SCHEDULE 14A INFORMATION
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toss.240.14a-12
SNAP2 CORPORATION
(Name of Registrant as Specified in Its Charter)
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SNAP2 CORPORATION
10641 Justin Drive
Urbandale, Iowa 50322
January 24, 2001
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of SNAP2
Corporation which will be held at the main office of the Company at 10641 Justin
Drive, Urbandale, Iowa, on February 22, 2001, at 2:00 p.m. Shareholders of
record as of the close of business on January 16, 2001, will be entitled to vote
at the Annual Meeting.
In addition to the matters scheduled for consideration, your Board of Directors
and management are looking forward to meeting with you and reviewing the major
developments of 2000.
Whether you plan to attend or not, please mark, sign, date, and return the proxy
card in the accompanying envelope. Your vote is important no matter how many
shares you own. If you attend the Annual Meeting and desire to vote in person,
you may do so even though you have previously sent in a proxy.
Sincerely,
/s/
Dean R. "Rick" Grewell, III
President
SNAP2 CORPORATION
10641 Justin Drive
Urbandale, Iowa 50322
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
February 22, 2001
Notice is hereby given that the Annual Meeting of Shareholders of SNAP2
CORPORATION will be held at its main office located at 10641 Justin Drive,
Urbandale, Iowa, on Thursday, February 22, 2001 at 2:00 p.m., Central Standard
Time, for the following purposes:
1. To elect six directors.
2. To ratify the appointment of auditors for the fiscal year ended
September 30, 2000.
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Only shareholders of record at the close of business on January 16, 2001, will
be entitled to notice of and to vote at the meeting or any adjournment thereof.
Shareholders are cordially invited to attend the meeting in person. WHETHER OR
NOT YOU WILL BE ABLE TO ATTEND THE MEETING IN PERSON, PLEASE DATE YOUR PROXY,
INDICATE YOUR CHOICE ON THE MATTERS TO BE VOTED UPON, AND RETURN IT PROMPTLY IN
THE ENCLOSED ENVELOPE. IF YOU DO ATTEND THE MEETING AND DESIRE TO WITHDRAW YOUR
PROXY, YOU MAY DO SO.
THE PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF SNAP2 CORPORATION.
The accompanying Proxy Statement describes in more detail the matters to be
acted upon at the meeting.
A copy of the Annual Report to Shareholders for 2000, including audited
financial statements, is also enclosed.
By Order of the Board of Directors
Kathy Hoffman
Secretary
Urbandale, Iowa
January 24, 2001
SNAP2 CORPORATION
PROXY STATEMENT
Annual Meeting of Shareholders, February 22, 2001
GENERAL INFORMATION
This Proxy Statement and the enclosed Proxy are being provided by SNAP2
Corporation (the "Company"), 10641 Justin Drive, Urbandale, Iowa 50322, for use
at the Annual Meeting of Shareholders to be held February 22, 2001 at 2:00 p.m.
at the Company's main office located at 10641 Justin Drive, Urbandale, Iowa, and
any adjournment thereof (the "Meeting"). When the Proxy is properly executed and
returned, the shares it represents will be voted at the Meeting in accordance
with the instructions contained therein. This Proxy Statement and the
accompanying Proxy will be first mailed to Shareholders of the Company on or
about January 24, 2001. The cost of the distribution and handling of the proxies
will be borne by the Company. The Proxy is solicited on behalf of the Board of
the Directors of the Company.
VOTING SECURITIES
Only Shareholders of record as of the close of business on January 16, 2001 will
be entitled to notice of and to vote at the Annual Meeting.
The Company has a single class of voting common stock, $.001 par value ("Common
Stock"), of which 17,856,000 shares were outstanding on January 16, 2001. The
shares of Common Stock were held by approximately 1,150 different Shareholders.
The presence, in person or by Proxy, of the holders of a majority of such
outstanding shares entitled to vote at the Annual Meeting shall constitute a
quorum. Each Shareholder of record of Common Stock of the Company as of the
record date will be entitled to one vote for each share of stock held of record
in such Shareholder's name. Shareholders do not have cumulative voting rights.
There are no appraisal or similar rights of dissenters applicable to any matter
to be voted upon at the Annual Meeting.
All Proxies delivered pursuant to this solicitation are revocable at the option
of the person executing the Proxy at any time before the voting thereof. Proxies
in the form enclosed, unless previously revoked, will be voted at the meeting.
Where a choice is specified by a Shareholder by means provided in the Proxy, the
Proxy will be voted in accordance with such specification. If no direction is
given as provided in the Proxy, the Proxy will be voted FOR the matters
presented in this Proxy Statement. Abstentions will be treated as unvoted for
purposes of determining the approval of any matter submitted to the Shareholders
for a vote. If shares are held by a broker which has indicated that it does not
have discretionary authority to vote on a particular matter, those shares will
not be considered as present and entitled to vote with respect to that matter.
Dean R. "Rick" Grewell, III, President and Director of the Company currently
owns of record 10,000,000 shares (56.0%) of Common Stock and has indicated his
intention to vote such shares "FOR" the matters to be presented at the Annual
Meeting including the election of each nominee to the Board of Directors. Since
each matter to be presented to the shareholders at the Annual Meeting requires
only a majority vote for approval, the matters will be approved.
ELECTION OF DIRECTORS
The Company's Bylaws provide that the number of directors shall not be less than
one (1) nor more than fifteen (15), the exact number to be determined from time
to time by the Board of Directors, or by resolution of the shareholders at any
meeting thereof. The Board of Directors has set the number of Directors at six
(6). Each of the directors is elected to a one (1) year term and until his or
her successor is elected. Directors need not be shareholders of the Company or
residents of any particular jurisdiction.
Nominees for Director
The terms of each of the existing directors of the Company will expire at the
Annual Meeting. Accordingly, six (6) directors need to be elected. The following
information is provided regarding those nominees:
2
Name Age Positions with Company
---- --- ----------------------
Dean R.("Rick") Grewell III 42 President, CEO and Director
Steven L. Johnson 40 Vice President of Marketing and
Director
Antony Hoffman 39 Vice President of Research and
Development and Director
Mark Malinak 39 Vice President of Sales and Director
Mike Hennel 41 Director
Stephen Dukes 47 None
The terms of each director of the Company will expire in January 2002 or at such
time as their successors shall have been elected and qualified.
Rick Grewell has been the President, CEO and a Director of the Company since the
merger with ISES Corporation. Prior to merger Mr. Grewell was President and CEO
of ISES Corporation since September 7, 1996. Prior to that time Mr. Grewell was
employed by Microware Systems Corporation, in Clive, Iowa ("Microware") for
approximately 12 years.
Steven Johnson has been a Vice President and Director of the Company since its
merger with ISES Corporation. Prior to the merger Mr. Johnson was Vice President
of Marketing of ISES Corporation since February 1, 1999. Mr. Johnson was
previously employed by Microware for approximately 11 years.
Antony Hoffman has been a Vice President and Director of the Company since its
merger with ISES Corporation. Prior to the merger Mr. Hoffman was Vice President
of Marketing of ISES Corporation since February 1, 1999. Mr. Hoffman was
previously employed at Microware for approximately 13 years.
Mark Malinak has been a Vice President and Director of the Company since its
merger with ISES Corporation. Prior to the merger Mr. Malinak was Vice President
of Sales of ISES Corporation since February 1, 1999. Prior to joining the
Company, Mr. Malinak had been employed at Microware for approximately 4 years
and at Sun Microsystems, Palo Alto, California for 2 years.
Mike Hennel has been a Director of the Company since June 14, 2000. Mr. Hennel
is President and CEO of Silvon Software, a position he has held since 1987.
Stephen Dukes, a new nominee for a position on the Board of Directors for the
Company, is a former CEO of MCNS Holdings, LLC a holding company for TCI, Time
Warner, Cox Cable, and Comcast. He is a member of a number of boards of
directors and advisory boards including
3
Broadcom, COM21, Inc., Interra, and MPEGLA and a former member of the CableLabs
DOCSIS Certification Board.
Committees of the Board of Directors
The Board of Directors does not currently have any standing Audit, Nominating or
Compensation Committee, or any other committees performing similar functions.
