As filed with the Securities and Exchange Commission on August 20, 2004
Registration No.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
(Name of Registrant in Our Charter)
Delaware 7372 52-1988677
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation Classification Code Number) Identification No.)
or Organization)
5210 Chairmans Court Dan Jonson
Suite 3 5210 Chairmans Court
Frederick, MD 21703 Suite 3
(301) 668-9600 Frederick, MD 21703
(Address and telephone number of Principal (301) 668-9600
Executive Offices and Principal Place of (Name, address and telephone
Business) number of agent for service)
Copy to:
Ernest M. Stern, Esq.
Patricio E. Garavito, Esq.
Schiff Hardin LLP
1101 Connecticut Avenue, N.W., Suite 600
Washington, D.C. 20036
(202) 778-6400
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Proposed Maximum Aggregate Amount Of
Title Of Each Class Of Amount To Be Offering Price Offering Registration
Securities To Be Registered Registered Per Share (1) Price (1) Fee
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Common stock, par value $0.001 per share 3,073,113 Shares $0.15 $460,966.95 $58.40
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933. The shares
included herein are being distributed to the stockholders of Mobilepro
Corp. No consideration will be received by Solution Technology
International, Inc. in consideration for such distribution and there is
no market for the shares being distributed. Accordingly, for purposes
of calculating the registration fee, the Registrant has used $0.15 per
share as the current estimated fair value of the shares being
distributed.
----------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
2
Subject to completion, dated ___________, 2004
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
Spin-off of 3,073,113 Shares of Common Stock
This prospectus relates to the distribution by dividend, or spin-off, to
all of the stockholders of Mobilepro Corp. of 3,073,113 shares of Common Stock
of Solution Technology International, Inc. ("STI"). STI is not selling any
shares of Common Stock in this offering and therefore will not receive any
proceeds from this offering. All costs associated with this registration will be
borne by STI.
Holders of Mobilepro common stock will receive one share of STI Common
Stock for every 93 shares of Mobilepro common stock that they hold. Holders of
certain warrants to purchase common stock of Mobilepro will retain the right to
receive the shares of STI Common Stock upon exercise of the warrant. Holders of
less than 93 shares of Mobilepro common stock will not receive any shares of STI
Common Stock. The 3,073,113 shares of Common Stock represent 6.7% of the total
outstanding shares of Common Stock. After the spin-off, STI, will be an
independent public company.
You will be required to pay income tax on the value of the shares of
Common Stock of STI received by you in connection with this distribution.
Currently, no public market exists for Common Stock of STI. We can provide
no assurance that a public market for our securities will develop and ownership
of our securities is likely to be an illiquid investment.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 10.
No underwriter or person has been engaged to facilitate the distribution
of shares of Common Stock in this offering.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed. The
dividend, or spin-off shall not occur until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to buy these securities in any state where the offer or sale is not
permitted.
The date of this prospectus is __________, 2004.
TABLE OF CONTENTS
PROSPECTUS SUMMARY...........................................................1
SUMMARY FINANCIAL INFORMATION................................................8
RISK FACTORS................................................................10
THE DISTRIBUTION............................................................17
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION.........................20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
OR PLAN OF OPERATION .......................................................22
DESCRIPTION OF BUSINESS.....................................................24
MANAGEMENT..................................................................28
LeGAl PROCEEDINGS...........................................................31
PRINCIPAL SHAREHOLDERS......................................................32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................34
DESCRIPTION OF SECURITIES...................................................35
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ...................................................36
EXPERTS.....................................................................36
LEGAL MATTERS...............................................................36
AVAILABLE INFORMATION.......................................................36
FINANCIAL STATEMENTS.......................................................F-1
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Our audited financial statements for the fiscal year ended December 31,
2003 are contained herein.
i
PROSPECTUS SUMMARY
OUR COMPANY
Solution Technology International, Inc. ("STI") is a development stage
company that designs, develops, markets and supports a web-based,
multi-language, multi-currency software solution ("SurSITE(R)") used by
insurance and reinsurance companies to facilitate and support their most
critical back-office business processes. The Company's reinsurance application
is proprietary software for reinsurance management of complex reinsurance
contract combinations throughout the entire reinsurance contract workflow. The
process begins when an insurance company buys reinsurance by ceding (or
transferring) a portion of its liability to one or more reinsurers. This is
referred to in the industry as ceded business. Reinsurers can also buy
reinsurance to spread the risk even further, which is referred to as retroceded
business.
What distinguishes the Company's SurSITE(R) solution from our competition
is an "industry-first" Technical Accounting Transaction Engine ("TATE") software
that automates calculations and generates transactions for premiums,
commissions, and claims based on events and transactions at the original
insurance policy level; it also manages statements of account, reinsurance
recovery notices, and claims notifications. TATE supports the two basic
categories of reinsurance being treaty and facultative contracts. The difference
between them is that a treaty contract covers multiple risks of a certain type
while a facultative contract is for a single risk. To further enhance the
applicability of the SurSITE(R) software, the Company is currently designing
extensive support for facultative reinsurance used to insure very large risks
that cannot be insured by a single insurance company like property and liability
insurance for multinational corporations, airlines and aerospace, cargo, energy,
engineering, manufacturers, ocean hull, etc. In addition to its software
product, the Company provides its customers with complete requirements studies,
data migrations, data integration tools, system integrations and other related
professional services.
We plan to market and sell our products worldwide, at the outset by
utilizing a network of international industry contacts developed by senior
management and indirectly through third parties. As part of the planned scaling
of the organization, the Company will establish an international sales force by
hiring experienced professionals with well-established track records and
contacts throughout the insurance and reinsurance industry. The Company plans to
establish a presence in the London market since it is the global center of
reinsurance trading.
The Company's initial multi-million dollar deployment and charter client,
won in competition against Computer Science Corporation, is an insurance and
reinsurance consortium based in Zurich, Switzerland consisting of 26 well-known
member companies, including, among others, Allianz, Partner Re, Swiss Re,
Winterthur Insurance Company and Zurich Insurance Group. The member companies
are using STI's software platform to produce direct insurance business and
manage the reinsurance transactions of the produced direct insurance business.
For decades, lack of automation coupled with fragmented information
systems of many global insurance and reinsurance organizations have made it
difficult to accurately manage complex technical accounting methods causing
losses from hard-to-detect errors involving premiums received and payable,
claims and risk allocation, unnecessary operating expenses and reduced
investment income from the negative impact of delayed claims recovery.
Frequently, these shortcomings have been amplified by fragmented business
processes, many repetitive, manual paper-based processes, untimely and
incomplete collection of data and lack of access to intelligence embedded in an
insurance company's own data to facilitate making the correct business
decisions. In addition, it is difficult for many organizations to maintain
reinsurance contract knowledge as a result of staff turnover since losses may be
reported years after a reinsurance contract has been initiated.
Our reinsurance software enables an organization to overcome the
limitations of fragmented business processes and gain control of
mission-critical reinsurance administration. The Technical Accounting
Transaction Engine, which has been tested by some of the most experienced
reinsurance industry professionals, provides the solution that addresses the
many problems associated with accurately managing complex technical accounting
methods, timely loss recoveries, and error prone business processes. Our
software products allow companies to leverage their substantial investments in
existing IT infrastructures while exploiting the many benefits offered by
automation of technical accounting transactions. We believe that the SurSITE(R)
reinsurance software solution improves the quality, consistency, and accuracy of
work performed and positions management to significantly and measurably reduce
operating expenses and reduce errors.
The Company's objective is to establish its reinsurance solution as the
industry standard in managing complex reinsurance contract combinations
throughout the entire reinsurance contract workflow. To achieve this goal the
Company intends to enhance its technological leadership by adding support for
new and evolving premium and claims recovery methods; functionality for trend
analysis, capacity utilization and exposure control; accelerating the acceptance
of its products by leveraging strategic partnerships; and providing the software
and services necessary to conduct safe and reliable technical accounting
transactions over the Internet.
1
Proposed Distribution
In August 2004, Mobilepro announced its intention to distribute STI Common
Stock to its shareholders as of September 15, 2004 upon the effectiveness of
required Securities and Exchange Commission filings and final approval by the
Board of Directors of the terms and conditions of the distribution. Following
the Distribution, Mobilepro will retain 2,048,742 shares of STI Common Stock.
Why Mobilepro Sent This Document To You
Mobilepro Corp. sent you this document because you were an owner of
Mobilepro common stock on the record date. This entitles you to receive a
distribution of one share of Common Stock of Solution Technology International,
Inc. ("STI Shares") for every 93 shares of Mobilepro you owned on that date. No
action is required on your part to participate in the Distribution and you do
not have to pay cash or other consideration to receive your STI Shares.
This document describes STI's business, the relationship between Mobilepro
and STI, and how this transaction benefits Mobilepro and its stockholders, and
provides other information to assist you in evaluating the benefits and risks of
holding or disposing of the STI Shares that you will receive in the
Distribution. You should be aware of certain risks relating to the Distribution
and STI's business, which are described in this document beginning on page 10.
Our principal office is located at 5210 Chairman's Court, Suite 3,
Frederick, MD 21703; telephone number (301) 668-9600.
Questions And Answers About The Distribution
The following section answers various questions that you may have with
respect to the pro rata distribution to Mobilepro stockholders of the
approximately 6.6% of the outstanding shares of STI Common Stock. We refer to
this distribution as the Distribution.
Q: When Will The Distribution Occur?
A: Mobilepro currently anticipates completing the Distribution on or about
the effective date of the registration statement. The record date for the
distribution is September 15, 2004.
Q: What Will I Receive As A Result Of The Distribution?
A: For every 93 shares of Mobilepro common stock that you own of record on
September 15, 2004, you will receive one share of STI Common Stock.
Mobilepro will distribute the STI shares by book entry. If you are a
record holder of Mobilepro stock, instead of physical stock certificates, you
will receive from STI's transfer agent shortly after the effective date of the
registration statement, a statement of your book entry account for the STI
shares distributed to you. Following the Distribution, you may request physical
stock certificates if you wish, and instructions for making that request will be
furnished with your account statement. If you are not a record holder of
Mobilepro stock because your shares are held on your behalf by your stockbroker
or other nominee, your STI shares should be credited to your account with your
stockbroker or nominee after the effective date of the registration statement.
Q: What Do I Have To Do To Receive My STI Shares?
A: Nothing. Your STI shares will be either reflected in an account
statement that STI's transfer agent will send to you shortly after the effective
date of the registration statement or credited to your account with your broker
or nominee after the effective date of the registration statement.
2
Q: When Will I Receive My STI Shares?
A: If you hold your Mobilepro shares in your own name, your account
statement will be mailed to you after the effective date of the registration
statement. You should allow several days for the mail to reach you.
If you hold your Mobilepro shares through your stockbroker, bank or other
nominee, you are probably not a stockholder of record and your receipt of STI
shares depends on your arrangements with the nominee that holds your Mobilepro
shares for you. Mobilepro anticipates that stockbrokers and banks generally will
credit their customers' accounts with STI shares after the effective date of the
registration statement, but you should check with your stockbroker, bank or
other nominee.
Q: Where Will My STI Shares Be Traded?
A: We anticipate that STI's shares will be listed on the Over-the-Counter
Bulletin Board under the proposed symbol "___." However, no assurance can be
given that the Over-the Counter Bulletin Board will accept STI shares for
listing. Trading of the STI shares may commence on a when-issued basis prior to
the distribution.
Q: What If I Want To Buy Or Sell Mobilepro Shares Or STI Shares?
A: You should consult with your own financial advisors, such as your
stockbroker, bank or tax advisor. Neither STI nor Mobilepro makes
recommendations on the purchase, retention or sale of shares of Mobilepro common
stock or STI Common Stock.
The shares distributed to you on the date of the Distribution may be
traded immediately.
If you do decide to buy or sell any shares, you should make sure your
stockbroker, bank or other nominee understands whether you want to buy or sell
Mobilepro common stock or STI Common Stock, or both. The following information
may be helpful in discussions with your stockbroker, bank or other nominee.
There is not currently a public market for the STI Common Stock, although
a when-issued market may develop prior to completion of the Distribution.
When-issued trading refers to a transaction made conditionally because the
security has been authorized but is not yet issued or available. Even though
when-issued trading may develop, none of these trades would settle prior to the
effective date of the Distribution, and if the Distribution does not occur, all
when-issued trading will be null and void. On the first trading day following
the date of the Distribution, when-issued trading in respect of STI's Common
Stock will end and regular-way trading will begin. Regular-way trading refers to
trading after a security has been issued and typically involves a transaction
that settles on the third full business day following the date of a transaction.
We anticipate that STI's shares will be listed on the Over-the-Counter Bulletin
Board under the proposed symbol "____."
Mobilepro's common stock may also trade on a when-issued basis on the
Over-the-Counter Bulletin Board, reflecting an assumed post-Distribution value
for Mobilepro common stock. When-issued trading in Mobilepro common stock, if
available, could last from on or about the later to occur of (1) the record date
or (2) the effectiveness of the registration statement filed by STI with the
Securities and Exchange Commission, through the effective date of the
Distribution. If when-issued trading in Mobilepro common stock is available,
Mobilepro stockholders may trade Mobilepro common stock prior to the effective
date of the Distribution in either the when-issued market or in the regular
market for Mobilepro common stock. If a stockholder trades in the when-issued
market, he will have no obligation to transfer to a purchaser of Mobilepro
common stock the STI Common Stock that he receives in the Distribution. If a
stockholder trades in the regular market, the shares of Mobilepro common stock
traded will be accompanied by due bills representing the STI Common Stock to be
distributed in the Distribution. If when-issued trading in Mobilepro common
stock is not available, neither the Mobilepro common stock nor the due bills may
be purchased or sold separately during the period from the record date through
the effective date of the Distribution. If a when-issued market for Mobilepro
common stock develops, an additional listing for Mobilepro common stock will
appear on the Over-the-Counter Bulletin Board. Differences will likely exist
between the combined value of when-issued STI Common Stock plus when-issued
Mobilepro common stock and the price of Mobilepro common stock during this
period.
Purchases and sales of Mobilepro common stock with the right to receive
shares of STI Common Stock should generally settle in the customary
three-business day settlement period. Purchases and sales of Mobilepro common
stock without the right to receive shares of the STI Common Stock and purchases
and sales of STI Common Stock without the right to receive Mobilepro common
stock are expected to settle four business days following the date account
statements for the STI shares are mailed. You should check with your
stockbroker, bank or other nominee for details.
3
Q: How Will The Distribution Affect The Amount Of Cash Dividends On My Mobilepro
Shares?
A: Mobilepro has not paid cash dividends in the past, and we anticipate
that following the Distribution, neither STI nor Mobilepro will pay cash
dividends. However, no formal action has been taken with respect to future
dividends, and the declaration and payment of dividends by STI and Mobilepro
will be at the sole discretion of their respective boards of directors.
Q: Will I Have To Pay Taxes On The STI Shares That I Receive?
A: Yes. You will be required to pay income tax on the value of your shares
of STI Common Stock received as a dividend. We expect that the dividend will be
taxed as ordinary income to the extent of the value of the shares you receive.
In addition, you will have to pay taxes on any shares that you receive as a
result of the rounding up of fractional shares. You are advised to consult your
own tax advisor as to the specific tax consequences of the Distribution.
Q: Will There Be Any Change In The United States Federal Tax Basis Of My
Mobilepro Shares As A Result Of The Distribution?
A: Yes, your tax basis in your Mobilepro shares will be reduced. If you
are the record holder of your Mobilepro shares, you will receive information
with your account statement that will help you calculate the adjusted tax basis
for your Mobilepro shares, as well as the tax basis for your STI shares. If you
are not the record holder of your Mobilepro shares because your shares are held
on your behalf by your stockbroker or other nominee, you should contact your
stockbroker or nominee for help in determining the tax basis for your Mobilepro
shares, as well as the tax basis for your STI shares.
Q: Where Can I Get More Information?
A: If you have any questions relating to the mechanics of the Distribution
and the delivery of account statements, you can contact the Distribution Agent:
Interwest Transfer Corporation
1981 East 4800 South
Suite 100
Salt Lake City, UT 84117
(801) 272-9294
For other questions related to the Distribution or Mobilepro, please
contact:
Mobilepro Corp.
6701 Democracy Blvd.
Suite 300
Bethesda, MD 20817
(301) 315-9040
STI's stockholders with inquiries relating to the Distribution or their
investment in STI should contact:
Solution Technology International, Inc.
5210 Chairmans Court
Suite 3
Frederick, MD 21703
(301) 668-9600
Attention: Investor Relations
4
Summary Of The Distribution
Distributing company
Mobilepro Corp., a Delaware corporation. As used in this prospectus, the
term Mobilepro includes Mobilepro Corp. and its wholly-owned and majority-owned
subsidiaries, other than STI, as of the relevant date, unless the context
otherwise requires.
Distributed company
Solution Technology International, Inc., a Delaware corporation. As used
in this prospectus, the terms STI, we, our, us and similar terms means Solution
Technology International, Inc. and its wholly-owned and majority-owned
subsidiaries, as of the relevant date, unless the context otherwise requires.
STI shares to be Distributed
Mobilepro will distribute to Mobilepro stockholders an aggregate of
3,073,113 shares of Common Stock, par value $0.001 per share, of STI. Based on
approximately 255,914,196 Mobilepro shares outstanding on the record date
(assuming Mobilepro options and convertible securities are not exercised or
converted prior to the record date) and warrants to purchase 30,603,537
Mobilepro shares, one STI Share will be distributed for approximately every 93
shares of Mobilepro common stock outstanding on the Record Date. (The
Distribution ratio may change depending on the number of outstanding shares of
Mobilepro common stock on the Record Date.) STI currently has 46,230,154 shares
of Common Stock outstanding. The STI Shares to be distributed will constitute
6.6% of the STI Shares outstanding after the Distribution. Immediately following
the Distribution, Mobilepro and its subsidiaries will still own 2,048,742 STI
Shares.
Record Date
If you own at least 93 Mobilepro shares at the close of business on
September 15, 2004 (the Record Date), then you will receive STI Shares in the
Distribution. If you own fewer than 93 Mobilepro shares on the Record Date, then
you will not receive any STI Shares or any other consideration.
