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from loan payable - bank 73,158 Repayments of loan payable - bank (8,972) (24,026) Repayments of notes payable - stockholders (36,703) (34,754) (109,678) Proceeds from issuance of common stock 661,249 483,596 1,723,705 - ---------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 624,546 439,870 1,663,159 - ---------------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (634) (4,340) 13,786 - ---------------------------------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH 256,839 79,455 95,886 Cash at beginning of period 16,431 - ---------------------------------------------------------------------------------------------------------------------------------- CASH AT END OF PERIOD 256,839 95,886 95,866 - ---------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest 1,443 3,862 - ----------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements F-14 TRANSFORMATION PROCESSING INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION, EVENTS, AND REVERSE ACQUISITION The financial statements of Transformation Processing Inc., ("the Company") included herein have been prepared pursuant to generally accepted accounting principles and have not been examined by independent public accountants. In the opinion of management all adjustments which are of a normal recurring nature necessary to present fairly the results of operations have been made. Pursuant to Securities and Exchange Commission ("SEC") rules and regulations, certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from these statements unless significant changes have taken place since the end of the most recent fiscal year. The disclosure contained herein should be read in conjunction with the financial statements and notes included in the Company's audited financial statements for the period ended July 31, 1997. The results of operations for the three-month period ended October 31, 1997 and the period ended October 31, 1996 are not necessarily indicative of the results to be expected for the full year. On August 20, 1996, Samuel Hamann Graphix, Inc. acquired all of the outstanding common stock of Transformation Processing Inc. ("Ontario"), a Canadian corporation. For accounting purposes the acquisition has been treated as a recapitalization of Ontario with Ontario as the acquirer (reverse acquisition). Samuel Hamann Graphix, Inc. changed its name to Transformation Processing Inc. (the "Company"). In December 1997, Ontario merged into the Company. The accompanying financial statements reflect this merger as if it had occurred on July 31, 1997. Loss per share is based on the weighted-average number of shares of common stock outstanding during the year. 2. STOCKHOLDERS' EQUITY The company issued shares of common stock as follows:
Common Stock Additional Paid-in Capital Stockholders' Equity Shares Amount August 28, 1997 198,000 $ 198 $ 88,496 $ 88,694 September 4, 1997 589,000 589 121,450 122,039 September 26, 1997 400,000 400 195,779 196,179 October 23, 1997 400,000 400 199,600 200,000 October 31, 1997 100,000 100 49,900 50,000 --------- ------ -------- -------- 1,687,000 $1,687 $655,225 $656,912 ========= ====== ======== ========
The Company received the cash for the October 23, 1997 and the October 31, 1997 issuances on November 5, 1997. On December 10, 1997, the Company issued for cash 997,778 shares of common stock for $220,000. On January 26, 1998, the Company issued for cash 444,445 shares of common stock for $100,000. F-15 SIGNATURES In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. TRANSFORMATION PROCESSING INC. ------------------------------ (Registrant) Date: March 11, 1998 By: /s/ Paul G. Mighton ------------------------------------- Paul G. Mighton, Chief Executive Officer PART III ITEM 1. INDEX TO EXHIBITS EXHIBITS *3.1 Articles of Incorporation of Samuel Hamann Graphix, Inc. (Nevada) as amended. *3.2 Articles of Merger between Samuel Hamann Graphix, Inc. (Nevada) and Samuel Hamann Graphix, Inc. (California). *3.3 By-laws of Transformation Processing Inc. (Nevada). *3.4 Articles of Merger between of TPI (Ontario) and TPI (Nevada). *10.1 Employment Agreement between TPI and Gary McCann dated January 1, 1997. *10.2 Employment Agreement between TPI and John McGee dated January 1, 1997. *10.3 Employment Agreement between TPI and Paul G. Mighton dated January 1, 1997. * To be filed by Amendment. *10.4 Employment Agreement between TPI and Vladimir Stepanoff dated January 1, 1997. *10.5 Letter Agreement dated September 29, 1997 as amended January 6, 1998 between Douglas Woolridge and TPI. *10.6 Real Estate Lease Agreement dated October 1, 1996 between TPI and Royal Trust Corporation of Canada, and Landlord's release of Security Interest. *10.7 Form of Software Conversion Agreement. *10.8 Form of Professional Services Agreement. *10.9 Form of Deployment Products License Agreement. *10.10 Form of Software License Agreement. *10.11 Business Development Agreement between Lotus Development Corporation and TPI. *10.12 Bill of Sale and Assignment of Copyright, dated July 17, 1996 between CyberPlan Enrg. and TPI as amended as of March 10, 1998. *10.13 Referral Program Agreement dated November 18, 1997 between Y2K Plus and TPI. *10.14 Referral Program Agreement dated November 12, 1997 between MCW Business Systems Ltd. and TPI. *10.15 Teaming Agreement dated April 21, 1997 between SHL Systemhouse Inc. and TPI. *10.16 Software License Agreement, Value Added Reseller Agreement and addendum dated April 23, 1997 between IntellAgent Control Corporation and TPI. *10.17 Professional Services Subcontract Agreement dated May 15, 1997 between GE IT Solutions/Universal Data Consultants and TPI. *10.18 Settlement Agreement and Release, among Ronald A. Content, Raconix Corporation, Raconix Europe Limited and TPI each dated June 16, 1997. *10.19 Demand Promissory Notes dated July 31, 1997, payable to TPI made by Gary G. McCann, Paul Mighton and Vladimir Stepanoff. *10.20 Customer Agreements and Small Business Loan Registrations, between the Bank of Nova Scotia and TPI pertaining to purchase money bank loans. *10.21 Guarantees of Bank loans, dated January 30, 1997 and November 27, 1997 by Gary G. McCann, Paul Mighton, Vladimir Stepanoff and John McGee in favor of the Bank of Nova Scotia. *10.22 Program Product License Agreement, dated October 21, 1997, between Allegient Legacy Solutions, Inc. and TPI. * To be filed by Amendment. -----END PRIVACY-ENHANCED MESSAGE-----