Meetings of the Board of Directors
The Board of Directors held 3 meetings during 2000. All directors attended all
of those meetings either in person or telephonically.
Compensation of the Board of Directors
The Members of the Board of Directors currently receive no compensation for
their attendance at meetings either in person or telephonically. However, each
Director is reimbursed for such director's travel or communication expenses and
related disbursements incurred in connection with attendance at the meetings.
Executive Officers of the Company
The executive officers of the Company are elected annually by the Board of
Directors at its Annual Meeting and hold office until the next annual meeting of
the Board of Directors and until their successors are chosen. Any officer may be
removed by the Board of Directors at any time, with or without cause. Officers
need not be a director or shareholder of the Company. The executive officers of
the Company as of the date of the mailing are currently all directors of the
Company and are identified above in "Nominees for Director":
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial security ownership, as of January
15, 2001, of the Company's Common Stock by the directors, director nominees,
executive officers individually and as a group:
Name and Address of Number of Percentage
Beneficial Owner Shares(1) Ownership(1)
---------------- --------- ------------
Dean R. Grewell, III
1032 54th, West Des Moines, Iowa 50266 5,117,563(2)(3) 18.37%(2)(3)
Steven L. Johnson 1,734,450(3)(4) 6.23%(3)
1620 NW 120th Street, Clive, Iowa 50325
4
Antony F. Hoffman 1,734,450(3)(4) 6.23%(3)
10113 NW 80th Lane, Grimes, Iowa 50111
Mark Malinak 1,734,450(3)(4) 6.23%(3)
8006 Monona Avenue, Austin, Texas 78717
Dean Davis 1,315,756(5) 4.72%(3)
86 Markham Street, Toronto, Ontario Canada
M6J 2G5
Mike Hennel -0- 0%
900 Oakmont, Westmont, Illinois 60559
Stephen Dukes -0- 0%
1383 Rainbow Lane
Camano Island, Washington 98282
All executive officers, directors and nominees for directors as a 11,636,669 41.77%
Group (7 persons)
(1) Ownership totals and percentages are computed based on the actual number of
shares of Company Common Stock issued and outstanding (17,856,000) plus
10,000,000 additional shares to be issued on February 28, 2002 in exchange
for 10,000 shares of the Company's $.001 par value preferred stock
currently held of record by Mr. Grewell. The totals and percentages do not
include options for 395,000 shares of common stock granted to non-executive
employees of the Company under the Company's Incentive Stock Plan. The
totals and percentages also include options granted by Mr. Grewell in March
of 1998 the final agreements with respect to which, have not yet been
executed (see footnote 5 below).
(2) Includes 10,000,000 shares of common stock to be issued on February 28,
2002 in exchange for 10,000 shares of preferred stock held of record by Mr.
Grewell.
(3) Assumes exercise of all options granted by Mr. Grewell (14,882,437 shares
total which includes 5,727,412 shares for which the final agreements have
not been executed and are therefore subject to cancellation), which subject
to vesting, the exercise date of which is immediately, February 2, 2000 or
March 4, 1999 depending on the option agreement.
(4) Subject to vesting, call option exercisable February 2, 2000 and expires
March 4, 2008.
(5) Mr. Davis (a current officer and director not standing for re-election) was
granted options by Mr. Grewell as of March 1998 for 1,315,756 shares (as
adjusted), but the final agreement has not been executed and the options
are therefor subject to cancellation.
5
To the knowledge of management of the Company, no person other than Mr. Grewell
is a beneficial owner of more than 5% of the Company's Common Stock on a fully
diluted basis.
EXECUTIVE COMPENSATION AND BENEFITS
The following summary compensation table shows the compensation paid by the
Company to its chief executive officer and each of its executive officers whose
salary and bonus for the year ended September 30, 2000 exceeded one hundred
thousand dollars ($100,000). (Information for periods prior to February 28,
2000, the effective date of the merger of ISES Corporation with and into the
Company, relates to the identified person's compensation from ISES Corporation).
Summary Compensation Table
Name and Fiscal Year
Position Ended 9/30 Salary Bonus
- -------- ---------- ------ -----
Dean R. Grewell, III 2000 $138,866 $0
President and CEO 1999 $120,090 $0
1998 $0 $0
Mark Malinak
Vice President Sales 2000 $125,000 $122,887 (1)
1999 $115,385 $0
1998 $0 $0
(1) Sales Commission income.
No other executive officer's or significant employee's total annual salary,
bonus and other annual compensation exceeded $100,000 during any of the periods
indicated.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Directors and officers Steven L. Johnson and Antony Hoffman filed Form 3s on
December 14, 2000 to disclose options given to them in February 1999 with
respect to an aggregate (as adjusted for stock splits and shares issued pursuant
to the merger) of 1,734,450 shares each of Company common stock currently owned
by Director and President Dean R. Grewell III. Mr. Grewell's related Form 4
disclosing these options was also filed on December 14, 2000.
RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has appointed the accounting firm of KPMG LLP to act as
independent auditors for the Company for its fiscal year ended September 30,
2000 and is requesting ratification by the Shareholders. The Company knows of no
direct or material indirect financial interests of KPMG LLP in the Company.
Representatives of KPMG LLP are expected to be present at the Meeting and may
make a statement, if they desire to do so, and will be available to respond to
appropriate questions.
6
SHAREHOLDER PROPOSALS
To be included in the Proxy Statement and Proxy for the 2002 Annual Meeting of
shareholders, shareholder proposals intended to be presented at that meeting
must be received by the Company at its principal office no later than September
26, 2001, and must otherwise be in compliance with applicable securities laws.
Shareholder proposals should be sent to: President, SNAP2 Corporation, 10641
Justin Drive, Urbandale, Iowa, 50322.
OTHER MATTERS
The Board of Directors does not know of any other matters which may come before
the Annual Meeting. However, if any other business properly comes before the
Annual Meeting, or any adjournments thereof, proxies will be voted upon any such
matter in accordance with the discretion of the persons named thereon.
By Order of the Board of Directors,
Kathy Hoffman, Secretary
Urbandale, Iowa
January 24, 2001
7
SNAP2 CORPORATION
2000 ANNUAL REPORT
TO
SHAREHOLDERS
SNAP2 CORPORATION
10641 Justin Drive
Urbandale, Iowa 50322
January 24, 2001
To our Shareholders:
Let me start with a heartfelt thank you to everyone who has invested in SNAP2
Corporation. Your confidence in us has encouraged everyone here to continue our
hard work to give you the best possible return on your investment for the long
term.
It has been a very productive year at SNAP2. It began with the merger on
February 28, 2000 of ISES Corporation into White Rock Enterprises, Ltd., a
publicly traded company on the Over-the-Counter Bulletin Board (OTCBB) using the
symbol WHTE. The merged entity then changed its name to SNAP2 Corporation and
the trading symbol to SSNP on July 12, 2000. The company name was changed to
better position us to the ever-growing embedded appliance markets of set-top
boxes, in-flight entertainment, and Internet appliances. This market is commonly
known as the "consumer device market" and our goal is to be an integral part by
enabling information and entertainment for these platforms.
SNAP2 continues to engage with leading consumer electronic manufacturers,
passenger airlines, and software companies providing our software products and
services. We have significant embedded software experience, technical skill sets
and business relationships in these growing consumer device markets and believe
we can be a major player as we move ahead. We look forward to growing the
company from this position.
Other Fiscal Year 2000 Highlights:
o SNAP2 distributed the SNAP2 Travel Kit Games to over 139 passenger
aircrafts and became the industry's leading game software provider for the
Rockwell Collins TES in-flight entertainment system.
o SNAP2 Travel Kit Games customers include: Air France, Delta Air Lines,
Airtours, LanChile Airlines, and AOM French Airlines. Also, Aer Lingus of
Ireland recently selected SNAP2 Travel Kit Games for its in-flight
entertainment.
o Entered into software engineering contracts with Motorola and Canal+ U.S.
