FULLER, TUBB, POMEROY & STOKES
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
201 ROBERT S. KERR AVENUE, SUITE 1000
OKLAHOMA CITY, OK 73102
G. M. FULLER (1920-1999) TELEPHONE 405-235-2575
JERRY TUBB FACSIMILE 405-232-8384
DAVID POMEROY
TERRY STOKES
--------
OF COUNSEL:
MICHAEL A. BICKFORD
THOMAS J. KENAN
ROLAND TAGUE
BRADLEY D. AVEY
January 17, 2003
Office of Small Business
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Softstone Inc.
Commission File No. 000-29523
Amendment No. 2 to Form 10-KSB
FYE 06-30-02
Gentlemen:
The attached Amendment No. 2 to Form 10-KSB is being filed solely to
include the report of the registrant's former independent auditor in response to
an oral comment received from the staff.
If you have any questions that might be properly handled by conversing with
the undersigned, please do so at my telephone number 405-235-2575, fax number
405-232-8384, or e-mail at kenan@ftpslaw.com.
Sincerely,
/s/ Thomas J. Kenan
Thomas J. Kenan
e-mail: kenan@ftpslaw.com
cc: Keith Boyd, President
Hamid Kabani, C.P.A.
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
OR
[ ] TRANSITION UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Softstone Inc.
(Exact name of registrant as specified in its charter)
Delaware 000-29523 73-1564807
(state of (Commission File Number) (IRS Employer
incorporation) I.D. Number)
111 Hilltop Lane, Pottsboro, TX 75076,
903-786-9618
-------------------------------------------------------
(Address and telephone number of registrant's principal
executive offices and principal place of business)
5 Interstate Court, Ardmore, OK 73401
580-223-3888
--------------------------------------------------------------
(Former Address and telephone number of registrant's principal
executive offices and principal place of business
if changed since last report)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past twelve months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X
No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $37,490
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of
October 15, 2002: $492,910.
As of September 30, 2002, there were 7,041,965 shares of the Registrant's Common
Stock, par value $0.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990). None
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
ii
TABLE OF CONTENTS
Page
----
Item 1 Description of Business 1
Item 2 Description of Property 9
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
Item 5 Market for Common Equity and Related Stockholder Matters 9
Item 6 Management's Discussion and Analysis 10
Item 7 Financial Statements 13
Item 8 Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 32
Item 9 Directors, Executive Officers, Promoters and
Control Persons 32
Item 10 Executive Compensation 34
Item 11 Security Ownership of Certain Beneficial Owners
and Management 35
Item 12 Certain Relationships and Related Transactions 36
Item 13 Exhibits and Reports on Form 8-K 36
Item 14 Controls and Procedures 37
Signatures 38
iii
Item 1. Description of Business.
Business Development.
----------------------
Our company was incorporated on January 28, 1999, pursuant to the
provisions of the General Corporation Act of the State of Delaware. On May 31,
1999, we merged with Soft Stone Building Products, Inc., an Oklahoma corporation
that was a predecessor to our company's business. Our initial business
operations were conducted at 620 Dallas Drive, Denton, Texas 76205. On February
1, 2000, we moved our offices and facilities to Ardmore, Oklahoma. In June 2002
we moved our production facilities to a building in Ardmore, OK at an industrial
air park and we moved our office facilities to 111 Hilltop Lane, Pottsboro,
Texas 75076, which is our present address.
Description of Business
-------------------------
Our focus initially was solely on realizing the commercial benefits of a
process developed for this purpose and patented by our first president,
Frederick Parker. Because we have this process, we have a contract with
Michelin North America's Ardmore tire manufacturing facility that pays us to
take its waste tires.
More recently our primary focus has shifted to the commercial possibilities
of a superior, newly discovered devulcanization process to which we recently
acquired a 5.5-year exclusive license for the Western Hemisphere.
Devulcanization - The Levgum Process
----------------------------------------
This process - called the Levgum Process after the name of the company of
scientists and engineers in Israel that developed and patented the process -
breaks down the sulfur links across polymer chains in vulcanized rubber. It
allows the rubber to be used again.
There are other devulcanization techniques. But, ours is better, cheaper
and eco-friendlier than all others.
Before we agreed to pay $250,000 for our exclusive license, we took the
Levgum devulcanized rubber product to the Akron Rubber Development Laboratory in
Akron, Ohio for testing and for comparison with virgin rubber and with the best
devulcanized rubber produced by other techniques. The laboratory results:
- Levgum devulcanized rubber retains 80 percent of virgin rubber's
properties, making it most useful. Other techniques retain 40 percent at
best.