Distribution Date
We currently anticipate that the Distribution will occur near the
effective date of the registration statement. If you are a record holder of
Mobilepro stock, instead of physical stock certificates you will receive from
STI's transfer agent shortly after the effective date of the registration
statement a statement of your book entry account for the STI Shares distributed
to you. If you are not a record holder of Mobilepro stock because such shares
are held on your behalf by your stockbroker or other nominee, your STI Shares
should be credited to your account with your stockbroker or other nominee after
the effective date of the registration statement. Following the Distribution,
you may request physical stock certificates if you wish, and instructions for
making that request will be furnished with your account statement.
Distribution
On the Distribution Date, the distribution agent identified below will
begin distributing certificates representing our Common Stock to Mobilepro
stockholders. You will not be required to make any payment or take any other
action to receive your shares of our Common Stock. The distributed shares of our
Common Stock will be freely transferable unless you are one of our affiliates or
you are issued shares in respect of restricted shares of Mobilepro common stock.
Distribution Ratio
Mobilepro will distribute to Mobilepro stockholders an aggregate of
3,073,113 shares of Common Stock of STI, based on approximately 255,914,196
Mobilepro shares outstanding on the record date and warrants to purchase
30,603,537 Mobilepro shares outstanding on the record date. Therefore, for every
93 shares of Mobilepro common stock that you own of record on September 15,
2004, you will receive one share of STI Common Stock. The Distribution ratio is
subject to change depending upon the number of outstanding shares of Mobilepro
common stock on the Record Date. If you own fewer than 93 shares of Mobilepro
common stock, you will not receive STI Shares in the Distribution or any other
consideration because the cost to Mobilepro to distribute either single shares
(if Mobilepro were to round up) or fractional shares would be greater than the
value Mobilepro shareholders of less than 93 shares would otherwise be entitled
to receive in the Distribution. Mobilepro shareholders are not receiving shares
of STI Common Stock on a one-for-one basis because STI's management has
determined that a more modest capital structure and fewer outstanding shares of
common stock would be more beneficial for stockholders.
5
Distribution Agent
Interwest Transfer Corporation. Their address is 1981 East 4800 South,
Suite 100, Salt Lake City, UT 84117. Their telephone number is (801) 272-9294.
Transfer Agent and Registrar for the STI Shares
SunTrust Bank is the transfer agent and registrar for our common stock.
Its address is 58 Edgewood Avenue, Room 225, Atlanta, GA 30303. Its telephone
number is (404) 588-7622.
Fractional Shares Of Our Common Stock
Mobilepro will not distribute any fractional shares of STI Common Stock.
In lieu of distributing a fraction of a share of our Common Stock to any
Mobilepro stockholder, fractional shares will be rounded up to the next highest
whole number of shares (unless you own less than 93 shares, in which case you
will not receive any STI Shares in the Distribution).
Trading Market
We anticipate that our Common Stock will be traded on the Over
-The-Counter Bulletin Board under the proposed symbol "_____." We expect that a
market maker will apply for quotation on the Over-the-Counter Bulletin Board on
our behalf prior to the Distribution. No trading market for our Common Stock
currently exists. However, a trading market for the entitlement to receive
shares of our Common Stock in the distribution, referred to as a when-issued
market, may develop on or after the record date for the distribution.
Dividend Policy
Mobilepro has not paid cash dividends in the past, and we anticipate that
following the Distribution, neither STI nor Mobilepro will pay cash dividends.
However, no formal action has been taken with respect to future dividends, and
the declaration and payment of dividends by STI and Mobilepro will be at the
sole discretion of their respective boards of directors.
Risk Factors
The distribution and ownership of our Common Stock involve various risks.
You should read carefully the factors discussed under Risk Factors beginning on
page 10. Several of the most significant risks of the Distribution include:
o Substantial sales of STI Shares may have an adverse impact on the
trading price of the STI Common Stock.
o There has not been a prior trading market for STI Shares and a
trading market for the STI Shares may not develop.
Federal Income Tax Consequences
Mobilepro and STI do not intend for the Distribution to be tax-free for
U.S. federal income tax purposes. You will be required to pay income tax on the
value of your shares of STI Common Stock received as a dividend. We expect that
the dividend will be taxed as ordinary income to the extent of the value of the
shares you receive. You are advised to consult your own tax advisor as to the
specific tax consequences of the Distribution.
Our Relationship With Mobilepro After The Distribution
Prior to the Distribution, Mobilepro and STI had no prior business
relationship, except for the services provided by Mobilepro to STI pursuant to a
Business Development Agreement. As part of the consideration for the services
provided in that Business Development Agreement, Mobilepro received 5,121,855
shares of Common Stock. Going forward, we intend to work with Mobilepro on
several things including bandwidth provisioning and web hosting services.
6
Board of Directors of STI
No directors of Mobilepro serve as directors of STI. STI's Board of
Directors currently consists of five (5) members.
Management of STI
No current executive officers of Mobilepro serve as executive officers
of STI. Mr. Dan L. Jonson serves as Chief Executive Officer and President of our
Company and will continue to serve in those capacities after the Distribution.
Stockholder Inquiries
Any persons having inquiries relating to the distribution should
contact the Shareholder Services department of the distribution agent at (801)
272-9294 or STI, in writing at 5210 Chairmans Court, Suite 3, Frederick, MD
21703, Attention: Investor Relations, or by telephone at (301) 668-9600.
7
SUMMARY FINANCIAL INFORMATION
The following information was taken from STI's financial statements for
the four-month periods ended April 30, 2004 (unaudited) and April 30, 2003
(unaudited) and the years ended December 31, 2003 (audited) and December 31,
2002 (audited) appearing elsewhere in this filing. This information should be
read in conjunction with such financial statements and the notes thereto. In
management's opinion all adjustments (consisting of normal recurring items)
considered necessary for a fair presentation have been included.
For the For the
Four Months Four Months For the For the
Ended Ended Year Ended Year Ended
April 30, April 30, December 31, December 31,
2004 2003 2003 2002
(Unaudited) (Unaudited) (Audited) (Audited)
----------- ----------- ----------- -----------
Statement of Operation Data:
Operating Revenues
Sales $ -- $ 348,458 $ 1,309,686 $ 2,400,930
Cost of Sales -- 481,672 688,300 1,723,551
----------- ----------- ----------- -----------
Operating Expenses
Total Operating Expenses 235,059 486,991 1,095,765 980,391
----------- ----------- ----------- -----------
Other Income (Expense)
Loss on disposal of fixed assets -- -- -- (13,002)
Interest income 23 674 1,214 2,997
Interest expense (38,573) (42,399) (146,383) (35,019)
Total Other Income (expense) (38,550) (41,725) (145,169) (45,024)
Net Loss Applicable to Common Shares $ (274,509) $ (625,930) $ (619,548) $ (348,036)
=========== =========== =========== ===========
Net Loss per Basic and Diluted Shares $ (0.14) $ (0.32) $ (0.32) $ (0.18)
=========== =========== =========== ===========
Weighted Average Number of
Common Stock Shares Outstanding 1,952,985 1,952,985 1,952,985 1,952,985
=========== =========== =========== ===========
8
April 30, April 30, December 31, December 31,
2004 2003 2003 2002
Balance Sheet Data: (Unaudited) (Unaudited) (Audited) (Audited)
----------- ----------- ----------- -----------
Assets
Total Assets $ 1,027,867 $ 1,106,091 $ 1,066,445 $ 1,146,054
=========== =========== =========== ===========
Liabilities
Total Current Liabilities $ 1,841,363 $ 1,713,161 $ 1,706,565 $ 1,241,521
----------- ----------- ----------- -----------
Total Long-term Liabilities 241,776 180,075 140,643 65,748
----------- ----------- ----------- -----------
Total Stockholders' Equity (Deficit) (1,055,272) (787,145) (780,763) (161,215)
----------- ----------- ----------- -----------
Total Liabilities And Stockholders' Deficit $ 1,027,867 $ 1,106,091 $ 1,066,445 $ 1,146,054
=========== =========== =========== ===========
9
RISK FACTORS
WE ARE SUBJECT TO VARIOUS RISKS THAT MAY MATERIALLY HARM OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YOU SHOULD CAREFULLY CONSIDER THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS FILING
BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE ARE AN EARLY-STAGE COMPANY WITH AN UNPROVEN BUSINESS MODEL, A NEW AND
UNPROVEN ENTERPRISE TECHNOLOGY MODEL AND A SHORT OPERATING HISTORY, WHICH MAKES
IT DIFFICULT TO EVALUATE OUR CURRENT BUSINESS AND FUTURE PROSPECTS AND MAY
INCREASE THE RISK OF YOUR INVESTMENT.
We have only a limited operating history upon which to base an evaluation
of our current business and future prospects. Although we were founded in 1993,
we began offering our SurSITE software products in 2003. Our limited operating
history makes an evaluation of our business and prospects very difficult. You
must consider our business and prospects in light of the risks and difficulties
we encounter as an early-stage company in the rapidly evolving market of
reinsurance contract management. These risks and difficulties include, but are
not limited to, the following:
o our new and unproven business and technology models;
o a limited number of service offerings and risks associated with
developing new product and service offerings;
o the difficulties we face in managing rapid growth in personnel and
operations;
o a failure of our physical infrastructure or internal systems caused
by a denial of service, third-party attack, employee error or
malfeasance, or other causes;
o a general failure of the Internet that impairs our ability to
deliver our service;
o a loss or breach of confidentiality of customer data;
o the negative impact on our brand, reputation or trustworthiness
caused by any significant unavailability of our service;
o the systematic failure of a core component of our service from which
it would be difficult for us to recover;
o the timing and success of new service introductions and new
technologies by our competitors; and
o our ability to build brand awareness in a highly competitive market.
We may not be able to successfully address any of these risks or others.
Failure to adequately do so could seriously harm our business and cause our
operating results to suffer.
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE, WHICH
MEANS THAT WE MAY NOT BE ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL
FUNDING.
We have historically lost money. In the four months ended April 30,
2004, we sustained net losses of $274,509. In the year's ended December 31, 2003
and December 31, 2002, we sustained net losses of $619,548 and $348,036,
respectively. Future losses are likely to occur. Accordingly, we may experience
liquidity and cash flow problems if we are not able to raise additional capital
as needed and on acceptable terms. No assurances can be given that we will be
successful in reaching or maintaining profitable operations.
We have a limited operating history upon which to evaluate our business
plan and prospects. If we are unable to draw down on the Standby Equity
Distribution Agreement provided by Cornell Capital or find alternative financing
on commercially reasonable terms, or generate revenue from the sales of our
products and services, we could be forced to curtail or cease our operations.
10
We have generated limited revenue from operations. If we do not begin
generating more revenue, we may have to cease operations. At December 31, 2003,
we had an accumulated deficit of $3,002,204. In order to become profitable, we
will need to generate revenues to offset our cost of research and development
and general and administrative expenses. We may not achieve or sustain our
revenue or profit objectives and our losses may increase in the future and
ultimately, we may have to cease operations.
Our operating results are impossible to predict because we have limited
operations. As a result, we cannot determine if we will be successful in our
proposed plan of operation. Accordingly, we cannot determine what the future
holds for our proposed plan of business. As such an investment in our business
is extremely risky and could result in the entire loss of your investment.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO CONTINUE OUR OPERATIONS.
Unless we can become profitable with the existing sources of funds we
have available and our sales efforts, we will require additional capital to
sustain operations and we may need access to additional capital or additional
debt financing to expand our business. In addition, to the extent that we have a
working capital deficit and cannot offset the deficit from profitable operations
we may have to raise capital to repay the deficit and provide more working
capital to permit growth in revenues. We cannot assure you that financing,
whether from external sources or related parties, will be available if needed or
on favorable terms. Our inability to obtain adequate financing will result in
the need to reduce the pace of business operations. Any of these events could be
materially harmful to our business and may result in a lower stock price.
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN DUE
TO RECURRING LOSSES AND WORKING CAPITAL SHORTAGES, WHICH MEANS THAT WE MAY NOT
BE ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING.
The report of our independent accountants on our April 30, 2004
financial statements, as noted in Note 13 and our December 31, 2003 financial
statements, as noted in Note 13 each included an explanatory paragraph
indicating that there is substantial doubt about our ability to continue as a
going concern due to our recurring losses from operations.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO RESELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS.
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny
stocks are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00
per share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last
three years.
Broker/dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Moreover, broker/dealers are required to determine whether an investment in a
penny stock is a suitable investment for a prospective investor. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline.
An evaluation of our business is difficult because we have no operating
history. We face a number of risks encountered by companies in our sector,
including:
o Our need to introduce reliable service that meet the demanding needs
of customers
o Our need to rapidly increase our marketing, sales and support
organizations, as well as our distribution channels;
o Our capacity to anticipate and respond to market competition and
technological change;
o The uncertainty of market acceptance of our service;
o Our need to manage growing operations;
11
WE HAVE BEEN A DEVELOPMENT STAGE COMPANY AND HAVE A LIMITED OPERATING HISTORY
UPON WHICH YOU CAN BASE YOUR INVESTMENT DECISION.
Based on our limited operating history and sales, it is difficult or
impossible for us to evaluate our operational and financial performance, or to
make accurate predictions about our future performance. If we are unable to
obtain additional external funding or generate additional revenue, we could be
forced to curtail or cease our operations.
IF WE CANNOT DELIVER THE FEATURES AND FUNCTIONALITY OUR CUSTOMERS DEMAND, WE
WILL BE UNABLE TO ATTRACT CUSTOMERS.
Our future success depends upon our ability to determine the needs of
our customers and to design and implement software products that meet their
needs in a cost efficient manner. We cannot assure you that we will be able to
successfully determine customer requirements or that our current or future
services will adequately satisfy customer demands.
OUR LIMITED OPERATING HISTORY MAY IMPEDE ACCEPTANCE OF OUR SERVICE BY
MEDIUM-SIZED AND LARGE CUSTOMERS.
Our ability to increase revenue and achieve profitability depends, in
large part, on widespread acceptance of our service by medium-sized and large
businesses. Our efforts to sell to these customers may not be successful. In
particular, because we are a relatively new company with a limited operating
history, these target customers may have concerns regarding our viability and
may prefer to purchase critical software applications from one of our larger,
more established competitors. Even if we are able to sell our service to these
types of customers, they may insist on additional assurances from us that we
will be able to provide adequate levels of service, which could harm our
business.
AS MORE OF OUR SALES EFFORTS ARE TARGETED AT LARGER ENTERPRISE CUSTOMERS, OUR
SALES CYCLE MAY BECOME MORE TIME-CONSUMING AND EXPENSIVE, POTENTIALLY DIVERTING
RESOURCES AND HARMING OUR BUSINESS.
As we target more of our sales efforts at larger enterprise customers, we
will face greater costs, longer sales cycles and less predictability in
completing some of our sales. In this market segment, the customer's decision to
use our service may be an enterprise-wide decision and, if so, these types of
sales would require us to provide greater levels of education to prospective
customers regarding the use and benefits of our service. In addition, larger
customers may demand more customization, integration services and features. As a
result of these factors, these sales opportunities may require us to devote
greater sales support and professional services resources to individual sales,
driving up costs and time required to complete sales and diverting sales and
professional services resources to a smaller number of larger transactions.
OUR FUTURE FINANCIAL PERFORMANCE WILL DEPEND ON THE INTRODUCTION AND WIDESPREAD
ACCEPTANCE OF NEW FEATURES TO, AND ENHANCED EDITIONS OF, OUR SERVICE.
Our future financial performance will depend on our ability to develop and
introduce new features to, and new editions of, our service. The success of new
features and editions depends on several factors, including the timely
completion, introduction and market acceptance of the feature or edition.
Failure in this regard may significantly impair our revenue growth. In addition,
the market for our service may be limited if prospective customers, particularly
large customers, require customized features or functions that are incompatible
with our application delivery model. If we are unable to develop new features or
enhanced editions of our service that achieve widespread levels of market
acceptance or if prospective customers require customized features or functions,
our business will suffer.
MANAGEMENT AND DIRECTORS OF THE COMPANY HAVE A SIGNIFICANT PERCENTAGE OF THE
FULLY DILUTED NUMBER OF COMMON SHARES AND SUCH CONCENTRATION OF OWNERSHIP MAY
HAVE THE EFFECT OF DELAYING OR PREVENTING A CHANGE OF CONTROL OF OUR COMPANY.
As a result, these management and director equity holders will have
significant influence in matters requiring stockholder approval, including the
election and removal of directors, the approval of significant corporate
transactions, such as any merger, consolidation or sale of all or substantially
all of the Company's assets, and the control of the management and affairs of
the Company. Accordingly, such concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of our Company, impeding a
merger, consolidation, takeover or other business combination involving the
Company or discouraging a potential acquirer from attempting to obtain control
of the Company.
12
IF WE FAIL TO DEVELOP OUR BRAND COST-EFFECTIVELY, OUR BUSINESS MAY SUFFER.
We believe that developing and maintaining awareness of our brand in a
cost-effective manner is critical to achieving widespread acceptance of our
existing and future services and is an important element in attracting new
customers. Furthermore, we believe that the importance of brand recognition will
increase as competition in our market develops. Successful promotion of our
brand will depend largely on the effectiveness of our marketing efforts and on
our ability to provide reliable and useful services at competitive prices. In
the past, our efforts to build our brand have involved significant expense.
Brand promotion activities may not yield increased revenue, and even if they do,
any increased revenue may not offset the expenses we incurred in building our
brand. If we fail to successfully promote and maintain our brand, or incur
substantial expenses in an unsuccessful attempt to promote and maintain our
brand, we may fail to attract enough new customers or retain our existing
customers to the extent necessary to realize a sufficient return on our
brand-building efforts, and our business could suffer.
ANY FAILURE TO ADEQUATELY EXPAND OUR DIRECT SALES FORCE WILL IMPEDE OUR GROWTH.
We expect to be substantially dependent on a direct sales force to obtain
new customers, particularly large enterprise customers, and to manage our
customer base. We believe that there is significant competition for direct sales
personnel with the advanced sales skills and technical knowledge we need. Our
ability to achieve significant growth in revenue in the future will depend, in
large part, on our success in recruiting, training and retaining sufficient
direct sales personnel. New hires require significant training and may, in some
cases, take more than a year before they achieve full productivity. Our recent
hires and planned hires may not become as productive as we would like, and we
may be unable to hire sufficient numbers of qualified individuals in the future
in the markets where we do business. If we are unable to hire and develop
sufficient numbers of productive sales personnel, sales of our service will
suffer.
SALES TO CUSTOMERS OUTSIDE THE UNITED STATES EXPOSE US TO RISKS INHERENT IN
INTERNATIONAL SALES.