Technologies for digital television applications. The Company participated
with these companies and demonstrated SNAP2 software at the Western Cable
Show, Consumer Electronics Show, National Association of Broadcasters and
National Cable Television Association tradeshows.
o Partnered with Wind River Systems Corporation to demonstrate Java language
applications for Wind River's Internet appliance platform (Wind
StormPad(TM)) at the Embedded Systems Conference.
o SNAP2 entered into an agreement with Microsoft WebTV(R) and is currently
providing embedded software services for the WebTV(R) set-top box
architecture.
o Partnered with Sun Microsystems to demonstrate SNAP2 interactive
television, Java(TM) based applications for Java TV(TM) at the cable
industry's Western Show in Los Angeles and the Consumer Electronic Show in
Las Vegas.
We expect the next fiscal year to be even more exciting. We have been successful
in our business model and approach by leveraging our skill sets and engaging in
software services with strategic customers. These engagements generate
significant revenues for the Company while bringing us closer to software
product opportunities for the emerging consumer devices we target. Our plan is
to continue this service and embedded software mix to grow revenues and to
achieve profitability within the fiscal year.
Again, I want to thank you for your investment in SNAP2. You have given us the
capital to turn the dream of defining the future of software content for
consumer devices into a profitable reality.
/s/
Dean R. Grewell, III
President and Chief Executive Officer
SNAP2 is a trademark of SNAP2 Corporation. Sun, Sun Microsystems, Java, and Java
TV are trademarks or registered trademarks of Sun Microsystems, Inc. in the
United States and other countries. Wind River Systems, the Wind River Systems
logo, and Tornado are registered trademarks, and StormPad is a trademark of Wind
River Systems, Inc. Microsoft and WebTV are either registered trademarks or
trademarks of Microsoft Corp. in the United States and/or other countries. All
other names mentioned are trademarks, registered trademarks, or service marks of
their respective companies or organizations.
2
This Annual Report is being provided to all of the shareholders of SNAP2
Corporation (the "Company") in connection with the 2001 Annual Meeting of the
Shareholders which will be held at SNAP2 Corporation located at 10641 Justin
Drive, Des Moines, Iowa on February 22, 2001, at 2:00 p.m. This Annual Report is
not incorporated into the Proxy Statement of the Company and is not proxy
soliciting material.
Cautionary Statement on Forward-Looking Statements.
Certain statements in this Annual Report contain forward-looking statements that
have been made pursuant to the provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on current
expectations, estimates and projections about the Company's business, based on
management's current beliefs and assumptions made by management. Words such as
"expects", "anticipates", "intends", "believes", "plans", "seeks", "estimates"
and similar expressions or variations of these words are intended to identify
such forward-looking statements. Additionally, statements that refer to the
Company's estimated or anticipated future results, sales or marketing
strategies, new product development or performance or other non-historical facts
are forward-looking and reflect the Company's current perspective based on
existing information. These statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual results and outcomes may differ
materially from what is expressed or forecasted in any such forward-looking
statements. Such risks and uncertainties include those set forth below in
"DESCRIPTION OF BUSINESS - Risk Factors That May Affect Future Results of
Operations" as well as previous public filings with the Securities and Exchange
Commission. The discussion of the Company's financial condition and results of
operations included should also be read in conjunction with the financial
statements and related notes included in this Annual Report. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
DESCRIPTION OF BUSINESS
General. SNAP2 Corporation (f/k/a White Rock Enterprises, Ltd.) (the "Company")
is a software product developer and software service provider for in-flight
entertainment systems (IFE) for passenger aircraft and interactive set-top boxes
(STB) for interactive television. The Company was incorporated on October 8,
1998 under the laws of the State of Nevada originally for the purpose of
developing and marketing its only product, a boot dryer that dries both boots
and shoes for commercial and consumer use. Effective February 28, 2000 the
Company merged with ISES Corporation (an Iowa corporation originally
incorporated on May 14, 1997) ("ISES") with the Company being the survivor. In
connection with the merger, the Company disposed of its boot dryer product to
the original owner. The Company's name was subsequently changed to SNAP2
Corporation pursuant to Articles of Amendment filed July 12, 2000.
The resulting Company's activities to date have consisted of:
o Developing the Airsoft Travel Kit software product which includes
destination information, language training, games and airline information
for IFE systems.
3
o Licensing and installing the Airsoft Travel Kit Games on international and
domestic airlines with IFE equipped aircraft.
o Providing interactive television set-top box manufacturers with
professional software design, programming and graphic design services.
o Research and development strategies to productize the intellectual property
assets of ISES (now the Company) for interactive television.
o Contracting with interactive television suppliers to support promotional
efforts of their related products.
o Expanding its engineering, sales and marketing staff to address the STB and
IFE markets.
o The Company is registered with the SEC as SNAP2 Corporation and is traded
on the over-the-counter bulletin board: OTCBB:SSNP.
The Company continues to develop software and service the STB and IFE industries
and to explore emerging markets for embedded software technologies. The Company
has engaged with companies creating embedded devices technologies such as
Internet appliances, personal digital assistants and wireless devices. The
Company feels that it can target these markets successfully with the
technologies and experience from the STB and IFE markets as well as the skill
sets it has acquired from its growth of embedded software programmers. The
Company will pursue additional product and service opportunities in these
markets.
Operations. The Company operates from its new headquarters located at 10641
Justin Drive, Des Moines, Iowa 50322. The Company was previously located at 2600
72nd Street and moved to its expanded facilities on May 23, 2000 to accommodate
its growth and development. In addition to its offices in Des Moines, the
Company also has a sales office in Austin, Texas and an affiliation with an
engineering and graphic design office in Toronto, Canada. The combined three
offices develop and market software products and services for IFE systems and
STB for interactive television created by the Company.
Products. The Company markets software applications for the IFE and interactive
television markets. Its Airsoft Travel Kit software targets IFE systems
manufactured by Rockwell Collins, Matsushita Avionics and Sony Trans Com. The
Travel Kit is comprised of digital information and entertainment software that
airline passengers can access from video displays at their passenger seats while
traveling. The complete Travel Kit consists of destination information, language
training and games and customized airline information. The package can be sold
as a complete package or as individual components. The Company has sold packages
of Travel Kit games to Air France, Delta Air Lines, Airtours and AOM French
airlines. The Company has licensed destination information and language training
from Lonely Planet Publishing based in Australia. Airsoft Travel Kit Games are
created, copyrighted, owned and licensed by the Company. The Company has also
licensed Tetris(R) game content from Blue Planet Software, San Francisco,
California for use in its In-Flight Tetris(TM) game for in-flight entertainment.
The game suite consists of 18 assorted board, card, arcade, children's games and
games of chance.
4
The Company is porting these games to interactive television STBs targeting
interactive cable and telephone networks. The Company plans to broaden its
software product offering for both the interactive television market and IFE
markets. The Company's products are sold on a royalty based model that generates
revenue at the time of customer contract execution and provides annual revenues
for continued use of the software. IFE products have been sold to airlines and
to IFE equipment manufacturers. The Company intends to sell interactive
television software products to cable and telephone network operators and STB
manufacturers.
Services and Revenues. The Company is staffed with software engineers
experienced in software design and programming for emerging embedded computer
systems and digital graphic artists experienced in graphical user interfaces and
display for consumer electronic applications. The Company has provided
development services to airlines, IFE equipment manufacturers and digital STB
manufacturers to support product development, promotion and deployment. The
Company has established and maintained a services relationship with Motorola's
Multimedia Systems Division supplying graphic and user interface design,
software programming and integration services in support of Motorola's
StreamasterTM digital STB architecture. Motorola Multimedia Systems Division is
part of the Imaging and Entertainment Solutions group within the Motorola
Semiconductor Products Sector (SPS).
Through September 30, 2000, the Company's revenues were derived from license
fees and renewals of its Airsoft Travel Kit Games for the IFE market and
software and engineering services provided to interactive television equipment
manufacturers and technology providers. The Company's IFE revenues were
comprised of two types: (i) license fees from airlines for Airsoft Travel Kit
Game products previously sold; and (ii) OEM initial product sales to IFE
equipment manufacturers for Airsoft Travel Kit Game products. Air France,
Airtours International, Delta Air Lines, AOM French airlines and Rockwell
Collins are currently using the Company's software products on deployed IFE
equipped aircraft. The Company also receives engineering service fees from
interactive television STB manufacturer Motorola and technology provider Canal+
US Technologies.
