FULLER, TUBB, POMEROY & STOKES
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
201 ROBERT S. KERR AVE., SUITE 1000
OKLAHOMA CITY, OK 73102
G.M. FULLER (1920-1999) TELEPHONE: 405-235-2575
JERRY TUBB FACSIMILE: 405-232-8384
DAVID POMEROY
TERRY STOKES
-
OF COUNSEL:
MICHEL A. BICKFORD THOMAS J. KENAN E-MAIL:
THOMAS J. KENAN kenan@ftpslaw.com
ROLAND TAGUE
BRADLEY D. AVEY
August 20, 2003
Securities and Exchange Commission
Division of Corporate Finance
Washington, D.C. 20549
Re: Preliminary Information Statement
TS Electronics, Inc (formerly named "Softstone Inc.")
Dear Madam or Sir:
As legal counsel to TS Electronics, Inc. ("the Registrant"), formerly named
Softstone Inc., I am filing a Preliminary Information Statement. It is
anticipated that definitive copies will be distributed to the shareholders of
the Registrant on August 30, 2003.
Please feel free to contact me should there be any questions. My telephone
number is 405-235-2575. My fax number is 405-232-8384. My email address is
kenan@ftpslaw.com.
Sincerely,
/s/ Thomas J. Kenan
Thomas J. Kenan
PRELIMINARY COPIES
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C
Information Statement Pursuant to Section 14(c)
Of the Securities Exchange Act of 1934
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14c-5(d)(2)
[ ] Definitive Information Statement
TS Electronics, Inc., formerly named Softstone Inc.
---------------------------------------------------
(Name of Registrant as Specified in its Charter)
Payment of Filling Fee (Check the appropriate box):
[ ] No fee required
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and
0-11
(1) Title of each class of securities to which transaction applies:
Common Stock
(2) Aggregate number of securities to which transaction applies:
5,400,000 shares
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount of which
the filing fee is calculated and state how it was determined):
$0.275 a share for 5,350,000 shares of common stock to be
distributed to securities holders in connection with an
acquisition, based on the average of the closing bid and asked
prices of the registrant's common stock on August 14, 2003 (the
registrant's stock traded then on the Bulletin Board under its
previous name, Softstone, Inc., and stock symbol "SOFS") and $0.275
a share for 50,000 shares of common stock (based as before) plus
$341,110 as the value of other properties to be distributed to
securities holders by the registrant from the sale of substantially
all of its assets.
(4) Proposed maximum aggregate value of transaction:
Acquisition transaction: 5,350,000 shares x $0.275 = $1,417,250.
Sale of assets transaction: 50,000 shares x $0.275 = $13,750 +
$341,110 = $354,860
(5) Total fee paid:
$294.25 + $70.97 = $365.22
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PRELIMINARY COPIES
INFORMATION STATEMENT
TS ELECTRONICS, INC.
(formerly named Softstone, Inc.),
This Information Statement is furnished to stockholders in connection with
the proposed taking of certain actions by the written authorization or consent
of persons holding a majority of the outstanding shares of common stock of TS
Electronics, Inc., a Delaware corporation ("our company", formerly named
"Softstone, Inc."). Although the approval of our company's stockholders is
required to fully effect the transactions, shareholders holding more than 75
percent of our outstanding shares have given their written approval of the
transactions. Accordingly, it is not necessary for the company to call a
special meeting of stockholders to consider the proposed reorganization, and
your approval is not required and is not being sought. Regulations of the U.S.
Securities and Exchange Commission (the "Commission") require that our company
transmit an information statement containing certain specified information to
every holder of our common stock that is entitled to vote or give an
authorization or consent with regard to any matter to be acted upon and from
whom proxy authorization or written consent is not solicited. This Information
Statement must be mailed at least 20 calendar days prior to the earliest date on
which the corporate action may be taken. This Information Statement is being
mailed to our stockholders on or about August 30, 2003 to our stockholders of
record of August 18, 2003.
We Are Not Asking You for a Proxy and You are Requested Not To Send Us a
Proxy.
SPECIAL FACTORS
The fifth Transaction described in this Information Statement (Sales of Assets
Transaction) relates to the sale of substantially all the present assets and the
rubber business of our Company to Gene F. Boyd, Betty Sue Boyd and Keith P. Boyd
("the Boyds"). Gene and Betty Boyd are the parents of Keith Boyd. Gene and
Keith Boyd are directors of our company. Keith Boyd is the president of our
company, and Gene Boyd is the secretary of our company. Our stockholders should
be aware of the following matters:
- In contemplation of the sale of our assets and rubber business to the
Boyds and of the effectuation of all five Transactions, in August 2003 our
company issued 3,650,651 shares of common stock to Gene Boyd, 1,064,187
shares of its common stock to Keith Boyd and 507,895 shares of its common
stock to Betty Sue Boyd (the "Boyds"). The issuance of these shares
increased the stock position of the Boyds to 50 percent of the 13,082,698
presently outstanding shares of our common stock. These shares were issued
primarily in exchange for (i) the Boyds releasing our company from the
obligation to pay approximately $547,852 in notes owed to them and (ii) the
Boyds assuming the obligation to personally pay, and obtaining the release
of our company from the obligation to pay, approximately $506,575 of
additional debt owed by our company to other persons. These shares were
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also issued in recognition of the fact that of the approximately $1,272,000
cash (disregarding shares issued for services) raised by our company
through the sale of stock since its inception, the Boyds have contributed
slightly more than half of that, or $646,865, and have not been fully
recognized for this contribution. The total contributions of the Boyds,
including their recent assumption to release or pay all debt of our
company, is approximately $1,701,292 or 51.7 percent of the $3,293,631
total contributions of capital to our company, after giving effect to the
release and assumption of debt by the Boyds described above. Absent the
Boyds' release of $547,852 of company debt owed to them and their assuming
the obligation to pay an additional $506,575 of debt of our company owed to
other parties, the Transactions described below would not be possible and
would not even be attempted.
- The Boyds negotiated the terms of the sale of our rubber business assets to
themselves.
- Because of the Boyds's control of our company, they have actual conflicts
of interest with regard to their participation in the negotiation of the
terms of the sale of our rubber business to themselves. They also have
conflicts of interest in the manner in which they would approve the sale of
assets to themselves. In an effort to resolve these conflicts of interest,
the Boyds agreed to their approving the five Transactions only after the
approval of the transactions should first be obtained from holders of a
majority of the outstanding shares not counting the shares held by the
Boyds. Such approval was obtained before the Boyds gave their written
consent to this and the other Transactions described herein.
- The Transactions described in this Information Statement relate to the
acquisition by our company of all the capital stock of TS Electronics
(China) (China), a Delaware corporation with its principal business located
in Tianjin, China. TS Electronics (China)'s business shall become the
business of our company and TS Electronics (China)'s 129 employees shall
effectively become employees of our company. The sale of our rubber
business and assets to the Boyds is a coincidence of the acquisition of the
business and assets of TS Electronics (China). This sale of assets to the
Boyds could not occur unless our stockholders should also approve the other
four Transactions described herein.
- Our company is insolvent. If all five Transactions described herein should
not be effectuated, the rubber business of our company would almost surely
fail in the immediate future. In such a case, the Boyds would be the major
creditor of our company. By reason of this, in any bankruptcy or
reorganization case, the Boyds would be in a position to acquire the
substantial majority or all of our assets. Our stockholders would almost
surely receive nothing in such a bankruptcy reorganization or liquidation
case.
- We have received no offers for the sale of our rubber business and are not
aware of any prospective purchaser of our assets or rubber business. We
believe the equipment relating to our rubber business that we have, which
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equipment has been in storage for several months, would have minimal or no
value as a bankruptcy auction item.
- Essentially, the business, management and control of our company are to be
changed. Because of the consolidation of all presently outstanding shares
of common stock of our company to only 600,000 shares and because of (i)
our issuance of 5,350,000 shares of Common Stock to the TS Electronics
(China) shareholders in exchange for all the capital stock of TS
Electronics (China) and (ii) our issuance of 50,000 shares of Common Stock
to the Boyds plus 100,000 Common Stock Purchase Warrants exercisable for
one year at $1.25 a warrant in exchange for the Boyds's paying or assuming
and obtaining the release of approximately $1,054,427 total indebtedness of
our company, you - our existing stockholders - will experience a 90 percent
dilution in your share ownership of our company. However, your shares will
become shares in a growing, profitable company that realizes net income
from its operations, a development that should improve the market liquidity
and value of your Common Stock.
BRIEF DESCRIPTION OF THE FIVE TRANSACTIONS
REORGANIZATION AGREEMENT TRANSACTION. The Board of Directors of our company has
recommended that our stockholders approve, and a majority of the shareholders
have approved, a Reorganization Agreement dated as of July 31, 2003 between our
company and TS Electronics (China), a Delaware corporation with its principal
offices in Tianjin, China; pursuant to which agreement, among other things, (i)
all outstanding shares of common stock of our company will be consolidated, pro
rata, into 600,000 shares, (ii) after such consolidation, 5,350,000 million
shares of our common stock will be issued to the TS Electronics (China)
shareholders in exchange for all the issued and outstanding shares of capital
stock of TS Electronics (China), (iii) the business of our company will then
become the business of TS Electronics (China) in China, and (iv) our company's
present rubber business and assets, 50,000 shares of post-consolidation Common
Stock plus 100,000 Common Stock Purchase Warrants exercisable for one year at
$1.25 a warrant will be sold to the Boyds in exchange for their releasing,
paying, or obtaining the cancellation of, approximately $1,054,427 of debt of
our company owed to the Boyds and others. For a more complete description of
the terms of the Reorganization Agreement Transaction, see - "The Reorganization
Agreement Transaction."
STOCK CONSOLIDATION TRANSACTION. The Board of Directors of our company has
recommended that our stockholders approve, and a majority of the shareholders
have approved, a Transaction to authorize the consolidation of all the presently
outstanding shares of common stock of our company into 600,000 shares (the
"Stock Consolidation Transaction"). For a more complete description of the terms
of the Stock Consolidation Transaction, see - "The Stock Consolidation
Transaction."
STOCK ISSUANCE TRANSACTION. The Board of Directors of our company has
recommended that our stockholders approve, and a majority of the shareholders
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have approved, a Transaction to authorize the issuance of 5,350,000 million
shares of Common Stock to the TS Electronics (China)'s shareholders pursuant to
the Reorganization Agreement (the "Stock Issuance Transaction"). For a more
complete description of the terms of the Stock Issuance Transaction, see - "The
Stock Issuance Transaction."
NAME CHANGE TRANSACTION. The Board of Directors of our company has recommended
that our stockholders approve, and a majority of the shareholders have approved,
the adoption of an amendment to our company's Certificate of Incorporation to
change the name of our company from "Softstone, Inc." to "TS Electronics, Inc."
For a more complete description of the terms of the Name Change Transaction,
see - "The Name Change Transaction."
SALE OF ASSETS TRANSACTION. The Board of Directors of our company has
recommended that our stockholders approve, and a majority of the shareholders
have approved, the Transaction - which is part of the Reorganization Agreement
Transaction - that our company sell to the Boyds our company's rubber business
and all our company's assets, 50,000 shares of post-consolidation Common Stock
plus 100,000 Common Stock Purchase Warrants exercisable for one year at $1.25 a
warrant in exchange for the Boyds's releasing, paying or obtaining the release
of approximately $1,054,427 in debt owed by our company to the Boyds and others.
For a more complete description of the terms of the Sale of Assets Transaction,
see - "The Sale of Assets Transaction."
LACK OF APPRAISAL RIGHTS
Delaware law and our certificate of incorporation do not provide appraisal
rights to stockholders that dissent from the transactions described herein.
THE TRANSACTIONS
REORGANIZATION AGREEMENT
PRINCIPAL PARTIES TO THE TRANSACTIONS
The principal parties to the transactions described below are:
The acquiring company:
Softstone, Inc. (now named "TS Electronics, Inc.)
111 Hilltop Lane
Pottsboro, TX 75076
Telephone: (903) 786-9618
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The company to be acquired:
TS Electronics (China) Corp.
C/o ShenDing Electronics, Inc.
XinMao Technology Park, D1, Suite 5C-D
Tianjin, China
Telephone: 011-86-22-83710114-
The persons to whom control of our company shall pass:
Jingyi Wang
XinMao Technology Park, D1, Suite 5C-D
Tianjin, China
JianZhong Wang
XinMao Technology Park, D1, Suite 5C-D
Tianjin, China
The persons who shall purchase our rubber business and related assets:
Gene F. Boyd
712 Franklin Court
Ardmore, OK 73401
Keith P. Boyd
111 Hilltop Lane
Pottsboro, TX 75076
Betty Sue Boyd
712 Franklin Court
Ardmore, OK 73401
BACKGROUND OF THE TRANSACTIONS
During the period from mid-July 2003 until the signing of the
Reorganization Agreement on July 31, 2003, our company's board of directors and
the directors of TS Electronics (China) were involved in discussions that
culminated in a proposal for our company to do the following:
- Sell 89-percent control of our company, through its issuance of shares of
our company's Common Stock to the two shareholders of TS Electronics
(China), in exchange for all the capital stock of TS Electronics (China).
TS Electronics (China) is a Delaware corporation, whose principal asset is
its wholly-owned subsidiary, Tianjin ShenDing Electronics Technology Co.,
Ltd., a Tianjin, China-based private company. TS Electronics (China)
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manufactures and markets (1) wireless transmission tower backup batteries
for the rapidly growing wireless communications industry in China and (2)
equipment that substantially reduces the loss in the transmission of
electricity, a product that not only conserves energy but greatly reduces
electricity cost to electricity end users.
- Sell to the Boyds our company's rubber business and related assets - the
total value of which is carried on our books at $341,879 but 90 percent of
which is equipment that is unproductive and has been in storage for several
months - plus 50,000 shares of common stock and 100,000 common stock
purchase warrants exercisable for one year at $1.25 a warrant-share in
exchange for the Boyds's releasing, paying or obtaining the release of
approximately $1,054,427 in debt owed by our company to the Boyds and
others.
The above Transactions would effectively cause our company to abandon its
efforts with regard to its rubber business, which efforts have not been
successful. The new business of our company would be the business of TS
Electronics (China), and control of our Company would pass to the management of
TS Electronics (China).