- Levgum's devulcanized rubber can be produced at significantly less cost
than can other devulcanization technologies or than the cost of virgin
rubber.
1
- We use conventional machines operating at room temperatures. Competing
technologies employ lengthy operations involving grinding, chemical, heating
and mechanical processes.
- The Levgum devulcanization process is non-toxic and eco-friendly. Other
technologies are not.
-
We took a sample of the Levgum devulcanized rubber and the Akron Rubber
Development Laboratory test results to the chief chemist at Michelin's Ardmore
tire factory. The chemist advised us that our product is superior to all other
devulcanized rubber products. He sent a sample of it and a copy of the
laboratory test results to Michelin North America's home office. He speculated
that Michelin could well decide to substitute our product for five percent of
the virgin rubber used in its tires and that other tire manufacturers could well
substitute our product for even higher percentages of virgin rubber. This
equates to an enormous amount.
We shall exploit our licensed technology through sub-licenses throughout
the Western Hemisphere. In addition to our Michelin contract, we are engaged in
discussions with Rubbermaid's principal plant in Mexico. It has to dispose of
150 tons of waste rubber a month. By substituting our Levgum technology and
making use of its own waste rubber, this Rubbermaid facility should effect
savings of $99,000 a month - savings that drop to its bottom line.
We do not propose to build devulcanization plants. Instead, we propose to
sub-contract the initial manufacturing of the devulcanized rubber and then sell
sub-licenses to other companies. We will also offer our assistance with the
marketing of the devulcanized rubber for a commission. Prospective licensees can
send representatives to us to learn the nuances of the Levgum process, and we
will offer through our contacts a turnkey system for r their own devulcanization
facilities. Our license obligations to Levgum and our anticipated charges to our
sub-licensees are as follows:
Charges
---------------------------------------------
Our outgo Income from Net to
to Levgum sub-licensees Softstone
---------- ------------- ---------
Levgum-supplied "modifier"
to mix with used rubber $3,000 a ton $3,500 a ton $500 a ton
Royalty on a ton of Levgum-
processed rubber $30 a ton $60 a ton $30 a ton
Sub-license fee $0 Will vary Will vary
We need $50,000 in capital to fund our manufacture of a fully automated
tire de-beader, which we propose to then manufacture for sale to the industry,
to pursue opportunities to sublicense the Levgum devulcanization technology, and
to market crumb rubber produced by us or other manufacturers. We have not
identified the source of these funds.
2
Devulcanization
---------------
Technology exists today to "fine grind" rubber from 80 to 200 mesh (holes
per square inch). This technology has long been the best source for injecting
recycled rubber into virgin rubber mixes. The cost to do so is extremely high;
often costing 20 to 30 percent more than the cost of virgin rubber itself.
Rubber manufacturing companies do this to meet government regulations and to
have a way to recycle their own waste. Rubber disposal is extremely expensive;
companies that can "fine grind" have the ability to sell back to a company 100%
of its scrap in a usable form.
For years, manufacturers tried to establish a process which breaks the
sulfur links across polymer chains (devulcanize) without hurting the original
chemical properties, allowing the resulting material to be re-deployed in new
and existing products. Although some have been successful, they were plagued
with economic or environmental problems. Softstone has a 5.5-year exclusive
license to the Western Hemisphere for a process that (i) breaks the sulfur
lattice under normal room temperature conditions using conventional machines and
(ii) does away with the expensive and lengthy operations involving grinding,
chemical, heating and mechanical processes. It is the only process known today
where relatively large pieces of rubber waste can be used, a feature that saves
substantial amounts of investment in terms of plant and machinery, labor, power,
space, storage and transportation. The process itself is 100% non-toxic and eco
friendly. The final product produced is in granular form and, when mixed with
virgin rubber or master compounds, results in better homogeneity than any other
process available today. The test results we obtained from a test facility in
Akron, Ohio proved that the devulcanized rubber, itself, maintains 80% of the
original properties of the uncured compound. This results in a product that can
be produced and sold far cheaper than the "fine grind" powders while maintaining
much higher physical properties.
Our devulcanized rubber development plan is as follows:
1. Develop a turnkey devulcanization system.
2. Develop the market.
3. Sub-license the technology to large recyclers, the largest of which has
contacted Softstone and is very interested in using the technology.