The Company intends to derive the primary portion of its revenues through
Company software product sales. Revenue is collected on execution of the
software product license and is subject to renewal fees on each anniversary date
of the agreement thereafter. The Company plans to continue distributing products
directly to end users as well as to original equipment manufacturers (OEMs) who
bundle and resell the Company's products to end users. The Company intends to
continue deriving engineering service fee revenues from both end users and OEMs
as those activities represent an immediate revenue stream and present the
Company with product licensing opportunities with the OEMs and their customers.
Expenses. Expenses consist primarily of payroll and related costs, third-party
consulting, other professional services, and travel. The majority of the
Company's products have been created and copyrighted by ISES (Company's
predecessor in interest pursuant to the merger which was effective February 28,
2000). The Company has licensed In-Flight TetrisTM from Blue Planet Software and
incurs licensing costs for each copy inventoried for or distributed to the IFE
market. The Company has also licensed travel information from Lonely Planet
Publishing and incurs licensing costs for copies distributed to the IFE market.
5
Research and Development. The Company's research and development expenses
include personnel costs, allocated facilities-related expenses and payments to
third-party consultants. The Company expects research and development expenses
will increase in the future as additional personnel are hired to support
anticipated growth. During the years ended September 30, 2000 and December 31,
1999 the Company estimates it expended $605,000 and $425,000, respectively on
research and development expense.
Employees. At September 30, 2000, the Company had 16 full time employees and no
part time employees.
Risk Factors That May Affect Future Results of Operations. In addition to the
other risk factors contained herein and within filings with the Securities and
Exchange Commission, the Company believes the following additional risk factors
should be taken into consideration in evaluating its business:
o The Company Expects to Incur Operating and Net Losses. The Company has a
limited operating history, has incurred significant losses in the past year
and, at September 30, 2000, had an accumulated stockholders' deficit of
$102,609. To date, the Company has recognized growing revenue, however, its
ability to generate revenue is subject to substantial uncertainty. The
Company expects to incur significant additional losses and continued
negative cash flow from operations and it may never become profitable. The
Company expects to incur significant sales and marketing, research and
development and general and administrative expenses. The Company will need
to generate significant revenues to achieve profitability and positive
operating cash flows. Even if profitability and positive operating cash
flow are achieved, the Company may not be able to achieve, sustain or
increase profitability or positive operating cash flow on a quarterly or
annual basis.
o The Company's Limited Operating History and the Emerging Market for
Interactive Television and In-Flight Entertainment Systems Make Its Future
Financial Results Unpredictable. The Company's business and prospects
depend on the development and market acceptance of interactive television
and the growth of aircraft in-flight entertainment systems. The Company's
future revenue prospects are subject to a high degree of uncertainty.
Currently, it derives approximately 40% of its revenues from in-flight
entertainment software license fees and 60% from interactive television
engineering service fees. In the future, however, the Company intends to
generate revenue primarily from software license fees particularly in the
emerging market of interactive television while maintaining modest growth
in the in-flight entertainment market. The market for interactive
television software is new, unproven and subject to rapid technology
change. This market may never develop or may develop at a slower rate than
anticipated. In addition, the Company's success in marketing the Company as
a supplier of interactive television application software is dependent upon
developing and maintaining relationships with industry-leading computer and
consumer electronics manufacturers, network operators and Internet content
providers. There is already competition in the market to provide
interactive television software. Companies such as Liberate, Intellocity,
Microsoft, and AOL have established a market presence and have
significantly greater financial, marketing and
6
technical resources than the Company. These companies who offer interactive
television application software may capture a larger portion of the market
than the Company. Any failure to establish relationships with interactive
television equipment manufacturers and network operators will have a
material adverse effect on the Company's business and prospects.
o The Company's Business is Dependent Upon the Successful Deployment of
Digital Set Top Boxes for Interactive Television and the In-Flight
Entertainment Systems Targeted by the Company. The Company's software
products target specific interactive television and in-flight entertainment
systems and the opportunity to generate revenue can be directly related to
the number and the timing of systems deployed. It is the Company's intent
to pursue and support the most popular system platforms for these markets.
If the targeted platforms fail to establish significant and timely
deployment in the market it will have a material adverse effect on the
Company's business and prospects.
o The Company Faces Competition from Companies with Significantly Greater
Financial, Marketing, and Technical Resources. The markets for interactive
television and in-flight entertainment systems are competitive. Companies
that offer competing software applications and services for interactive
television include Liberate, Intellocity, Microsoft, AOL and others. These
entities each have a larger customer base, a greater number of
applications, and greater brand recognition, market presence and financial,
marketing and distribution resources than the Company. Other companies that
offer competing software applications and services for in-flight
entertainment include Nintendo, Infogrames, Tenzing, and Intergame some of
which have a larger customer base, a greater number of applications, and
greater brand recognition, market presence and financial, marketing and
distribution resources than the Company. As a result, the Company will have
difficulty increasing the number of design "wins" for its products and
services.
o The Company May Not Be Able to Respond to the Rapid Technological Change in
the Markets in Which It Competes. The Company currently participates in
markets which are subject to:
|_| rapid technology change;
|_| frequent product upgrades and enhancements;
|_| changing customer requirements for new products and features; and
|_| multiple, competing and evolving industry standards.
The introduction of the software applications targeting interactive
television and in-flight entertainment containing new technologies and the
emergence of new industry standards could render the Company's products
less desirable or obsolete. In particular, the Company expects that changes
in the operating system environment including client and server middleware
will require it to rapidly evolve and adapt its products to be competitive.
As a result, the life cycle of each release of the Company's products is
difficult to estimate. To be competitive, the Company will need to develop
and release new products and upgrades that respond to technological changes
or evolving industry standards on a timely and cost-effective basis. There
can be no assurance that the Company will successfully develop and
7
market these types of products and upgrades or that the Company's products
will achieve market acceptance. If the Company fails to produce
technologically competitive products in a timely and cost-effective manner,
its business and results of operations could suffer materially.
o Volatility of Stock Price. The market price of the Company's common stock
is likely to fluctuate in the future. The Company believes that various
factors, including quarterly fluctuations in results of operations,
announcements of new products or partners by the Company or by its
competitors, changes in interactive television and in-flight entertainment
markets in general, or general economic, political and market conditions
may significantly affect the market price of its common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This section of this Annual Report should be read in conjunction with the
discussion included in "Description of Business," above, and the financial
statements of the Company included at the end of this Annual Report.
Results of Operations
Since the inception of ISES Corporation (now the Company), it has been engaged
primarily in the business of developing and licensing software products and
providing engineering software and graphic design services. Accordingly,
historical results of operations are not indicative of and should not be relied
upon as an indicator of future performance.
All revenue and the majority of the costs and expenses of the Company as
discussed below were generated by ISES Corporation. The Company had no revenue
prior to the merger with ISES Corporation and minimal costs and expenses. As a
result, the consolidated comparative data represents the comparison of ISES
revenue, costs and expenses for a similar period in the previous year.
Years Ended September 30, 2000 and December 31, 1999
Revenues
Total revenues increased 3.5% to $737,054 for the year ended September 30, 2000,
compared to $712,286 for the year ended December 31, 1999. The increase was
related to an increase in product license revenues and license updates. Product
license fees represented approximately 40% of revenues versus 53% for
engineering service fees. During the year ended September 30, 2000, transactions
with Motorola, Canal+ U.S. Technologies, Delta Airlines, Airtours International,
Rockwell Collins and AOM accounted for 43%, 12%, 7%, 10%, 2% and 2%,
respectively of the Company's total revenues.
8
Costs and Expenses
Total costs increased 33% to $1,704,093 for the year ended September 30, 2000,
compared to $1,135,433 for the year ended December 31, 1999. The increase was
related to merger administrative costs, sales commission costs and added
software development costs needed to support increased business and anticipated
future growth. The Company believes that costs and expenses will continue to
increase as it attempts to expand operations (including product development) and
sales and marketing efforts.
Payroll and Related Benefits
Payroll and related benefits increased 52% to $938,877 for the year ended
September 30, 2000 from $618,653 for the year ended December 31, 1999 reflecting
research and development, marketing and administrative employee expansion in Des
Moines, Iowa and establishing a sales office in Austin, Texas.