REASONS FOR ENGAGING IN THE TRANSACTIONS
Our directors considered the facts that our company has never had a
profitable quarter, is insolvent, and faces liquidation or receivership this
year if it remains in the rubber business.
Our directors also considered the impressive growth of TS Electronics
(China). TS Electronics (China) has 129 full-time employees as of May 1, 2003.
Its assets at March 31, 2003 were $992,664 against liabilities of $378,355. It
had sales for the twelve-month period ended March 31, 2003 of $870,444 - an
8-fold increase from sales of $97,132 for the preceding twelve-month period. It
had net income of $349,649 for the twelve-month period ended March 31, 2003 - a
12-fold increase from net profits of $26,614 for the preceding twelve-month
period. It dominates its market in the third largest city in China and has
solidified its position in that region as a supplier of certain equipment used
in the rapidly growing wireless communications industry in China. It has
ambitious growth plans, plans that can best be achieved if it is a public
company with its stock trading in the United States.
REORGANIZATION AGREEMENT
GENERAL
-------
The Reorganization Agreement that our company and TS Electronics (China),
entered into contemplates two transactions:
The Softstone-TS Electronics Reorganization Transaction. Our company shall
acquire all the capital stock of TS Electronics (China) on the following basis:
- Our company shall be the surviving corporation;
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- Our company, before acquiring all the capital stock of TS Electronics
(China), shall consolidate to 600,000 shares, on a pro rata basis, all of
its outstanding common stock ( each 21.8045 shares outstanding on August
14, 2003 shall be consolidated into one share with fractional shares being
rounded up or down to the nearest whole number);
- We shall then issue 5,350,000 shares of our common stock to the
shareholders of TS Electronics (China), pro rata, in exchange for all the
capital stock of TS Electronics (China);
- The officers and directors of TS Electronics (China) at the time of the
reorganization shall become the officers and directors of our company; and
- Softstone will change its name to TS Electronics, Inc.
The Boyds-Softstone transaction. Our company shall sell to the Boyds its
rubber business and all related assets, 50,000 shares of post-consolidation
stock plus100,000 Common Stock Purchase Warrants exercisable for one year at
$1.25 a warrant in exchange for the Boyds's releasing, paying or obtaining the
release of approximately $1,054,427 in debt owed by our company to the Boyds and
others.
NET EFFECT OF THE REORGANIZATION AGREEMENT TRANSACTIONS
The net effect of the consummation of the Reorganization Agreement
Transactions would be as follows:
- The current rubber business of our Company will be transferred to an
entity wholly owned by the Boyds.
- The new business of our Company will be the business currently conducted
by TS Electronics (China).
- The Boyds's ownership of our company's Common Stock will have been reduced
from 50 percent to approximately five percent. The control of our company
will pass to the present shareholders of TS Electronics (China).
- Our company's debt owed to creditors other than the Boyds will have been
released or paid by the Boyds. Our company's debt to the Boyds will have
been cancelled. Our company will have no liabilities.
- Our company's management will be replaced by the present management of TS
Electronics (China).
- The historical financial statements of our company will be those of TS
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Electronics (China), not our company. The transaction will be accounted for
as a recapitalization of our company.
- For Federal income tax purposes, the Reorganization Transaction will be
tax-free to our shareholders and to the two shareholders of TS Electronics
(China) pursuant to the provisions of Section 368(a)(1) of the Internal
Revenue Code. There will be no income tax consequences to the stockholders
of our company other than a change in the per-share tax basis of their
shareholdings after giving effect to the stock consolidation. Our company
will realize ordinary income to the extent that the Boyds cancel debt of TS
Electronics owed to them and obtain releases of other debt of our company.
- There are no c hanges in the rights of our stockholders as a result of the
transaction.
- Our company will be renamed "TS Electronics, Inc."
CONDITIONS TO THE CONSUMMATION OF THE REORGANIZATION AGREEMENT
CONDITIONS TO THE CLOSING BY OUR COMPANY. The obligation of our company to
consummate the transactions contemplated by the Reorganization Agreement is
subject to the satisfaction, or waiver by our company, of certain conditions
including the following:
(i) The representations and warranties made by TS Electronics (China) under
the Reorganization Agreement must be true and correct as of the date of
the Reorganization Agreement and as of the Closing Date with the
same force and effect as if they had been made on the Closing
Date;
(ii) All covenants, agreements and conditions contained in the
Reorganization Agreement must be performed or complied with by TS
Electronics (China) on or prior to the Closing Date in all
material respects; and
(iii) Our company must have obtained stockholder approval of the
Transactions, which approval has been obtained.
The Boyds, who own 50 percent of the outstanding voting stock of our company,
withheld their consent to the five transactions until our company had first
obtained the written consent to the transactions from holders of a majority of
the other outstanding shares of the company.
CONDITIONS TO THE CLOSING BY TS ELECTRONICS (CHINA). The obligation of TS
Electronics (China) to consummate the transactions contemplated by the
Reorganization Agreement is subject to the satisfaction, or waiver by TS
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Electronics (China), of certain conditions including the following:
(i) The representations and warranties made by our company under the
Reorganization Agreement must be true and correct as of the date of
the Reorganization Agreement and as of the Closing Date with the same
force and effect as if they had been made on the Closing Date; and
(ii) All covenants, agreements and conditions contained in the
Reorganization Agreement must be performed or complied with by our
company on or prior to the Closing Date in all material respects; and
(iii) Prior to the Closing, our company shall not have suffered any
material adverse change.
REPRESENTATIONS AND COVENANTS OF THE PARTIES
COMPANY REPRESENTATIONS AND COVENANTS. Under the terms of the
Reorganization Agreement, our company has made numerous representations and
agreed to abide by several affirmative covenants, among which are the following:
(i) The financial statements of our company, which are attached hereto as
Annex I, present fairly the financial condition and results of
operations of our company in accordance with generally accepted
accounting practices;
(ii) All material liabilities of our company, contingent or matured, are
revealed in the financial statements or as a separate exhibit;
(iii) Our company has filed, or will file prior to the Closing, all tax
returns required to be filed by any taxing authority and has paid or
accrued all taxes required to be paid; and
(iv) We have not made any material misstatements of fact or omitted to
state any material fact necessary or desirable to make complete,
accurate and not misleading every representation set forth in the
Reorganization Agreement.
TS ELECTRONICS (CHINA)'S REPRESENTATIONS AND COVENANTS. Under the terms
of the Reorganization Agreement, TS Electronics (China) has made numerous
representations and agreed to abide by several affirmative covenants, among
which are the following:
(i) The financial statements of TS Electronics(China), which are attached
hereto as Annex II, present fairly the financial condition and results
of operations of TS Electronics (China) in accordance with generally
accepted accounting practices;
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(ii) All material liabilities of TS Electronics(China), contingent or
matured, are revealed either in the financial statements or in Exhibit
4.10 attached to the Reorganization Agreement.
iii) TS Electronics (China) has filed, or will file prior to the Closing,
all tax returns required to be filed by any taxing authority and has
paid or accrued all taxes required to be paid; and
(iv) TS Electronics (China) has not made any material misstatements of fact
or omitted to state any material fact necessary or desirable to make
complete, accurate and not misleading every representation set forth
in the Reorganization Agreement.
APPROVALS AND CONSENTS
Other than the approval of our company's stockholders of the transactions,
the transactions contemplated by the Reorganization Agreement do not require the
approval or consent of third parties, including governmental entities, in order
for the parties to perform their obligations under the Reorganization Agreement.
Our company is of the opinion that no consents are required.
OTHER REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains customary representations and
warranties of our company and of TS Electronics (China) relating to, among other
things, (i) organization, good standing, qualification to do business and other
corporate matters; (ii) the authorization, execution, delivery and
enforceability of the Reorganization Agreement; (iii) the status of the shares
of Common Stock of our company and of TS Electronics (China) to be delivered;
(iv) the status of certain financial statements referenced in the Reorganization
Agreement; (v) the absence of certain changes or events since the date of the
balance sheet referenced in the Reorganization Agreement; (vi) the status of our
company's contracts and commitments; (vii) the absence of certain litigation;
(viii) the employees and employee benefit programs of our company; (ix) required
consents and approvals; (x) compliance with laws; (xi) the title of each of our
company and TS Electronics (China) to its property and assets; (xii) tax
matters; and (xiii) related party transactions, including indebtedness to
officers and directors.
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CHANGE OF CONTROL
The 5,350,000 shares of Common Stock to be issued to the shareholders of TS
Electronics (China) pursuant to the Reorganization Agreement will represent, in
the aggregate, 89 percent of all shares then outstanding, after considering the
effect of consolidating to 600,000 the number of shares of our company
outstanding prior to the issuance of such 5,350,000 shares. As a result,
following the consummation of the transactions contemplated by the
Reorganization Agreement, the number of shares that will be controlled by the
present two shareholders of TS Electronics (China) will enable them, acting in
concert, to effectively control the outcome of any matter presented to the
stockholders, including the election of all of the members of our board of
directors.
INFORMATION WITH RESPECT TO OUR COMPANY
Business Development
Our company was incorporated as "Softstone, Inc." on January 28, 1999,
pursuant to the provisions of the General Corporation Act of the State of
Delaware. On May 31, 1999, we merged with Soft Stone Building Products, Inc.,
an Oklahoma corporation that was a predecessor to our company's business. Our
initial business operations were conducted at 620 Dallas Drive, Denton, Texas
76205. On February 1, 2000, we moved our offices and facilities to Ardmore,
Oklahoma. In June 2002 we moved our production facilities into storage and
moved our office facilities to 111 Hilltop Lane, Pottsboro, Texas 75076, which
is our present address. On August 13, 2003 we changed our name to "TS
Electronics, Inc."
Description of Business
Our focus initially was solely on realizing the commercial benefits of a
process developed for this purpose and patented by our first president,
Frederick Parker. Because we have this process, we have a contract with
Michelin North America's Ardmore tire manufacturing facility that pays us to
take its waste tires.
Our primary focus later shifted to the commercial possibilities of a
superior, newly discovered devulcanization process to which we acquired a
5.5-year exclusive license for the Western Hemisphere and to the brokering of
crumb rubber manufactured by other companies.
Devulcanization - The Levgum Process
This process - called the Levgum Process after the name of the company of
scientists and engineers in Israel that developed and patented the process -
breaks down the sulfur links across polymer chains in vulcanized rubber. It
allows the rubber to be used again.
There are other devulcanization techniques. But, we believe ours is better,
cheaper and eco-friendlier than all others.
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Before we agreed to pay $250,000 for our exclusive license, we took the
Levgum devulcanized rubber product to the Akron Rubber Development Laboratory in
Akron, Ohio for testing and for comparison with virgin rubber and with the best
devulcanized rubber produced by other techniques. The laboratory results:
- Levgum devulcanized rubber retains 80 percent o f virgin rubber's
properties, making it most useful. Other techniques retain 40 percent at
best.
- Levgum's devulcanized rubber can be produced at significantly less cost
than can other devulcanization technologies or than the cost of virgin
rubber.
- We use conventional machines operating at room temperatures. Competing
technologies employ lengthy operations involving grinding, chemical,
heating and mechanical processes.
- The Levgum devulcanization process is non-toxic and eco-friendly. Other
technologies are not.
We have not proposed to build devulcanization plants. Instead, it has been
our intention to sub-contract the initial manufacturing of the devulcanized
rubber, sell sub-licenses to other companies, and offer our assistance with the
marketing of the devulcanized rubber for a commission. We have not been
successful in realizing our intentions.
We need $50,000 in capital to fund our manufacture of a fully automated
tire de-beader, which we propose to then manufacture for sale to the industry,
to pursue opportunities to sublicense the Levgum devulcanization technology, and
to market crumb rubber produced by us or other manufacturers. We have not
identified the source of these funds.
Conversion of Waste Tires Into Useful Products
There is a worldwide need for a method to convert whole waste tires into
useful products with no waste as a byproduct and with favorable economic
results. New tire manufacturers in the U.S. are required to dispose of their
manufacturing rejects without creating an unsightly mess or adding to ecological
problems. Government agencies at all levels tend to cooperate with any company
having a reasonable means of disposing of the approximately seven million tires
each year that are discarded as rejects or as worn-out tires. Virtually every
state has a program whereby it pays a fee per tire to qualified companies that
dispose of used tires.
Our past president, Frederick Parker, is a co-inventor of a patented
process Softstone uses to convert waste tires into useful products. The Parker
I System machine was constructed in Ardmore, Oklahoma as a proof-of-concept
prototype. With subtle adjustments recently made, this machine became a
production model that ingests whole tires at one end of the machine and ejects
rubber modules at the other end with virtually no waste or contaminants. The
rubber modules are virtually indestructible and have been tested for use as a
playground covering, pathways, walking trails, horse barn stalls and other uses.
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The Parker I System machine can make a variety of products by using
different molds. Our most popular product is a two-foot by four-foot module
approximately two inches thick that interlocks with adjacent modules for walk
ways and driveways. However, the size and thickness of the modules can be
adjusted for use as highway cone holders, crash barriers, guardrails, bridge and
road impact pads and as a substitute for asphalt in several key applications.
Approximately 80 to 85 percent of the modules' composition is comprised of
wire-free tire chips. The balance is comprised of readily available
polyurethane binders and other substances.
We have raised and spent approximately $1.5 million since inception on
developing our patented process and on designing and constructing our Parker
System I proof-of-concept machine in Joshua, Texas. The Parker System I is
highly automated. Whole tires are inserted into a shredder, reduced to chip
rubber, blended with a specially prepared binder element, placed into a custom
mold and then pressed into place and locked. These molds are then moved on a
conveyor belt through a heated oven where the product cures and comes out the
other end as a rubber-molded product ready for sale. We believe there is no more
efficient or economical method of processing tires into finished products than
our process.
We need to refurbish our tire shredder and to purchase equipment that
produces wire-free chips from the shredded tires. Our modules have withstood a
300,000-pound deformation test and immediately rebounded; yet, the product has
qualified for installation on children's playgrounds. The product is ready to be
installed immediately after it is made. There is no curing time necessary. The
product is relatively light but does not break, crack or tear.
We believe that the primary markets for our products are paving
applications where concrete and asphalt now dominate, such as sidewalks,
driveways and trails. Concrete and asphalt have significant drawbacks compared
to Softstone-based products. Concrete and asphalt crack and heave due to soil
and weather conditions. They often must be replaced after a few years of use.