4 Manufacture an automated tire de-beader.
Softstone envisions utilizing its contacts in the recycled rubber and
virgin rubber industry to establish market presence. We see no need at this
time to establish a raw material supply beyond the needs of the development
location to implement the devulcanized technology into the market. Instead, we
plan to expand on our relationships with crumb rubber manufacturers by
sublicensing the technology and jointly developing the market.
Our compensation for these efforts will come from the following sources.
1. Sales of devulcanized rubber from the pilot plant in Ardmore.
2. Sales of sub-licenses.
3
3. Sales of the automated tire de-beader.
4. Royalties for the amount of rubber devulcanized with our process and
commissions on sales.
Conversion of Waste Tires Into Useful Products
----------------------------------------------------
There is a worldwide need for a method to convert whole waste tires into
useful products with no waste as a byproduct and with favorable economic
results. New tire manufacturers in the U.S. are required to dispose of their
manufacturing rejects without creating an unsightly mess or adding to ecological
problems. Government agencies at all levels tend to cooperate with any company
having a reasonable means of disposing of the approximately seven million tires
each year that are discarded as rejects or as worn-out tires. Virtually every
state has a program whereby it pays a fee per tire to qualified companies that
dispose of used tires.
Softstone's past president, Frederick Parker, is a co-inventor of a
patented process Softstone uses to convert waste tires into useful products.
The Parker I System machine was constructed in Ardmore, Oklahoma as a
proof-of-concept prototype. With subtle adjustments recently made, this machine
became a production model that ingests whole tires at one end of the machine and
ejects rubber modules at the other end with virtually no waste or contaminants.
The rubber modules are virtually indestructible and have been tested for use as
a playground covering, pathways, walking trails, horse barn stalls and other
uses.
The Parker I System machine can make a variety of products by using
different molds. Our most popular product is a two-foot by four-foot module
approximately two inches thick that interlocks with adjacent modules for walk
ways and driveways. However, the size and thickness of the modules can be
adjusted for use as highway cone holders, crash barriers, guardrails, bridge and
road impact pads and as a substitute for asphalt in several key applications.
Approximately 80 to 85 percent of the modules' composition is comprised of
wire-free tire chips. The balance is comprised of readily available
polyurethane binders and other substances.
We have raised and spent approximately $1.5 million since inception on
developing our patented process and on designing and constructing our Parker
System I proof-of-concept machine in Joshua, Texas. The Parker System I is
highly automated. Whole tires are inserted into a shredder, reduced to chip
rubber, blended with a specially prepared binder element, placed into a custom
mold and then pressed into place and locked. These molds are then moved on a
conveyor belt through a heated oven where the product cures and comes out the
other end as a rubber-molded product ready for sale. We believe there is no more
efficient or economical method of processing tires into finished products than
our process.
We need to refurbish our tire shredder and to purchase equipment that
produces wire-free chips from the shredded tires. However, once this equipment
is added to our existing machinery, our plant should become profitable and will
have several cash flow streams -
- tire revenue from Michelin,
4
- sale of modules,
- sale of extra crumb rubber,
- sale of excess chip rubber for use as tire-derived fuel in cement plants
in the southwestern U.S., and
- additional rubber-molded product lines (still to be developed).
Our modules have withstood a 300,000-pound deformation test and immediately
rebounded; yet, the product has qualified for installation on children's
playgrounds. The product is ready to be installed immediately after it is made.
There is no curing time necessary. The product is relatively light but does not
break, crack or tear.
We have attended U.S. Army Corps of Engineers presentations at which our
product was discussed by the Corps as a suitable substitute for concrete in uses
such as erosion control along the Mississippi River. Our articulated mattress
configurations have multiple applications for the Corps -
- in soil conservation,
- along highways,
- at beaches as storm surge protection,
- for wetlands protection,
- as temporary roads over delicate marshlands,
- to prevent riverbank erosion, and
- underwater, to cover transoceanic pipelines and protect them from being
snagged by fishnets.
We believe, however, that the primary markets for our products are paving
applications where concrete and asphalt now dominate, such as sidewalks,
driveways and trails. Concrete and asphalt have significant drawbacks compared
to Softstone-based products. Concrete and asphalt crack and heave due to soil
and weather conditions. They often must be replaced after a few years of use.
Softstone's rubber modules, however, will not crack because of weather's cold or
melt because of its heat. If there is a soil heaving condition, our product can
be lifted and relaid when the ground condition is corrected.
Distribution Methods
---------------------
We have one distributor of the product in Oklahoma City, Trinity Brick
Sales, Inc. Softstone has several interested parties; however, we await the
refurbishment of our tire shredder and the installation of the equipment that
5
produces wire-free chips from the shredded tires before we increase this staff.