Sales in Europe and Asia Pacific represented approximately all of our
total revenue in fiscal year 2003 and 2002. We intend to expand our domestic and
international sales efforts. As a result, we will be subject to risks and
challenges that we would otherwise not face if we conducted our business only in
the United States. These risks and challenges include:
o localization of our service, including translation into foreign
languages and associated expenses;
o laws and business practices favoring local competitors;
o more established competitors with greater resources;
o compliance with multiple, conflicting and changing governmental laws
and regulations, including tax, privacy and data protection laws and
regulations;
o different employee/employer relationships and the existence of
workers' councils and labor unions;
o different pricing environments;
o difficulties in staffing and managing foreign operations;
o longer accounts receivable payment cycles and other collection
difficulties; and
o regional economic and political conditions.
These factors could harm our future international sales.
WE MAY NOT BE ABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD HARM OUR BUSINESS BY MAKING IT EASIER FOR OUR COMPETITORS TO
DUPLICATE OUR SERVICES.
Our success depends on our ability to protect our proprietary rights to
the technologies used to implement and operate our software in the United States
and in foreign countries. In the event that a third party breaches the
confidentiality provisions or other obligations in one or more of our agreements
or misappropriates or infringes on our intellectual property or the intellectual
property licensed to us by third parties, our business would be seriously
harmed. To protect our proprietary rights, we rely on a combination of trade
secrets, confidentiality agreements and other contractual provisions and
agreements, copyright and trademark laws, which afford STI limited protection.
The measures we take to protect our proprietary rights may not be adequate.
13
WE MAY NOT EFFECTIVELY MANAGE THE GROWTH NECESSARY TO EXECUTE OUR BUSINESS PLAN,
WHICH COULD ADVERSELY AFFECT THE QUALITY OF OUR OPERATIONS AND OUR COSTS.
In order to achieve the critical mass of business activity necessary to
successfully execute our business plan, we must significantly increase the
number of strategic partners and customers that use our software. This growth
will place significant strain on our personnel, systems and resources. We also
expect that we will continue to hire employees, including technical,
management-level employees, and sales staff for the foreseeable future. This
growth will require us to improve management, technical, information and
accounting systems, controls and procedures. We may not be able to maintain the
quality of our operations, control our costs, continue complying with all
applicable regulations and expand our internal management, technical information
and accounting systems in order to support our desired growth. We cannot be sure
that we will manage our growth effectively, and our failure to do so could cause
us to reduce or cease operations.
We depend on recruiting and retaining qualified personnel and our
inability to do so would seriously harm our business. Because of the technical
nature of our services and the market in which we compete, our success depends
on the continued services of our current executive officers and our ability to
attract and retain qualified personnel with significant expertise. New employees
generally require substantial training, which requires significant resources and
management attention. Even if we invest significant resources to recruit, train
and retain qualified personnel, we may not be successful in our efforts.
STI STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION IF FUTURE EQUITY OFFERINGS
ARE USED TO FUND OPERATIONS OR ACQUIRE BUSINESSES
If working capital or future acquisitions are financed through the
issuance of equity securities, such as through the Standby Equity Distribution
Agreement with Cornell Capital Partners, STI stockholders could experience
significant dilution. In addition, securities issued in connection with future
financing activities or potential acquisitions may have rights and preferences
senior to the rights and preferences of the STI Shares. Further, the conversion
of outstanding debt obligations into equity securities, such as the debentures
held by Cornell Capital Partners, could have a dilutive effect on STI
shareholders.
We may issue a substantial number of shares of our common stock without
investor approval. Any such issuance of our securities in the future could
reduce an investor's ownership percentage and voting rights in our company and
further dilute the value of your investment.
RISKS RELATING TO THE DISTRIBUTION
SUBSTANTIAL SALES OF STI SHARES MAY HAVE AN ADVERSE IMPACT ON THE TRADING PRICE
OF THE STI COMMON STOCK
After the Distribution, some STI stockholders may decide that they do
not want shares in a company, and may sell their STI common stock following the
Distribution.
Based on the number of shares of Mobilepro common stock anticipated to
be outstanding on the record date, Mobilepro will distribute to Mobilepro
stockholders a total of approximately 3,073,113 STI Shares. Under the United
States federal securities laws, substantially all of these shares may be resold
immediately in the public market, except for (i) STI Shares held by affiliates
of STI or (ii) shares which are issued in respect of restricted shares of
Mobilepro common stock. STI cannot predict whether stockholders will resell
large numbers of STI Shares in the public market following the Distribution or
how quickly they may resell these STI Shares. If STI stockholders sell large
numbers of STI Shares over a short period of time, or if investors anticipate
large sales of STI Shares over a short period of time, this could adversely
affect the trading price of the STI Shares.
THERE HAS NOT BEEN ANY PRIOR TRADING MARKET FOR THE STI SHARES AND A TRADING
MARKET FOR THE STI SHARES MAY NOT DEVELOP
There is no current trading market for the STI Shares, although a
when-issued trading market may develop prior to completion of the Distribution.
We anticipate that the STI Shares will be listed on the Over-the-Counter
Bulletin Board under the proposed symbol "_____."
14
STI Shares may not be actively traded or the prices at which the STI
Shares will trade may be low. Some of the Mobilepro stockholders who receive STI
Shares may decide that they do not want shares in a company which is in the
enterprise software business, and may sell their STI Shares following the
Distribution. This may delay the development of an orderly trading market in the
STI Shares for a period of time following the Distribution. Until an orderly
market develops, the prices at which the STI Shares trade may fluctuate
significantly and may be lower than the price that would be expected with a
fully developed market. Prices for STI Shares will be determined in the
marketplace and may be influenced by many factors, including the depth and
liquidity of the market for the shares, STI's results of operations, what
investors think of STI and its industry, changes in economic conditions in the
financial services industry, and general economic and market conditions. Market
fluctuations could have a material adverse impact on the trading price of the
STI Shares.
HOLDERS OF LESS THAN 93 SHARES OF MOBILEPRO COMMON STOCK WILL NO LONGER HOLD ANY
INTEREST IN THE ASSETS THAT MOBILEPRO WILL TRANSFER TO STI AS A RESULT OF THE
DISTRIBUTION
If you own less than 93 shares of Mobilepro common stock, you will not
receive any STI Shares in the Distribution.
THE DISTRIBUTION MAY CAUSE THE TRADING PRICE OF MOBILEPRO COMMON STOCK TO
DECLINE
Following the Distribution, Mobilepro's common stock will continue to
be listed and traded on the Over-the-Counter Bulletin Board under the symbol
"MOBL." As a result of the Distribution, the trading price of Mobilepro common
stock immediately following the Distribution may be lower than the trading price
of Mobilepro common stock immediately prior to the Distribution. Further, the
combined trading prices of Mobilepro common stock and the STI Shares after the
Distribution may be less than the trading price of Mobilepro common stock
immediately prior to the Distribution.
THE DISTRIBUTION OF STI SHARES MAY RESULT IN SUBSTANTIAL TAX LIABILITY
You will be required to pay income tax on the value of your shares of
STI Common Stock received as a dividend. The dividend will be taxed as ordinary
income to the extent of the value of the shares you receive. You are advised to
consult your own tax advisor as to the specific tax consequences of the
Distribution.
OUR COMMON STOCK HAS NEVER BEEN TRADED AND WE CANNOT PREDICT THE EXTENT TO WHICH
A TRADING MARKET WILL DEVELOP.
Before this offering, our common stock was privately held. We expect
that our common stock may be thinly traded compared to larger more widely known
companies in our industry. Thinly traded common stock can be more volatile than
common stock trading in an active public market. We cannot predict the extent to
which an active public market for the common stock will develop or be sustained
after this offering.
15
USE OF PROCEEDS
We will receive no proceeds from the distribution of our shares from
the spin-off.
DILUTION
As of April 30, 2004, STI had 39,059,700 shares of common stock
outstanding (on an as adjusted basis reflecting a 20:1 split that occurred on
June 22, 2004), with an unaudited net book value as reflected on the STI balance
sheet at June 30, 2004 of ($2,082,736), or ($0.053) per share. Net book value
per shares represents the amount or our total assets less liabilities, divided
by the number of shares of our common stock outstanding. The spin-off
transaction represents a distribution of shares that are already outstanding and
will have no effect on the net tangible book value of STI.
16
THE DISTRIBUTION
Introduction
In August 2004, Mobilepro's board of directors declared a distribution
payable to the holders of record of outstanding Mobilepro common stock at the
close of business on September 15, 2004 (the "Record Date"). Mobilepro will
distribute to Mobilepro stockholders an aggregate of 3,073,113 STI Shares.
Accordingly, the Distribution will consist of one STI Share for approximately
every 93 shares of Mobilepro common stock outstanding on the Record Date. The
Distribution Ratio may change depending on the number of outstanding shares of
Mobilepro common stock on the Record Date. We currently anticipate that the
Distribution will be effected near the effective date of the registration
statement. The Record Date and Distribution Date may change based on the timing
of the effectiveness with the Securities and Exchange Commission of the
registration statement of which this information statement is a part.
Mobilepro is the beneficial holder of 5,121,855 shares of STI's Common
Stock. As a result of the Distribution, Mobilepro will distribute 3,073,113
shares of STI Common Stock to Mobilepro stockholders. Immediately following the
Distribution, Mobilepro will still be the beneficial owner of 2,048,742 shares
of STI Common Stock. The STI Shares will be distributed by book entry. Instead
of stock certificates, each Mobilepro stockholder that is a record holder of
Mobilepro shares will receive a statement of such stockholder's book entry
account for the STI Shares distributed to such stockholder. Account statements
reflecting ownership of the STI Shares will be mailed shortly after the
Distribution Date. STI Shares should be credited to accounts with stockbrokers,
banks or nominees of Mobilepro stockholders that are not record holders after
the effective date of the distribution.
Our executive offices are located at 5210 Chairmans Court, Suite 3,
Frederick, MD and our telephone number is (301) 668-9600.
Reasons For The Distribution
The board of directors and management of Mobilepro believe that the
Distribution is in the best interests of Mobilepro and Mobilepro stockholders.
Mobilepro believes that the Distribution will enhance value for Mobilepro
stockholders and reduce the risk that Mobilepro may be classified as an
Investment Company under the Investment Company Act of 1940.
STI's board of directors and management believe that the Distribution
will enhance its ability to focus on strategic initiatives and new business
opportunities, improve cost structures and operating efficiencies and design
equity-based compensation programs targeted to its own performance. In addition,
STI's board of directors expects that the transition to a public company will
heighten STI management's focus by allowing management to focus solely on STI's
operations, provide STI with greater access to capital by allowing the financial
community to focus solely on STI, and allow the investment community to measure
STI' performance relative to its peers.
The Distribution will give STI direct access to the capital markets as
a stand alone company.
Manner Of Effecting The Distribution
The Distribution will be made on the basis of one STI Share for
approximately every 93 shares of Mobilepro common stock outstanding on the
Record Date. The Distribution Ratio may change depending on the number of
outstanding shares of Mobilepro common stock on the Record Date. An aggregate of
3,073,113 STI Shares will be distributed to Mobilepro stockholders regardless of
the number of shares of Mobilepro common stock outstanding as of the Record
Date. The STI Shares to be distributed will constitute 6.6% of the outstanding
STI Shares.
The STI Shares will be fully paid and non-assessable and the holders
thereof will not be entitled to preemptive rights.
Mobilepro will use a book entry system to distribute the STI Shares in
the Distribution. Following the Distribution, each record holder of Mobilepro
stock on the Record Date will receive from the Distribution Agent a statement of
the STI Shares credited to the stockholder's account. If you are not a record
holder of Mobilepro stock because your shares are held on your behalf by your
stockbroker or other nominee, your STI shares should be credited to your account
with your stockbroker or nominee after the effective date of the registration
statement. After the Distribution, stockholders may request stock certificates
from STI' transfer agent instead of participating in the book entry system.
17
No fractional STI Shares will be issued. If you own a fractional share
of Mobilepro common stock as of the Record Date or own a number of Mobilepro
shares that is not a multiple of 93, you will receive the next lowest whole
number of STI Shares in the Distribution, unless you own less than 93 shares, in
which case you will not receive any STI Shares or any other consideration.
No Mobilepro stockholder will be required to pay any cash or other
consideration for the STI Shares received in the Distribution, or to surrender
or exchange Mobilepro shares in order to receive STI Shares. The Distribution
will not affect the number of, or the rights attaching to, outstanding Mobilepro
shares. No vote of Mobilepro stockholders is required or sought in connection
with the Distribution, and Mobilepro stockholders will have no appraisal rights
in connection with the Distribution.
In order to receive STI Shares in the Distribution, Mobilepro
stockholders must be stockholders at the close of business on the Record Date.
Results Of The Distribution
After the Distribution, STI will be a separate public company.
Immediately after the Distribution, STI expects to have approximately 580
holders of record of STI Shares, and 3,073,173 STI Shares outstanding,
regardless of the number of stockholders of record and outstanding Mobilepro
shares as of the Record Date. The Distribution will not affect the number of
outstanding Mobilepro shares or any rights of Mobilepro stockholders.
Listing And Trading Of The STI Shares
Neither STI nor Mobilepro makes recommendations on the purchase,
retention or sale of shares of Mobilepro common stock or STI Shares. You should
consult with your own financial advisors, such as your stockbroker, bank or tax
advisor.
If you do decide to purchase or sell any Mobilepro or STI shares, you
should make sure your stockbroker, bank or other nominee understands whether you
want to purchase or sell Mobilepro common stock or STI Shares, or both. The
following information may be helpful in discussions with your stockbroker, bank
or other nominee.
There is not currently a public market for the STI Shares, although a
when-issued market may develop prior to completion of the Distribution.
When-issued trading refers to a transaction made conditionally because the
security has been authorized but is not yet issued or available. Even though
when-issued trading may develop, none of these trades would settle prior to the
effective date of the Distribution, and if the Distribution does not occur, all
when-issued trading will be null and void. On the first trading day following
the date of the Distribution, when-issued trading in respect of STI Shares will
end and regular-way trading will begin. Regular-way trading refers to trading
after a security has been issued and typically involves a transaction that
settles on the third full business day following the date of a transaction. We
anticipate that the STI Shares will trade on the Over-the-Counter Bulletin Board
under the proposed symbol "_____."
The STI Shares distributed to Mobilepro stockholders will be freely
transferable, except for (i) STI Shares received by persons who may be deemed to
be affiliates of STI under the Securities Act of 1933, as amended (the
Securities Act), and (ii) STI Shares received by persons who hold restricted
shares of Mobilepro common stock. Persons who may be deemed to be affiliates of
STI after the Distribution generally include individuals or entities that
control, are controlled by, or are under common control with STI and may include
certain directors, officers and significant stockholders of STI. Persons who are
affiliates of STI will be permitted to sell their STI Shares only pursuant to an
effective registration statement under the Securities Act or an exemption from
the registration requirements of the Securities Act, such as the exemptions
afforded by Section 4(1) of the Securities Act and the provisions of Rule 144
thereunder.
There can be no assurance as to whether the STI Shares will be actively
traded or as to the prices at which the STI Shares will trade. Some of the
Mobilepro stockholders who receive STI Shares may decide that they do not want
shares in a company consisting of a diversified financial services business, and
may sell their STI Shares following the Distribution. This may delay the
development of an orderly trading market in the STI Shares for a period of time
following the Distribution. Until the STI Shares are fully distributed and an
orderly market develops, the prices at which the STI Shares trade may fluctuate
significantly and may be lower than the price that would be expected for a fully
distributed issue. Prices for STI Shares will be determined in the marketplace
and may be influenced by many factors, including the depth and liquidity of the
market for the shares, STI' results of operations, what investors think of STI
and its industry, the amount of dividends that STI pays, changes in economic
conditions in the industry and general economic and market conditions.
18
Following the Distribution, Mobilepro's common stock will continue to
be listed and traded on the Over-the-Counter Bulletin Board under the symbol
"MOBL." As a result of the Distribution, the trading price of Mobilepro common
stock immediately following the Distribution may be lower than the trading price
of Mobilepro common stock immediately prior to the Distribution. Following the
distribution, Mobilepro operating assets will consist of its wireless technology
and broadband telecommunications businesses. These retained businesses
represented approximately 100% of Mobilepro's consolidated assets and 100% of
Mobilepro's consolidated revenues as of and for the year ended December 31,
2003. The combined trading prices of Mobilepro common stock and the STI Shares
after the Distribution may be less than the trading prices of Mobilepro common
stock immediately prior to the Distribution.
Even though Mobilepro is currently a publicly held company, there can
be no assurance as to the prices at which the Mobilepro common stock will trade
after the Distribution. Mobilepro stockholders may sell their Mobilepro common
stock following the Distribution. These and other factors may delay or hinder
the return to an orderly trading market in the Mobilepro common stock following
the Distribution. The prices for Mobilepro common stock will be determined in
the marketplace and may be influenced by many factors, including the depth and
liquidity of the market for the shares, Mobilepro's results of operations, what
investors think of Mobilepro and its businesses, changes in economic conditions
in its businesses and general economic and market conditions.
In addition, the stock market often experiences significant price
fluctuations that are unrelated to the operating performance of the specific
companies whose stock is traded. Market fluctuations could have a material
adverse impact on the trading price of the STI Shares and/or Mobilepro common
stock.
19
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
The following discussion summarizes the material U.S. federal income
tax consequences resulting from the Distribution. This discussion is based upon
the U.S. federal income tax laws and regulations now in effect and as currently
interpreted by courts or the Internal Revenue Service and does not take into
account possible changes in such tax laws or such interpretations, any of which
may be applied retroactively.
The following summary is for general information only and may not be
applicable to stockholders who received their shares of Mobilepro stock pursuant
to an employee benefit plan or who are not citizens or residents of the United
States or who are otherwise subject to special treatment under the Code. Each
stockholder's individual circumstances may affect the tax consequences of the
Distribution to such stockholder. In addition, no information is provided with
respect to tax consequences under any applicable foreign, state or local laws.
Consequently, each Mobilepro stockholder is advised to consult his own tax
advisor as to the specific tax consequences of the Distribution and the affect
of possible changes in tax laws.