Softstone's rubber modules, however, will not crack because of weather's cold or
melt because of its heat. If there is a soil heaving condition, our product can
be lifted and relaid when the ground condition is corrected.
Distribution Methods
We have several interested parties in distributing our products; provided,
however, that we first refurbish our tire shredder and install equipment that
produces wire-free chips from the shredded tires in order that we can sell our
products at commercially attractive prices. Our strategy has been to market our
rubber products primarily and directly to construction companies, home builders,
landscape architects, golf course designers, road and path construction
companies and municipalities.
14
Competitive Business Conditions
Many firms make molded rubber products, including some for patio, horse
trailer and barn applications. It is our observation and belief that our
products are superior to all others in economics and durability.
Should we ever obtain the capital to buy and install equipment that will
reduce tires to wire-free tire chips, we believe we would commence to realize
the potential from our molding operations. We estimate that we would be able to
achieve gross revenue of more than $2 million a year from our single
"prototype-production" assembly line, with a gross margin of better than 60
percent. Should we add a second assembly line, we estimate that our gross margin
would increase to better than 70 percent. We doubt that our competition could
compete with such efficiency. To the best of our knowledge and belief, no other
company takes a whole tire and reduces it to a useable retail product in a
single, continuous process with no waste or by-product.
Sources and Availability of Raw Materials; Names of Principal Suppliers
There is virtually an endless supply of waste tires. Many sources will pay
us to take the tires off their hands. Michelin pays us $0.77 to $0.85 a tire
and states that it would like to do this at every one of its eighteen U.S. tire
manufacturing facilities.
We use pure MDI-based RoyalBond binders from Uniroyal Chemical. MDI -
methylene diphenyl diisocyanate - in its pure form provides superior adhesion
between rubber particles and the surrounding polymer and improves properties
such as flex-life, elongation and long-term weatherability.
Dependence on Major Customers or Suppliers
While our present source of supply of tires is reject tires from the
Michelin tire manufacturing facility in Ardmore, Oklahoma, and our source of
binder is MDI-based RoyalBond binder from Uniroyal Chemical, we are not
dependent on either of these for their products. There are ample supplies of
used tires - more than we can use - within the Oklahoma City and Dallas, Texas
areas, both of which are less than two hours driving distance from our offices
in Pottsboro, Texas on the Texas-Oklahoma border. As for binders, MDI-based
binders are readily available from other sources.
We are still in the development stage as far as sales are concerned and are
not dependent on any major customers. However, our lack of significant sales is
due to our need for a wire-free chip producing grinder.
Patents, Trademarks and Licenses
The inventors of our patented Parker One System, one of whom is Frederick
Parker, our past president, have assigned the patent to Softstone with no
retained royalty.
15
We have a 5.5-year exclusive license to the Levgum devulcanization
technology for the Western Hemisphere.
Government Approval of Principal Products or Services
We are not required to obtain the approval of our products by any
governmental agency. Our operations, however, are subject to a number of
governmental regulations.
Government Regulations
Our operations are subject to regulation by various federal, state and
local governmental entities and enactments, which include environmental laws and
workplace regulations, including the Occupational Safety and Health Act, the
Fair Labor Standards Act, the Clean Air Act, the Clean Water Act and other laws
and regulations regarding health, safety, sanitation, environmental issues,
building codes and fire codes. We believe that our current compliance programs
adequately address such concerns and that we will be in substantial compliance
with such laws and regulations. Our failure to comply with such laws and
regulations could result in serious sanctions and penalties that could
materially and adversely affect our business.
Research and Development
We spent approximately $650,000 over the last two years in research and
development activities with regard to the development of our products. None of
the cost of these activities was borne directly by our customers.
Environmental Laws
We must comply with the environmental regulations of the Environmental
Protection Agency and the equivalent Oklahoma and Texas agencies charged with
environmental protection. This consists, primarily, in complying with
regulations regarding the disposal of waste products. Such compliance requires
no significant outlay of capital by us and only minimum costs. We produce no
hazardous waste as most of our competitors do.
Seasonality
There is no seasonal aspect to our business.
Employees
We have one full-time employee and no part-time employees.
Exclusive License With Levgum, Ltd.
On March 15, 2002 we executed an agreement with Levgum, Ltd. of Tel Aviv,
Israel. Levgum owns patents pertaining to certain technology for the
16
devulcanization of rubber tires. We are convinced that this is the best
devulcanization technology in the world and that it is commercially viable, as
compared to other devulcanization technologies that work but cost more to apply
per pound of rubber produced than the cost of virgin rubber.
Levgum shipped to us ten kilograms of its devulcanized rubber for us to
perform laboratory trials on. The trials were most satisfactory. We then
acquired the exclusive rights to Levgum's technology for the Western Hemisphere,
including the right to sublicense the technology in this geographic area.
We paid $250,000 to Levgum for these exclusive rights for a 5.5 year period
and for a ten percent equity interest in Levgum. To retain the exclusive rights,
we will have to remit royalties to Levgum as follows:
First 18 months: $ 200,000
Next 12 months: 1,000,000
Next 12 months: 2,000,000
Next 12 months: 3,000,000
Next 12 months: 5,000,000
The royalties will consist of $30 for each ton of devulcanized rubber
produced in the Western Hemisphere using Levgum's devulcanization technology.
Reports to Security Holders
We file reports with the Securities and Exchange Commission. These reports
are annual 10-KSB, quarterly 10-QSB, and periodic 8-K reports. We also intend
to furnish stockholders with annual reports containing financial statements
audited by independent public or certified accountants and such other periodic
reports as we may deem appropriate or as required by law. The public may read
and copy any materials we file with the SEC at the Public Reference Room of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet
Web site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC. The
address of such site is http://www.sec.gov.
DESCRIPTION OF PROPERTY
We neither own nor lease any office or manufacturing space. Our office
space is provided rent free in Pottsboro, Texas by our president. We no longer
have any space for manufacturing, and all of our tire processing equipment has
been placed into storage, rent free, at a facility owned by one of our
shareholders.
17
LEGAL PROCEEDINGS
Neither our company nor any of our property is a party to, or the subject
of, any material pending legal proceedings other than ordinary, routine
litigation incidental to our business.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of our stockholders during
the last fiscal year or during the subsequent period to the filing of this
report.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock was admitted to trading on the OTC Bulletin Board on April
17, 2002. Its stock symbol initially was "SOFS." On August 15, 2003 the symbol
was changed to "TSET". The following table shows the quarterly high and low
prices of the stock since it was admitted to trading through June 30, 2003,
which was before the stock symbol change. The prices reflect inter-dealer
quotations without mark-up, mark-down or commissions and may not represent
actual transactions.
High Low
---- ---
Calendar 2002:
2nd Qtr 0.51 0.11
3rd Qtr 0.25 0.06
4th Qtr 0.17 0.05
Calendar 2003:
1st Qtr 0.1 0.1
2nd Qtr 0.1 0.05
There are approximately 175 holders of record of our company's common
stock.
Our company has declared no dividends on our common stock. There are no
restrictions that would or are likely to limit the ability of our company to pay
dividends on its common stock, but we have no plans to pay dividends in the
foreseeable future and intend to use earnings for the expansion of our business.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with
the financial statements and the accompanying notes thereto and is qualified in
its entirety by the foregoing and by more detailed financial information
appearing elsewhere. See "Financial Statements."
Results of operations, Fiscal Years 2002 and 2001
The following table presents, as a percentage of sales, certain selected
financial data for each of fiscal years ended June 30, 2002 and June 30, 2001:
18
Fiscal Year Ended
------------
06-30-2002 06-30-2001
---------- ----------
Sales 100% 100%
Operating expenses 2,007% 1,335%
------ ------
Income from operations (1,907)% (1,235)%
Other expenses (1,038)% 88%
------ ------
Net income (loss) (2,945)% (1,322)%
Net loss per share $(0.18) $(0.06)
Sales
Sales of $37,490 for fiscal year 2002 increased by $7,403, or 25 percent
over sales of $30,087 in fiscal 2001. The increase is due primarily to an order
from the City of Ardmore for an installation at Douglas Park.
Operating expenses
Operating expenses increased from $401,548 in fiscal 2001 to $752,324 in
fiscal 2002, or 87 percent. This 87 percent increase is attributed primarily to
the purchase of, and research conducted prior to, the purchase of the Levgum
Devulcanization Technology.
Net income (loss)
Our net loss of $397,809 in fiscal 2001 plummeted to a net loss of
$1,104,133 in fiscal 2002. This increase is attributed to the company's
purchasing the rights to a foreign patent for $250,000, which purchase had to be
expensed as the patent has not been appraised, the compensation of individuals
with stock and the cost associated with the reorganization of the company to
alleviate overhead. We have temporarily stored our production equipment until
we obtain a needed tire shredder, in order to conserve money.
Balance sheet items
Current assets of $3,836 on June 30, 2002, compares unfavorably with
current liabilities of $673,467 at that time, an unfavorable current ratio of
..006.
Liquidity and Capital Resources
During the fiscal year ended June 30, 2001, we financed our net loss of
$397,809 primarily through -
- sales of common stock for $164,640 in cash,
19
- the issuance of $92,743 worth of common stock for services, equipment and
a patent, and
- loans amounting to $250,941 from an officer and director of the company.
During the fiscal year ended June 30, 2002, we financed our net loss of
$1,104,133 primarily through -
- sales of common stock for $254,520 in cash,
- loans of $287,263,
- the issuance of $346,537 worth of common stock for services and interest,
- depreciation and amortization of $83,307,
- $125,000 loss on an investment, and
- a $214,444 loss on the impairment of assets.
Results of Operations - First Nine Months of Fiscal Year 2003 Compared
----------------------------------------------------------------------
to First Nine Months of Fiscal Year 2002
-----------------------------------------------
We had sales of $95,354 in the first nine months of FY 2003 (March 31,
2003) compared to sales of $36,120 in the first nine months of FY 2002 (March
31, 2002). The increase in sales is due to progress in the areas of brokering
crumb rubber manufactured by other companies. However, until our company should
(i) increase its volume of sales of specified crumb rubber or (ii) expand the
Levgum devulcanized technology throughout the Western Hemisphere, it is unable
to operate profitably.
Our general, selling and administrative expenses - which have been devoted
to raising capital, brokering specified crumb rubber, expanding our rights to
the Levgum Devulcanization Technology and acquiring a public market for our
common stock - were $111,722 in the first nine months of FY 2003 as compared
with $630,545 in the first nine months of FY 2002.
We had a net loss of $185,722, or $0.03 a share, in the first nine months
of FY 2003 as compared with a net loss of $629,684, or $0.10 a share, in the
first nine months of FY 2002.
We covered our $185,722 loss in the first nine months of FY 2003 by loans
of $40,100, an increase of accrued expenses of $37,049, proceeds of $32,576 from
the sale of assets, and the sale of $38,750 in stock in private placements.
Additionally, some $51,466 of the loss was attributable to a non-cash line item,
depreciation and amortization.
OUTLOOK
We have been unable to raise funds for the renovation of our tire shredder
and the purchase of equipment that produces wire-free chips from shredded tires.
We were able, however, to raise $250,000 from the Boyds to acquire the exclusive
license from Levgum for the Western Hemisphere rights to its devulcanization
technology. We shifted our business emphasis to exploiting such license and to
brokering the sale of crumb rubber manufactured by other manufacturers. We have
20
not been able to achieve any significant success and have determined that it is
in the best interests of our shareholders to reorganize our company in
accordance with the reorganization agreement described herein.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On September 5, 2002 Hogan & Slovacek of Oklahoma City and Tulsa, the
principal independent accountants of Softstone Inc., resigned. Hogan & Slovacek
had been engaged as Softstone's principal independent accountants since August
22, 2001, when it replaced Grant Thornton LLP as Softstone's principal
independent accountants. See Softstone's Form 8-K filed with the Commission on
August 27, 2001 (Commission File No. 000-29523).
The report of Hogan & Slovacek on the financial statements of Softstone for
its fiscal year ended June 30, 2001 contained no adverse opinions or disclaimers
of opinion, and, other than raising substantial doubt about Softstone's ability
to continue as a going concern for the fiscal year ended June 30, 2001, were not
otherwise modified as to uncertainty, audit scope, or accounting principles
during the period of its engagement (August 22, 2001 to September 5, 2002) or
the interim period to September 5, 2002, the date of resignation. Similarly,
the reports of Grant Thornton on the financial statements of Softstone contained
no adverse opinions or disclaimers of opinion, and, other than raising
substantial doubt about Softstone's ability to continue as a going concern for
each of the fiscal years ended June 30, 2000 and 1999, were not modified as to
uncertainty, audit scope, or accounting principles during such past two years or
the interim period to August 21, 2001, the date of resignation.
During the past two years or interim periods prior to September 5, 2002,
there were no disagreements between Softstone and either Grant Thornton or Hogan
& Slovacek, whether or not resolved, on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which,
if not resolved to Grant Thornton's or Hogan & Slovacek's satisfaction, would
have caused it to make reference to the subject matter of the disagreements in
connection with its reports.
On September 5, 2002, Softstone engaged Kabani & Company, Inc. of Fountain
Valley, California as its new principal accountant to audit its consolidated
financial statements.
The decision to change accountants was recommended and approved by the
board of directors.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
A list of our current officers, directors and significant employees appears
below. The directors are elected annually by the shareholders. The officers
serve at the pleasure of the board of directors. The directors do not presently
receive fees or other remuneration for their services.
Office Held Term of
Person Office Since Office
Keith P. Boyd, 29 President 2001 October 2003
Director 2001 October 2003
21
Frederick W. Parker, 68 Director 1999 October 2003
Gene F. Boyd, 65 Secretary 1999 October 2003
Chairman of the
Board of Directors 1999 October 2003
Leo Templer, 73 Director 2002 October 2003
Keith P. Boyd. Mr. Boyd has spent most of his adult life assisting his
father, Gene Boyd, with the family interests, Meinecke-Boyd, Inc., located near
Ardmore, Oklahoma. After a year in college, he joined the U.S. Navy and ended
his naval career as a petty officer - machinist mate 3rd class - aboard the USS
Chicago, SSN 721, a nuclear-powered, fast-attack submarine. In late 1998, Mr.