Our strategy is to market our rubber products primarily and directly to
construction companies, home builders, landscape architects, golf course
designers, road and path construction companies and municipalities. We also
intend to market directly to end-users and distributors through independent,
commissioned salesmen.
Competitive Business Conditions
---------------------------------
Many firms make molded rubber products, including some for patio, horse trailer
and barn applications. It is our observation and belief that our products are
superior to all others in economics and durability.
Once we complete the installation in our integrated plant of equipment that
will reduce tires to wire-free tire chips, Softstone will commence to realize
its potential from our molding operations. We estimate we can achieve gross
revenue of more than $2 million a year from our single "prototype-production"
assembly line, with a gross margin of better than 60 percent. If we add a
second assembly line, we estimate that our gross margin will increase to better
than 70 percent. We doubt that our competition can compete with such
efficiency. To the best of our knowledge and belief, no other company takes a
whole tire and reduces it to a useable retail product in a single, continuous
process with no waste or by-product.
Sources and Availability of Raw Materials; Names of Principal Suppliers
--------------------------------------------------------------------------------
There is virtually an endless supply of waste tires. Many sources will pay
us to take the tires off their hands. Michelin pays us $0.77 to $0.85 a tire
and states that it would like to do this at every one of its eighteen U.S. tire
manufacturing facilities.
We currently use pure MDI-based RoyalBond binders from Uniroyal Chemical.
MDI - methylene diphenyl diisocyanate - in its pure form provides superior
adhesion between rubber particles and the surrounding polymer and improves
properties such as flex-life, elongation and long-term weatherability.
Dependence on Major Customers or Suppliers
-----------------------------------------------
While our present source of supply of tires is reject tires from the
Michelin tire manufacturing facility in Ardmore, Oklahoma, and our source of
binder is MDI-based RoyalBond binder from Uniroyal Chemical, we are not
dependent on either of these for their products. There are ample supplies of
used tires - more than we can use - within the Oklahoma City and Dallas, Texas
areas, both of which are less than two hours driving distance from our offices
in Pottsboro, Texas on the Texas-Oklahoma border. As for binders, MDI-based
binders are readily available from other sources.
We are still in the development stage as far as sales are concerned and are
not dependent on any major customers. However, our lack of significant sales is
due to our need for a wire-free chip producing grinder.
Patents, Trademarks and Licenses
-----------------------------------
6
The inventors of our patented Parker One System, one of whom is Frederick
Parker, our past president, have assigned the patent to Softstone with no
retained royalty.
We have a 5.5-year exclusive license to the Levgum devulcanization
technology for the Western Hemisphere.
Government Approval of Principal Products or Services
-----------------------------------------------------------
We are not required to obtain the approval of our products by any
governmental agency. Our operations, however, are subject to a number of
governmental regulations.
Government Regulations
-----------------------
Our operations are subject to regulation by various federal, state and
local governmental entities and enactments, which include environmental laws and
workplace regulations, including the Occupational Safety and Health Act, the
Fair Labor Standards Act, the Clean Air Act, the Clean Water Act and other laws
and regulations regarding health, safety, sanitation, environmental issues,
building codes and fire codes. We believe that our current compliance programs
adequately address such concerns and that we will be in substantial compliance
with such laws and regulations. Our failure to comply with such laws and
regulations could result in serious sanctions and penalties that could
materially and adversely affect our business.
Research and Development
--------------------------
We have spent approximately $650,000 over the last two years in
research and development activities with regard to the development of our
products. None of the cost of these activities was borne directly by our
customers.
Environmental Laws
-------------------
We must comply with the environmental regulations of the Environmental
Protection Agency and the equivalent Oklahoma and Texas agencies charged with
environmental protection. This consists, primarily, in complying with
regulations regarding the disposal of waste products. Such compliance requires
no significant outlay of capital by us and only minimum costs. We produce no
hazardous waste as most of our competitors do.
Seasonality
-----------
There is no seasonal aspect to our business.
7
Employees
---------
At present we have one full-time employee and no part-time employees. We
propose to add seven full-time and five part-time employees at such time as we
install equipment that converts shredded tires into wire-free tire chips.
Exclusive License With Levgum, Ltd.
---------------------------------------
On March 15, 2002 we executed an agreement with Levgum, Ltd. of Tel Aviv,
Israel. Levgum owns patents pertaining to certain technology for the
devulcanization of rubber tires. We are convinced that this is the best
devulcanization technology in the world and that it is commercially viable, as
compared to other devulcanization technologies that work but cost more to apply
per pound of rubber produced than the cost of virgin rubber.