General
This Distribution does not qualify as a tax-free distribution under
Section 355 of the Code. The corporate-level tax would be based upon the excess
of the fair market value of the STI Shares on the Distribution Date, over
Mobilepro's adjusted tax basis for such shares on such date. Each Mobilepro
stockholder who receives STI Shares in the Distribution would generally be
treated as receiving a taxable distribution in an amount equal to the fair
market value of such shares on the Distribution Date, taxed first as a dividend
to the extent of such holder's pro rata share of Mobilepro's current and
accumulated earnings and profits (as increased to reflect any Mobilepro gain on
a taxable distribution as discussed above), and then as a nontaxable return of
capital to the extent of such holder's tax basis in the shares of Mobilepro
stock, with any remaining amount being taxed as capital gain (provided that the
Mobilepro shares were held by the stockholder as a capital asset on the
Distribution Date). Stockholders which are corporations may be subject to
additional special provisions dealing with taxable distributions, such as the
dividends received deduction and the extraordinary dividend rules.
YOU SHOULD CONSULT YOUR OWN TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF THE
DISTRIBUTION TO YOU, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX
LAWS.
Reasons For Furnishing This Document
This document is being furnished solely to provide information to
Mobilepro stockholders who will receive STI Shares in the Distribution. It is
not, and is not to be construed as, an inducement or encouragement to buy or
sell any securities of Mobilepro or STI. Neither Mobilepro nor STI will update
the information contained in this document except in the normal course of their
respective public disclosure practices. However, this document will be amended
if there is any material change in the terms of the Distribution.
20
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus
may contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "should," "expect," "anticipate," "estimate," "believe,"
"intend" or "project" or the negative of these words or other variations on
these words or comparable terminology.
This prospectus contains forward-looking statements, including
statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans and (e) our anticipated needs for
working capital. These statements may be found under "Management's Discussion
and Analysis or Plan of Operations" and "Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION
The following information should be read in conjunction with the
consolidated financial statements of STI and the notes thereto appearing
elsewhere in this filing. Statements in this Management's Discussion and
Analysis, Plan of Operation and Positioning and elsewhere in this prospectus
that are not statements of historical or current fact constitute
"forward-looking statements."
Overview
We are a provider of web-based enterprise software and technical
support services that enable insurance and reinsurance companies to
significantly reduce expenses through enhanced administration of their
reinsurance contracts through the entire reinsurance contract workflow. For
example, our software enables an organization to (i) significantly reduce
hard-to-detect errors around premium received and payable, claims and risk
allocations caused by repetitive manual work and paper-based processes; (ii)
reduce operating expenses by curtailing labor costs, software and certain IT
expenses caused by lack of automated straight-through processes; and (iii)
improve investment income by shorten the time it takes to recover reinsurance
claims. The Company's SurSITE(R) suite of software modules for insurance and
reinsurance was developed during the 2002 to 2003 period in conjunction with a
concurrent deployment of a major enterprise solution for the Schweizer Pool fur
Luftfahrtversicherungen ("SPL"), Zurich Switzerland. The software and its
transaction engine was thoroughly tested and validated by industry professionals
representing several well-known international reinsurance companies and one of
the world's largest reinsurance brokers.
Our objective is to establish the Company's software platform as an
industry standard in managing reinsurance transactions within and between
insurance and reinsurance companies. In order to increase our revenue and take
advantage of the unique marketing opportunity presented by the SurSITE(R)
software and supported by the newly concluded Standby Equity Distribution
Agreement with Cornell Capital, we will need to significantly increase our sales
and marketing effort in the US and European markets. In that regard, our
management is focusing on a number of short and long term challenges, including
establishing an aggressive marketing strategy and implementation schedule for
advertising, direct mail, publications, trade shows, sales channels and targeted
sales support; building qualified domestic and international sales teams;
expanding our sales and marketing efforts into new markets; adding additional
customers; developing new sales channels, and establishing a presence in the
London market while extending our product and services offerings.
Revenue Model
We derive our revenue from four sources: (i) requirements study fees;
(ii) perpetual SurSITE(R) license fees; (iii) professional service fees, and
(iv) 5-year mandatory maintenance and technical support fees.
Revenue, Expenses and Cost of Revenue
During 2002 and 2003 while we developed our software and deployed the
system at the Swiss Charter client, we recognized revenue of $2,400,930 and
$1,309,686, respectively. Operating expenses for the same periods were $980,391
and $1,095,765, respectively. Interest expenses for the two years were $45,024
and $146,383, respectively.
Cost of development, implementation and customer-specific modifications
consisted primarily of expenses related to third-party onshore and offshore
developers, salaries and certain equipment. Cost of revenue for fiscal years
2002 and 2003 was $1,723,551 and $688,300, respectively.
Due to the difficulty in obtaining financing on favorable terms in
fiscal year 2003 and the first 6 months of 2004, we have not recognized revenue
from our primary operation for the eight months ended June 30, 2004. However,
with financing provided by Cornell Capital now in place, we believe that we will
be able begin scaling the Company and gradually building its revenue base
according to plan.
Net Loss
For the fiscal years 2002 and 2003, we have incurred a net loss of $
348,036 and $619,548, respectively. Total accumulated deficit at the end of 2002
and 2003 was $2,387,656 and $3,002,204, respectively primarily due to expenses
for R & D, design and development of the SurSITE(R) suite of software modules
and the subsequent deployment at the Swiss Charter client.
22
Plan of Operation and Positioning
The Company's most urgent task is to accelerate its sales and marketing
efforts to facilitate a sustainable revenue growth as outlined in our business
plan. Our defined target market consists of three segments of major companies
and other insurance entities that could greatly benefit from deploying our
reinsurance solution. With adequate operating capital secured for the next
24-month period, we will focus our sales efforts in (i) the top twenty-five
international reinsurance companies; (ii) domestic and international insurance &
reinsurance consortia (Pools); large insurance groups each with a fleet of
companies. Each such large organization represents multiple sales and licensing
opportunities, due to the fact that they have operations and many subsidiaries
around the world. We are continuing to invest in Research & Development to
improve the value of our Intellectual Property with the intent to stay ahead of
competing solutions. Currently, we are defining additional functionality,
enhancements, and support of life reinsurance methods to be included in the next
scheduled release of our software. In collaboration with a Washington, D.C.
marketing agency, we are creating a sales and marketing strategy to support the
overall plan objectives. In addition to Sales Channels, we plan to build
Marketing Alliances and Lead Generating Channels for both the US and
international marketplace.
We are not viewed solely as a software vendor but rather as experienced
insiders who "stepped out" of the industry to build knowledge-based support
solutions grounded in more than thirty years of international industry
experienced. The value proposition for the SurSITE(R) suite of software modules
includes real time execution of complex technical accounting methods with much
reduced labor cost and time to complete loss recoveries, improved investment
income and cash flow, coupled with elimination of costly errors caused by
inadequate systems and paper-based processes. We were given a unique opportunity
to test and validate its positioning through the Zurich-based consortium. We
plan to reach our target market by communicating, illustrating, and quantifying
the strong benefits of the SurSITE(R) software as a Web-based business system
designed to solve common industry problems in a cost efficient manner. In
addition, we will continue to leverage and further extend our domain knowledge
and expertise since it is a competitive, and for us very valuable, sales
argument that the market understands and appreciates.
Liquidity and Capital Resources
We have not been able to maintain profitable operations since we
initiated development of the SurSITE(R) software and we have not progressed
according to our original business plan in our operations. We have incurred
recurring losses and at April 30, 2004 had an accumulated deficit of $3,276,713.
For the four months ended April 30, 2004, we sustained a net loss of $274,509.
We do not have sufficient capital to meet our obligations for the next twelve
month period. Working capital shortages continue to limit our ability to conduct
business, whether related to the ability to pay general operating expenses or to
the ability to finance implementation of our sales and marketing program and
working capital requirements for additional Research & Development. At this
stage, our future business is dependent upon our ability to secure additional
financing and the ability to secure revenue sources to increase shareholder
value. No assurances can be given that we will be successful in this regard. In
addition, our auditors have raised substantial doubt as to our ability to
continue as a going concern without additional financing. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
We have been pursing efforts to raise the substantial funds necessary
to finance the commencement of our business plan. Management believes that we
need to raise up to as much as $12 million, which amount may change or be
subject to modification depending on various circumstances. These funds are
needed in order to execute our business plan and to implement our sales and
marketing strategy, and to provide sufficient working capital to commence
contemplated activities. Without adequate financing, our ability to commence our
business will be adversely impacted. We anticipate that funding for our business
will be in the form of equity financing from the private placement of our common
stock. While debt financing may not represent a viable source of funds, we are
exploring the conditions under which a commercial credit line may be available.
At this time, we cannot provide investors with any assurance that we will be
able to raise sufficient funding from the sale of our common stock or obtain
debt financing on satisfactory conditions. Even if adequate funding is raised or
debt financing obtained, no assurances can be provided that our business
activities will generate sufficient revenues which may result in net profits for
the Company.
23
DESCRIPTION OF BUSINESS
The Company
We were incorporated in the State of Delaware on April 27, 1993 as Dan
L. Jonson Associates, Inc. On June 22, 1994 we changed our name to Solution
Technology International, Inc.
We are a development stage company that launched professional service
activities in January 1997 and concluded technical research and development of
our enterprise software solution in June 2001. Today, we design, develop, market
and support a web-based, multi-language multi-currency software solution
("SurSITE(R)") used by insurance and reinsurance companies to facilitate and
support their most critical back-office business processes including reinsurance
administration with its industry-wide problems - the issues associated with
accurately managing complex technical accounting methods. Technical accounting
is the tedious "record keeping" of each individual premium and claim transaction
gathered over a specific period of time from the original insurance policy
throughout multiple reinsurance contracts to the ultimate creation of statements
of account for each such contract and the participating reinsurer.
For decades, lack of automation coupled with fragmented information
systems of many global insurance and reinsurance organizations have made it
difficult to accurately manage complex technical accounting methods causing
losses from hard-to-detect errors around premiums received and payable, claims
and risk allocation, unnecessary operating expenses and reduced investment
income due to the negative impact of delayed claims recovery. Frequently, these
shortcomings have been amplified by fragmented business processes, many
repetitive manual paper-based processes, untimely and incomplete collection of
data and lack of access to intelligence embedded in an insurance company's own
data to facilitate making the "right" business decisions. In addition, it is
difficult for many organizations to maintain reinsurance contract knowledge due
to staff turnover since losses may be reported years after a reinsurance
contract has been put in place.
The Company's proprietary reinsurance software for reinsurance
management solves the costly problems described above. It manages complex
reinsurance contract combinations throughout the entire reinsurance contract
workflow, from ceded and assumed to retroceded business.
What distinguishes the Company's SurSITE(R) solution from our
competition is an "industry-first" Technical Accounting Transaction Engine
("TATE") that automates calculations and generates transactions for premiums,
commissions, and claims based on events and transactions at the original
insurance policy level; it also manages statements of account, reinsurance
recovery notices, and claims notifications. To further enhance the applicability
of the SurSITE(R) software, the Company is currently designing extensive support
for facultative reinsurance used to insure very large risks that cannot be
insured by a single insurance company like property and liability insurance for
multinational corporations, airlines & aerospace, cargo, energy, engineering,
manufacturers, ocean hull, etc. In addition to its software product, the Company
provides its customers with complete requirements studies, data migrations, data
integration tools, system integrations and other related professional services.
The Company's reinsurance software enables an organization to overcome
the limitations of fragmented business processes and gain control of
mission-critical reinsurance administration. The TATE, which has been tested by
some of the most experienced reinsurance industry professionals, provides a way
to address the many problems associated with accurately managing complex
technical accounting methods, timely loss recoveries, and error prone business
processes. Our software products allow companies to leverage their substantial
investments in existing IT infrastructures while exploiting the many benefits
offered by automation of technical accounting transactions. The SurSITE(R)
reinsurance software solution improves the quality, consistency, and accuracy of
work performed and it positions top management to significantly and measurably
reduce operating expenses and reduce errors. In that regard, the Company's
charter client and its member companies quickly realized significant labor cost
savings and discovered loss recoverables that otherwise most likely would have
been undetected.
Despite its international reach, reinsurance is mostly an unknown
business yet it has a significant impact on both local and global economies. The
function of reinsurance is to absorb the impact of particularly hard blows to
individual insurance companies from very large losses, or an unexpected series
of medium or small losses caused by a particular event like an earthquake or
hurricane. Hence, reinsurance is the insurance for insurance companies that
protects:
o the insured (you) against sudden fluctuations in the cost of
insurance;
o the shareholders of an insurance company against a considerable loss
of its capital, or alternatively, reinsurance guarantees the
shareholder a constant and possibly increasing yield;
o the tax payers when the reinsured entity is government owned;
o the employees of insurance companies since job losses from
unexpected large claims can be reduced.
24
We plan to market and sell our products worldwide, at the outset by
utilizing a network of international industry contacts developed by senior
management and indirectly through third parties. As part of the planned scaling
of the organization, the Company will establish an international sales force by
hiring experienced professionals with well-established track record and contacts
throughout the insurance and reinsurance industry. The Company plans to
establish a presence in the London market since it is the global center of
reinsurance trading.
The Company's initial multi-million dollar deployment and charter
client, won in competition against CSC, is an insurance and reinsurance
consortium based in Zurich Switzerland consisting of twenty-six well-known
member companies, including, among others, Allianz, Partner Re, Swiss Re,
Winterthur Insurance Company and Zurich Insurance Group. The member companies
are producing direct insurance business and managing the reinsurance
transactions of the produced business through STI's software platform.
The Company's objective is to establish its reinsurance solution as the
industry standard in managing complex reinsurance contract combinations
throughout the entire reinsurance contract workflow. In this regard, the Company
intends to enhance its technological leadership by adding support for new and
evolving premium and claims recovery methods for both property & casualty and
life insurance business; functionality for trend analysis, capacity utilization
and exposure control; accelerate the acceptance of its products by leveraging
strategic partnerships; and to provide the software and services necessary to
conduct safe and reliable technical accounting transactions over the Internet.
In addition to traditional license agreements, the Company plans to offer its
solutions as an Application Service Provider allowing smaller companies to
"pay-as-you-go".
Competition
We compete against a number of different companies in the area of
reinsurance contract management ("RCM"). A smaller subset of those competitors
offer an enterprise-wide solution needed to partially support automation of
complex technical accounting methods and claims recovery processes.
Although we believe we compete primarily with reinsurance contract
management providers, we also believe that we may now, or in the future, compete
with companies in the following groups:
o Internal Information Technology departments
o Reinsurance product providers like CSC, SAP, Siebel and Sungard
o Professional service organizations like IBM, Accenture, Deloitte
Consulting, EDS, BearingPoint and Cap Gemini Ernst & Young
o Other Potential Competitors such as industry initiative
Today, CSC's SICS/NT software solution constitutes STI's primary
competition among professional reinsurers and large insurance groups with
offerings from Xchanging/RebusIS in the European, and Freedom Group and Siebel
in the U.S. market. In addition, SAP is trying to extend its offerings to the
reinsurance market. The significant differences between these offerings and
STI's SurSITE(R) solution are low completeness of vision, lack of market
uniformity and lean eBusiness architecture. In many cases, available systems do
not meet the future needs of giants like Allianz, AXA, Hannover Re, Munich Re,
Partner Re, Swiss Re, Winterthur and XL Capital because they do not offer
automation of technical accounting transactions. In comparison to STI, however,
their greater financial resources and longer presence in the market have allowed
them to generate more sales than STI.
We believe that we have one of the most complete visions for integrated
reinsurance administration and technical accounting required by reinsurance and
insurance providers. In making future sales we intend to rely on references from
attesting to our efforts to establish the unique and powerful appeal of our
solution.
With greater financial resources as being afforded by the Cornell
Capital Standby Equity Distribution Agreement ("SEDA"), we believe we may be
able to become a leading provider of enterprise-wide facultative and treaty
reinsurance solutions within the next few years.
25
Market Opportunity
We are aiming our products and services at the field we know best, the
two-and-a-half trillion dollar global insurance and reinsurance industry and its
6,500 primary providers and the many specialized insurance consortia. Our
defined target market consists of three segments of major companies and other
insurance entities that could greatly benefit from deploying our reinsurance
solution. With adequate operating capital secured for the next 24-month period,
we will focus our sales efforts in (i) the top twenty-five international
reinsurance companies; (ii) domestic and international insurance & reinsurance
consortia (Pools); large insurance groups each with a fleet of companies. Each
such large organization represents multiple sales and licensing opportunities,
due to the fact that they have operations and many subsidiaries around the
world. Combined, our targeted market segments include 200 opportunities for our
initial sales activity. The projected number of clients identified for the plan
period amounts to ~20% of the initial target market and less than 1% of the
total market opportunity. As a result of the interest generated from the
deployment in Zurich, our sales pipeline has an initial European concentration.
We expect, however, that future growth primarily will be generated from the
North American market.
Sales and Marketing
With an extended sales and marketing organization, we believe we can
accelerate sales through a combination of cost efficient lead generating
partnerships working in tandem with our own regional channels:
In collaboration with a Washington, D.C. marketing agency, we are
creating an extended sales and marketing strategy to support the overall plan
objectives. In addition to Sales Channels, we plan to build Marketing Alliances
and Lead Generating Channels for both the US and international marketplace.
STI's current sales team consist of the Company's founder and the CEO of our
European Sales Channel both with extensive domain knowledge and personal
industry networks that will guide our primary sales effort until we can
implement the planned sales and marketing strategy for the North American and
European markets. As part of extending our sales and marketing organization, we
are actively searching for a senior executive to complement our current team.
The selected individual will be a senior sales executive with experience selling
enterprise solutions within the re/insurance industry. In addition, we
anticipate engaging a well-recognized and respected international reinsurance
executive to support and guide the Company's international sales teams with his
or her domain knowledge and industry contacts.
Selective lead-generating channels for specific segments of the
marketplace include international reinsurance brokers and other intermediaries
throughout their global market, and other insurance industry "insider"
organizations like CEO Customer Economical Organisation GmbH (Winterthur,
Switzerland) for prospects in the Continental European and London markets. We
are engaged in an early stage dialogue with a Japanese-American strategic
business development organization that could assist the Company in establishing
a presence in the considerable Japanese insurance and reinsurance market. The
Company expects to enter into at least two US sales channel agreements before
the end of 2004.
Fee-based client referrals include our arrangements with the Schweitzer
Pool fur Luftfahrtversicherungen that target a specific segment of the market
with a high potential to yield additional clients.