Boyd raised the first investor capital for Softstone. He has considerable
mechanical skills and abilities and assisted with the design and fabrication of
Softstone's Parker System machine. He formulated Softstone's sales and marketing
effort and has been responsible to date for all of its sales. In June 2001 he
was elected president and CEO of Softstone, Inc. (the company's third) and then
merged the company with a 12G reporting shell, making Softstone an SEC-reporting
public corporation. Mr. Boyd negotiated our contract with Levgum, Ltd., of
Israel and restructured the company to incorporate the devulcanization
technology. Keith Boyd has initiated the beginnings of a global market strategy
through his research of product applications as well as market entries. He
devotes 100 percent of his time to the affairs of our company.
Frederick W. Parker. Mr. Parker attended the University of Southern
California and the University of Wyoming. From December 1969 to May 1980 he was
employed as an executive and wholesaler of drilling fund securities of Canadian
American Securities, a subsidiary of American Quasar Petroleum. From May 1980
to June 1982 he founded and operated ENEX Securities and the ENEX Income Funds.
From 1982 to November 1984 he owned and operated Parker Energy Funding, a coal
methane gas company. From 1986 to 1987 he was a consultant to several oil and
gas production companies regarding deep well injection of hazardous oil field
waste. From June 1987 to October 1990 he was the executive vice president of
Princeton Clearwater Corporation. From 1990 to 1999 he operated the consulting
firm of Donner-Gray, primarily regarding oil and gas and real estate activities.
From May 1996 to September 1998 he was the director of marketing of VE
Enterprises, a manufacturing concern. From October 1998 until June 1999 when it
was merged with Softstone, Inc., he was the president and owner of Softstone
International LLC, which owned the patented technology for the manufacture of
rubber modules, which patent was assigned to Softstone, Inc. Upon the
incorporation of Softstone, Inc. on January 28, 1999, he became its president
and a director. He is still a director but resigned his position as president
in May 2001.
Gene F. Boyd. Mr. Boyd , a 1960 graduate of Texas Tech, has been the
president of Meinecke-Boyd, Inc., an Oklahoma ranching and investment
corporation, since January 1979. As the operator of a 3600-acre Simmental
cattle ranch at Tishomingo, Oklahoma, Mr. Boyd practiced (and preached) holistic
resource management, which included rotational grazing to enhance the natural
recycling of soil and grasses. He also served as vice-president of the Oklahoma
Simmental Association and as a board member of soil and water conservation
districts. Intrigued by the potential and the need for recycled rubber
22
products, Mr. Boyd and his wife moved to Ardmore, Oklahoma after 26 years on the
ranch, so that he could be a full-time participant in the start-up and
development of Softstone, Inc. Upon the incorporation of Softstone, Inc., on
January 28, 1999, Mr. Boyd became its secretary and its chairman of the board of
directors, positions he still holds.
EXECUTIVE COMPENSATION
No executive officer of the company has received total compensation in any
of the last three years that exceeds $100,000. The table below sets forth all
compensation awarded to, earned by, or paid to the presidents of the company
during the last three fiscal years:
Annual Compensation Awards
------------------------------ -------------------------------------
Securities
Other Underlying
Fiscal Annual Restricted Options/ LTIP
Name Year Salary Bonus Compensation Stock Awards SARS Payouts
---- ------ ------- ----- ------------ ------------ ---------- -------
Keith Boyd 2002 $36,000 0 0 $50,000 0 0
Keith Boyd 2001 $36,000 0 0 $20,000 0 0
Frederick Parker 2001 0 0 0 0 0 0
Tom Brewer 2000 20,833 0 0 0 0 0
Frederick Parker 2000 0 0 0 0 0 0
Tom Brewer 1999 18,750 0 0 0 0 0
Employment Contracts
We have no long-term compensation plans or employment agreements with any
of our officers or directors.
There are no employment contracts, compensatory plans or arrangements,
including payments to be received from our company, with respect to any director
or executive officer which would in any way result in payments to any such
person because of his or her resignation, retirement or other termination of
employment, any change in control, or a change in the person's responsibilities
following a change in control of our company.
Stock Options
There have been no stock options granted to the officers and directors of
our company, nor have there been any other forms of compensation paid to the
officers and directors of the company.
23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the common stock of Softstone as of August 14, 2003 (before the
one-for-each-21.8045 stock consolidation), by each officer and director of our
company, by each individual who is known, as of the date of this filing, to be
the beneficial owner of more than five percent of our common stock, its only
voting security, and by the officers and directors as a group:
Amount and
Nature of Percent
Name and Address of Beneficial of
Beneficial Owner Ownership Class Office
------------------- ----------- -------- ------
Keith P. Boyd 1,616,337 12.4 President
111 Hilltop Lane Director
Pottsboro, TX 75076
Frederick W. Parker 775,419 5.9 Director
811 N. Rockford Place
Ardmore, OK 73401
Gene F. Boyd 4,363,566 33.4 Secretary
712 Franklin Court Director
Ardmore, OK 73401
Betty Sue Boyd 545,446 4.2
712 Franklin Court
Ardmore, OK 73401
Leo G. Templer 77,225 0.6 Director
916 Stratford Drive
Bedford, TX 76021
Officers and Directors as a Group 2,112,865 52.3
(4 persons)
No executive officer, director, person nominated to become a director,
promoter or control person of our Company has been involved in legal proceedings
during the last five years such as
- bankruptcy,
- criminal proceedings (excluding traffic violations and other minor
offenses), or
- proceedings permanently or temporarily enjoining, barring, suspending or
otherwise limiting his involvement in any type of business, securities or
banking activities.
Nor has any such person been found by a court of competent jurisdiction in
a civil action, or the Securities and Exchange Commission or the Commodity
24
Futures Trading Commission to have violated a federal or state securities or
commodities law.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 29, 1999 Softstone acquired a license to the U.S. patent rights to
the manufacturing process now employed in the company's plant in Joshua, Texas.
The license was acquired from Softstone International LLC, an entity under the
control of Frederick Parker, a co-inventor of the patented process and who was
at that time the chief executive officer and a director of Softstone, Inc. The
cost of the license was $100,000 and was financed by a promissory note due
December 31, 2000. Subsequently, on July 31, 2000 Softstone bought all rights
to the patent through the issuance of 300,000 shares of common stock to
Softstone International LLC, and the $100,000 promissory note was cancelled.
MANAGEMENT'S PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and the accompanying notes thereto. It is qualified in
its entirety by the foregoing and by more detailed financial information
appearing elsewhere.
We have exhausted our cash reserves. Our liabilities exceed $1 million.
Our assets consist primarily of unique equipment that has no known value other
than its scrap value. The cost of preparing and filing with the Securities and
Exchange Commission the periodic reports and audited financial statements
required of a public company can no longer be paid by our company. For these
reasons and the other reasons stated in this Information Statement, our
management has concluded that the best and most prudent course of action for all
shareholders is to approve the Reorganization Agreement with TS Electronics
(China), sell the rubber assets and business to the Boyds in exchange for the
cancellation or release of all debt and liabilities of our company, turn over
control of our company to the owners of TS Electronics (China) and pursue the
business of TS Electronics (China) rather than the rubber business that has
never been adequately capitalized.
FINANCIAL STATEMENTS OF OUR COMPANY
See Annex I attached hereto for the financial statements of our company.
INFORMATION WITH RESPECT TO TS ELECTRONICS (CHINA)
Business Development
TS Electronics (China) was incorporated in the State of Delaware on July
31, 2002. It conducts it business through a wholly-owned subsidiary, Tianjin
ShenDing Electronics Technology Co., Ltd. ("ShenDing Electronics"), which was
incorporated in China in March, 2001 and has its principal offices at XinMao
Technology Park, D1, Suite 5C-D, Tianjin, P.R. China.
25
Business
TS Electronics (China), through its subsidiary in China, ShenDing
Electronics Technology Co., Ltd., manufacturers and distributes electronic
equipment for the wireless communications and utilities industries in China.
Our company is headquartered in the city of Tianjin, one of the largest Chinese
cities with a population exceeding 8 million. ShenDing has two main products -
Reactive Power Compensation Power saving box ("RPCP Saving Box") and
Uninterruptible Power Supply electronics equipment ("UPS").
RPCP Saving Box
RPCP Saving Box is utilized during the transmission of electricity.
Traditionally, when electricity is being transported via copper wires from a
power plant to various destinations, there is a high percentage of loss of the
electricity during such a transmission. TS Electronics (China)'s RPCP Saving
Box can substantially increase power transmission efficiency at minimum cost
while avoiding the shortfalls of alternative technologies.
In 1998, the Chinese State Power Corporation, a state-owned enterprise
reporting directly to the Central Government, initiated a "National Power
Network Restructuring" (NPNR) project. Its purpose is to improve and update the
Nation's electrical generation and transmission facilities in order to save
energy, to make power transmission safer and more reliable, and to meet the
Nation's rapidly growing power demands, particularly in rural areas. The
situation has changed little. The current Power Factor (the percentage of
generated electricity received after transmission) of the Chinese State Power
Transmission Network is still as low as 30 to 50 percent or even lower in rural
areas, and averages 15 to 20 percent elsewhere. TS Electronics (China)'s main
product, its RPCP Saving Box, is designed and produced as an integral part of
the NPNR project to meet the national mandate for efficient electricity
transmission. TS has a strategic alliance with the Tianjin Electronic Power
Corporation, a government agency that oversees the NPNR project in the Tianjin
area.
TS Electronics (China)'s RPCP saving box can be widely used in industrial
enterprises, oil fields, residential areas, high rise buildings, construction
areas, and low voltage power distribution networks in both cities and rural
areas, playing a role of dynamic compensation for the reactive power needed by
the electricity loads. The RPCP Saving Box optimizes power quality and expands
the electricity transmission capacity.
In particular, TS Electronics (China)'s RPCP Saving Box has the following
benefits:
- It improves the receiving power factor to over 95 percent (which is a 95%
electricity transmission retention rate),
- It adjusts terminal voltage and eliminates voltage fluctuation,
- It stabilizes the terminal voltage and improves the conformity rate of the
voltages,
26
- It improves the unbalanced-properties, three-phase power transmission
networks, and
- It optimizes the reactive power wave of the electric network by purifying
the pollution of the electric network and improving the operating security
of the electric network.
Such benefits are significant for the country of China, which stresses the
importance of power conservation and transmission loss reduction from a power
plant to end-users.
UPS
TS Electronics (China)'s second principal product is Power 2000
Uninterruptible Power Supply (UPS) electronic equipment utilized in the
telecommunications industry. UPS is based on line-interactive technology to
provide a back-up power supply for regional cellular transmission towers. UPS
is specifically used in so-called Personal Access Systems (PAS), a relatively
new regional cell phone solution in China. PAS is a relatively low-cost
wireless service in limited geographical areas, such as cities or towns.
Utilizing smaller transmission towers that can only effectively carry signals to
the distance of 300 meters, a PAS sets up such towers all over a city or a town.
Such towers, due to unstable power supply in certain regions, require reliable
backup batteries to provide the power needed in case of a power outage. Nasdaq-
listed UT Starcom (Nasdaq NM symbol UTSI) is a pioneer in China in the area of
providing telecommunications equipment that makes PAS possible in China. "UT
Starcom is capitalizing on a technology that many had dismissed as passe and is
fashioning it as the most affordable wireless solution for the common man in
China," says Alan Hellawell, head of Asian telecom research at Lehman Brothers
in Hong King.
China has the largest market for mobile telephones in the world, with 207
million users. To promote competition among the country's phone service
providers, especially in the rapidly growing mobile phone sector, China grants
the rights to provide nationwide cellular phone services to only two large
companies, China Mobile (NYSE symbol: CHL) and China Unicom (NYSE symbol: CHU).
China Telecom and other regional fixed line providers are prohibited from
providing nationwide cellular services. However, such restrictions are limited
to nationwide cellular phone services, not regional- or city-wide cellular phone
services. Companies such as UT Starcom teamed up with China Telecom and started
promoting regional cellular phone services that only cover the territories of a
city or a town, the PAS system. Over half of the Chinese population lives in
small and mid-sized cities, and most of the Chinese do not travel beyond their
cities or towns. Especially in large cities, such PAS systems have proved to be
efficient and cost-effective - their costs of service are about 25 percent of
the cost of nationwide cellular phone services. PAS has been well accepted by
most Chinese.
TS Electronics (China)'s UPS equipment is generally fixed on each
substation of a PAS communication network near a transmission tower and provides
a backup battery support in case an electricity outage occurs.
27
Distribution Methods
TS Electronics (China) usually markets and promotes its products by
participating in regional or national industry equipment exhibitions and product
promotional conferences, such as the Annual National Electronic Equipment
Exhibition and the Annual Telecommunication Equipment Exhibition.
Another approach that TS Electronics (China) utilizes in establishing sales
channels is by building close and reliable business relationships with various
regional and city power supply companies, as these companies normally are owned
or run by the government and play the important administrative role of
regulating the local electricity industry.
Tianjin Electric Power Corporation, a state-owned enterprise, has been a
steady customer of TS Electronics (China).
Competition
TS Electronics (China) is the major manufacturer of an RPCP Saving Box in
Tianjin and occupies 90 percent of the present market in Tianjin, the third
largest city in China.
TS Electronics (China) has, through ShenDing Electronics, built up
excellent working relationships with the Tianjin Power Corporation. TS
Electronics (China) believes that this has secured for itself an almost-monopoly
position over its competitors in the Tianjin area.
TS Electronics (China) is now proceeding to expand its market beyond the
city of Tianjin. TS Electronics (China) perceives that it has several advantages
over potential competitors:
- There are approximately thirty RPCP saving box manufacturers in China.
However, none of these competitors has produced products that are
commercially available and mature enough to be widely utilized. The
majority of these competitors are subsidiary research labs of universities
or research institutes.
- TS Electronics (China) continues to develop new technologies to improve
its existing products.
- TS Electronics (China) has an established name brand, an established
customer base, and good product quality control.
- As for the UPS market, there are about a dozen competitors in China, but
only a few of them are the main suppliers of PAS. TS Electronics (China)
markets its UPS products through its own distribution channels. TS
Electronics (China) has rapidly gained market share since its initial
production in March 2002. In general, TS Electronics (China) has relatively
advanced technology due to sustained research and development and has low
costs and expenses because of its good management.
28
Sources and Availability of Raw Materials
There are numerous suppliers of raw materials TS Electronics (China) can
choose from to satisfy its production requirement.