Levgum shipped to us ten kilograms of its devulcanized rubber for us to
perform laboratory trials on. The trials were most satisfactory. We then
acquired the exclusive rights to Levgum's technology for the Western Hemisphere,
including the right to sublicense the technology in this geographic area.
We paid $250,000 to Levgum for these exclusive rights for a 5.5 year period
and for a ten percent equity interest in Levgum. To retain the exclusive rights,
we will have to remit royalties to Levgum as follows:
First 18 months: $ 200,000
Next 12 months: 1,000,000
Next 12 months: 2,000,000
Next 12 months: 3,000,000
Next 12 months: 5,000,000
The royalties will consist of $30 for each ton of devulcanized rubber
produced in the Western Hemisphere using Levgum's devulcanization technology.
Reports to Security Holders
------------------------------
We file reports with the Securities and Exchange Commission. These reports
are annual 10-KSB, quarterly 10-QSB, and periodic 8-K reports. We also intend
to furnish stockholders with annual reports containing financial statements
audited by independent public or certified accountants and such other periodic
reports as we may deem appropriate or as required by law. The public may read
and copy any materials we file with the SEC at the Public Reference Room of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. We are an electronic filer, and the SEC maintains an Internet
Web site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC. The
address of such site is http://www.sec.gov.
8
Item 2. Description of Property.
We neither own nor lease any office or manufacturing space. Our office
space is provided rent free in Pottsboro, Texas by our president, and our
manufacturing space, in which all our tire processing equipment has been placed,
has been provided rent free in Ardmore, Oklahoma by the Ardmore Development
Authority.
Item 3. Legal Proceedings.
Neither our company nor any of our property is a party to, or the subject
of, any material pending legal proceedings other than ordinary, routine
litigation incidental to our business.
Item 4. Submission of Matters to a Vote of Security Holders.
There have been no matters submitted to a vote of our stockholders during
the last fiscal year or during the subsequent period to the filing of this
report.
Item 5. Market for Common Equity and Related Stockholder Matters.
Our common stock was admitted to trading on the OTC Bulletin Board on April
17, 2002. Its stock symbol is "SOFS." The following table shows the quarterly
high and low prices of the stock since it was admitted to trading. The prices
reflect inter-dealer quotations without mark-up, mark-down or commissions and
may not represent actual transactions.
High Low
Calendar 2002:
2nd Qtr 0.51 0.11
3rd Qtr 0.25 0.06
There are approximately 173 holders of record of our company's common
stock.
Our company has declared no dividends on our common stock. There are no
restrictions that would or are likely to limit the ability of our company to pay
dividends on its common stock, but we have no plans to pay dividends in the
foreseeable future and intend to use earnings for the expansion of our business.
Recent Sales of Unregistered Securities
-------------------------------------------
During the past three years Softstone sold shares of its Common Stock
without registering them as follows:
9
Amount of
Date Amount Purchasers Consideration Type of Consideration
-------------- ------ ----------------------------- ------------- ---------------------
07/99 to 07/00 250,000 Employees and consultants(1) $212,500 Services
22,500 Employee(1) $22,490 Services and vehicles
400,000 Officers(1) 383,097 Cash and cancellation
of notes payable
210,000 Employees(1) 210,000 Services
423,190 Rule 405 Offering 503,782 Cash
07/00 to 07/01 42,500 Rule 405 Offering 53,125 Cash
675,000 Warrant Holders(2) 675 Cash
300,000 Officer(2) 21,922 Assignment of Patent
18,000 Officer(2) 18,525 Office equipment
522,961 Consultants(2) 52,296 Services
277,100 Rule 506 Offering 47,944 Cash
07/01 to 07/02 545,200 Rule 506 Offering 254,520 Cash
825,075 Rule 506 Offering 322,247 Services
52,250 Rule 506 Offering 24,290 Cancellation of Interest
on Debt
1,158,387 Rule 506 Merger 1,158 Corporate shell
(1) Sold in an offering exempt from registration pursuant to the
provisions of Regulation D, Rule 504. The 504 offering was
registered with the securities regulatory authorities in each
state where securities were sold.
(2) Sold in an offering exempt from registration pursuant to the
provisions of Regulation D, Rule 506. All purchasers were either
"accredited investors" or, if not, were provided with offering
materials that met the requirements of a Form SB-2 offering
circular. All purchasers were provided with an opportunity to ask
questions of management before making their investment decisions.
Item 6. Management's Discussion and Analysis.