Software Development and Consulting
Software development and consulting expenses increased 26% to $377,551 for the
year ended September 30, 2000 from $299,603 for the year ended December 31,
1999.
Other Expenses
Other expenses increased 79% to $387,665 for the year ended September 30, 2000
from $217,177 for the year ended December 31, 1999 reflecting associated costs
of the Company's growth.
Liquidity and Capital Resources
The Company requires working capital to fund its operations. The Company expects
to continue to experience losses from operations and negative cash flows for at
least the next nine (9) month period.
Effective February 28, 2000 (the date of filing of a Certificate of Merger with
the Nevada Secretary of State), the Company merged with ISES Corporation with
the Company as the surviving corporation. The merger was arranged for the
Company by Investment Capital Corporation and Pursuit Capital LLC, venture
capital firms located in Scottsdale, Arizona in accordance with understandings
these entities reached with ISES Corporation to raise capital in private
transactions. According to their agreement, these entities were to raise
$2,000,000 to fund the Company's post-merger research and development, marketing
and overall expansion. Pursuant to and in consideration of this arrangement and
the identification of the potential merger as an investment opportunity, the
Company issued 2,200,000 shares of its $.001 par value per share common stock to
these entities and/or their designees. During the fiscal quarter ended March 31,
2000 these entities conducted a private placement on behalf of the Company and
raised $760,000, the proceeds of which have been given to the Company. For these
funds, the Company issued an additional 760,000 shares of its $.001 per share
common stock. The current
9
understanding of the parties obligates these venture capital entities to provide
additional funding of $2,000,000 (without the issuance of any additional shares
of stock by the Company) on or before August 12, 2000 (i.e., six months after
the merger became effective) of which $100,000 was received by the Company as of
June 30, 2000 and an additional $470,610 was received by November 30, 2000. The
balance owed by Investment Capital Corporation and Pursuit Capital LLC to the
Company as of November 30, 2000 totaled $1,429,390.
Management of the Company is continuing discussions with these venture capital
parties regarding their collective obligation to provide additional equity
funding. At this time it appears unlikely that such funding will be available,
in which event a portion of the Common Stock of the Company issued to them will
be cancelled.
The proceeds of the private placement and any additional capital resources
provided by the venture capital firms are being and will be used for working
capital and general corporate purposes, including expansion of sales and
marketing efforts, increases in research and development activities, any
licensing and acquisition of new technologies and legal and accounting expense
incurred as a result of the merger and relating to the Company's ongoing
business.
Since incorporation, ISES (the Company's predecessor in interest pursuant to the
merger) has experienced various levels of losses and negative cash flow from
operations and notwithstanding the merger, expects to experience negative cash
flows in the foreseeable future. In addition, the Company may need to raise
additional capital and there can be no assurance the merged Company will be able
to obtain additional financing on favorable terms, if at all. If additional
capital cannot be obtained on acceptable terms, if and when needed, the Company
may not be able to further develop or enhance its products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements, any of which could have a material adverse effect on the Company's
business.
DIRECTORS AND OFFICERS
The Company's directors and executive officers as of the time of the preparation
of this Annual Report were as follows:
Name Age Positions
---- --- ---------
Dean R.("Rick") Grewell III 42 President, CEO and Director
Steven L. Johnson 40 Vice President of Marketing and
Director
Antony Hoffman 39 Vice President of Research and
Development and Director
Mark Malinak 39 Vice President of Sales and Director
10
Dean Davis 26 Director
Mike Hennel 41 Director
The terms of each director of the Company will continue until the Annual Meeting
or at such time as their successors shall have been elected and qualified.
Rick Grewell has been the President, CEO and a Director of the Company since the
merger with ISES Corporation. Prior to merger Mr. Grewell was President and CEO
of ISES Corporation since September 7, 1996. Prior to that time Mr. Grewell was
employed by Microware Systems Corporation, in Clive, Iowa ("Microware") for
approximately 12 years.
Steven Johnson has been a Vice President and Director of the Company since its
merger with ISES Corporation. Prior to the merger Mr. Johnson was Vice President
of Marketing of ISES Corporation since February 1, 1999. Mr. Johnson was
previously employed by Microware for approximately 11 years.
Antony Hoffman has been a Vice President and Director of the Company since its
merger with ISES Corporation. Prior to the merger Mr. Hoffman was Vice President
of Marketing of ISES Corporation since February 1, 1999. Mr. Hoffman was
previously employed at Microware for approximately 13 years.
Mark Malinak has been a Vice President and Director of the Company since its
merger with ISES Corporation. Prior to the merger Mr. Malinak was Vice President
of Sales of ISES Corporation since February 1, 1999. Prior to joining the
Company, Mr. Malinak had been employed at Microware for approximately 4 years
and at Sun Microsystems, Palo Alto, California for 2 years.
Dean Davis has been a Vice President and Director of the Company since its
merger with ISES Corporation. Prior to the merger Mr. Davis had been a graphics
artist with ISES Corporation since February 6, 1998.
Mike Hennel has been a Director of the Company since June 14, 2000. Mr. Hennel
is President and CEO of Silvon Software, a position he has held since 1987.
The number of directors for the Company is currently set at six. The Bylaws
permit the Board of Directors to establish the number of directors at not less
than one (1) nor more than fifteen (15). Each of Company's directors is elected
to a one year term and until his or her successor is elected. Directors need not
be shareholders of the Company or residents of any particular jurisdiction.
The officers of the Company are to be elected annually by the board of directors
at its annual meeting, and hold office until the next annual meeting of the
board of directors and until their successors are chosen. Officers may also be
removed by the board of directors at any time, with or without cause. Officers
need not be a director or a shareholder of the Company.
11
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is authorized to issue 50,000,000 shares of its $0.001 par value
common stock and 20,000,000 shares of its $0.001 par value preferred stock. As
of September 30, 2000, the Company had 17,856,000 issued and outstanding shares
of common stock and 10,000 issued and outstanding shares of preferred stock
which are automatically convertible into 10,000,000 shares of common stock on
February 28, 2002.
The Company's common stock is traded on the OTC Electronic Bulletin Board
sponsored by the National Association of Securities Dealers under the trading
symbol "SSNP." The Electronic Bulletin Board is a network of security dealers
who buy and sell stock. The dealers are connected by a computer network which
provides information on current "bids" and "asks" as well as volume information.
As of September 30, 2000 the Company had approximately 1,150 common stock
shareholders and one shareholder of its preferred stock and there has been only
a limited public market for the Company's common stock. The following table
shows, for the periods indicated, the high and low per share prices of common
stock, as reported on the OTC Electronic Bulletin Board. Such prices represent
prices between dealers, do not include retail mark-ups, mark downs or
conversions and may not represent actual transactions. No information is
provided for periods prior to the effective date of the merger of ISES with and
into the Company, which merger was effective February 28, 2000.
Period Ended High Low
------------ ---- ---
March 31, 2000 (one month) $5.625 $3.937
June 30, 2000 $4.50 $1.875
September 30, 2000 $3.875 $0.937
October 1, 2000 through December 29, 2000 $1.88 $0.38
On December 29, 2000, the closing bid and ask prices of the common stock as
reported on the OTC Electronic Bulletin Board were $0.875 and $0.9375,
respectively.
The Company has never declared or paid cash dividends on its capital stock. It
is anticipated that the Company would retain its future earnings, if any, to
fund the operation and expansion of its business and management does not
anticipate paying any cash dividends in the foreseeable future.
In connection with the merger of ISES with and into the Company, the Acquisition
Agreement and Plan of Merger (filed with the Securities and Exchange Commission
as Exhibit 1.1 to the Company's Current Report on Form 8-K filed March 1, 2000)
provided for the issuance of (i) 10,000,000 shares of common stock and (ii)
10,000 shares of convertible preferred stock which are automatically convertible
into 10,000,000 shares of common stock of the Company two (2) years after the
Closing Date of the Merger which was February 28, 2000. None of such shares of
common stock or preferred stock was or will be registered under the Securities
Act of 1933, as amended.