Dependence on Major Clients
TS Electronics (China) relies on its strategic alliance with Tianjin
Electric Power Corporation and several other regional power companies for
repeated business.
Patents, Trademarks and Licenses
TS Electronics (China), through its subsidiary company Tianjin ShenDing
Electronics Technology Co., Ltd. has various trademarks and licenses. It is also
in the process of applying for several patents in China related to the RPCP
Savings Box.
Governmental Approval of Principal Products
TS Electronics (China) does not need any special governmental approval
other than the customary business licenses to be able to sell its principal
products.
Governmental Regulations
The regulatory bodies of China's communication system, especially the
Ministry of Information Industry, do not have clearly stated policies regarding
the rapidly growing popularity of PAS - Personal Access Systems. Since PAS is
the target market of TS Electronics (China)'s UPS product, the projected demand
for TS Electronics (China)'s UPS depends on the future regulatory policies for
this new type of regional mobile communication system.
The Chinese telecommunications industry is regulated at national,
provincial and local levels. Currently, PAS is approved in some regions by
Public Telecommunication Administrations at the provincial and local levels.
China Telecom, restricted to providing only regional cellular services,
nevertheless competes at such levels with China Mobile, the major national
mobile communication service provider in China. China Telecom, a major customer
for TS Electronics (China)'s UPS equipment, has a vested interest in promoting
PAS systems in regional China, and the PAS system does provide a cost-effective
and reliable mobile communications system for the majority of the Chinese who
seldom leave their towns, cities or local regions.
29
Cost and Effects of Compliance with Environmental Laws
TS Electronics (China) is not subject to any environmental controls or
restrictions that require the outlay of capital or the obtaining of a permit in
order to engage in business operations.
Research and Development
During its fiscal year 2001, TS Electronics (China) spent approximately
$24,000 on research and development activities and spent $18,000 during 2002.
No cost of such activities is borne directly by customers.
TS Electronics (China)'s research and development has a staff of five.
Much of the company's research work is done in close cooperation with
universities and research labs. TS Electronics (China) expects to add an
additional fifteen technology experts in the next six months to strengthen its
research and development department.
Number of Employees
On March 31, 2003, TS Electronics (China) employed 129 full time and no
part time persons.
Description of Property
TS Electronics (China) owns 7,000 square feet of office and manufacturing
space in Tianjin, China, against which there is no indebtedness. There is ample
space available for currently anticipated expansion needs.
Legal Proceedings
Neither TS Electronics (China) nor any of its property is a party to, or
the subject of, any material pending legal proceedings.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is no public market on which TS Electronics (China)'s common stock is
traded.
There are two stockholders of TS Electronics (China). The transaction
described herein contemplates that all the capital stock of TS Electronics
(China) will be acquired by our company from these two stockholders.
PRO FORMA FINANCIAL INFORMATION
The following shows the pro forma effects of the acquisition by our company
of TS Electronics (China) and the sale to the Boyds of our rubber business and
related assets.
30
PRO FORMA BALANCE SHEET
AS OF MARCH 31, 2003
Our Company Adjustments TS Electronics Adjustments Pro Forma
----------- ----------- -------------- ----------- ---------
Assets $ 341,110 (341,110) $ 992,664 $ 992,664
Liabilities 1,054,427 (1,054,427) 378,355 378,355
Common Stock and
Surplus 2,280,953 579,816 2,860,769
Retained Earnings
(Deficit) (2,994,270) 34,493 3
Total Liabilities
and Capital 3,335,380 (1,054,427) 958,171 3,239,124
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 2003
Our Company Adjustments TS Electronics Adjustments Pro Forma
----------- ----------- -------------- ----------- ---------
Income $ 8,929 $ 870,444 $ 870,444
Cost of Sales 77,897 404,437 404,437
General, Selling
& Administrative
Expenses 70,217 (70,217) 56,510 56,510
Net Income (Loss)
Before Taxes (185,177) 185,177 408,945 408,945
Provision for Income
Taxes 0 59,237 59,287
Net Income (185,177) 185,177 349,649 349,649
Earnings per Share $(0.01) $0.06 $0.06
FINANCIAL STATEMENTS OF TS ELECTRONICS (CHINA)
See Annex II for the unaudited financial statements of TS Electronics
(China).
CERTAIN DIRECTOR MATTERS
New Director Designees
Simultaneously with the consummation of the transactions contemplated by,
and pursuant to, the Reorganization Agreement, the directors and officers of TS
Electronics (China) will become the directors and officers of our company.
There are no agreements, understandings or arrangements regarding any right by
any person to designate members of the post-merger board of directors other than
those contained in the Reorganization Agreement. All directors will stand for
re-election at our company's Annual Meeting in 2004.
The following sets forth the names and positions of the officers and
31
directors of TS Electronics (China) who will replace our present officers and
directors at the closing of the transactions contemplated by the Reorganization
Agreement, as well as certain biographical information relating to each such
person:
Office Held Term
Person Positions and Offices Since Expires
---------------- ---------------------- ----------- -------
Jingyi Wang, 45 (1) Chairman of Board of Directors March 2001 March 2004
and CEO
Jianzhong Wang, 39 (1) Vice President and Director March 2001 March 2004
Shao Hongwu, 37 Director March 2001 March 2004
Ling Fang, 30 Chief Financial Officer October 2002 March 2004
Jiaqi Sun, 41 Vice President, R & D March 2001 March 2004
---------------------------
(1) Jingyi Wang and Jianzhong Wang are brothers.
Jiangyi Wang. Mr. Wang has served as chairman and chief executive officer
of TS Electronics since the inception of our company. Mr. Wang has over 20 years
of experience in the Chinese electronics industry. He was formerly a senior
manager at Tianjin Great Wall Electronics Co., Ltd., one of the largest
electronics instrument manufacturers in China. Mr. Wang worked in various
departments of production, quality inspection, marketing and management. From
1992 to 1999, Mr. Wang was the general manager of Tianjin XinSanLi Automobile
Electronics Technology Inc., an electronic instrument supplier for Tianjin
Daihatsu Automobile Company in China. Since 1999 to present, Mr. Wang has been
the Chief Executive Officer of Tianjin ShenDing Electronics Technology Co.,
Ltd., a wholly -owned subsidiary of TS Electronics (China). Mr. Wang graduated
from one of China's leading universities, the People's University, and received
a bachelor's degree in management. Mr. Wang has also received the accreditation
of Senior Economist.
Jianzhong Wang. From 1998 to 2000 Mr. Wang worked as head of business
development for Beijing Telecom. From 2000 to present, Mr. Wang has served as
the Vice President of Tianjin ShenDing Electronics Technology Co., Ltd. Mr.
Wang graduated from Beijing Construction and Engineering College with bachelor's
and master's degrees in automation. Mr. Wang has been the project manager of
several telecommunication projects.
Hongwu Shao. Mr. Shao has served as an independent director of Tianjin
ShenDing Electronics Technology Co., Ltd. since March 2001. Mr. Shao brings
extensive experience in investment banking and financial consulting to TS
Electronics (China). Presently, Mr. Shao is the chief representative of the
Beijing office of Tianjin Huaerjie Investment Consulting Co., Ltd., a business
consulting firm. Mr. Shao graduated from Hebei Mechanical and Electronics
College in 1988. Mr. Shao has over fourteen years of business experience in
marketing and management. From 1997 to June 2002, Mr. Shao set up and operated
his own company, DeAn Electronic Equipment Inc. in the Hebei province of China,
which was the sole agent of Rolls Royce's electronic machines and instruments
and supplied several power plants in Huabei, China.
Ling Fang. Ms. Fang is the Chief Financial Officer of TS Electronics
(China) and graduated from Tianjin Economics and Management College, majoring in
32
international trade. Ms. Fang acquired the qualification of assistant
accountant in 1998. From 1998 to October 2002, Ms. Fang worked as a senior
accounting officer for the CPA firm of Tianjin Guanxin Certified Public
Accountants. Ms. Fang has extensive experience in accounting, auditing and
operations management. She has audited over 100 firms in various industries,
many of which are large multinational companies.
Jiaqi Sun. From 2002 to present, Mr. Sun has been a senior engineer at
Tianjin ShenDing Electronics Technology Co., Ltd. Mr. Sun received a bachelor's
degree in electrical engineering from Beijing Industry University in 1988.
After graduation, Mr. Sun continued to do research work in electronics for
Beijing Iron Engineering Research Institution for three years. From 1991 to
1999, Mr. Sun worked as vice president of Beijing SouTi Electric Installment
Company and was in charge of many electric installation projects for hotels.
From 1999 to 2000 Mr. Sun worked for Beijing Wanke Group and was the chief
project manager in charge of electric system construction and installation of
Wanke City Garden and Wanke Star Garden.
EXECUTIVE COMPENSATION
Set forth below is the aggregate compensation during fiscal years 2001 and
2002 and the current anticipated compensation for 2003 of the president of TS
Electronics (China):
Annual Salary in U S Dollars
---------------------------------
Name 2001 2002 2003
---- ---- ---- ----
Jingyi Wang $10,361 $14,457 $18,072
INDEPENDENT AUDITORS
Rosenberg Rich Baker Berman & Company of New Jersey has been retained by TS
Electronics (China) to audit its financial statements. Audited financial
statements of TS Electronics (China) will be filed with the Securities and
Exchange Commission in a Form 8-K or other appropriate form should the
reorganization transactions described herein be approved and effectuated.
CONSENT REQUIRED FOR APPROVAL
The affirmative consent of at least a majority of shares of Common Stock
outstanding has been obtained for the approval of all of the Transactions
described herein.
ANNUAL REPORT
Copies of our company's annual Form 10-KSB and most recent Form 10-QSB
filed with the Securities and Exchange Commission may be obtained, without
charge to stockholders, by writing to Sherie Adams, Fuller Tubb Pomeroy and
Stokes, 201 Robert S. Kerr Ave., Oklahoma City, OK 73102.
33
By order of the Board of Directors,
/s/ Keith Boyd
-----------------------------------------
Keith Boyd, President
August 20, 2003
Pottsboro, Texas
34
ANNEX I
Set forth below are the following financial statements for our company:
Independent Auditors' Report dated September 27, 2002 I-1
Independent Auditors Report dated October 15, 2001 I-2
Balance Sheet June 30, 2002 I-3
Statement of Operations from October 7, 1998 (Inception)
through June 30, 2002 I-4
Statement of Stockholders' Equity (Deficit) from October 7, 1998
through June 30, 2002 I-5
Statements of Cash Flows from October 7, 1998 (Inception)
through June 30, 2002 and 2001, and Cumulative From Inception I-7
Notes to Financial Statements I-8
Balance Sheet March 31, 2003 (Unaudited) I-19
Statements of Operations for the Three-Month and
Nine-Month Periods Ended March 31, 2003 and 2002 (Unaudited) I-20
Statements of Cash Flows for the Three-Month
and Nine-Month Periods Ended March 31, 2003 and 2002 (Unaudited) I-21
Notes to Unaudited Financial Statements I-22
ANNEX I
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Softstone, Inc.
We have audited the accompanying balance sheet of Softstone, Inc. (a development
stage company) as of June 30, 2002 and the related statements of operations,
stockholders' equity and cash flows for the period then ended and for the period
from October 7, 1998 (inception), to June 30, 2002. 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 auditing standards generally accepted
in the United States of America. 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 Softstone, Inc. as of June 30,
2002 and the results of its operations and its cash flows for the period then
ended and from October 7, 1998 (inception), to June 30, 2002, in conformity with
accounting principles generally accepted in the United States of America.
The Company's financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has not earned any revenue since its inception and through
June 30, 2002, the Company had incurred cumulative losses of $2,808,548 and
negative working capital of $667,631. These factors, as discussed in Note 9 to
the financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 9. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/Kabani & Company, Inc.
KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Fountain Valley, California
September 27, 2002
I-1
Independent Auditors' Report
Board of Directors
Softstone, Inc.
We have audited the accompanying statements of operations, stockholders' equity
(deficit), and cash flows for the year ended June 30, 2001 of Softstone, Inc. (a
development stage company). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 of Softstone, Inc. referred to above
present fairly, in all material respects, the results of its operations, cash
flows and changes in stockholders' equity (deficit) for the year ended June 30,
2001 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, the Company has been in the
development stage since its inception on October 7, 1998, and the primary
activities include establishing its operations and raising capital to fund its
activities. The Company incurred losses since inception to June 30, 2001, of
$1,704,415. Realization of a major portion of its assets and satisfaction of its
liabilities is dependent upon the Company's ability to meet its future financing
requirements and the success of future operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might arise as a
result of this uncertainty.
Hogan and Slovacek
/s/ Hogan and Slovacek
Oklahoma City, Oklahoma
October 15, 2001
I-2
SOFTSTONE, INC
(A Development Stage Company)
BALANCE SHEET
June 30, 2002
ASSETS
------
CURRENT ASSETS:
Cash & cash equivalents $ 1,253
Accounts receivable 2,583
-----------
Total current assets 3,836
-----------
PROPERTY AND EQUIPMENT, net 421,837
-----------
$ 425,673
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-
CURRENT LIABILITIES:
Accounts payable $ 39,366
Accounts payable-related party 160,879
Accrued expenses 29,618
Loans - current 443,605
-----------
Total current liabilities 673,467
-----------
LONG TERM LIABILITIES
Notes payable 56,014
Loans from related parties, net of current portion 262,537
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 30,000,000
shares authorized; 7,041,965 shares issued
and outstanding 7,042
Additional paid-in capital 2,232,162
Shares to be issued 2,999
Deficit accumulated from inception (2,808,548)
-----------
Total stockholders' deficit (566,345)
-----------
$ 425,673
===========
The accompanying notes are an integral part of these financial statements.