The following discussion and analysis should be read in conjunction with
the financial statements and the accompanying notes thereto and is qualified in
its entirety by the foregoing and by more detailed financial information
appearing elsewhere. See "Financial Statements."
Results of operations.
------------------------
The following table presents, as a percentage of sales, certain selected
financial data for each of fiscal years June 30, 2002 and June 30, 2001:
Fiscal Year Ended
-----------------
06-30-2002 06-30-2001
---------- ----------
Sales 100% 100%
Operating expenses 2,007% 1,335%
Income from operations (1,907)% (1,235)%
Other expenses (1,038)% 88%
Net income (loss) (2,945)% (1,322)%
Net loss per share $(0.18) $(0.06)
10
Sales.
------
Sales of $37,490 for fiscal year 2002 increased by $7,403, or 25 percent
over sales of $30,087 in fiscal 2001. The increase is due primarily to an order
from the City of Ardmore for an installation at Douglas Park.
Operating expenses.
--------------------
Operating expenses increased from $401,548 in fiscal 2001 to $752,324 in
fiscal 2002, or 87 percent. This 87 percent increase is attributed primarily to
the purchase of, and research conducted prior to, the purchase of the Levgum
Devulcanization Technology.
Net income (loss).
--------------------
Our net loss of $397,809 in fiscal 2001 plummeted to a net loss of
$1,104,133 in fiscal 2002. This increase is attributed to the company's is
purchasing the rights to a foreign patent for $250,000, which purchase had to be
expensed as the patent has not been appraised, the compensation of individuals
with stock and the cost associated with the reorganization of the company to
alleviate overhead. We have temporarily stored our production equipment until
we obtain a needed tire shredder, in order to conserve money.
Balance sheet items.
----------------------
Current assets of $3,836 on June 30, 2002, compares unfavorably with
current liabilities of $673,467 at that time, an unfavorable current ratio of
..006.
Liquidity and Capital Resources.
-----------------------------------
During the fiscal year ended June 30, 2001, we financed our net loss of
$397,809 primarily through -
- sales of common stock for $164,640 in cash,
- the issuance of $92,743 worth of common stock for services, equipment and
a patent, and
- loans amounting to $250,941 from an officer and director of the company.
During the fiscal year ended June 30, 2002, we financed our net loss
of $1,104,133 primarily through -
11
- sales of common stock for $254,520 in cash,
- loans of $287,263,
- the issuance of $346,537 worth of common stock for services and interest,
- depreciation and amortization of $83,307,
- a $125,000 loss on an investment, and
- a $214,444 loss on the impairment of assets.
OUTLOOK
The statements made in this Outlook are based on current plans and
expectations. These statements are forward looking, and actual results may vary
considerably from those that are planned.
We have been unable to raise funds for the renovation of our tire shredder
and the purchase of equipment that produces wire-free chips from shredded tires.
We were able, however, to raise $250,000 to acquire the exclusive license from
Levgum for the Western Hemisphere rights to its devulcanization technology. We
have shifted our business emphasis to exploiting such license, to manufacturing
a fully automated tire de-beader for sale to the industry and to selling crumb
rubber manufactured by other manufacturers.
We have cut our overhead by laying off our tire processing crew, by moving
our tire processing equipment to rent-free space in Ardmore, OK and by moving
our corporate offices to Pottsboro, Texas to space provided rent free by our
president. We are enthusiastic about our prospects regarding sublicensing our
devulcanization technology, selling our fully automated tire de-beader machine
and selling crumb rubber to our many contacts in the industry.
Our future results of operations and the other forward-looking statements
contained in this Report involve a number of risks and uncertainties. In
addition to the factors discussed above, among the other factors that could
cause actual results to differ materially are the following: the loss of any of
several key personnel; the emergence of competition not now detected; and a
general economic turndown.
12
Item 7. Financial Statements.
Page
----
Independent Auditors' Report dated September 27, 2002 14
Independent Auditors' Report dated October 15, 2001 15
Balance Sheet June 30, 2002 16
Statements of Operations from October 7, 1998
(Inception) through June 30, 2002 17
Statements of Stockholders' Equity (Deficit)
from October 7, 1998 (Inception)
through June 30, 2002 18
Statements of Cash Flows from October 7, 1998
(Inception) through June 30, 2002 20
Notes to the Financial Statements 21
13
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Stockholders and Board of Directors
Softstone, Inc.