12
An additional 2,200,000 shares of common stock were issued to various designees
of Investment Capital Corporation and Pursuit Capital, LLC in connection with
the merger, in exchange for the commitment of these entities to raise $2,000,000
to fund working capital needs and general corporate purposes, including, but not
limited to, expansion of sales and marketing efforts, research and development
activities, licensing of new technology and payment of additional legal and
accounting services occasioned by the merger of the Company and ISES. These
entities conducted a private placement of the Company's $.001 par value common
stock during the fiscal quarter ended March 31, 2000 and raised $760,000, in
consideration of which the Company issued an additional 760,000 shares of its
common stock. These entities are obligated to provide the Company with an
additional $2,000,000 in equity (without further issuance of equity securities
by the Company) of which $100,000 was received by the Company as of June 30,
2000 and an additional $470,610 was received through November 30, 2000 leaving a
balance of $1,429,390 to be provided by these entities. However, as discussed
above, management of the Company believes that these entities may be unable to
provide the equity funding for which they were committed and the Company may
cancel a proportionate number of the shares of Common Stock which were issued to
them.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company is the resulting corporation of a merger between White Rock
Enterprises, Ltd. (the Company, n/k/a SNAP2 Corporation) and ISES Corporation,
an Iowa corporation which was effective on February 28, 2000. Prior to that time
the Company was a "shell" corporation and ISES Corporation was an operating
company. The Company was the surviving corporation of the merger. ISES
Corporation (as a predecessor to the Company) has not had any change in its
accountants during the last three years or any disagreement with its accountants
during that period which are the type required to be disclosed under this Item.
However, on December 15, 2000, the Board of the Company approved the hiring of
KPMG LLP (KPMG) as the Company's independent accountants for the audit of the
financial statements of the Company for the year ended September 30, 2000. The
Company's previous accountant (prior to the merger) was Barry L. Friedman, P.C.,
Las Vegas, Nevada, ("Friedman").
The audit report of Friedman on the financial statements of the Company for the
period ended September 30, 1999 did not contain an adverse opinion or disclaimer
of opinion, nor was the report qualified or modified as to uncertainty, audit
scope, or accounting principles, except as to an uncertainty regarding the
Company's ability to continue as a going concern due to recurring losses and the
absence of sources of revenue.
To the knowledge of management, during the audit of the period ended September
30, 1999 , there were no disagreements with Friedman on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
The change in the Company's accountants was previously reported on the Company's
Current Report on Form 8-K filed with the Securities and Exchange Commission on
December 20, 2000.
13
AVAILABILITY OF OTHER INFORMATION
The Company will provide to each Shareholder, upon written request of the
Shareholder, a copy of the Company's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 2000. The report on Form 10-KSB will be provided
without charge. Shareholders should direct any written request to the Company at
the following address: SNAP2 Corporation, 10641 Justin Drive, Urbandale, Iowa
50322.
The request should be directed to the attention of Vice President Steven L.
Johnson.
FINANCIAL STATEMENTS
The following pages set forth certain financial statements of the Company with
respect to the years ended December 31, 1999 and September 30, 2000.
[The Remainder of this Page is Intentionally Left Blank.]
14
Independent Auditors' Report
To the Stockholders
SNAP2 Corporation:
We have audited the accompanying balance sheet of SNAP2 Corporation (formerly
ISES Corp. - note 1) to the financial statements) as of December 31, 1999, and
the related statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SNAP2 Corporation, as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/S/ McGowen, Hurst, Clark & Smith, P.C.
April 25, 2000
15
Independent Auditors' Report
The Board of Directors
SNAP2 Corporation:
We have audited the accompanying balance sheet of SNAP2 Corporation (a Nevada
Corporation) as of September 30, 2000, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SNAP2 Corporation as of
September 30, 2000, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has suffered significant losses in the last 21
months, and as a result has insufficient liquidity to pay its obligations as
they come due. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/S/ KPMG LLP
December 18, 2000
16
SNAP2 CORPORATION
Balance Sheets
September 30, 2000 and December 31, 1999
1999
Assets 2000 (note 1)
--------- ---------
Current assets:
Cash $ 18,956 --
Accounts receivable (note 7) 127,279 138,917
--------- ---------
Total current assets 146,235 138,917
--------- ---------
Property and equipment:
Office furniture and equipment 49,952 14,681
Computer equipment 59,555 20,992
--------- ---------
Total property and equipment 109,507 35,673
Less accumulated depreciation (32,674) (19,704)
--------- ---------
Net property and equipment 76,833 15,969
Other assets 4,760 15,260
--------- ---------
Total assets $ 227,828 170,146
========= =========
17
SNAP2 CORPORATION
Balance Sheets
September 30, 2000 and December 31, 1999
1999
Liabilities and Stockholders' Equity (Deficit) 2000 (note 1)
----------- -----------
Current liabilities:
Checks disbursed in excess of amounts on deposit $ -- 685
Accounts payable 56,390 109,523
Deferred income 9,343 9,984
Accrued royalty 3,750 --
Accrued interest -- 9,786
Accrued payroll and related liabilities 36,339 105,754
Notes payable -- 175,000
Current portion of long-term debt (note 3) 21,445 --
----------- -----------
Total current liabilities 127,267 410,732
Long-term debt (note 3) 203,170 135,000
----------- -----------
Total liabilities 330,437 545,732
----------- -----------
Stockholders' equity (deficit) (note 4):
Common stock - $0.001 par value; 50,000,000 shares authorized; 17,856,000
shares issued and outstanding at September 30, 2000 and 10,000,000 shares
issued or committed to be issued at December 31, 1999 17,856 10,000
Convertible preferred stock - $0.0001 par value; 20,000,000
shares authorized; 10,000 shares issued and outstanding at
September 30, 2000 and 1999. Shares convert to common stock
at a ratio of 1,000 shares of common for each share of convertible
preferred stock on February 28, 2002 10 10
Additional paid in capital 1,188,858 (8,696)
Accumulated deficit (1,291,683) (376,900)
Unearned compensation (17,650) --
----------- -----------
Total stockholders' deficit (102,609) (375,586)
----------- -----------
Total liabilities and stockholders' deficit $ 227,828 170,146
=========== ===========
See accompanying notes to financial statements.
18
SNAP2 CORPORATION
Statements of Operations
Years ended September 30, 2000 and December 31, 1999
1999
2000 (note 1)
------------ ------------
Revenue (note 7):
License fees $ 294,751 162,680
Consulting 387,723 539,654
Maintenance 33,061 9,952
Other income 21,519 --
------------ ------------
Total revenue 737,054 712,286
------------ ------------
Expenses:
Payroll 839,550 585,353
Payroll taxes 59,227 33,300
Employee health insurance 40,100 --
Software development and consulting (note 6) 377,551 299,603
Administrative 191,064 79,877
Interest 19,914 15,553
Travel 110,029 91,115
Marketing 4,388 6,536
Miscellaneous 1,066 1,559
Equipment and office rent 46,734 16,620
Depreciation 14,470 5,917
------------ ------------
Total expenses 1,704,093 1,135,433
------------ ------------
Net loss $ (967,039) (423,147)
============ ============
Net loss per share -
Basic and diluted $ (0.07) (0.04)
============ ============
Weighted average shares and outstanding -
Basic and diluted 14,536,175 10,000,000
============ ============
See accompanying notes to financial statements.
19
SNAP2 CORPORATION
Statements of Stockholders' Equity
Years ended September 30, 2000 and December 31, 1999
Additional Retained
Common Convertible Paid Earnings Unearned
Stock Preferred In Capital (Deficit) Compensation Total
---------- ---------- ---------- ---------- ------------ ----------
Balance January 1, 1999 (note 1) $ 10,000 10 (8,696) 51,247 -- 52,561
Distributions to S corporation -- -- -- (5,000) -- (5,000)
shareholders
Net loss -- -- -- (423,147) -- (423,147)
---------- ---------- ---------- ---------- ---------- ----------
Balance December 31, 1999 10,000 10 (8,696) (376,900) -- (375,586)
---------- ---------- ---------- ---------- ---------- ----------
Net loss of companies for three
months ended
December 31, 1999
duplicated to adjust to -- -- -- 52,256 -- 52,256
common fiscal year end
Issuance of common stock 7,856 -- 1,179,004 -- -- 1,186,860
Stock options issued to -- -- 18,550 -- (18,550) --
employees below fair value
Amortization of unearned -- -- -- -- 900 900
compensation
Net loss -- -- -- (967,039) -- (967,039)
---------- ---------- ---------- ---------- ---------- ----------
Balance September 30, 2000 $ 17,856 10 1,188,858 (1,291,683) (17,650) (102,609)
========== ========== ========== ========== ========== ==========
See accompanying notes to financial statements.