Insurance
We maintain commercial insurance to the benefit of the Company, which
includes General Liability, Products/Completed Operation, and Personal &
Advertising Injury; Workers' Compensation; Property; Health and Life insurance.
In conjunction with the registration of the Company's Form SB-2, we will add
Directors' & Officers' and Professional (Errors & Omission) liability insurance.
Intellectual Property
The Company owns Intellectual Property as outlined below:
1. The SurSITE(R) Suite of modules for insurance and reinsurance comprised of
the following web-based functional modules:
a. Reinsurance Contract Management
b. Technical Accounting Transaction Engine (including all algorithms)
c. Quote Engine for automated rating of "standard" business including
workflow processes and support for conditioning of "non-standard"
business by an underwriter
d. Direct Business Integration Module
e. Business Administration Module
f. Report Engine
26
2. Registered trademarks:
a. SurSITE(R)
b. DirectINSURE(R)
3. Domain Names:
a. www.stius.com
b. www.sursite.com
c. www.PolicyWorld.com
d. www.SwissLuftPool.com
Employees
As of August 16, 2004, we employ three full-time employees and four
consultants. We expect the Company's staff to increase to about 12 full-time
employees and approximately ten consultants during the fourth quarter 2004. We
have no collective bargaining agreements with our employees.
Property
Our principal executive offices are located in approximately 4,500
square feet of office space at 5210 Chairmans Court, Suite 3, Frederick,
Maryland 21703.
27
MANAGEMENT
Our directors and executive officers and their ages as of August 16,
2004 are as follows:
NAME AGE POSITION
Dan L. Jonson 61 President and Director
Subhash C. Bhatia 57 Director
Andrew Larsen 57 Director
Michael Shor 52 Director
Mark D. Spaeth 36 Director
--------------------------------------------------------------------------------
The following is a brief description of the background of our directors
and executive officers.
Background Information
Dan L. Jonson. Mr. Jonson is the President and Chief Executive Officer
of our Company and a member of our Board of Directors and has been serving in
those capacities since 1997, when the Company become operational. Prior to
launching STI, Mr. Jonson served between 1987 and 1996 as Senior Vice President
of Strategic Business Development of AVEMCO Corporation, a publicly traded niche
insurance company specialized in aviation, marine, and collateral protection for
banks and the WINS software for the property & casualty insurance market through
its fully owned subsidiary The Wheatley Group Ltd. Between 1980 and 1987, Mr.
Jonson served as Vice President of Underwriting of AVEMCO Insurance Company. Mr.
Jonson's expertise in the insurance and reinsurance industry was developed over
more than thirty years in various industry positions, with the Skandia Group in
Stockholm, Sweden, Extended Reinsurance Group in New York and the AVEMCO Group
based in Frederick, Maryland. Mr. Jonson also gained experience in underwriting
at Skandia Group where he was responsible for underwriting, marketing and
business development for the North American, Far East and Pacific Rim markets.
Subhash C. Bhatia. Mr. Bhatia is a member of our Board of Directors and
has been serving in that capacity since 1997. Mr. Bhatia has over 35 years of
experience in the Information Technology Industry. Mr. Bhatia currently runs the
New York based Key Management Group, a software company which specializes in
providing offshore IT outsourcing services to the Insurance Industry. Prior to
founding Key Management Group in 1990, Mr. Bhatia had worked for over 20 years
in various sales and marketing capacities at IBM, both in India and the United
States. During his time at IBM, Mr. Bhatia received various awards including 9
Hundred Percent Clubs and Two Golden Circles. Mr. Bhatia is also the founder of
two charitable foundations. Mr. Bhatia obtained an Engineering degree from Delhi
College of Engineering in 1967 and earned a Management Diploma from the
University of Delhi in 1972.
Andrew Larsen. Mr. Larsen recently joined our Board of Directors on
July 16, 2004. Mr. Larsen has more than 35 years of executive, underwriting and
claims experience in the property & casualty and life insurance and reinsurance
industry. Mr. Larsen worked at GE between 1996 and 2003, serving in a variety of
capacities, most recently as Executive Vice President of GE Financial Assurance
between 2000 and 2003. During his tenure at GE, he also served as an officer and
Director of the Board of several other GE property & casualty and life insurance
subsidiaries. Prior to joining GE, Mr. Larsen served as the Executive Vice
President of First Colony Life Insurance Company. Between 1969 and 1986, he held
executive, management, underwriting, claims and sales positions at companies
including CIGNA Corporation, Chubb & Son, Inc., Liberty Mutual Insurance Company
and Fidelity Union Life Insurance Company. Mr. Larsen received his Bachelor's
degree in Political Science from Ursinus College, an MBA in Insurance & Risk
Management from Temple University, and Graduate Study in Life Insurance from
University of Hartford.
Michael Shor. Mr. Shor is a member of our Board of Directors and has
been serving in that capacity since June 2004. Michael Shor has over 24 years of
executive and sales experience in the Insurance, Banking, and the Investment
Industries. Mr. Shor is currently serving as Business Development Officer and
Relationship Manager at SunTrust Corporation. Immediately prior to joining
SunTrust, Mr. Shor was serving as a Senior Vice President at Morgan Stanley from
July 1999 until June 2003. He has also held Senior Vice President positions at
First Union Securities and Wheat First Butcher and Singer. Active in the Venture
Capital Community for the past 10 years, Shor has helped numerous private and
public companies develop strategies for recognizing and achieving their goals.
Among some of his other achievements, Shor is the founder of The Virginia
Baseball Club, which has been working to bring Major League Baseball to Northern
Virginia for over a decade. He has also served on the boards or Executive
Committees of the Northern Virginia Technology Council, National Diabetes
Foundation, Nation Leukemia Foundation, and the Northern Virginia American Lung
Association.
28
Mark D. Spaeth. Mr. Spaeth is a member of our Board of Directors and has
been serving in that capacity since March 2002. Until May 2004, Mr. Spaeth had
been serving as Chief Strategy Officer for Technium, Inc., a Chicago based
consultancy for the last 5 years where he lead the company to develop packaged
services through the implementation of robust delivery methodologies. During the
last 18 years, Spaeth has worked primarily in technology based roles including
Chief Technology Officer and Software Architect across a wide variety of
industries including manufacturing, healthcare, finance and insurance. Recently,
Mr. Spaeth has been consulting with large manufacturers to improve supply chain
processes and realize large scale recoveries. Mr. Spaeth has also written about
the enterprise software industry and is currently writing a book about his
experiences with enterprise application development and best practices.
Executive Compensation
Summary Compensation Table. The following table sets forth the annual and
long-term compensation for services in all capacities for the fiscal years ended
December 31, 2003, 2002 and 2001, paid to our most highly compensated executive
officers.
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards
------
Restricted Securities
Stock Underlying All Other
Name and Principal Position Year Salary Bonus Award(s) Options Compensation(1)
--------------------------- ---- ------ -------- -------- ------- ---------------
Dan L. Jonson 2003 $208,333 $12,500 -- -- $25,000
President and Chief Executive Officer 2002 $200,000 $0 -- -- --
2001 $175,000 $0 -- -- --
$0
Birgitta M. Jonson (2) 2003 $25,008 $0 $8,334
Vice President 2002 $50,004 $0
2001 $50,004 $0
$0
Salvatore J. Mastellone (3) 2003 $52,500 $0
Vice President of Human 2002 $105,000 $0
Resources and Administration 2001 $105,000 $0
$0
Urban K. Jonson (4) 2003 $100,000 $0
Senior Vice President and 2002 $150,000 $0
Chief Technology Officer 2001 $67,429 $0
(1) All of the amounts in this column were paid in the form of stock for
deferred compensation. The amounts listed represent the fair market value
of the stock on the date of grant.
(2) Salary received by Ms. Jonson was paid through June 30, 2003, her last day
of employment with the Company.
(3) Salary received by Mr. Mastellone was paid through June 30, 2003, his last
day of employment with the Company.
(4) Salary received by Mr. Jonson was paid through July 31, 2003, his last day
of employment with the Company.
29
Aggregated Option Exercises In Last Fiscal Year And Fiscal
Year-End Option Values
The following table sets forth certain information concerning the
number and value of securities underlying exercisable and unexercisable stock
options as of the fiscal year ended December 31, 2003 by our executive officers
listed in the Summary Compensation Table above.
Number of Securities
Number of Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options at
Acquired on Value December 31, 2003(1) December 31, 2003(1)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- -------- ------------------------- --------------------
Dan L. Jonson None N/A 2,488,933 / 1,594,287 $124,447 $79,714
Birgitta M. Jonson None N/A 0 / 0 -- --
Salvatore J. Mastellone None N/A 0 / 0 -- --
Urban K. Jonson None N/A 0 / 0 -- --
(1) Based on the initial public offering price of $0.15 per share, minus the
exercise price, multiplied by the number of shares issued upon the
exercise of, or subject to, the option, without taking into account any
taxes that may be payable in connection with the transaction. All shares
in this table reflect a 20:1 stock split that took place on June 22, 2004.
Compensation of Directors
We have no standard arrangement pursuant to which our Directors are
compensated for services provided as a Director.
Employment Agreements
On October 11, 2002, the Board of Directors approved the Solution
Technology International, Inc. 2002 Stock Incentive Plan under which employees,
officers, directors and consultants are eligible to receive grants of stock
options. STI has reserved a total of 30,000,000 shares of common stock under the
2002 Stock Incentive Plan. It is presently administered by the Board of
Directors. Subject to the provisions of the 2002 Stock Incentive Plan, the Board
of Directors has full and final authority to select the individuals to whom
options will be granted, to grant the options and to determine the terms and
conditions and the number of shares issued pursuant thereto.
Change in Control
There are no arrangements which would result in payments to any
officers or directors in the event of a change-in-control of STI.
Indemnification
Our Certificate of Incorporation and Bylaws provide that we may
indemnify an officer or director who is made a party to any proceeding,
including a lawsuit, because of his position, if he acted in good faith and in a
manner he reasonably believed to be in our best interest. In certain cases, we
may advance expenses incurred in defending any such proceeding. To the extent
that the officer or director is successful on the merits in any such proceeding
as to which such person is to be indemnified, we must indemnify him against all
expenses incurred, including attorney's fees. With respect to a derivative
action, indemnity may be made only for expenses actually and reasonably incurred
in defending the proceeding, and if the officer or director is judged liable,
only by a court order. The indemnification is intended to be to the fullest
extent permitted by the laws of the state of Delaware.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
30
LEGAL PROCEEDINGS
We are not subject to any action, suit, proceeding, claim, arbitration
or investigation before any court or governmental agency.
31
PRINCIPAL SHAREHOLDERS
Beneficial Owners
The following table sets forth information regarding the beneficial
ownership of our common stock as of August 16, 2004 for:
o each person known by us to own beneficially more than 5% of our of
common stock;
o each of our directors;
o each executive officer listed in the Summary Compensation Table
above; and
o all directors and executive officers as a group.
Unless otherwise indicated below, to our knowledge, all persons and
entities listed below have sole voting and investment power over their shares of
common stock, except to the extent that individuals share authority with spouses
under applicable law.
Shares
neficially Percent
Name and Address Title of Class Owned (1) f Class(1)
---------------- ------------- --------- ----------
Dan Jonson
5210 Chairmans Court
Suite 3
Frederick, MD 21703 Common 33,577,320 42.1%
Crosshill Georgetown Capital, LP
1000 Wilson Boulevard
Suite 1850
Arlington, Virginia 22209 Common 22,204,900 32.4%
Subhash Bhatia
5210 Chairmans Court
Suite 3
Frederick, MD 21703 Common 8,213,280 15.1%
Birgitta Jonson
5210 Chairmans Court
Suite 3
Frederick, MD 21703 Common 5,551,200 10.7%
Mobilepro Corp.
6701 Democracy Blvd.
Suite 300
Bethesda, MD 20817 Common 5,121,855 10.0%
SQL Star International
1265 El Camino Real,
Suite 206
Santa Clara, CA 95050 Common 4,331,400 8.6%
Michael Shor
5210 Chairmans Court
Suite 3
Frederick, MD 21703 Common 4,000,000 8.0%
Robert Coyne
5210 Chairmans Court
Suite 3
Frederick, MD 21703 Common 3,600,000 7.2%
32
State of Maryland
Department of Business and Economic
Development
826 E. Baltimore Street
Baltimore, MD 21202 Common 3,500,100 7.0%
Key Management Group
125 Baylis Road, Suite 260
Melville, NY 11747 Common 2,746,200 5.6%
Margaret Bogen Coyne
5210 Chairmans Court
Suite 3
Frederick, MD 21703 Common 2,446,200 5.0%
Officers and Directors as a Group
(3 Persons) (2) Common 33,577,320 49.8%
----------
* Less than 1%.
(1) Applicable percentage of ownership is based on 46,230,154 shares of common
stock outstanding as of August 16, 2004, together with applicable options
for each shareholder. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and generally
includes voting or investment power with respect to securities. Shares of
common stock subject to options that are currently exercisable or
exercisable within 60 days of August 16, 2004 are deemed to be
beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such person, but are not treated
as outstanding for the purpose of computing the percentage ownership of
any other person.
(2) As of August 16, 2004, Dan Jonson was our sole executive officer. Subhash
Bhatia and Michael Shor are directors of the Company.
33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
34
Description of Securities
The following description of our capital stock does not purport to be
complete and is subject to, and qualified in its entirety by, our amended and
restated certificate of incorporation and bylaws, which are exhibits to the
registration statement of which this prospectus forms a part.
Common Stock
On June 28, 2004, STI amended its Certificate of Incorporation and now
is authorized to issue up to 500,000,000 shares of common stock, with a par
value of $0.001 per share, of which 46,230,154 shares are issued and outstanding
as of August 16, 2004.
Holders of shares of common stock are entitled to one vote for each
share on all matters to be voted on by the shareholders. Holders of common stock
have no cumulative voting rights.
STI does not currently anticipate paying any dividends on its common
stock. In the event of a liquidation, dissolution or winding up of STI, the
holders of shares of common stock are entitled to share pro-rata all assets
remaining after payment in full of all liabilities, subject however, to any
rights of the shareholders of preferred shares issued and outstanding at the
time of such liquidation, dissolution or winding up of STI (see preferred stock
below). Holders of common stock have no preemptive rights to purchase STI's
common stock. There are no conversion rights or redemption or sinking fund
provisions with respect to the common stock.
Options
As of August 16, 2004, we had 30,000,000 outstanding options with
exercise prices ranging from $0.05 to $0.10.
Warrants
As of August 16, 2004, warrants to 26,204,900 shares of our common
stock were outstanding with exercise prices ranging from of $0.001 to $0.10 per
share. The weighted average exercise price of the warrants is $0.016 per share.
Each warrant contains provisions for the adjustment of the exercise price and
the number of shares issuable upon the exercise of the warrant in the event of
stock dividends, stock splits, reorganizations and reclassifications and
consolidations.
Transfer Agent and Registrar
SunTrust Bank is the transfer agent and registrar for our common stock.
Its address is 58 Edgewood Avenue, Room 225, Atlanta, GA 30303. Its telephone
number is (404) 588-7622.
Exchange Listing
We expect to apply to list our common stock on either the OTC Bulletin
Board market or the Pink Sheets.
35
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Our board of directors approved a decision to engage Bagell, Josephs &
Company, LLC, as our independent auditors for our fiscal years ending December
31, 2003. Bagell, Josephs & Company, LLC accepted such appointment on June 30,
2004.
Bagell, Josephs & Company, LLC also audited our financial statements
for the year ending December 31, 2002 which are provided in this registration
statement.
EXPERTS
The financial statements as of April 30, 2004 and 2003 and for each of
the years in the period ended December 31, 2003 and 2002 included in this
Prospectus have been included in reliance on the report of Bagell, Josephs &
Company, LLC, independent accountants, given on the authority of said firm as
experts in auditing and accounting. Each of the reports contains an explanatory
paragraph relating to STI's ability to continue as a going concern.
LEGAL MATTERS
Schiff Hardin LLP, Washington, D.C., will pass upon the validity of the
shares of our common stock.
AVAILABLE INFORMATION
For further information with respect to us and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto. Statements herein concerning the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
such contract or other statement filed with the Securities and Exchange
Commission or included as an exhibit, or otherwise, each such statement, being
qualified by and subject to such reference in all respects.
Reports, registration statements, proxy and information statements, and
other information filed by us with the Securities and Exchange Commission can be
inspected and copied at the public reference room maintained by the Securities
and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Copies of these materials may be obtained at prescribed
rates from the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The
Securities and Exchange Commission maintains a site on the World Wide Web
(http://www.sec.gov) that contains reports, registration statements, proxy and
information statements and other information. You may obtain information on the
Public Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330.
36
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
FINANCIAL STATEMENTS
INDEX
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
REVIEWED FINANCIAL STATEMENTS
APRIL 30, 2004 AND 2003
AND DECEMBER 31, 2003 AND 2002
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
FINANCIAL STATEMENTS
APRIL 30, 2004 AND 2003
INDEX TO REVIEWED FINANCIAL STATEMENTS
Page(s)
Accountants' Review Report 1
Balance Sheets as of April 30, 2004 and 2003 2
Statements of Operations for the Four Months Ended
April 30, 2004 and 2003 3
Statements of Changes in Stockholder's (Deficit) for the
Four Months Ended April 30, 2004 and 2003 4
Statements of Cash Flows for the Four Months Ended
April 30, 2004 and 2003 5
Notes to Reviewed Financial Statements 6-19
BAGELL, JOSEPHS & COMPANY, L.L.C.
Certified Public Accountants
High Ridge Commons
Suites 400-403
200 Haddonfield Berlin Road
Gibbsboro, New Jersey 08026
(856) 346-2828 Fax (856) 346-2882
ACCOUNTANTS' REVIEW REPORT
Board of Directors
Solutions Technology International, Inc.
Fredrick, Maryland
We have reviewed the accompanying balance sheets of Solution Technology
International, Inc. (the "Company") as of April 30 2004 and 2003 and the related
statements of operations, changes in stockholders' (deficit), and cash flows for
the four months then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. All information included in these financial statements is
the representation of Solution Technology International, Inc.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the financial statements in order for them to be in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 13 to the financial
statements, certain conditions indicate that the Company may be unable to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
BAGELL, JOSEPHS & COMPANY, L.L.C.
BAGELL, JOSEPHS & COMPANY, L.L.C.