We have audited the accompanying balance sheet of Softstone, Inc. (a development
stage company) as of June 30, 2002 and the related statements of operations,
stockholders' equity and cash flows for the period then ended and for the period
from October 7, 1998 (inception), to June 30, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Softstone, Inc. as of June 30,
2002 and the results of its operations and its cash flows for the period then
ended and from October 7, 1998 (inception), to June 30, 2002, in conformity with
accounting principles generally accepted in the United States of America.
The Company's financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has not earned any revenue since its inception and through
June 30, 2002, the Company had incurred cumulative losses of $2,808,548 and
negative working capital of $667,631. These factors, as discussed in Note 9 to
the financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 9. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/Kabani & Company, Inc.
KABANI & COMPANY, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Fountain Valley, California
September 27, 2002
14
Independent Auditors' Report
Board of Directors
Softstone, Inc.
We have audited the accompanying statements of operations, stockholders' equity
(deficit), and cash flows for the year ended June 30, 2001 of Softstone, Inc. (a
development stage company). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements of Softstone, Inc. referred to above
present fairly, in all material respects, the results of its operations, cash
flows and changes in stockholders' equity (deficit) for the year ended June 30,
2001 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, the Company has been in the
development stage since its inception on October 7, 1998, and the primary
activities include establishing its operations and raising capital to fund its
activities. The Company incurred losses since inception to June 30, 2001, of
$1,704,415. Realization of a major portion of its assets and satisfaction of its
liabilities is dependent upon the Company's ability to meet its future financing
requirements and the success of future operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might arise as a
result of this uncertainty.
Hogan and Slovacek
/s/ Hogan and Slovacek
Oklahoma City, Oklahoma
October 15, 2001
15
SOFTSTONE, INC
(A Development Stage Company)
BALANCE SHEET
June 30, 2002
ASSETS
------
CURRENT ASSETS:
Cash & cash equivalents $ 1,253
Accounts receivable 2,583
-----------
Total current assets 3,836
-----------
PROPERTY AND EQUIPMENT, net 421,837
-----------
$ 425,673
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
----------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 39,366
Accounts payable-related party 160,879
Accrued expenses 29,618
Loans - current 443,605
-----------
Total current liabilities 673,467
-----------
LONG TERM LIABILITIES
Notes payable 56,014
Loans from related parties, net of current portion 262,537
COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 30,000,000
shares authorized; 7,041,965 shares issued
and outstanding 7,042
Additional paid-in capital 2,232,162
Shares to be issued 2,999
Deficit accumulated from inception (2,808,548)
-----------
Total stockholders' deficit (566,345)
-----------
$ 425,673
===========
The accompanying notes are an integral part of these financial statements.
16
SOFTSTONE, INC
(A Development Stage Company)
STATEMENTS OF OPERATIONS
FROM OCTOBER 7, 1998 (INCEPTION) THROUGH JUNE 30, 2002
Cumulative
From Inception
Year Ended June 30, (October 7, 1998) to
2002 2001 June 30, 2002
------------ ------------ --------------------
Net revenues $ 37,490 $ 30,087 $ 71,675
Operating expenses
General and administrative 752,324 401,548 2,440,277
------------ ------------ -------------
Operating loss (714,834) (371,461) (2,368,602)
Other expense:
Interest expense 49,855 26,348 100,502
Loss on investment 125,000 - 125,000
Loss on impairment of
intangibles 214,444 - 214,444
------------ ------------ -------------
Total other expense 389,299 26,348 439,946
Loss before income taxes (1,104,133) (397,809) (2,808,548)
Income tax - - -
Net loss $ (1,104,133) $ (397,809) $(2,808,548)
============ ============ ===========
Basic weighted average number
of common stock outstanding 6,174,516 6,629,351
============ ============
Basic net loss per share $ (0.18) $ (0.06)
============ ============
Diluted weighted average
number of common stock
outstanding 6,174,516 6,629,351
============ ============
Diluted net Loss per share $ (0.18) $ (0.06)
============ ============
The accompanying notes are an integral part of these financial statements.