20
SNAP2 CORPORATION
Statements of Cash Flows
Years ended September 30, 2000 and December 31, 1999
1999
2000 (note 1)
----------- -----------
Cash flows from operating activities:
Net loss $ (967,039) (423,147)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 15,370 5,917
Deferred income 4,375 9,984
Change in:
Accounts receivable (1,003) (79,375)
Accounts payable and accrued expenses (80,401) 204,531
----------- -----------
Net cash used by operating activities (1,028,698) (282,090)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (71,163) (11,098)
Increase in other assets (4,760) (15,260)
----------- -----------
Net cash used by investing activities (75,923) (26,358)
----------- -----------
Cash flows from financing activities:
Checks disbursed in excess of amounts on deposit -- 685
Proceeds from issuance of common stock 1,186,860 --
Distributions to shareholders -- (5,000)
Proceeds from notes payable and long-term debt 100,000 310,000
Repayment of notes payable and long-term debt (185,385) --
----------- -----------
Net cash provided by financing activities 1,101,475 305,685
----------- -----------
Net decrease in cash (3,146) (2,763)
Cash at beginning of year 22,102 2,763
----------- -----------
Cash at end of year $ 18,956 --
=========== ===========
Supplemental disclosures:
Cash paid for interest $ 20,076 5,767
=========== ===========
See accompanying notes to financial statements.
21
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
(1) Business and Organization
SNAP2 Corporation (the Company) formerly known as White Rock Enterprises,
Ltd. is a software product developer and software service provider for
in-flight entertainment systems (IFE) for passenger aircraft and
interactive set-top boxes (STB) for interactive television. The Company
markets and licenses its software worldwide.
Reverse Merger
Effective February 28, 2000, the Company merged with ISES Corporation
(ISES), with the Company as the surviving corporation. At the date of the
merger, the Company was a "shell company" as the Company had approximately
$1,000 in assets and no liabilities, had generated no revenues since
inception and had incurred total expenses of $6,100 since its inception on
October 8, 1998. The merger transaction has been accounted for as a reverse
merger. In such transaction, the operating enterprise (ISES) is determined
to be the acquiring enterprise for financial reporting purposes. The
historical financial statements of ISES are presented as the historical
financial statements of the combined enterprise. The equity of ISES is
presented as the equity of the combined enterprise, however, the capital
stock account of ISES is adjusted to reflect the par value of the
outstanding stock of the Company after giving effect to the number of
shares issued in merger. For periods prior to the merger, the equity of the
combined enterprise is the historical equity of ISES prior to the merger
retroactively restated to reflect the number of shares received in the
merger. The Company's year end is September 30 whereas ISES' year end was
December 31; therefore, the historical financial statements of ISES for the
year ended December 31, 1999 are presented for comparative purposes to the
Company's year ended September 30, 2000. The three month period from
October 1, 1999 through December 31, 1999 is included in both years.
Revenues, net loss, and basic and diluted earnings per share for that three
month period were $232,056, ($52,256), and ($0.003), respectively.
In connection with the merger, the Company issued 10,000,000 shares of
common stock and 10,000 shares of convertible preferred stock for 100% of
the outstanding shares of ISES. The convertible preferred stock
automatically converts to 10,000,000 shares of common stock on February 28,
2002. Also in connection with the merger, an additional 2,200,000 shares of
common stock were issued to others in exchange for locating investors and a
commitment to raise $2,000,000 to fund the Company's working capital needs
and for general corporate purposes. As the $2,000,000 is received,
additional paid in capital will be recorded.
Use of Estimates
The preparation of financial statements, in conformity with auditing
standards generally accepted in the United States of America, requires the
Company to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of
22
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
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.
Property and Equipment
Property and equipment is stated at cost and is depreciated on
straight-line methods with estimated useful lives of 3 to 7 years.
Revenue Recognition
Software license fees are recognized as revenue upon contract signing and
shipment of the software master copy or download of software by the
customer. Consulting revenues are derived primarily from custom contract
engineering work and training and consulting services. Revenues from custom
contract engineering work are recognized using the percentage of completion
method. Revenues from training and consulting services are recognized as
the services are rendered. Maintenance revenues, excluding maintenance of
one year or less bundled with software license fees, are recognized ratably
over the term of the related agreements.
Fair Value of Financial Instruments
Fair value estimates, methods, and assumptions are set forth below:
Trade accounts receivable, accounts payable, and accrued expenses--The
carrying amount approximates the estimated fair value due to the
short-term nature of those instruments.
Long-term debt--Due to amounts being borrowed from a related party of
the Company's president and from an economic development agency of the
State of Iowa, the fair value of long-term debt was not reasonably
determinable.
Limitations--Fair value estimates are made as of a specific point in
time, based upon the relevant market information about the financial
instruments. Because no market exists for a majority of the Company's
financial instruments, fair value estimates are based on judgments
regarding current economic conditions and other factors. These
estimates are subjective in nature and involve uncertainties and
matters of judgments and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (ABP No. 25) and related
interpretations. Under APB No. 25,
23
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
compensation cost is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over the exercise price
of the option granted. Compensation cost for stock options, if any, is
recognized ratably over the vesting period for those options granted to
employees and directors. Compensation cost for stock options issued other
than to employees and directors, if any, is recognized at the date of the
grant. The Company provides additional pro forma disclosures as required
under SFAS No. 123, "Accounting for Stock-Based Compensation" (see note 4).
Income Taxes
ISES originally elected to be treated as a S corporation for federal and
state income tax purposes. Effective February 28, 2000, due to the merger
of ISES into the Company, ISES revoked its S corporation status.
Accordingly, the stockholders of ISES included their proportionate share of
the Company's taxable loss in their personal tax returns for the period
from October 1, 1999 to February 28, 2000. The Company is organized as a C
Corporation.
The Company accounts for income taxes under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
are recognized in income in the period that includes the enactment date.
Earnings Per Share
Basic EPS is computed using the weighted average number of actual common
shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of actual common shares plus the
potential dilution that would occur from the conversion of convertible
preferred stock and the exercise of stock options. Due to the net loss
incurred for the years ended September 30, 2000 and December 31, 1999, the
effect of convertible preferred stock and stock options is not included in
the calculation of diluted earnings per share because the effect is
anti-dilutive.
(2) Going-Concern Matters
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course
of business. However, the Company does not have significant cash or other
assets, nor does it have an established source of revenues sufficient to
cover its operating costs to allow it to continue as a going concern.
24
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
The financial statements do not include any adjustments that might result
if the Company is unable to continue its operations.
Management of the Company indicates that it has entered into and is
currently negotiating additional contracts for its products and services.
The Company is also exploring the licensing or sale of its intellectual
property and existing contracts to raise additional capital.
(3) Long-term debt
On June 20, 1999, the Company entered into a promissory note with a related
party of the Company's president whereby $135,000 was borrowed by the
Company. The note bears an interest rate of 9% per annum on the unpaid
principal balance. Under the terms of the note, principal payments of
$10,385 along with interest are due in quarterly installments beginning
July 1, 2001. The Company prepaid $10,385 of principal. The remaining
maturities of this note are $10,385, 2001; $41,538, 2002: $41,538, 2003;
and $31,154, 2004.
On August 17, 1999 the Company entered an agreement with the Iowa
Department of Economic Development (IDED) whereby the Company would receive
$100,000 of financial assistance under the Community Economic Betterment
Account (CEBA). Under the terms of the agreement, the Company pays an
annual royalty equal to 1.5% of the prior year total gross revenues to IDED
in semi-annual payments each June 1 and December 1, until a repayment
amount of $200,000 has been reached. The first scheduled semi-annual
payment is June 1, 2001 and is $5,530.
The Company has a $200,000 line of credit with a bank bearing interest at
the bank's commercial base rate. Funds advanced are secured by the
Company's accounts receivable and property and equipment. The line of
credit matures November 10, 2001. There were no borrowings outstanding at
September 30, 2000.