I-3
SOFTSTONE, INC
(A Development Stage Company)
STATEMENTS OF OPERATIONS
FROM OCTOBER 7, 1998 (INCEPTION) THROUGH JUNE 30, 2002
Cumulative
From Inception
Year Ended June 30, (October 7, 1998) to
2002 2001 June 30, 2002
------------ ------------ --------------------
Net revenues $ 37,490 $ 30,087 $ 71,675
Operating expenses
General and administrative 752,324 401,548 2,440,277
------------ ------------ ------------
Operating loss (714,834) (371,461) (2,368,602)
Other expense:
Interest expense 49,855 26,348 100,502
Loss on investment 125,000 - 125,000
Loss on impairment of
intangibles 214,444 - 214,444
------------ ------------ ------------
Total other expense 389,299 26,348 439,946
Loss before income taxes (1,104,133) (397,809) (2,808,548)
Income tax - - -
------------ ------------ -----------
Net loss $ (1,104,133) $ (397,809) $(2,808,548)
============ ============ ===========
Basic weighted average number
of common stock outstanding 6,174,516 6,629,351
============ ============
Basic net loss per share $ (0.18) $ (0.06)
============ ============
Diluted weighted average
number of common stock
outstanding 6,174,516 6,629,351
============ ============
Diluted net Loss per share $ (0.18) $ (0.06)
============ ============
The accompanying notes are an integral part of these financial statements.
I-4
SOFTSTONE, INC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM OCTOBER 7, 1998 (INCEPTION) THROUGH JUNE 30, 2002
Deficit Total
Common Stock Additional Stock accumulated Stockholders'
Number of Paid-In to be Unearned from Equity
shares Amount Capital issued Compensation inception (Deficit)
--------- ------ ------------ ---------- ------------ ------------ --------------
Shares issued for
cash - Oct. 7, 1998 5,000,000 $ 5,000 $ 51,100 $ - $ - $ - $ 56,100
Stock issued for cash
and services 292,500 293 43,582 - - - 43,875
Net loss - - - - - (197,426) (197,426)
---------- ------- ------------ -------- -------- ------------ ------------
Balance, June 30 1999 5,292,500 5,293 94,682 - - (197,426) (97,451)
Stock issued for
services ($.85/shr) 250,000 250 212,250 - - - (251,002)
Stock issued for
services and vehicle
($1.00/shr) 22,500 22 22,478 - - - -
Warrants issued to
employees - - 75,000 - (75,000) - -
Stock issued for
settlement of ST notes
payable ($34,250) and
cash ($1.00/shr) 400,000 400 382,697 - - - 383,097
Stock issued for
services ($1.00/shr) 210,000 210 209,790 - - - 210,000
Stock issued for cash
net of offering cost
of $25,783
($1.25/shr) 423,190 423 502,782 - - - 503,205
Amortization of
unearned compensation - - - - 11,250 - 11,250
Net Loss - - - - (1,109,180) (1,109,180)
---------- ------- ------------ -------- -------- ------------ ------------
Balance June 30, 2000 6,598,190 6,598 1,499,679 - (63,750) (1,306,606) (350,081)
Stock issued for
cash ($1.25/shr) 42,500 43 53,082 - - - 53,125
Unearned warrants
granted to employee
upon termination - - (63,750) - 63,750 - -
Warrants exercised 675,000 675 - - - - 675
Stock issued in exchange
for patent ($.33/shr) 300,000 300 21,622 - - - 21,922
I-5
SOFTSTONE, INC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
FROM OCTOBER 7, 1998 (INCEPTION) THROUGH JUNE 30, 2002
Deficit Total
Common Stock Additional Stock accumulated Stockholders'
Number of Paid-In to be Unearned from Equity
shares Amount Capital issued Compensation inception (Deficit)
--------- ------ ------------ ---------- ------------ ------------ -------------
Stock issued in exchange
for office equipment
($1.03/shr) 18,000 18 18,507 - - - 18,525
Stock contributed back
to Company by
principals (3,947,698) (3,948) 3,948 - - - -
Stock issued for
service ($.10/shr) 522,961 523 51,773 - - - 52,296
Stock issued for cash
($.40/shr) net of
offering cost of
$62,896 277,100 277 47,667 - - - 47,944
Net Loss - - - - - (397,809) (397,809)
---------- ------- ------------ -------- -------- ------------ ------------
Balance 30, 2001 4,486,053 4,486 1,632,528 - - (1,704,415) (553,403)
Share issued for cash
($.40/shr) 243,300 243 97,077 - - - 97,320
Shares issued for cash
($.50/shr) 289,400 290 144,410 - - - 144,700
Shares issued for cash
($1.00/shr) 12,500 13 12,487 - - - 12,500
Share issued for
service ($.36/shr) 257,075 257 92,290 - - - 92,547
Share issued for
service ($.40/shr) 543,000 543 216,657 - - - 217,200
Share issued for
service ($.50/shr) 25,000 25 12,475 - - - 12,500
Shares issued for
interest ($.45/shr) 52,250 52 24,238 - - - 24,290
Shares issued for
merger ($.001/shr) 1,158,387 1,158 - - - - 1,158
Shares to be issued
for cash ($.33/shr) - - - 999 - - 999
shares to be issued
for loan incentive
($.40/shr) - - - 2,000 - - 2,000
Cancellation of shares (25,000) (25) - - - - (25)
Net loss - - - - - (1,104,133) (1,104,133)
---------- ------- ------------ -------- -------- ------------ ------------
Balance June 30, 2002 7,041,965 $ 7,042 $ 2,232,162 $ 2,999 $ - $ (2,808,548) $(1,052,347)
========= ======= ============ ======= ======== ============ ===========
The accompanying notes are an integral part of these financial statements.
I-6
SOFTSTONE, INC
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
FROM OCTOBER 7, 1998 (INCEPTION) THROUGH JUNE 30, 2002
Cumulative
From Inception
Year Ended June 30, (October 7, 1998) to
2002 2001 June 30, 2002
------------ ------------ --------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (1,104,133) $ (397,809) $ (2,808,548)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization 83,307 82,230 221,102
Issuance of common stock
for compensation - - 487,332
Issuance of common stock
for services and
interest 346,537 - 346,537
Issuance of common stock
for merger 1,133 - 1,133
Shares to be issued for
loan incentive 2,000 - 2,000
Loss on investment 125,000 - 125,000
Loss on impairment
of assets 214,444 - 214,444
Write-off of samples - 11,712 11,712
(Increase) decrease of
other current assets 4,473 (4,473) (20,044)
Increase of accounts
receivable (2,583) (2,583)
Increase (decrease) in
accounts payable 22,368 (12,081) 32,497
Increase (decrease) in
accrued expense 8,252 (2,717) 33,488
------------ ------------ ------------
Total adjustments 804,931 74,671 1,452,618
------------ ------------ ------------
Net cash used in
operating activities (299,202) (323,138) (1,355,930)
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of
patents/investment (250,000) - (250,000)
Other - (384) (384)
Purchase of property
and equipment - (31,380) (419,859)
Net cash used in
investing activities (250,000) (31,764) (670,243)
------------ ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Investments by stockholders - 250,941 250,941
Proceeds from borrowings 287,263 75,360 608,015
Payments on borrowings (5,000) (130,937) (160,134)
Issuance of common stock
for cash 254,520 164,640 1,327,605
Receipt of cash for stock
to be issued 999 - 999
------------ ------------ ------------
Net cash provided by
financing activities 537,782 360,004 2,027,426
------------ ------------ ------------
Net increase (decrease) in
cash & cash equivalents (11,420) 5,102 1,253
CASH & CASH EQUIVALENTS,
BEGINNING 12,673 7,571 -
CASH & CASH EQUIVALENTS,
ENDING $ 1,253 $ 12,673 $ 1,253
============ ============ ============
CASH PAID FOR:
Interest $ 31,318 $ 12,953 $ 44,770
============ ============ ============
Income taxes $ 0 $ 0 $ 0
============ ============ ============
The accompanying notes are an integral part of these financial statements.
I-7
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATIONS AND DESCRIPTION OF BUSINESS
Softstone, Inc. (the "Company"), a development stage company, was formed to
manufacture a patented rubber product used in the road and building
construction industries and has been in the development stage since
inception (October 7, 1998). The Company plans to create rubber modules
entirely from recycled tires which can be used in the construction of
roads, driveways, decks, and other types of walkways. Its principal
activities have consisted of financial planning, establishing sources of
production and supply, developing markets, and raising capital. Its
principal operations have not started and the Company has no present
sources of significant revenues. Realization of a major portion of its
assets and satisfaction of its liabilities is dependent upon the Company's
ability to meet its future financing requirements and the success of future
operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern (see Note 9 for more information
regarding these matters). The financial statements do not include any
adjustments that might arise as a result of this uncertainty.
On October 7, 1998, SoftStone Building Products, Inc. ("SSBI" - an Oklahoma
corporation and predecessor to the Company) was incorporated. Effective May
31, 1999, SSBI was merged into Softstone, Inc. (incorporated January 28,
1999 under the laws of the State of Delaware) and SSBI was subsequently
dissolved. Each share of previously outstanding common stock was converted
into 2,500 shares of common stock of the new entity and the new
capitalization is reflected in the accompanying financial statements as if
it had occurred at the beginning of the period presented.
On July 24, 2001, the Company entered into a plan of reorganization
involving Kilkenny Acquisition Corp. (Kilkenny) whereby the Company is the
survivor and in control of the board of directors. The merger agreement
provided for the exchange of 1,158,387 shares of the Company's common stock
for all the common stock of Kilkenny. In connection with this merger, on
April 4, 2001, certain insider shareholders of the Company contributed
3,947,698 shares of their common stock to the Company effectively reducing
the then outstanding shares of stock to 3,685,992. Subsequent issues of
common stock for cash and services increased the outstanding stock of the
Company to 4,590,646. The issuance of the above mentioned shares of the
Company's common stock on the merger date increased the common stock of the
Company to 5,669,033 with the Company shareholders, prior to the merger,
owning approximately 81% of the outstanding shares of the Company. For
accounting purposes, the transaction between the Company and Kilkenny has
been treated as a re-capitalization of the Company, with the Company as
the accounting acquirer (reverse acquisition), and has been accounted for
in a manner similar to a pooling of interests. Since Kilkenny is a dormant
entity with insignificant assets or liabilities, no pro forma information
is presented.
I-8
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
Property and equipment
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are charged to expense as incurred. Upon sale, retirement, or
other disposition, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in
operations for the period. The Company depreciates property and equipment
using the straight-line method over their estimated useful lives ranging
from five to seven years.
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the related carrying
amount may not be recoverable. When required, impairment losses are
recognized based upon the estimated fair value of the asset. Being a
development stage company, the Company does not believe any of its property
and equipment is impaired.
Patent and patent license agreement
In August 2000, patent rights amounting to $100,000 were acquired, in
exchange for 300,000 shares of common stock, forgiveness of debt and
assumption of additional debt. Patent rights were acquired for the
manufacturing process and had been amortized using the straight-line method
over fifteen years. In March 2002, additional patent rights were purchased
for $125,000. The net book value of $89,444 for the patent purchased in
2000 and the newly purchased patent of $125,000 were written off as
impairment of intangible assets as on June 30, 2002.
Revenue recognition
The Company's revenue recognition policies are in compliance with Staff
Accounting Bulletin (SAB) 101. Revenue is recognized when merchandise is
shipped to a customer. The Company currently has no significant revenues as
it is still in the development stage.
Income taxes
Deferred income taxes are provided on temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements that will result in taxable or deductible amounts in future
years. Deferred income tax assets or liability are determined by applying
the presently enacted tax rates and laws.
I-9
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Fair value of financial instruments
The carrying amount of all financial instruments at June 30, 2002 and 2001,
which consist of various notes and loans payable, approximate their fair
values.
Earnings per share
Net loss per share is calculated in accordance with the Statement of
financial accounting standards No. 128 (SFAS No. 128), "Earnings per
share". Basic net loss per share is based upon the weighted average number
of common shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options and warrants are assumed to be exercised
at the beginning of the period (or at the time of issuance, if later), and
as if funds obtained thereby were used to purchase common stock at the
average market price during the period.
Weighted average number of shares used to compute basic and diluted loss
per share is the same in this financial statement since the effect of
dilutive securities is anti-dilutive.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Stock-based compensation
SFAS No. 123 prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options,
restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS No. 123 requires compensation expense to be recorded (i) using
the new fair value method or (ii) using the existing accounting rules
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
stock issued to employees" (APB 25) and related interpretations with
proforma disclosure of what net income and earnings per share would have
been had the Company adopted the new fair value method. The Company has
chosen to account for stock-based compensation using Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
has adopted the disclosure only provisions of SFAS 123. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of the grant
over the amount an employee is required to pay for the stock.
The Company accounts for stock-based compensation issued to non-employees
and consultants in accordance with the provisions of SFAS 123 and the
I-10
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"),
"Accounting for Equity Instruments that are Issued to Other Than Employees
for Acquiring or in Conjunction with Selling, Goods or Services". Valuation
of shares for services is based on the estimated fair market value of the
services performed.
Segment Reporting
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosure About Segments of an Enterprise and Related Information"
requires use of the "management approach" model for segment reporting. The
management approach model is based on the way a company's management
organizes segments within the company for making operating decisions and
assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company. Currently, SFAS 131 has
no effect on the Company's consolidated financial statements as
substantially all of the Company's operations are conducted in one
industry segment.
Accounting developments
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangibles." SFAS No. 142 addresses the initial recognition, measurement
and amortization of intangible assets acquired individually or with a group
of other assets (but not those acquired in a business combination) and
addresses the amortization provisions for excess cost over fair value of
net assets acquired or intangibles acquired in a business combination. The
statement is effective for fiscal years beginning after December 15, 2001,
and is effective July 1, 2001 for any intangibles acquired in a business
combination initiated after June 30, 2001. The Company is evaluating any
accounting effect, if any, arising from the recently issued SFAS No. 142,
"Goodwill and Other Intangibles" on the Company's financial position or
results of operations.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued in August 2001. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001, and addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. The Company is
evaluating any accounting effect, if any, arising from the recently issued
SFAS No. 144, "Goodwill and Other Intangibles" on the Company's financial
position or results of operations.
In May 2002, the Board issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS 145"). SFAS 145 rescinds the automatic treatment of
I-11
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
gains or losses from extinguishments of debt as extraordinary unless they
meet the criteria for extraordinary items as outlined in APB Opinion No.
30, Reporting the Results of Operations, Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 145 also requires sale-leaseback
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions and makes various technical
corrections to existing pronouncements. The provisions of SFAS 145 related
to the rescission of FASB Statement 4 are effective for fiscal years
beginning after May 15, 2002, with early adoption encouraged. All other
provisions of SFAS 145 are effective for transactions occurring after May
15, 2002, with early adoption encouraged. The Company does not anticipate
that adoption of SFAS 145 will have a material effect on its earnings or
financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit cost,
as defined, was recognized at the date of an entity's commitment to an exit
plan. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002 with earlier
application encouraged. The Company does not expect adoption of SFAS No.