Certified Public Accountants
Gibbsboro, New Jersey
Date July 15, 2004
MEMBER OF: AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
NEW JERSEY SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
PENNSYLVANIA INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
NEW YORK STATE SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
1
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
BALANCE SHEETS
APRIL 30, 2004 AND 2003
ASSETS
------
2004 2003
----------- -----------
Current Assets:
Cash and cash equivalents $ 403 $ 45,908
Prepaid expenses and other current assets -- 16,667
----------- -----------
Total Current Assets 403 62,575
----------- -----------
Fixed assets, net of depreciation 59,170 75,222
----------- -----------
Other Assets:
Intangible assets, net 961,229 961,229
Security deposits 7,065 7,065
----------- -----------
Total Other Assets 968,294 968,294
----------- -----------
TOTAL ASSETS $ 1,027,867 $ 1,106,091
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
---------------------------------------
LIABILITIES
Current Liabilities:
Note payable $ 795,000 $ 630,000
Notes payable - bank 75,000 500
Revolving promissory note 750,000 750,000
Current portion of obligations under capital lease 5,586 9,259
Accounts payable and accrued expenses 215,777 323,402
----------- -----------
Total Current Liabilities 1,841,363 1,713,161
----------- -----------
Long-term Liabilities:
Deferred compensation 238,103 169,439
Obligations under capital lease, net of current maturities 3,673 10,636
----------- -----------
Total Long-term Liabilities 241,776 180,075
----------- -----------
Total Liabilities 2,083,139 1,893,236
----------- -----------
STOCKHOLDERS' (DEFICIT)
Common stock, $.001 Par Value; 20,000,000 shares authorized
1,952,985 shares issued and outstanding 1,953 1,953
Additional paid-in capital 2,219,488 2,219,488
Accumulated deficit (3,276,713) (3,008,586)
----------- -----------
Total Stockholders' (Deficit) (1,055,272) (787,145)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 1,027,867 $ 1,106,091
=========== ===========
2
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
FOR THE FOUR MONTHS ENDED APRIL 30, 2004 AND 2003
2004 2003
----------- -----------
OPERATING REVENUES
Sales $ -- $ 384,458
COST OF SALES 481,672
----------- -----------
GROSS LOSS -- (97,214)
----------- -----------
OPERATING EXPENSES
Compensation expense 142,300 311,705
General and administrative expenses 86,617 163,171
Depreciation and amortization 7,042 12,115
----------- -----------
Total Operating Expenses 235,959 486,991
----------- -----------
LOSS BEFORE OTHER INCOME (EXPENSE) (235,959) (584,205)
OTHER INCOME (EXPENSE)
Interest income 23 674
Interest expense (38,573) (42,399)
----------- -----------
Total Other Income (Expense) (38,550) (41,725)
----------- -----------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (274,509) (625,930)
Provision for Income Taxes -- --
----------- -----------
NET LOSS APPLICABLE TO COMMON SHARES $ (274,509) $ (625,930)
=========== ===========
NET LOSS PER BASIC AND DILUTED SHARES $ (0.14) $ (0.32)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 1,952,985 1,952,985
=========== ===========
3
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT)
FOR THE FOUR MONTHS ENDED APRIL 30, 2004 AND 2003
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficits Total
--------- ------ ---------- ----------- -----------
Balance December 31, 2002 1,952,985 $1,953 $2,219,488 $(2,382,656) $ (161,215)
Net loss for the four months ended April 30, 2003 -- -- -- (625,930) (625,930)
--------- ------ ---------- ----------- -----------
Balance April 30, 2003 1,952,985 $1,953 $2,219,488 $(3,008,586) $ (787,145)
========= ====== ========== =========== ===========
Balance December 31, 2003 1,952,985 $1,953 $2,219,488 $(3,002,204) $ (780,763)
Net loss for the four months ended April 30, 2004 -- -- -- (274,509) (274,509)
--------- ------ ---------- ----------- -----------
Balance April 30, 2004 1,952,985 $1,953 $2,219,488 $(3,276,713) $(1,055,272)
========= ====== ========== =========== ===========
4
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE FOUR MONTHS ENDED APRIL 30, 2004 AND 2003
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(274,509) $(625,930)
--------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 7,042 12,115
Changes in assets and liabilities
Decrease in accounts receivable 11,055 71,749
Decrease in prepaid expenses and other assets -- 1,100
Increase in deferred compensation 102,000 116,664
Increase (decrease) in accounts payable and
and accrued expenses 62,645 (132,871)
--------- ---------
Total adjustments 182,742 68,757
--------- ---------
Net cash (used in) operating activities (91,767) (557,173)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITES
Proceeds from revolving promissory note -- 750,000
Proceeds from line of credit 75,000 --
Payment on line of credit -- (105,000)
Payments of notes payable -- (35,000)
Payments of notes payable - bank -- (4,603)
Payments of obligations under capital lease (3,714) (3,223)
--------- ---------
Net cash provided by financing activities 71,286 602,174
--------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (20,481) 45,001
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 20,884 907
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 403 $ 45,908
========= =========
CASH PAID DURING THE PERIOD FOR:
Interest expense $ 32,585 $ 42,399
========= =========
5
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO REVIEWED FINANCIAL STATEMENTS
APRIL 30, 2004 AND 2003
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
Solution Technology International, Inc. (the "Company") incorporated
in Delaware on April 27, 1993, is an emerging software product
company based in Frederick, Maryland offering an enterprise solution
for the global insurance and reinsurance industry. The Company has
created complex reinsurance algorithms and methodologies to support
automation of complex technical accounting methods and claims
recovery processes. The Company has also developed sophisticated
expert underwriting methods and trend analysis tools that support
the insurance and reinsurance industries.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and other
short- term investments with an initial maturity of three months or
less to be cash or cash equivalents.
The Company maintains cash and cash equivalents with a financial
institution that periodically exceed the limit of insurability under
Federal Deposit Insurance Corporation.
Identified Intangible Assets
Intellectual property assets represent technology and are amortized
over the periods of benefit, ranging from two to ten years,
generally on a straight-line basis.
Identified intangible assets are regularly reviewed to determine
whether facts and circumstances exist which indicate that the useful
life is shorter than originally estimated or the carrying amount of
assets may not be recoverable. The Company assesses the
recoverability of its identifiable intangible assets by comparing
the projected discounted net cash flows associated with the related
asset or group of assets over their remaining lives against their
respective carrying amounts. Impairment, if any, is based on the
excess of the carrying amount over the fair value of those assets.
Start-up Costs
In accordance with the American Institute of Certified Public
Accountants Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities", the Company expenses all costs incurred in
connection with the start-up and organization of the Company.
6
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO REVIEWED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company records its transactions under the accrual method of
accounting whereby income is recognized when the services are billed
rather than when the fees are collected, and costs and expenses are
recognized in the period they are incurred rather than when paid.
The Company is an emerging software product company who has
developed a software package to help insurance and reinsurance
companies in their claims recovery process.
In 2002, the Company entered into an agreement with the Swiss Pool
for Aviation Insurance ("SPL") and recorded revenue under this
agreement for license and hosting services rendered. SPL consists of
a pool of approximately 26 insurance and reinsurance companies.
The Company accounts for the licensing of software in accordance
with the American Institute of Certified Public Accountants
Statement of Position (SOP) 97-2, "Software Revenue Recognition."
The Company recognizes revenue when (i) persuasive evidence of an
arrangement exists; (ii) delivery has occurred or services have been
rendered; (iii) the sales price is fixed or determinable; and (iv)
the ability to collect is reasonably assured. For software
arrangements with multiple elements, revenue is recognized dependent
upon whether vendor-specific objective evidence (VSOE) of fair value
exists for each of the elements. When VSOE does not exist for all
the elements of a software arrangement and the only undelivered
element is post-contract customer support (PCS), the entire
licensing fee is recognized ratably over the contract period.
Revenue attributable to undelivered elements, including technical
support, is based on the average sales price of those elements, when
sold separately, and is recognized ratably on a straight-line basis
over the products life cycle. PCS revenue is recognized ratably over
the contract period. Shipping charges billed to customers are
included in revenue and the related shipping costs are included in
cost of sales.
Income Taxes
The income tax benefit is computed on the pretax loss based on the
current tax law. Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each
year-end based on enacted tax laws and statutory tax rates. No
benefit is reflected for the four months ended April 30, 2004 and
2003, respectively.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash and
cash equivalents, and accounts payable approximate fair value
because of the immediate or short-term maturity of these financial
instruments.
7
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO REVIEWED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
The Company expenses the costs associated with advertising as
incurred. Advertising expenses are included in the statements of
operations for the four months ended April 30, 2004 and 2003.
Fixed Assets
Furniture and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of
the assets.
When assets are retired or otherwise disposed of, the costs and
related accumulated depreciation are removed from the accounts, and
any resulting gain or loss is recognized in income for the period.
The cost of maintenance and repairs is charged to income as
incurred; significant renewals and betterments are capitalized.
Deduction is made for retirements resulting from renewals or
betterments.
Accounts Receivable
The Company conducts business and extends credit based on an
evaluation of the customers' financial condition, generally without
requiring collateral. Exposure to losses on receivables is expected
to vary by customer due to the financial condition of each customer.
The Company monitors exposure to credit losses and maintains
allowances for anticipated losses considered necessary under the
circumstances.
Earnings (Loss) Per Share of Common Stock
Historical net income (loss) per common share is computed using the
weighted average number of common shares outstanding. Diluted
earnings per share (EPS) includes additional dilution from common
stock equivalents, such as stock issuable pursuant to the exercise
of stock options and warrants. Common stock equivalents were not
included in the computation of diluted earnings per share when the
Company reported a loss because to do so would be antidilutive for
periods presented.
8
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO REVIEWED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings (Loss) Per Share of Common Stock (Continued)
The following is a reconciliation of the computation for basic and
diluted EPS:
April 30, April 30,
2004 2003
----------- -----------
Net loss $ (274,509) $ (625,930)
----------- -----------
Weighted-average common shares
Outstanding (Basic) 1,952,985 1,952,985
Weighted-average common stock
Equivalents
Stock options -- --
Warrants -- --
----------- -----------
Weighted-average common shares
Outstanding (Diluted) 1,952,985 1,952,985
=========== ===========
Options and warrants outstanding to purchase stock were not included
in the computation of diluted EPS for April 30, 2004 and 2003
because inclusion would have been antidilutive.
Goodwill and Other Intangible Assets
In June 2001, the FASB issued Statement No. 142 "Goodwill and Other
Intangible Assets". This statement addresses financial accounting
and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. It addresses how
intangible assets that are acquired individually or with a group of
other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other
intangible assets should be accounted for after they have been
initially recognized in the financial statements.
10
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO REVIEWED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
Employee stock awards under the Company's compensation plans are
accounted for in accordance with Accounting Principles Board Opinion
No. 25 ("APB 25"), "Accounting for Stock Issued to Employees", and
related interpretations. The Company provides the disclosure
requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), and related
interpretations. Stock-based awards to non-employees are accounted
for under the provisions of SFAS 123 and has adopted the enhanced
disclosure provisions of SFAS No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure, an amendment of SFAS No.
123".
The Company measures compensation expense for its employee
stock-based compensation using the intrinsic-value method. Under the
intrinsic-value method of accounting for stock-based compensation,
when the exercise price of options granted to employees is less than
the estimated fair value of the underlying stock on the date of
grant, deferred compensation is recognized and is amortized to
compensation expense over the applicable vesting period. In each of
the periods presented, the vesting period was the period in which
the options were granted. All options were expensed to compensation
in the period granted rather than the exercise date.
The Company measures compensation expense for its non-employee
stock-based compensation under the Financial Accounting Standards
Board (FASB) Emerging Issues Task Force (EITF) Issue No. 96-18,
"Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services". The fair value of the option issued is used to measure
the transaction, as this is more reliable than the fair value of the
services received. The fair value is measured at the value of the
Company's common stock on the date that the commitment for
performance by the counterparty has been reached or the
counterparty's performance is complete. The fair value of the equity
instrument is charged directly to compensation expense and
additional paid-in capital.
9
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO REVIEWED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
On October 3, 2001, the FASB issued Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), that is applicable to
financial statements issued for fiscal years beginning after
December 15, 2001. The FASB's new rules on asset impairment
supersede SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and portions of
Accounting Principles Board Opinion 30, "Reporting the Results of
Operations." This Standard provides a single accounting model for
long-lived assets to be disposed of and significantly changes the
criteria that would have to be met to classify an asset as
held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at
the lower of fair value and carrying amount. This Standard also
requires expected future operating losses from discontinued
operations to be displayed in the period (s) in which the losses are
incurred, rather than as of the measurement date as presently
required.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. This statement rescinds SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and an amendment of
that statement, SFAS No. 44, Accounting for Intangible Assets of
Motor Carriers, and SFAS No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. This statement amends SFAS No.
13, "Accounting for Leases", to eliminate inconsistencies between
the required accounting for sales-leaseback transactions and the
required accounting for certain lease modifications that have
economic effects that are similar to sales-leaseback transactions.
Also, this statement amends other existing authoritative
pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions.
Provisions of SFAS No. 145 related to the rescissions of SFAS No. 4
were effective for the Company on November 1, 2002 and provisions
affecting SFAS No. 13 were effective for transactions occurring
after May 15, 2002. The adoption of SFAS No. 145 did not have a
significant impact on the Company's results of operations or
financial position.
10
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO REVIEWED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
In June 2003, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement covers
restructuring type activities beginning with plans initiated after
December 31, 2002. Activities covered by this standard that are
entered into after that date will be recorded in accordance with
provisions of SFAS No. 146. The adoption of SFAS No. 146 did not
have a significant impact on the Company's results of operations or
financial position.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of
FASB Statement No. 123"("SFAS 148"). SFAS 148 amends FASB Statement
No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. Finally, this
Statement amends Accounting Principles Board ("APB") Opinion No. 28,
"Interim Financial Reporting", to require disclosure about those
effects in interim financial information. SFAS 148 is effective for
financial statements for fiscal years ending after December 15,
2002. The Company will continue to account for stock-based employee
compensation using the intrinsic value method of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," but has adopted the
enhanced disclosure requirements of SFAS 148.
In April 2003, the FASB issued SFAS Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities",
which amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities".
This Statement is effective for contracts entered into or modified
after June 30, 2003, except for certain hedging relationships
designated after June 30, 2003. Most provisions of this Statement
should be applied prospectively. The adoption of this statement did
not have a significant impact on the Company's results of operations
or financial position.
11
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO REVIEWED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2004 AND 2003
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
In May 2003, the FASB issued SFAS Statement No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity". This Statement establishes standards for
how an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). This
statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003,
except for mandatorily redeemable financial instruments of nonpublic
entities, if applicable. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period
of adoption. The adoption of this statement did not have a
significant impact on the Company's results of operations or
financial position.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45
requires a company, at the time it issues a guarantee, to recognize
an initial liability for the fair value of obligations assumed under
the guarantees and elaborates on existing disclosure requirements
related to guarantees and warranties. The recognition requirements
are effective for guarantees issued or modified after December 31,
2002 for initial recognition and initial measurement provisions. The
adoption of FIN 45 did not have a significant impact on the
Company's results of operations or financial position.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51". FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of
the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other
parties. FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual
period beginning after June 15, 2003. The adoption of FIN 46 did not
have a significant impact on the Company' results of operations or
financial position.
12
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO REVIEWED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2004 AND 2003
NOTE 3- FIXED ASSETS
Property and equipment as of April 30, 2004 and 2003 were as follows:
Estimated
Useful
Lives (Years)
2004 2003
---- ----
Furniture and fixtures 7 $23,268 $23,268
Machinery and equipment 3-7 80,016 80,016
Leasehold improvements 39 11,870 11,870
Vehicles 5 26,908 26,908
------ ------
Less: accumulated depreciation 82,892 66,840
------ ------
Property and equipment, net $59,170 $75,222
======= =======
There was $7,042 and $12,115 charged to operations for depreciation
expense for the four months ended April 30, 2004 and 2003,
respectively.
NOTE 4- NOTES PAYABLE
The Company entered into an agreement with the Swiss Pool for
Aviation Insurance ("SPL") whereby SPL advanced the Company under
their Master SurSite Agreement, a license/hosting fee and associated
professional service fees. Advanced fees were recognized as both
revenue to the Company for achieving certain benchmarks in
accordance with the agreement, and certain fees were advances to be
repaid due to contractual obligations to SPL. The original terms
were for the advances to be repaid in a period not to exceed five
years, no interest. In 2004, interest started accruing at 2.5%
annually. The Company originally was advanced $700,000 from June
2002 through October 2002, and credited one quarterly maintenance
fee of $35,000 in 2002 and two quarterly maintenance fees totaling
$70,000 in 2003. Additionally, SPL advanced another $200,000 in 2003
at 9% interest annually. Interest expense on this portion for the
four months ended April 30, 2004 was $5,988. The note payable
balance due at April 30, 2004 and 2003 was $795,000 and $630,000,
respectively. All amounts are included as current liabilities due to
the fact that these amounts are due on demand.
13
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO REVIEWED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2004 AND 2003
NOTE 5- NOTES PAYABLE - BANK
The Company during 2004 and 2003 maintained a $200,000 Line of
Credit with two banks. The Company would borrow funds from time to
time for working capital needs. Interest on the line of credit was
variable at prime rate plus 2.5%. The balance at April 30, 2004 and
2003 was $75,000 and $500, respectively. Interest for the four
months ended April 30, 2004 and 2003 was $412 and $0, respectively.
NOTE 6- REVOLVING PROMISSORY NOTE
The Company entered into a revolving promissory note agreement (the
"Agreement") with Crosshill Georgetown Capital, L.P. ("Crosshill")
on January 10, 2003. Pursuant to the Agreement, Crosshill loaned the
Company $750,000 which matures upon the earlier of the Company
closing on an equity raise of not less than $2,000,000 or July 10,
2003, which has been amended on three occasions through March 31,
2004. The note accrued interest at 12% annually. The Company has the
full $750,000 outstanding at April 30, 2004. Interest expense for
the four months ended April 30, 2004 is $30,500 due to added
interest payments due to late payments made by the Company.
The amounts are secured by a Loan and Security Agreement and an
Intellectual Property Security Agreement. In addition, the Company
issued 930,245 warrants to Crosshill for inducement to enter into
the Agreement. In accordance with the third amendment which
established March 31, 2004 as the new maturity date, these warrants
increase 60,000 per month effective April 2004, should the Company
fail to repay the note.