(4) Stock Options
On February 1, 1999 and March 4, 1998 the president of the Company granted
options to purchase 7,805,025 and 6,191,800, respectively, shares of common
stock of the Company owned by him, (adjusted for the February 28, 2000
merger) to employees of the Company and consultants to the Company for
$0.10 and $0.05 per share, respectively. These options were issued at fair
value at the date of granted and were accounted for as if such options were
issued directly by the Company. The options vest three years from the date
of grant.
The Company's Board of Directors adopted the Stock Option Plan (the Plan)
effective March 15, 2000. Under the Plan options may be granted to
employees, officers, consultants, directors and advisors to purchase up to
an aggregate of 1,000,000 shares of
25
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
the Company's common stock. Options granted under the Plan may be options
that are intended to qualify as incentive stock options and options that
are not intended to so qualify. If incentive stock options are granted to a
person possessing more than ten percent of the combined voting power or
value of all classes of stock of the Company, the exercise price shall not
be less than 110% of the Company's common stock fair market value on the
date of grant. Under the Plan, the term of options may not exceed ten years
unless an incentive stock option is granted to a stockholder who owns more
than ten percent of the combined voting power of the Company, then the term
may not exceed five years. The Board of Directors determines the exercise
price, vesting period of options at the date of grant and other conditions
as specified in the Plan.
The Company applies the provisions of APB No. 25 and related
interpretations in accounting for stock options and related compensation
expense, if any, under the Plan. Compensation expense of $900 was
recognized for stock options issued below fair value to employees to
purchase 105,000 shares of the Company's common stock during the year ended
September 30, 2000.
Had the Company determined compensation cost based on the fair value at the
grant date for stock options including options granted by the Company's
president under SFAS 123, the Company's net loss and net loss per share
would have been as indicated below:
2000 1999
----------- -----------
Net loss - as reported $ (967,039) (423,147)
Net loss - pro forma (1,102,754) (515,332)
Basic loss per share - as reported (0.07) (0.04)
Basic loss per share - pro forma (0.08) (0.05)
Diluted loss per share - as reported (0.07) (0.04)
Diluted loss per share - pro forma (0.08) (0.05)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option valuation model with the following weighted
average assumptions used for grants during fiscal 2000: risk-free interest
rate of 6.5%, dividend yield of 0.0%, expected volatility of 110%, and
expected lives of 5 years. The fair values of the option grants in fiscal
2000 were $1.64 to $2.02 per share. As the Company was a nonpublic entity
until February 28, 2000, it is permitted under SFAS 123 to use the "minimum
value" method to value stock options granted prior to February 28, 2000.
Under the "minimum value" method expected volatility is effectively zero.
The weighted average fair value of stock options granted by the Company's
president for the years ended December 31, 1999 and 1998 were $0.03 and
$0.01, respectively. The effects of applying SFAS 123 may not be
representative of the effects on reported net earnings (loss) for future
years.
26
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
The stock option activity under the Plan during the year ended September
30, 2000 is summarized as follows:
Weighted-
Year average
ended exercise
2000 price
--------- ---------
Beginning Balance $ -- --
Granted 470,000 2.44
Exercised -- --
Canceled (75,000) 2.88
--------- ---------
Ending Balance $ 395,000 2.36
========= =========
Options exercisable at period end $ --
=========
At September 30, 2000, 605,000 stock options were available for grant.
The options outstanding under the Plan as of September 30, 2000 have the
following attributes:
Option statistics $2.03 $2.50 $3.00
by price rages: to $2.49 to $2.99 and over
----------------- ----------------- -------------------
Options outstanding 280,000 75,000 40,000
Weighted-average price $ 2.14 2.63 3.38
Weighted-average remaining life 9.7 yrs 9.7 yrs 9.5 yrs
Number exercisable -- -- --
(5) Income Taxes
Prior to February 28, 2000 the Company was an S corporation for income tax
purposes and the tax profits or losses passed through to the shareholders.
On a proforma basis as if the Company had been taxed as a C corporation for
the year ended December 31, 1999 there would have been no income taxes or
benefits since the Company had a net operating loss and the benefit of such
carryforward would not have been recognized.
The income tax expense for 2000, differs from the "expected" tax expense
computed by applying the United States federal income tax rate of 34% to
the loss before income taxes, as follows:
27
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
2000
---------
Computed "expected" tax benefit for the period
February 28, 2000 through September 30, 2000,
the C corporation period $(264,114)
Increase (decrease) in "expected" tax expense
resulting from:
Net operating loss carryforward
not recognized 266,000
Other, net (1,886)
---------
Income tax benefit $ --
=========
At September 30, 2000 the only temporary difference that gave rise to a
significant portion of deferred income tax assets was a net operating loss
carryforward. The net operating loss of approximately $788,000 expires in
2020. A valuation allowance has been established for $268,000. The
valuation allowance at September 30, 2000 increased $266,000.
(6) Related Party
ISES Canada, a Canadian Company with common ownership through the Company's
president, provides software development and consulting services to the
Company. Fees paid or accrued to ISES Canada totaled $322,802 and $299,603
for the years ended September 30, 2000 and December 31, 1999, respectively.
(7) Business and Credit Concentration
For the year ended September 30, 2000 the Company had three customers who
accounted for approximately 66% of total sales. Included in trade accounts
receivable at September 30, 2000 was $99,163 due from these customers.
(8) Leases
The Company leases an office facility under an operating lease. For the
year ended September 30, 2000, rent expense was approximately $42,000.
28
SNAP2 CORPORATION
Notes to Financial Statements
September 30, 2000 and December 31, 1999
At September 30, 2000, the Company's future minimum Lease obligations are
approximately:
Year ending
September 30,
-------------
2001 $63,000
2002 58,500
2003 60,000
2004 61,000
2005 39,000
--------
$281,500
========
29
[Form of Proxy]
This Proxy is Solicited on Behalf of the Board of Directors
SNAP2 CORPORATION
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS ON FEBRUARY 22, 2001
The undersigned hereby constitutes and appoints Dean R. Grewell, III and Steven
L. Johnson or either of them, the proxies and attorneys for the undersigned,
each with full power of substitution, for and in the name, place, and stead of
the undersigned to attend the Annual Meeting of Shareholders of SNAP2
Corporation to be held at the main office of SNAP2 Corporation located at 10641
Justin Drive, Urbandale, Iowa, on February 22, 2001 at 2:00 p.m. and any
adjournments thereof, and to vote as directed below all shares of Common Stock
held of record by the undersigned on January 16, 2001, with all powers the
undersigned would possess if personally present at such meeting.
1. Election of Directors (mark only one box):
To withhold authority to vote for any individual nominee, strike a line
through the nominee's name.
|_| FOR all nominees listed below |_| WITHHOLD AUTHORITY on all
(except as marked to the nominees listed below
contrary below)
Dean R. Grewell, III
Steven L. Johnson
Mike Hennel
Antony F. Hoffman
Mark Malinak
Stephen Dukes
2. Ratification of the appointment of KPMG LLP as the independent auditors of
SNAP2 Corporation for the fiscal year ended September 30, 2000.
|_| FOR |_| AGAINST |_| ABSTAIN
3. In their discretion, upon such other matters as may properly come before
the meeting or any adjournments thereof.
This proxy when properly executed will be voted in the manner directed herein by
the shareholder. If no direction is given, this proxy will be voted FOR the
matters listed above.
Shareholders who are present at the meeting may withdraw their proxies and vote
in person if they so desire.
PLEASE MARK, SIGN, DATE, AND RETURN THIS PROXY PROMPTLY
USING THE ENCLOSED ENVELOPE
(Please sign exactly as your name appears on this proxy. When signing in a
representative capacity such as guardian, attorney, trustee, or executor, please
indicate your full title as such. Proxies by a corporation should be signed in
its name by an authorized officer. Proxies by a partnership should be signed in
its name by an authorized person. If more than one name appears, all persons so
designated should sign.)
The undersigned hereby acknowledges receipt of the Notice of the Annual Meeting
of Shareholders and Proxy Statement dated January 24, 2001.
Dated _______________, 2001 Signature ________________________