146 to have a material impact, if any, on its financial position or
results of operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2002:
Furniture and computer equipment $ 43,529
Production and other equipment 522,318
Vehicles 59,869
---------
625,716
Less: Accumulated depreciation
and amortization (203,879)
--------
$ 421,837
========
I-12
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
4. NOTES PAYABLE
Notes payable consist of the following at June 30, 2002:
Revolving note payable to bank;
interest due 7/5/02, prime + 1%,
maturing December 5, 2002 $100,035
Notes payable to stockholder, 8% & 12%
interest rates 541,537
Bank term loan; 3.9% interest rate;
maturing September 24, 2002
The fair value of the loan at current
market rate of 9% would be
approximately $64,000. 64,570
Note payable to finance vehicle, 9.5%
interest rate, maturing July 15,
2005, collaterized by vehicle 16,202
Refinanced bank term loan; payable on
demand or in semiannual payments of
$6,485, including interest at 10.75%
(variable); collateralized by
equipment accounts receivable and
intangibles and guaranteed by the
principal stockholder of the Company,
due July 15, 2004 30,839
Note payable to bank, collateralized
by tractor, 9%, variable payable in
60 monthly installments beginning
July 29, 2001 8,973
Note payable to stockholder; interest
free; due on demand 160,879
--------
923,035
Less: current portion 604,484
--------
Long-term debt $318,551
========
I-13
The following is a summary of maturities of principal under long-term debt
for years ending June 30:
2004 $ 262,537
2005 16,202
2006 39,812
----------
$ 318,551
==========
The notes payable has been classified in the balance sheet at June 30, 2002
as per follows:
Accounts payable - related part $ 160,879
Loans current 443,605
Current liabilities 604,484
Notes Payable 56,014
Loans related parties - non current 262,537
----------
$ 923,035
==========
5. COMMON STOCK AND WARRANTS
On January 28, 1999, the Company issued 395,000 warrants and on July 1,
1999, issued 275,000 additional warrants to several stockholders of the
Company. Each warrant gives the holder the right to purchase one share of
common stock at a price of $.50 per share at any time on or before January
28, 2004. The fair value of each warrant, estimated on the date of grant
using the minimum value method, is nominal.
During October 1999, the Company issued warrants to purchase 150,000 shares
of common stock at $.50 per share to two employees. The warrants vest over
a five-year period and resulted in compensation of $75,000, of which
$63,750 was unearned at June 30, 2000, and will be recognized over the
remaining vesting period. The fair value of these warrants does not exceed
the compensation cost recognized for financial reporting. During the fiscal
year end June 30, 2001, the one employee terminated and another exercised
his warrants with paid-in capital charged for the unearned compensation. At
June 30, 2001, a total of 145,000 warrants remained outstanding.
During August 2000, the Company purchased office equipment by issuing
18,000 shares of its common stock and recording the office equipment at its
estimated fair value based on invoiced cost of $1.03 for each share of
stock issued. The Company also issued 300,000 shares of its common stock to
acquire all the patent rights for its production process, recording as cost
of the newly acquired rights the estimated predecessor cost of the patent
rights acquired, and stockholders exercised their rights to acquire 675,000
shares of common stock at par value.
I-14
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
In April 2001, pursuant to the merger agreement discussed in Note 8 certain
insider stockholders contributed back to the Company 3,947,698 shares of
their common stock, and this common stock was cancelled, and 522,961 shares
of common stock valued at $ .10 was issued to consultants and an attorney
for services rendered in acquiring capital and facilitating the merger.
Compensation
During August 1999, the Company entered into employment contracts with two
key employees, resulting in the issuance of 250,000 shares of the Company's
common stock. Such contracts are for a term of 12 months and contain a
vesting provision requiring the employees, in the event of early
termination of employment, to either surrender to the Company the pro rata
unearned portion of the stock issued or to purchase the stock at a price of
$.85 per share. Additionally, the Company issued 22,500 shares of stock to
another employee in exchange for a vehicle and services that vested
immediately. Also, the Company issued 210,000 shares of stock to employees
and non-employees in exchange for services that vested immediately. These
agreements result in compensation expense of approximately $432,500
recognized by the Company during fiscal 2000.
Stock Offering
Pursuant to Rule 504 of Regulation D ("504 offering") of the Securities Act
of 1933, the Company offered for sale 400,000 shares of its common stock
for $1.00 per share under an Offering Memorandum dated August 24, 1999. The
Company offered 480,000 shares of common stock under a second 504 offering
for $1.25 per share, of which 423,190 have been sold as of June 30, 2000.
During the fiscal year ended June 30, 2001, an additional 42,500 shares
were sold for $53,125 in connection with the second offering.
In May 2001, the Company, pursuant to Rule 504, offered 625,000 shares of
common stock at $.40 per share and prior to June 30, 2001, 277,100 shares
were issued. Offering costs of this offering totaled $62,896 of which
$52,296 related to the shares of stock issued for services mentioned above.
6. INCOME TAXES
The Company's effective income tax benefit differed from the benefit
computed using the federal statutory tax rate as follows:
I-15
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Period from
October 7, 1998
Year Ended June 30, (inception) through
2002 2001 June 30, 2002
---------- --------- --------------------
Income tax benefit at
federal statutory rate $ 375,405 $ 135,256 $ 954,907
Nondeductible expenses (2,100) (1,700) 7,970
Other, including
graduated rates - - 23,321
Change in valuation
allowance (373,305) (133,556) (981,998)
---------- ---------- ---------
$ - $ - -
========== ======== =========
Components of deferred tax assets at June 30, 2002, are as follows:
Assets
Net operating loss carryforward $ 981,998
Valuation allowance (981,998)
---------
$ -
=========
The valuation allowance increase $373,305 for the year ended June 30, 2002,
and $133,556 for the year ended June 30, 2001.
A valuation allowance is provided for deferred tax assets when it is more
likely than not that some portion or all of the deferred tax assets will
not be realized. At June 30, 2002 and 2001, the Company had a net deferred
tax asset mainly related to a net operating loss carryforward from
operating losses incurred. As such carryforward can only be used to offset
future taxable income, management has fully reserved this net deferred tax
asset with a valuation allowance until it is more likely than not that
taxable income will be generated. Net operating loss carryforwards can be
carried forward for fifteen years for federal tax purpose subject to
certain limitations and they will expire in the year 2017.
7. RELATED PARTY TRANSACTIONS
In August 2000, the Company completed its acquisition of the patent rights
to its production process. This transaction involved the issuance of
300,000 shares of common stock to a corporation owned by stockholders of
the Company. Office equipment was acquired from a stockholder for the
issuance of common stock and certain shareholders contributed their common
stock, which was cancelled to facilitate the merger discussed in Note 8.
Most of the equipment used in the Company manufacturing process was
purchased from a company controlled by a shareholder of the Company.
I-16
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
8. MERGER & ACQUISITION
The Company has agreed to participate in a plan of reorganization involving
Kilkenny Acquisition Corp. (Kilkenny) whereby the Company, upon merger, is
the survivor and controls the board of directors. To facilitate the merger
and acquire additional capital, the Company is committed to issue certain
of the Company stock for all the common stock of Kilkenny. In connection
with this merger, on April 4, 2001, certain insider shareholders of the
Company contributed 3,947,686 of their common stock to the Company and
effectively reduced the then outstanding shares of stock to 3,685,992.
Subsequent issues of common stock for cash and services increased the
outstanding stock of the Company to 4,590,646. The issuance of the above
mentioned shares of the Company's common stock on the merger date, July 24,
2001, increased the Common stock of the Company to 5,669,033 with the
Company shareholders, prior to the merger, owning approximately 81% of the
outstanding shares of the merged Company.
In March 2002, the Company entered into a purchase agreement with Levgum,
Ltd. (Levgum) of Tel Aviv, Israel, where the Company received 83 shares
with 1.00 par value representing 10% of outstanding capital, for $250,000.
The Company also received the right to use their technology for rubber
devulcanization and right to sublicense as part of this purchase agreement.
The recorded its investment in Levgum for $125,000 and license agreement
acquired through acquisition at $125,000. On June 30, 2002, the Company
evaluated its investment and patents rights according to FASB 121 and
recognized an impairment loss equal to the book value of these intangible
assets.
9. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting
contemplates the recovery of the Company's assets and the satisfaction of
its liabilities in the normal course of business. Through June 30, 2002,
the Company had incurred cumulative losses of $2,808,548 and negative
working capital of $667,631. The Company's successful transition from a
development stage company to attaining profitable operations is dependent
upon obtaining financing adequate to fulfill its research and development
activities, production of its equipment and achieving a level of revenues
adequate to support the Company's cost structure. Management's plan of
operations anticipates that the cash requirements for the next twelve
months will be met by obtaining capital contributions through the sale of
common stock and cash flow from operations. However, there is no assurance
that the Company will be able to implement its plan.
10. SUBSEQUENT EVENT
Effective August 7, 2002, the Company ventured a business agreement to sell
specified tire bufflings with $42,500 advance payment and $42,500 upon
delivery.
I-17
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
The Company received stock subscriptions to purchase 3,500 shares of
restricted common stock for $1,165 subsequent to June 30, 2002.
I-18
SOFTSTONE, INC.
BALANCE SHEET
March 31, 2003
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash & cash equivalents $ 196
Accounts receivable 30,035
------------
Total current assets 30,231
PROPERTY AND EQUIPMENT, net 310,879
------------
$ 341,110
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 29,921
Accounts payable-related party 161,682
Accrued expenses 66,656
Loans - current, including $547,852 to related parties 747,614
------------
Total current liabilities 1,005,873
LONG TERM LIABILITIES
Notes payable, financial institutions 48,554
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value;
30,000,000 shares authorized;
7,041,965 shares issued and outstanding 7,042
Additional paid-in capital 2,232,162
Shares to be issued 41,749
Accumulated deficit (2,994,270)
------------
Total stockholders' deficit (713,317)
------------
$ 341,110
============
The accompanying notes are an integral part of these financial statements.
I-19
SOFTSTONE, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
Three months ended March 31, Nine months ended March 31,
--- --
2003 2002 2003 2002
----------- ------------ ----------- -----------
Revenues $ 5,079 $ 8,624 $ 95,354 $ 36,120
Cost of revenue 38,329 - 92,719 -
----------- ------------ ----------- -----------
Gross profit (loss) (33,250) 8,624 2,635 36.120
Operating expenses
General and administrative 26,205 355,172 111,722 630,545
----------- ------------ ----------- -----------
Operating loss (59,455) (346,548) (109,087) (594,425)
Other expense
Interest expense 16,322 12,857 48,920 35,259
Loss on sale of assets 5,802 - 26,916 -
----------- ------------ ----------- -----------
Total other expense 22,124 12,857 75,835 35,259
----------- ------------ ----------- -----------
Loss before income taxes (81,579) (359,405) (184,922) (629,684)
Income taxes - - 800 -
----------- ------------ ----------- -----------
Net loss $ (81,579) $ (359,405) $ (185,722) $ (629,684)
=========== =========== =========== ===========
Basic and diluted weighted average number
of common stock outstanding 7,041,965 6,348,697 7,041,965 6,471,385
=========== =========== ============ ===========
Basic and diluted net loss per share $ (0.01) $ (0.06) $ (0.03) $ (0.10)
=========== =========== ============ ===========
The accompanying notes are an integral part of these financial statements.
I-20
SOFTSTONE, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (185,722) $ (629,684)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 51,466 64,689
Non Cash Compensation - 306,581
Loss on sale of assets 26,916 -
Increase of accounts receivable (27,452) (21,011)
Decrease in other current assets - 3,355
Decrease of accounts payable (8,652) 22,354
Increase of license fees payable - 125,000
Increase of accrued expense 37,049 (10,253)
------------ ------------
Total adjustments 79,327 490,715
------------ ------------
Net cash used in operating activities (106,396) (138,969)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets 32,576 -
Purchase of exclusive license - (125,000)
Purchase of stock - (125,000)
Purchase of property and equipment - (10,000)
------------ ------------
Net cash provided by (used in)
investing activities 32,576 (260,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Investments by stockholders - 89,000
Proceeds from loans 40,100 96,697
Payments of loans (6,087) (15,046)
Cash received for shares to be issued 38,750 -
Issuance of common stock pursuant to
offering - 237,020
------------ ------------
Net cash provided by
financing activities 72,763 407,671
------------ ------------
Net increase (decrease) in cash & cash
equivalents (1,057) 8,702
CASH & CASH EQUIVALENTS, BEGINNING 1,253 12,673
------------ ------------
CASH & CASH EQUIVALENTS, ENDING $ 196 $ 21,375
============ ============
CASH PAID FOR:
Interest $ 14,057 $ 12,417
============ ============
Income taxes $ - $ -
============ ============
The accompanying notes are an integral part of these financial statements.
I-21
SOFTSTONE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Softstone, Inc. (the "Company"), was formed to manufacture a patented
rubber product used in the road and building construction industries. The
Company plans to create rubber modules entirely from recycled tires, which
can be used in the construction of roads, driveways, decks, and other types
of walkways. Its principal activities have consisted of financial planning,
establishing sources of production and supply, developing markets, and
raising capital. Prior to July 2002, the Company was in the development
stage in accordance with Statement of Financial Accounting Standards No. 7.
Its principal operations began in the quarter ended September 30, 2002.
On October 7, 1998, SoftStone Building Products, Inc. ("SSBI" - an Oklahoma
corporation and predecessor to the Company) was incorporated. Effective May
31, 1999, SSBI was merged into Softstone, Inc. (incorporated January 28,
1999 under the laws of the State of Delaware) and SSBI was subsequently
dissolved. Each share of previously outstanding common stock was converted
into 2,500 shares of common stock of the new entity and the new
capitalization is reflected in the accompanying financial statements as if
it had occurred at the beginning of the period presented.