Crosshill can purchase these warrants for $1 and other good and
valuable consideration as defined in the Warrant Agreement. The
warrants have a price of $.001 (the par value of the Company) and
expire January 9, 2010.
NOTE 7- INTELLECTUAL PROPERTY
Costs incurred in creating products are charged to expense when
incurred as research and development until technological feasibility
is established upon completion of a working model. Thereafter, all
software production costs are capitalized and subsequently reported
at the lower of unamortized cost or net realizable value.
Capitalized costs are amortized based on current and future revenue
for each product with an annual minimum equal to the straight-line
amortization over the remaining estimated economic life of the
product.
14
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO REVIEWED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2004 AND 2003
NOTE 7- INTELLECTUAL PROPERTY (CONTINUED)
In accordance with SFAS No. 2, "Accounting for Research and
Development Costs", SFAS No. 68, "Research and Development
Arrangements", and SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed",
technological feasibility for the product was established on January
1, 2001 with completion of the working model.
All costs subsequent to this date have been capitalized. Management
on an annual basis determines impairment on their intangible assets
as they have an indefinite life.
NOTE 8- OBLIGATIONS UNDER CAPITAL LEASE
The Company is the lessee of computer equipment and office equipment
under capital leases expiring during the fiscal year ended April 30,
2007. The leases are collateralized by the equipment.
Minimum lease payments under capital leases are as follows:
Fiscal Year Ended
April 30,
---------
2005
2006 $ 6,449
2007 3,247
812
-------
10,508
Less: amounts representing interest (1,249)
Less: current portion (5,586)
-------
Long-term portion $ 3,673
=======
15
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO REVIEWED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2004 AND 2003
NOTE 9- OPERATING LEASE
The Company has a facility lease for office space and equipment
leases with various expiration dates through the fiscal year ended
April 30, 2007. The office lease contains a four percent yearly
escalation clause along with the Company paying taxes, insurance and
utilities. Monthly payments for all leases range from $99 to $6,808
per month.
Minimum lease payments under operating leases are as follows:
Fiscal Year Ended
April 30,
2005 $ 72,570
2006 74,340
2007 19,328
----------
$166,238
NOTE 10- ACCRUED COMPENSATION
The Company as of April 30, 2004 and 2003 has accrued compensation
to an officer in the amount of $238,103 and $169,439, respectively.
These amounts are reflected as current liabilities.
NOTE 11- STOCKHOLDERS' DEFICIT
Common Stock
As of April 30, 2004 and 2003, the Company has 20,000,000 shares of
common stock authorized and 1,952,985 issued and outstanding. The
par value of the common stock is $.001.
The Company prior to October 10, 2002 had 150,000 shares authorized
and 130,199 shares issued and outstanding. The Company then
increased the authorized level of common shares to 20,000,000 that
the board of directors approved and a corresponding 15:1 forward
stock split increasing the issued and outstanding shares to
1,952,985. Additionally, the board of directors approved a change in
the par value of the common stock to $.001 from no par value. There
were no other issuances or cancellations of stock during the four
months ended April 30, 2004 and for the year ended December 31,
2003.
16
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO REVIEWED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2004 AND 2003
NOTE 12- PROVISION FOR INCOME TAXES
Deferred income taxes will be determined using the liability method
for the temporary differences between the financial reporting basis
and income tax basis of the Company's assets and liabilities.
Deferred income taxes will be measured based on the tax rates
expected to be in effect when the temporary differences are included
in the Company's tax return. Deferred tax assets and liabilities are
recognized based on anticipated future tax consequences attributable
to differences between financial statement carrying amounts of
assets and liabilities and their respective tax bases.
At April 30, 2004, deferred tax assets consist of the following:
Net operating loss carry-forwards $ 1,092,238
Less: valuation allowance (1,092,238)
---------------
$ -0-
At April 30, 2004, the Company had deficits accumulated in the
approximate amount of $3,276,713, available to offset future taxable
income through 2023. The Company established valuation allowances
equal to the full amount of the deferred tax assets due to the
uncertainty of the utilization of the operating losses in future
periods.
17
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO REVIEWED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2004 AND 2003
NOTE 13- GOING CONCERN
As shown in the accompanying financial statements the Company has
sustained net operating losses for the four months ended April 30,
2004 and 2003. There is no guarantee that the Company will be able
to raise enough capital or generate revenues to sustain its
operations.
Management believes that the Company's capital requirements will
depend on many factors including the success of the Company's sales
efforts. The Company is in discussions to be acquired by a public
company and simultaneously spun out into its own public company.
With this spin out, the Company is in negotiations with an equity
provider for a commitment of over 12 million dollars in equity
financing which will enable the Company to expand and carry out its
business plan.
The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
NOTE 14- SUBSEQUENT EVENTS
The Company has entered into a letter of intent with a publicly
traded company to be acquired. The Company is currently in the due
diligence phase with respect to this transaction. If acquired, the
public company in all likelihood will simultaneously spin off the
Company into its own public company.
With respect to this transaction, the Company is expected to enter
into a convertible debenture agreement and standby equity line of
credit agreement for approximately 12 million dollars. The Company
anticipates using these proceeds to further production of their
software as well as engage sales and marketing professionals.
18
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2003 AND 2002
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
INDEX TO FINANCIAL STATEMENTS
Page(s)
-------
Independent Auditors' Report 1
Balance Sheets as of December 31, 2003 and 2002 2
Statements of Operations for the Years Ended
December 31, 2003 and 2002 3
Statements of Changes in Stockholders' Equity (Deficit) for the
Years Ended December 31, 2003 and 2002 4
Statements of Cash Flows for the Year Ended
December 31, 2003 and 2002 5
Notes to Financial Statements 6-21
BAGELL, JOSEPHS & COMPANY, L.L.C.
Certified Public Accountants
High Ridge Commons
Suites 400-403
200 Haddonfield Berlin Road
Gibbsboro, New Jersey 08026
(856) 346-2828 Fax (856) 346-2882
INDEPENDENT AUDITORS' REPORT
Board of Directors
Solution Technology International, Inc.
Fredrick, Maryland
We have audited the accompanying balance sheets of Solution Technology
International, Inc. (the "Company") as of December 31, 2003 and 2002 and the
related statements of operations, changes in stockholders' (deficit), and cash
flows for the years ended December 31, 2003 and 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 audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinions.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company has sustained operating losses and capital
deficits that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 13. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Solution Technology
International, Inc. as of December 31, 2003 and 2002, and the results of its
statements of operations, changes in stockholders' equity (deficit), and cash
flows for the years ended in conformity with accounting principles generally
accepted in the United States of America.
BAGELL, JOSEPHS & COMPANY, L.L.C.
BAGELL, JOSEPHS & COMPANY, L.L.C.
Certified Public Accountants
Gibbbsboro, New Jersey
July 14, 2004
MEMBER OF: AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
NEW JERSEY SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
PENNSYLVANIA INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
NEW YORK STATE SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS
1
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS
------
2003 2002
----------- -----------
Current Assets:
Cash and cash equivalents $ 20,884 $ 907
Accounts receivable, net 11,055 71,749
Prepaid expenses and other current assets -- 17,767
----------- -----------
Total Current Assets 31,939 90,423
----------- -----------
Fixed assets, net of depreciation 66,212 87,337
----------- -----------
Other Assets:
Intangible assets, net 961,229 961,229
Security deposits 7,065 7,065
----------- -----------
Total Other Assets 968,294 968,294
----------- -----------
TOTAL ASSETS $ 1,066,445 $ 1,146,054
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
---------------------------------------
LIABILITIES
Current Liabilities:
Note payable $ 795,000 $ 665,000
Notes payable - bank -- 5,103
Line of credit -- 105,000
Revolving promissory note 750,000 --
Current portion of obligations under capital lease 8,433 10,145
Accounts payable and accrued expenses 153,132 456,273
----------- -----------
Total Current Liabilities 1,706,565 1,241,521
----------- -----------
Long-term Liabilities:
Deferred compensation 136,103 52,775
Obligations under capital lease, net of current maturities 4,540 12,973
----------- -----------
Total Long-term Liabilities 140,643 65,748
----------- -----------
Total Liabilities 1,847,208 1,307,269
----------- -----------
STOCKHOLDERS' (DEFICIT)
Common stock, $.001 Par Value; 20,000,000 shares authorized
1,952,985 shares issued and outstanding 1,953 1,953
Additional paid-in capital 2,219,488 2,219,488
Accumulated deficit (3,002,204) (2,382,656)
----------- -----------
Total Stockholders' (Deficit) (780,763) (161,215)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 1,066,445 $ 1,146,054
=========== ===========
2
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003 AND 2002
2003 2002
----------- -----------
OPERATING REVENUES
Sales $ 1,309,686 $ 2,400,930
COST OF SALES 688,300 1,723,551
----------- -----------
GROSS PROFIT 621,386 677,379
----------- -----------
OPERATING EXPENSES
Compensation expense 646,691 515,135
General and administrative expenses 427,949 437,431
Depreciation and amortization 21,125 27,825
----------- -----------
Total Operating Expenses 1,095,765 980,391
----------- -----------
LOSS BEFORE OTHER INCOME (EXPENSE) (474,379) (303,012)
OTHER INCOME (EXPENSE)
Loss on disposal of fixed assets -- (13,002)
Interest income 1,214 2,997
Interest expense (146,383) (35,019)
----------- -----------
Total Other Income (Expense) (145,169) (45,024)
----------- -----------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (619,548) (348,036)
Provision for Income Taxes -- --
----------- -----------
NET LOSS APPLICABLE TO COMMON SHARES $ (619,548) $ (348,036)
=========== ===========
NET LOSS PER BASIC AND DILUTED SHARES $ (0.32) $ (0.18)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 1,952,985 1,952,985
=========== ===========
3
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 2003 AND 2002
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficits Total
----------- ----------- ----------- ----------- -----------
Balance December 31, 2001 1,952,985 $ 1,953 $ 2,219,488 $(2,034,620) $ 186,821
Net loss for the year -- -- -- (348,036) (348,036)
----------- ----------- ----------- ----------- -----------
Balance December 31, 2002 1,952,985 1,953 2,219,488 (2,382,656) (161,215)
Net loss for the year -- -- -- (619,548) (619,548)
----------- ----------- ----------- ----------- -----------
Balance December 31, 2003 1,952,985 $ 1,953 $ 2,219,488 $(3,002,204) $ (780,763)
=========== =========== =========== =========== ===========
4
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003 AND 2002
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(619,548) $(348,036)
--------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 21,125 27,825
Loss on disposition of fixed assets -- 13,002
Changes in assets and liabilities
Decrease in accounts receivable 60,694 (42,579)
(Increase) decrease in prepaid expenses and other assets 17,767 (16,667)
(Decrease) in deferred income (300,000)
(Decrease) in deferred compensation 83,328 (5,559)
Increase in accounts payable and
and accrued expenses (303,141) 372,101
--------- ---------
Total adjustments (120,227) 48,123
--------- ---------
Net cash (used in) operating activities (739,775) (299,913)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of intangible assets -- (571,252)
Acquisitions of fixed assets -- (6,826)
--------- ---------
Net cash (used in) investing activities -- (578,078)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITES
Proceeds from revolving promissory note 750,000 --
Proceeds from line of credit -- 105,000
Payment on line of credit (105,000) --
Proceeds from note payable 200,000 665,000
Payments of notes payable (70,000) --
Payments of notes payable - bank (5,103) (115,723)
Payments of obligations under capital lease (10,145) (13,520)
--------- ---------
Net cash provided by financing activities 759,752 640,757
--------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 759,752 (237,234)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 907 238,141
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 760,659 $ 907
========= =========
CASH PAID DURING THE YEAR FOR:
Interest expense $ 132,367 $ 35,019
========= =========
5
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
Solution Technology International, Inc. (the "Company") incorporated
in Delaware on April 27, 1993, is an emerging software product
company based in Frederick, Maryland offering an enterprise solution
for the global insurance and reinsurance industry. The Company has
created complex reinsurance algorithms and methodologies to support
automation of complex technical accounting methods and claims
recovery processes. The Company has also developed sophisticated
expert underwriting methods and trend analysis tools that support
the insurance and reinsurance industries.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and other
short- term investments with an initial maturity of three months or
less to be cash or cash equivalents.
The Company maintains cash and cash equivalents with a financial
institution that periodically exceed the limit of insurability under
Federal Deposit Insurance Corporation.
Identified Intangible Assets
Intellectual property assets represent technology and are amortized
over the periods of benefit, ranging from two to ten years,
generally on a straight-line basis.
Identified intangible assets are regularly reviewed to determine
whether facts and circumstances exist which indicate that the useful
life is shorter than originally estimated or the carrying amount of
assets may not be recoverable. The Company assesses the
recoverability of its identifiable intangible assets by comparing
the projected discounted net cash flows associated with the related
asset or group of assets over their remaining lives against their
respective carrying amounts. Impairment, if any, is based on the
excess of the carrying amount over the fair value of those assets.
Start-up Costs
In accordance with the American Institute of Certified Public
Accountants Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities", the Company expenses all costs incurred in
connection with the start-up and organization of the Company.
6
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company records its transactions under the accrual method of
accounting whereby income is recognized when the services are billed
rather than when the fees are collected, and costs and expenses are
recognized in the period they are incurred rather than when paid.
The Company is an emerging software product company who has
developed a software package to help insurance and reinsurance
companies in their claims recovery process.
In 2002, the Company entered into an agreement with the Swiss Pool
for Aviation Insurance ("SPL") and recorded revenue under this
agreement for license and hosting services rendered. SPL consists of
a pool of approximately 26 insurance and reinsurance companies.
The Company accounts for the licensing of software in accordance
with the American Institute of Certified Public Accountants
Statement of Position (SOP) 97-2, "Software Revenue Recognition."
The Company recognizes revenue when (i) persuasive evidence of an
arrangement exists; (ii) delivery has occurred or services have been
rendered; (iii) the sales price is fixed or determinable; and (iv)
the ability to collect is reasonably assured. For software
arrangements with multiple elements, revenue is recognized dependent
upon whether vendor-specific objective evidence (VSOE) of fair value
exists for each of the elements. When VSOE does not exist for all
the elements of a software arrangement and the only undelivered
element is post-contract customer support (PCS), the entire
licensing fee is recognized ratably over the contract period.
Revenue attributable to undelivered elements, including technical
support, is based on the average sales price of those elements, when
sold separately, and is recognized ratably on a straight-line basis
over the products life cycle. PCS revenue is recognized ratably over
the contract period. Shipping charges billed to customers are
included in revenue and the related shipping costs are included in
cost of sales.
Income Taxes
The income tax benefit is computed on the pretax loss based on the
current tax law. Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each
year-end based on enacted tax laws and statutory tax rates. No
benefit is reflected for the year ended December 31, 2003 and 2002,
respectively.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash and
cash equivalents, and accounts payable approximate fair value
because of the immediate or short-term maturity of these financial
instruments.
7
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
The Company expenses the costs associated with advertising as
incurred. Advertising expenses are included in the statements of
operations for the years ended December 31, 2003 and 2002.
Fixed Assets
Furniture and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of
the assets.
When assets are retired or otherwise disposed of, the costs and
related accumulated depreciation are removed from the accounts, and
any resulting gain or loss is recognized in income for the period.
The cost of maintenance and repairs is charged to income as
incurred; significant renewals and betterments are capitalized.
Deduction is made for retirements resulting from renewals or
betterments.
Accounts Receivable
The Company conducts business and extends credit based on an
evaluation of the customers' financial condition, generally without
requiring collateral. Exposure to losses on receivables is expected
to vary by customer due to the financial condition of each customer.
The Company monitors exposure to credit losses and maintains
allowances for anticipated losses considered necessary under the
circumstances.
Earnings (Loss) Per Share of Common Stock
Historical net income (loss) per common share is computed using the
weighted average number of common shares outstanding. Diluted
earnings per share (EPS) includes additional dilution from common
stock equivalents, such as stock issuable pursuant to the exercise
of stock options and warrants. Common stock equivalents were not
included in the computation of diluted earnings per share when the
Company reported a loss because to do so would be antidilutive for
periods presented.
The following is a reconciliation of the computation for basic and
diluted EPS:
8
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings (Loss) Per Share of Common Stock (Continued)
December 31, December 31,
2003 2002
----------- -----------
Net loss $ (619,548) $ (348,036)
----------- -----------
Weighted-average common shares
Outstanding (Basic) 1,952,985 1,952,985
Weighted-average common stock
Equivalents
Stock options -- --
Warrants -- --
----------- -----------
Weighted-average common shares
Outstanding (Diluted) 1,952,985 1,952,985
=========== ===========
Options and warrants outstanding to purchase stock were not included in the
computation of diluted EPS for December 31, 2003 and 2002 because inclusion
would have been antidilutive.
Goodwill and Other Intangible Assets
In June 2001, the FASB issued Statement No. 142 "Goodwill and Other Intangible
Assets". This statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements.
9
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
Employee stock awards under the Company's compensation plans are accounted for
in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees", and related interpretations. The
Company provides the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), and related interpretations. Stock-based awards to non-employees are
accounted for under the provisions of SFAS 123 and has adopted the enhanced
disclosure provisions of SFAS No. 148 "Accounting for Stock-Based Compensation-
Transition and Disclosure, an amendment of SFAS No. 123".
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic-value method. Under the intrinsic-value method
of accounting for stock-based compensation, when the exercise price of options
granted to employees is less than the estimated fair value of the underlying
stock on the date of grant, deferred compensation is recognized and is amortized
to compensation expense over the applicable vesting period. In each of the
periods presented, the vesting period was the period in which the options were
granted. All options were expensed to compensation in the period granted rather
than the exercise date.
The Company measures compensation expense for its non-employee stock-based
compensation under the Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF) Issue No. 96-18, "Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services". The fair value of the option issued is used to
measure the transaction, as this is more reliable than the fair value of the
services received. The fair value is measured at the value of the Company's
common stock on the date that the commitment for performance by the counterparty
has been reached or the counterparty's performance is complete. The fair value
of the equity instrument is charged directly to compensation expense and
additional paid-in capital.
10
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
On October 3, 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), that is applicable to financial statements issued for fiscal years
beginning after December 15, 2001. The FASB's new rules on asset impairment
supersede SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and portions of Accounting Principles
Board Opinion 30, "Reporting the Results of Operations." This Standard provides
a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. This Standard also requires expected future
operating losses from discontinued operations to be displayed in the period (s)
in which the losses are incurred, rather than as of the measurement date as
presently required.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that statement, SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers," and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This
statement amends SFAS No. 13, "Accounting for Leases", to eliminate
inconsistencies between the required accounting for sales-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sales-leaseback transactions.
Also, this statement amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. Provisions of SFAS No. 145 related to the rescissions
of SFAS No. 4 were effective for the Company on November 1, 2002 and provisions
affecting SFAS No. 13 were effective for transactions occurring after May 15,
2002. The adoption of SFAS No. 145 did not have a significant impact on the
Company's results of operations or financial position.
11
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
In June 2003, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement covers restructuring type
activities beginning with plans initiated after December 31, 2002. Activities
covered by this standard that are entered into after that date will be recorded
in accordance with provisions of SFAS No. 146. The adoption of SFAS No. 146 did
not have a significant impact on the Company's results of operations or
financial position.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB Statement No.
123"("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends Accounting Principles
Board ("APB") Opinion No. 28, "Interim Financial Reporting", to require
disclosure about those effects in interim financial information. SFAS 148 is
effective for financial statements for fiscal years ending after December 15,
2002. The Company will continue to account for stock-based employee compensation
using the intrinsic value method of APB Opinion No. 25, "Accounting for Stock
Issued to Employees," but has adopted the enhanced disclosure requirements of
SFAS 148.
In April 2003, the FASB issued SFAS Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities", which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This Statement is effective for contracts entered into or modified
after June 30, 2003, except for certain hedging relationships designated after
June 30, 2003. Most provisions of this Statement should be applied
prospectively. The adoption of this statement did not have a significant impact
on the Company's results of operations or financial position.
12
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
In May 2003, the FASB issued SFAS Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities, if applicable. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period of adoption.
The adoption of this statement did not have a significant impact on the
Company's results of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". FIN 45 requires a company, at the time it
issues a guarantee, to recognize an initial liability for the fair value of
obligations assumed under the guarantees and elaborates on existing disclosure
requirements related to guarantees and warranties. The recognition requirements
are effective for guarantees issued or modified after December 31, 2002 for
initial recognition and initial measurement provisions. The adoption of FIN 45
did not have a significant impact on the Company's results of operations or
financial position.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51".
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The adoption of FIN 46 did not
have a significant impact on the Company' results of operations or financial
position.
13
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 3- FIXED ASSETS
Property and equipment as of December 31, 2003 and 2002 were as follows:
Estimated Useful
Lives (Years)
2003 2002
---- ----
Furniture and fixtures 7 $23,268 $23,268
Machinery and equipment 3-7 80,016 80,016
Leasehold improvements 39 11,870 11,870
Vehicles 5 26,908 26,908
------ ------
142,062 142,062
Less: accumulated depreciation 75,850 54,725
------ ------
Property and equipment, net $ 66,212 $ 87,337
======== ========
There was $21,125 and $27,825 charged to operations for depreciation expense for
the years ended December 31, 2003 and 2002, respectively.
NOTE 4- NOTES PAYABLE
The Company entered into an agreement with the Swiss Pool for Aviation Insurance
("SPL") whereby SPL advanced the Company under their Master SurSite Agreement, a
license/hosting fee and associated professional service fees. Advanced fees were
recognized as both revenue to the Company for achieving certain benchmarks in
accordance with the agreement, and certain fees were advances to be repaid due
to contractual obligations to SPL. The original terms were for the advances to
be repaid in a period not to exceed five years, no interest. In 2004, interest
started accruing at 2.5% annually. The Company originally was advanced $700,000
from June 2002 through October 2002, and credited one quarterly maintenance fee
of $35,000 in 2002 and two quarterly maintenance fees totaling $70,000 in 2003.
Additionally, SPL advanced another $200,000 in 2003 at 9% interest annually.
Interest expense on this portion for the year ended December 31, 2003 was
$10,347. The note payable balance due at December 31, 2003 and 2002 was $795,000
and $665,000, respectively. All amounts are included as current liabilities due
to the fact that these amounts are due on demand.
14
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 5- NOTES PAYABLE - BANK
The Company during 2003 and 2002 maintained a $200,000 Line of Credit with two
banks. The Company would borrow funds from time to time for working capital
needs. Interest on the lines of credit were variable at prime rate plus 2.5%.
The balance at December 31, 2003 and 2002 was $0 and $105,000, respectively.
Interest for the years ended December 31, 2003 and 2002 was $469 and $3,291,
respectively.
NOTE 6- REVOLVING PROMISSORY NOTE
The Company entered into a revolving promissory note agreement (the "Agreement")
with Crosshill Georgetown Capital, L.P. ("Crosshill") on January 10, 2003.
Pursuant to the Agreement, Crosshill loaned the Company $750,000 which matures
upon the earlier of the Company closing on an equity raise of not less than
$2,000,000 or July 10, 2003, which has been amended on three occasions through
March 31, 2004. The note accrued interest at 12% annually. The Company has the
full $750,000 outstanding at December 31, 2003. Interest expense for the year
ended December 31, 2003 is $102,588 due to added interest payments due to late
payments made by the Company.
The amounts are secured by a Loan and Security Agreement and an Intellectual
Property Security Agreement. In addition, the Company issued 930,245 warrants to
Crosshill for inducement to enter into the Agreement. In accordance with the
third amendment which established March 31, 2004 as the new maturity date, these
warrants increase 60,000 per month effective April 2004, should the Company fail
to repay the note.
Crosshill can purchase these warrants for $1 and other good and valuable
consideration as defined in the Warrant Agreement. The warrants have a price of
$.001 (the par value of the Company) and expire January 9, 2010.
NOTE 7- INTELLECTUAL PROPERTY
Costs incurred in creating products are charged to expense when incurred as
research and development until technological feasibility is established upon
completion of a working model. Thereafter, all software production costs are
capitalized and subsequently reported at the lower of unamortized cost or net
realizable value. Capitalized costs are amortized based on current and future
revenue for each product with an annual minimum equal to the straight-line
amortization over the remaining estimated economic life of the product.
15
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 7- INTELLECTUAL PROPERTY (CONTINUED)
In accordance with SFAS No. 2, "Accounting for Research and Development Costs",
SFAS No. 68, "Research and Development Arrangements", and SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed", technological feasibility for the product was established on January
1, 2001 with completion of the working model.
All costs subsequent to this date have been capitalized. Management on an annual
basis determines impairment on their intangible assets as they have an
indefinite life.
NOTE 8- OBLIGATIONS UNDER CAPITAL LEASE
The Company is the lessee of computer equipment and office equipment under
capital leases expiring during 2006. The leases are collateralized by the
equipment.
Minimum lease payments under capital leases at December 31, 2003, are as
follows:
2004 $ 9,652
2005 3,247
2006 1,894
---------
14,793
Less: amounts representing interest ( 1,820)
Less: current portion ( 8,433)
----------
Long-term portion $ 4,540
=========
16
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 9- OPERATING LEASE
The Company has a facility lease for office space and equipment leases with
various expiration dates through 2006. The office lease contains a four percent
yearly escalation clause along with the Company paying taxes, insurance and
utilities. Monthly payments for all leases range from $99 to $6,808 per month.
Minimum lease payments under operating leases at December 31, 2003, are as
follows:
2004 $ 72,481
2005 72,669
2006 38,657
---------
$183,807
NOTE 10- ACCRUED COMPENSATION
The Company as of December 31, 2003 and 2002 has accrued compensation to an
officer in the amount of $136,103 and $52,775, respectively. These amounts
are reflected as current liabilities.
NOTE 11- STOCKHOLDERS' DEFICIT
Common Stock
As of December 31, 2003 and 2002, the Company has 20,000,000 shares of common
stock authorized and 1,952,985 issued and outstanding. The par value of the
common stock is $.001.
The Company prior to October 10, 2002 had 150,000 shares authorized and 130,199
shares issued and outstanding. The Company then increased the authorized level
of common shares to 20,000,000 that the board of directors approved and a
corresponding 15:1 forward stock split increasing the issued and outstanding
shares to 1,952,985. Additionally, the board of directors approved a change in
the par value of the common stock to $.001 from no par value. There were no
other issuances or cancellations of stock during 2003 and 2002.
17
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 11- STOCKHOLDERS' DEFICIT (CONTINUED)
Stock Options and Warrants
The Company has authorized 600,000 shares to be issued as options to employees
of the Company. In addition, the Company from time to time has issued board
resolutions to issue warrants to key personnel. Subsequent to December 31, 2003,
the Company increased the authorized number of common shares to be issued as
options to 1,500,000. As of December 31, 2003 and 2002, the Company had issued
224,786 and 397,286 options to officers, directors and employees.
Under the Black-Scholes option pricing model, the total value of the stock
options granted in 2003 and 2002 is charged to operations as these options are
fully vested. SFAS No. 123, "Accounting for Stock-Based Compensation",
encourages adoption of a fair-value-based method for valuing the cost of
stock-based compensation. However, it allows companies to continue to use the
intrinsic-value method for options granted to employees and disclose pro forma
net loss.
The following tables summarizes the activity of the Company's stock option plan:
Year Ended
December 31, 2003
----------------------
Weighted-
average
Number of exercise
Options price
------- -------
Outstanding - beginning of period
397,286 $ 2.00
Granted 40,000 2.00
Exercised/Expired 212,500) (2.00)
------- -------
Outstanding - end of period 224,786 $ 2.00
=======
Exercisable at end of period: 224,786 $ 2.00
18
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 11- STOCKHOLDERS' DEFICIT (CONTINUED)
Stock Options and Warrants (Continued)
Year Ended
December 31, 2002
---------------------------
Weighted-
Number average
of exercise
Options price
--------- ---------
Outstanding - beginning of period
$ 0 $ .00
Granted 547,313 2.00
Exercised/Expired (150,017) (2.00)
--------- ---------
Outstanding - end of period $ 397,286 $ 2.00
=========
Exercisable at end of period: $ 397,286 $ 2.00
For disclosure purposes, the fair value of each stock option granted is
estimated on the date of grant using the Black-Scholes option-pricing model,
which approximates fair value, with the following weighted-average assumptions
used for stock options granted in 2003; no annual dividends, volatility of 60%,
risk-free interest rate of 4.50%, and expected life of 9.45 years.
If compensation expense for the Company's stock-based compensation plans had
been determined consistent with SFAS 123, the Company's net income and net
income per share including pro forma results would have been the amounts
indicated below:
Year Ended December 31,
2003 2002
--------- ---------
Net loss:
As reported ($619,548) ($348,036)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax (53,869) (243,783)
effects --------- ---------
($673,417) ($591,819)
Pro forma
Net loss per share:
As reported:
Basic ($0.32) ($0.18)
Diluted ($0.32) ($0.18)
Pro forma:
Basic ($0.34) ($0.30)
Diluted ($0.34) ($0.30)
19
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 11- STOCKHOLDERS' DEFICIT (CONTINUED)
Stock Options and Warrants (Continued)
The Company has 930,245 stock warrants outstanding as of December 31, 2003.
There were no warrants issued during 2002. In 2003 the Company issued 930,245
warrants and valued them in accordance with the Black-Scholes pricing model.
The Company has the following warrants exercisable for the purchase of its
common stock:
Year Ended
Exercise December 31,
------------
Price Expiration Date 2003 2002
----- --------------- ---- ----
$1.00 January, 2010 930,245 0
--------- -------
930,245 0
========= =======
Weighted average exercise price $1.00 $0.00
--------- -------
In addition, all of these warrants are outstanding as of December 31, 2003.
NOTE 12- PROVISION FOR INCOME TAXES
Deferred income taxes will be determined using the liability method for the
temporary differences between the financial reporting basis and income tax basis
of the Company's assets and liabilities. Deferred income taxes will be measured
based on the tax rates expected to be in effect when the temporary differences
are included in the Company's tax return. Deferred tax assets and liabilities
are recognized based on anticipated future tax consequences attributable to
differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases.
At December 31, 2003, deferred tax assets consist of the following:
Net operating loss carryforwards $1,000,000
Less: valuation allowance (1,000,000)
----------
$ -0-
==========
At December 31, 2003, the Company had deficits accumulated in the approximate
amount of $3,002,204, available to offset future taxable income through 2023.
The Company established valuation allowances equal to the full amount of the
deferred tax assets due to the uncertainty of the utilization of the operating
losses in future periods.
20
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2003 AND 2002
NOTE 13- GOING CONCERN
As shown in the accompanying financial statements the Company has sustained net
operating losses for the years ended December 31, 2003 and 2002. There is no
guarantee that the Company will be able to raise enough capital or generate
revenues to sustain its operations.
Management believes that the Company's capital requirements will depend on many
factors including the success of the Company's sales efforts. The Company is in
discussions to be acquired by a public company and simultaneously spun out into
its own public company. With this spin out, the Company is in negotiations with
an equity provider for a commitment of over 12 million dollars in equity
financing which will enable the Company to expand and carry out its business
plan.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
NOTE 14- SUBSEQUENT EVENTS
The Company has entered into a letter of intent with a publicly traded company
to be acquired. The Company is currently in the due diligence phase with respect
to this transaction. If acquired, the public company in all likelihood will
simultaneously spin off the Company into its own public company.
With respect to this transaction, the Company is expected to enter into a
convertible debenture agreement and standby equity line of credit agreement for
approximately 12 million dollars. The Company anticipates using these proceeds
to further production of their software as well as engage sales and marketing
professionals.
21
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification
Our Certificate of Incorporation and Bylaws provide that we may
indemnify an officer or director who is made a party to any proceeding,
including a lawsuit, because of his position, if he acted in good faith and in a
manner he reasonably believed to be in our best interest. In certain cases, we
may advance expenses incurred in defending any such proceeding. To the extent
that the officer or director is successful on the merits in any such proceeding
as to which such person is to be indemnified, we must indemnify him against all
expenses incurred, including attorney's fees. With respect to a derivative
action, indemnity may be made only for expenses actually and reasonably incurred
in defending the proceeding, and if the officer or director is judged liable,
only by a court order. The indemnification is intended to be to the fullest
extent permitted by the laws of the State of Delaware.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered.
Securities and Exchange Commission Registration Fee $ 100
Printing and Engraving Expenses $ 3,000
Accounting Fees and Expenses $23,000
Legal Fees and Expenses $35,000
Miscellaneous $15,000
-------
TOTAL $76,100
=======
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued Crosshill Georgetown Capital warrants to
purchase 22,204,900 shares of the Company's common stock through a series of
transactions, the most recent of which closed on June 30, 2004.
In June 2004, the Company entered into a Note and Warrant Purchase
Agreement with Michael Shor, pursuant to which, Mr. Shor received Warrants to
purchase up to 4,000,000 shares of the Company's common stock.
On June 29, 2004, the Company issued to Cornell Capital, a $400,000
convertible debenture.
On June 29, 2004, the Company issued to Mobilepro Corp., 5,121,855
shares of the Company's common stock pursuant to the terms of a Business
Development Agreement. On that same date, the Company issued 2,048,599 shares to
Lighthouse Advisors, Inc. pursuant to the terms of a Business Development
Agreement.
Except as otherwise noted, the securities described in this Item were
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933. Each such issuance was made pursuant to individual
contracts which are discrete from one another and are made only with persons who
were sophisticated in such transactions and who had knowledge of and access to
sufficient information about STI to make an informed investment decision. Among
this information was the fact that the securities were restricted securities.
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ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed as part of this registration
statement:
Exhibit No. Description Location
----------- ----------- --------
3.1 Fourth Amended and Restated Certificate of Incorporation Provided herewith
3.2 Bylaws of Registrant. Provided herewith
4.1 2002 Stock Incentive Plan Provided herewith
4.2 Warrant issued by the Company to Cornell Capital. Provided herewith
5.1 Opinion of Schiff Hardin LLP Provided herewith
10.1 Standby Equity Distribution Agreement, dated June 29, Provided herewith
2004, between the Company and Cornell Capital.
10.2 Registration Rights Agreement, dated June 29, 2004, Provided herewith
between the Company and Cornell Capital.
10.3 Placement Agent Agreement, dated June 29, 2004, between Provided herewith
the Company and Newbridge Securities Corporation.
10.4 Escrow Agreement, dated June 29, 2004, between the Provided herewith
Company and Cornell Capital.
10.5 Securities Purchase Agreement dated June 29, 2004, Provided herewith
between the Company and Cornell Capital
10.6 Investor Registration Rights Agreement dated June 29, Provided herewith
2004, between the Company and Cornell Capital
10.7 Security Agreement dated June 29, 2004, between the Provided herewith
Company and Cornell Capital
10.8 Irrevocable Transfer Agent Instructions dated June 29, Provided herewith
2004.
10.9 Secured Debenture issued by the Company on June 29, 2004 Provided herewith
to Cornell Capital.
10.10 Convertible Debenture issued by the Company on June 29, Provided herewith
2004 to Cornell Capital.
10.11 Business Development Agreement between the Company and Provided herewith
Mobilepro Corp., dated June 29, 2004.
10.12 Business Development Agreement between the Company and Provided herewith
Lighthouse Advisors, Inc., dated June 29, 2004.
10.13 Escrow Agreement, dated June 29, 2004, between the Company Provided herewith
and Cornell Capital.
23.1 Consent of Schiff Hardin LLP Contained in Exhibit 5.1
23.2 Consent of Bagell, Josephs & Company, L.L.C. Provided herewith
24.1 Power of Attorney Included on signature page
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ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of
the Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be a bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, in Frederick, Maryland.
SOLUTION TECHNOLOGY INTERNATIONAL, INC.
By: /s/Dan Jonson
-----------------------------------------
Name: Dan L. Jonson
Title: President and Chief Executive Officer
Date: August 19, 2004
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose
signature appears below constitutes and appoints Dan L. Jonson his or her true
and lawful attorney-in-fact and agent, with full power of substitution and
revocation, for him or her and in his or her name, place and stead, in any and
all capacities (until revoked in writing), to sign any and all amendments
(including post-effective amendments) to this Registration Statement and to file
the same with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done as fully for all intents and purposes
as he or she might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or is substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
/s/ Dan L. Jonson August 19, 2004
-------------------
Dan L. Jonson President, CEO and Director
August __, 2004
-------------------
Subhash C. Bhatia Director
August __, 2004
-------------------
Andrew Larsen Director
/s/ Michael Shor August 19, 2004
-------------------
Michael Shor Director
/s/ Mark D. Spaeth August 19, 2004
-------------------
Mark D. Spaeth Director
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