On July 24, 2001, the Company entered into a plan of reorganization
involving Kilkenny Acquisition Corp. (Kilkenny) whereby the Company is the
survivor and in control of the board of directors. The merger agreement
provided for the exchange of 1,158,387 shares of the Company's common stock
for all the common stock of Kilkenny. In connection with this merger, on
April 4, 2001, certain insider shareholders of the Company contributed
3,947,698 shares of their common stock to the Company effectively reducing
the then outstanding shares of stock to 3,685,992. Subsequent issues of
common stock for cash and services increased the outstanding stock of the
Company to 4,590,646. The issuance of the above mentioned shares of the
Company's common stock on the merger date increased the common stock of the
Company to 5,669,033 with the Company shareholders, prior to the merger,
owning approximately 81% of the outstanding shares of the Company. For
accounting purposes, the transaction between the Company and Kilkenny has
been treated as a re-capitalization of the Company, with the Company as the
accounting acquirer (reverse acquisition), and has been accounted for in a
manner similar to a pooling of interests.
Basis of presentation
The accompanying unaudited condensed interim financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for the presentation of interim financial information,
but do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
audited consolidated financial statements for the year ended June 30, 2002
were filed on October 15, 2002 with the Securities and Exchange Commission
and are hereby referenced. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the nine-month ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ended June 30,
2003.
Segment Reporting
During the periods ended March 31, 2003 and 2002, the Company only operated
in one segment. Therefore, segment disclosure has not been presented.
I-22
SOFTSTONE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Reclassifications
Certain comparative amounts have been reclassified to conform to the
current year's presentation.
2. RECENT PRONOUNCEMENTS
In May 2002, the Board issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS 145"). SFAS 145 rescinds the automatic treatment of
gains or losses from extinguishments of debt as extraordinary unless they
meet the criteria for extraordinary items as outlined in APB Opinion No.
30, Reporting the Results of Operations, Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 145 also requires sale-leaseback
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions and makes various technical
corrections to existing pronouncements. The provisions of SFAS 145 related
to the rescission of FASB Statement 4 are effective for fiscal years
beginning after May 15, 2002, with early adoption encouraged. All other
provisions of SFAS 145 are effective for transactions occurring after May
15, 2002, with early adoption encouraged. The adoption of SFAS 145 does not
have a material effect on the earnings or financial position of the
Company.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3 a liability for an exit cost as
defined, was recognized at the date of an entity's commitment to an
exit plan. The adoption of SFAS 146 does not have a material effect on the
earnings or financial position of the Company.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No.
72 and Interpretation 9 thereto, to recognize and amortize any excess of
the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible
asset. This statement requires that those transactions be accounted for in
accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." In addition, this statement amends
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include certain financial institution-related intangible
assetsThe adoption of SFAS 147 does not have a material effect on the
earnings or financial position of the Company.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December
15, 2002The adoption of this pronouncement does not have a material effect
on the earnings or financial position of the Company.
I-23
SOFTSTONE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used, on reported results. The Statement is effective
for the Companies' interim reporting period ending January 31, 2003. The
adoption of SFAS 148 does not have a material effect on the earnings or
financial position of the Company.
On April 30, the FASB issued FASB Statement No. 149 (FAS 149), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. FAS 149
amends and clarifies the accounting guidance on (1) derivative instruments
(including certain derivative instruments embedded in other contracts) and
(2) hedging activities that fall within the scope of FASB Statement No. 133
(FAS 133), Accounting for Derivative Instruments and Hedging Activities.
FAS 149 also amends certain other existing pronouncements, which will
result in more consistent reporting of contracts that are derivatives in
their entirety or that contain embedded derivatives that warrant separate
accounting. FAS 149 is effective (1) for contracts entered into or modified
after June 30, 2003, with certain exceptions, and (2) for hedging
relationships designated after June 30, 2003. The guidance is to be applied
prospectively. The Company does not expect the adoption of SFAS No. 149 to
have a material impact on its financial position or results of operations
or cash flows.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at March 31, 2003:
Furniture and computer equipment $ 42,198
Production and other equipment 450,063
Vehicles 29,381
----------
521,642
Less: Accumulated depreciation (210,763)
----------
$ 310,879
==========
4. NOTES PAYABLE
Notes payable consist of the following at March 31, 2003:
Revolving note payable to bank;
interest due 7/5/02, prime + 1%,
due on demand $ 96,448
Notes payable to stockholder, 8% & 12%
interest rates 547,852
Bank term loan; 3.9% interest rate;
due on demand. The fair value of the
loan at current market rate of 9%
would be approximately $64,000 63,214
I-24
Bank term loan; 6.78% interest rate;
maturing September 13, 2003. 40,100
Note payable to finance vehicle, 9.5%
interest rate, maturing July 15, 2005,
collaterized by vehicle 14,739
Refinanced bank term loan; payable on
demand or in semiannual payments of
$6,485, including interest at 10.75%
(variable); collateralized by
equipment, accounts receivable and
intangibles and guaranteed by the
principal stockholder of the Company,
due July 15, 2004 25,331
Note payable to bank, collateralized
by tractor, 9%, variable payable in
60 monthly installments beginning
July 29, 2001 8,484
Payable to stockholder; interest
free; due on demand and unsecured 161,682
----------
957,850
Less: current portion 909,296
----------
Long-term debt $ 48,554
==========
The following is a summary of maturities of principal under long-term debt
for periods ending March 31:
2004 $ 25,331
2005 14,250
2006 8,973
----------
$ 48,554
==========
The notes payable has been classified in the balance sheet at March
31, 2003 as per follows:
Accounts payable - related party $ 161,682
Loans current 747,614
----------
Current liabilities 909,296
Notes Payable 48,554
----------
$ 957,850
==========
5. MERGER & ACQUISITION
The Company has agreed to participate in a plan of reorganization involving
Kilkenny Acquisition Corp. (Kilkenny) whereby the Company, upon merger, is
the survivor and controls the board of directors. To facilitate the merger
I-25
SOFTSTONE, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
and acquire additional capital, the Company is committed to issue certain
of the Company stock for all the common stock of Kilkenny. In connection
with this merger, on April 4, 2001, certain insider shareholders of the
Company contributed 3,947,686 of their common stock to the Company and
effectively reduced the then outstanding shares of stock to 3,685,992.
Subsequent issues of common stock for cash and services increased the
outstanding stock of the Company to 4,590,646. The issuance of the above
mentioned shares of the Company's common stock on the merger date, July 24,
2001, increased the Common stock of the Company to 5,669,033 with the
Company shareholders, prior to the merger, owning approximately 81% of the
outstanding shares of the merged Company.
In March 2002, the Company entered into a purchase agreement with Levgum,
Ltd. (Levgum) of Tel Aviv, Israel, where the Company received 83 shares
with 1.00 par value representing 10% of outstanding capital, for $250,000.
The Company also received the right to use their technology for rubber
devulcanization and right to sublicense as part of this purchase agreement.
The recorded its investment in Levgum for $125,000 and license agreement
acquired through acquisition at $125,000. On June 30, 2002, the Company
evaluated its investment and patents rights according to FASB 121 and
recognized an impairment loss equal to the book value of these intangible
assets.
6. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting
contemplates the recovery of the Company's assets and the satisfaction of
its liabilities in the normal course of business. Through March 31, 2003,
the Company had incurred cumulative losses of $2,994,270 and negative
working capital of $975,642. The Company's goal to attain profitable
operations is dependent upon obtaining financing adequate to fulfill its
research and development activities, production of its equipment and
achieving a level of revenues adequate to support the Company's cost
structure. Management's plan of operations anticipates that the cash
requirements for the next twelve months will be met by obtaining capital
contributions through the sale of common stock and cash flow from
operations. However, there is no assurance that the Company will be able to
implement its plan.
I-26
ANNEX II
Set forth below are the following unaudited financial statements for T S
Electronics (China):
Balance Sheets (Unaudited) for fiscal years ended
September 30, 2002 and 2001 II-1
Statement of Income and Retained Earnings for the
fiscal years ended September 30, 2002 and 2001 II-3
Balance Sheet March 31, 2003 (Unaudited) II-4
Statements of Operations for the six-month period ended
March 31, 2003 and 2002 (Unaudited) II-5
ANNEX II
TS Electronics Corporation
Balance Sheets
(unaudited)
For fiscal years ended Sep. 30,2001 and Sept. 30, 2002
US$
30-Sep-01 30-Sep-02
----------- ------------
Assets
Current Assets
Cash and equivalents 1,963.80 4,644.18
Marketable securities -
Accounts receivable net of allowance for
doubtful accounts of 49,030.83 30,775.59
Inventories - 139,952.14
Other current assets 239,044.74 92,375.90
----------- -----------
Total Current Assets 290,039.37 267,747.81
----------- -----------
Marketable investment securities
Property, plant and equipment - 220,151.53
Goodwill and organization costs
Other assets
----------- -----------
Total Assets 290,039.37 487,899.34
=========== ===========
II-1
30-Sep-01 30-Sep-02
----------- ------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses 30,029.33 219,158.79
Notes payable
Current maturities of long-term debt
Current maturities of capitalized lease obligations
Loans from officers/stockholders/affiliates
Income taxes payable - -
Customer deposits
Deferred income taxes
Current portion of deferred rental obligation
Other current liabilities 8,141.40 (2,234.35)
---------- ----------
Total Current Liabilities 38,170.73 216,924.44
----------- -----------
Long-term debt, excluding current maturities
Obligations under capital leases, excluding
current maturities
Loans from stockholders/officers/affiliates
(if long-term)
Deferred income taxes
Deferred rental obligation
Other liabilities
Total Liabilities 38,170.73 216,924.44
----------- -----------
Stockholders' Equity
Convertible preferred stock, redeemable 5%
cumulative $100 par value, 100 shares authorized, 241,837.97 241,837.97
issued and outstanding
Common stock, $1 par value, 10,000 shares
authorized; 5,000 shares issued
and 4,800 shares outstanding
Additional paid-in capital
Retained earnings (deficit) 10,030.67 16,844.42
Accumulated other comprehensive income - 12,292.51
Treasury stock, 200 common shares at cost
----------- -----------
Total Stockholders' Equity (Impairment) 251,868.64 270,974.90
----------- -----------
Total Liabilities and Stockholders' equity 290,039.37 487,899.34
=========== ==========
II-2
TS Electronics Corporation
Statements of Income and Retained Earnings
For the fiscal years ended Sept.30, 2002 and Sept.30, 2001
(unaudited)
US$
Sept. 2002 Sept. 2001
---------------------- -----------------------
Amount % of Sales Amount % of Sales
---------- ---------- ---------- ----------
Net Sales 113,515.12 100.00% 77,867.38 100.00%
Cost of goods sold 70,494.61 62.10% 64,329.83 82.61%
---------- ------ --------- ------
Gross Profit 43,020.51 13,537.55
---------- ------ --------- ------
Selling expenses 217.75 0.19% 1,116.01 1.43%
General and administrative
expenses 20,721.73 18.25% 2,644.33 3.40%
---------- ------ --------- ------
Total Operating Expenses 20,939.48 3,760.34
---------- ------ --------- ------
Income from Operations 22,081.12 9,777.21
---------- ------ --------- ------
Other income (expense) (1,885.13) (1.66%) (12.90) (0.02%)
Interest income 97.86 0.09% 286.87 0.37%
Interest expense 63.82 0.06% 21.32 0.03%
---------- ------ --------- ------
Total Other Income (1,851.09) 253.46
---------- ------ --------- ------
Income before income taxes,
Extraordinary item and
cumulative effect of
accounting change 20,230.04 17.82% 10,030.67 12.88%
---------- ------ --------- ------
Net Income 20,230.04 10,030.67
========== ====== ========= ======
Retained Earnings at
Beginning of Period 10,030.67
Less dividends
Net income above 20,230.04 10,030.67
---------- ------ --------- ------
Retained Earnings
at End of Period 30,260.70 10,030.67
========== ====== ========= ======
II-3
TS ELECTRONICS CORPORATION
BALANCE SHEET
MARCH 31, 2003
(Unaudited)
US$
ASSETS
------
Current Assets
Cash and equivalents $ 31,392.76
Other receivable 79,877.71
Marketable securities --
Accounts receivable net of allowance for doubtful accounts 585,469.02
Of (1998) and (1997) --
Inventories 5,780.01
Other current assets 73,615.11
------------
Total Current Assets 776,134.61
------------
Property, plant and equipment 216,529.63
Goodwill and organization costs --
Other assets --
------------
Total Assets $ 992,664.24
============
II-4
TS ELECTRONICS CORPORATION
BALANCE SHEET (Continued)
MARCH 31, 2003
(Unaudited)
US$
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expense $ 342,079.36
Notes payable --
Current maturities of long-term debt --
Current maturities of capitalized lease obligations --
Loans from officers/stockholders/affiliates --
Income taxes payable 33,118.43
Customer deposits --
Deferred income taxes --
Current portion of deferred rental obligation --
Other current liabilities 3,156.93
------------
Total Current Liabilities 378,354.72
------------
Long-term debt, excluding current maturities --
Obligations under capital leases, excluding current maturities --
Deferred income taxes --
Deferred rental obligation --
------------
Total Liabilities 378,354.72
------------
Stockholders' Equity
Convertible preferred stock, redeemable 5%
cumulative $100 par 241,837.97
Additional paid-in capital retained earnings (deficit) 337,978.39
Accumulated other comprehensive income 34,493.16
------------
Total Stockholders' Equity 614,309.52
------------
Total Liabilities and Stockholders' Equity $ 992,664.24
============
II-5
TS ELECTRONICS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
US$
For the six-month period
ended March 31,
2003 2002
----------- ----------
Net Sales $870,443.89 $97,132.15
Cost of goods sold 404,436.99 60,710.10
----------- ----------
Gross profit 466,006.90 36,422.05
Selling expenses 24,670.38 15.77
General and administrative expenses 31,840.18 9,653.27
----------- ----------
Total operating expenses 56,510.56 26,753.01
Income (loss) from operations 409,496.34 --
----------- ----------
Other income (expense) -- --
Interest income -- --
Interest expense 6.77 138.83
Gain on disposition of assets 544.14 --
----------- ----------
Total other income (expense) -- 138.83
Income before income taxes,
extraordinary item and cumulative
effect of accounting change 408,945.43 26,614.18
Provision for income taxes 59,236.85 --
Income before extraordinary
item and cumulative effect of
accounting change 349,708.58 --
Extraordinary item, net of income tax effect 60.08 --
----------- ----------
Net income 349,648.50 26,614.18
=========== ==========
Net income above -- $26,614.18
==========
Retained earnings at end of period -- $26,614.18
==========
Note: Exchange Rte US$1 = RMB8.27. Official exchange rate quoted by Bank of
China
II-6