17
SOFTSTONE, INC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM OCTOBER 7, 1998 (INCEPTION) THROUGH JUNE 30, 2002
Deficit Total
Common Stock Additional Stock accumulated Stockholders'
Number of Paid-In to be Unearned from Equity
shares Amount Capital issued Compensation inception (Deficit)
--------- ------ ------------ ---------- ------------ ------------- -------------
Shares issued for
cash - Oct. 7, 1998 5,000,000 $ 5,000 $ 51,100 $ - $ - $ - $ 56,100
Stock issued for cash
and services 292,500 293 43,582 - - - 43,875
Net loss - - - - - (197,426) (197,426)
---------- ------- ------------ -------- -------- ------------ ------------
Balance, June 30 1999 5,292,500 5,293 94,682 - - (197,426) (97,451)
Stock issued for
services ($.85/shr) 250,000 250 212,250 - - - (251,002)
Stock issued for
services and vehicle
($1.00/shr) 22,500 22 22,478 - - - -
Warrants issued to
employees - - 75,000 - (75,000) - -
Stock issued for
settlement of ST notes
payable ($34,250) and
cash ($1.00/shr) 400,000 400 382,697 - - - 383,097
Stock issued for
services ($1.00/shr) 210,000 210 209,790 - - - 210,000
Stock issued for cash
net of offering cost
of $25,783
($1.25/shr) 423,190 423 502,782 - - - 503,205
Amortization of
unearned compensation - - - - 11,250 - 11,250
Net Loss - - - - (1,109,180) (1,109,180)
---------- ------- ------------ -------- -------- ------------ ------------
Balance June 30, 2000 6,598,190 6,598 1,499,679 - (63,750) (1,306,606) (350,081)
Stock issued for
cash ($1.25/shr) 42,500 43 53,082 - - - 53,125
Unearned warrants
granted to employee
upon termination - - (63,750) - 63,750 - -
Warrants exercised 675,000 675 - - - - 675
Stock issued in exchange
for patent ($.33/shr) 300,000 300 21,622 - - - 21,922
18
SOFTSTONE, INC
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
FROM OCTOBER 7, 1998 (INCEPTION) THROUGH JUNE 30, 2002
Deficit Total
Common Stock Additional Stock accumulated Stockholders'
Number of Paid-In to be Unearned from Equity
shares Amount Capital issued Compensation inception (Deficit)
--------- ------ ------------ ---------- ------------ ------------- -------------
Stock issued in exchange
for office equipment
($1.03/shr) 18,000 18 18,507 - - - 18,525
Stock contributed back
to Company by
principals (3,947,698) (3,948) 3,948 - - - -
Stock issued for
service ($.10/shr) 522,961 523 51,773 - - - 52,296
Stock issued for cash
($.40/shr) net of
offering cost of
$62,896 277,100 277 47,667 - - - 47,944
Net Loss - - - - - (397,809) (397,809)
---------- ------- ------------ -------- -------- ------------ ------------
Balance 30, 2001 4,486,053 4,486 1,632,528 - - (1,704,415) (553,403)
Share issued for cash
($.40/shr) 243,300 243 97,077 - - - 97,320
Shares issued for cash
($.50/shr) 289,400 290 144,410 - - - 144,700
Shares issued for cash
($1.00/shr) 12,500 13 12,487 - - - 12,500
Share issued for
service ($.36/shr) 257,075 257 92,290 - - - 92,547
Share issued for
service ($.40/shr) 543,000 543 216,657 - - - 217,200
Share issued for
service ($.50/shr) 25,000 25 12,475 - - - 12,500
Shares issued for
interest ($.45/shr) 52,250 52 24,238 - - - 24,290
Shares issued for
merger ($.001/shr) 1,158,387 1,158 - - - - 1,158
Shares to be issued
for cash ($.33/shr) - - - 999 - - 999
shares to be issued
for loan incentive
($.40/shr) - - - 2,000 - - 2,000
Cancellation of shares (25,000) (25) - - - - (25)
Net loss - - - - - (1,104,133) (1,104,133)
---------- ------- ------------ -------- -------- ------------ ------------
Balance June 30, 2002 7,041,965 $ 7,042 $ 2,232,162 $ 2,999 $ - $ (2,808,548) $(1,052,347)
========= ======= ============ ======= ======== ============ ===========
The accompanying notes are an integral part of these financial statements.
19
SOFTSTONE, INC
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
FROM OCTOBER 7, 1998 (INCEPTION) THROUGH JUNE 30, 2002
Cumulative
From Inception
Year Ended June 30, (October 7, 1998) to
2002 2001 June 30, 2002
------------ ------------ --------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (1,104,133) $ (397,809) $ (2,808,548)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization 83,307 82,230 221,102
Issuance of common stock
for compensation - - 487,332
Issuance of common stock
for services and
interest 346,537 - 346,537
Issuance of common stock
for merger 1,133 - 1,133
Shares to be issued for
loan incentive 2,000 - 2,000
Loss on investment 125,000 - 125,000
Loss on impairment
of assets 214,444 - 214,444
Write-off of samples - 11,712 11,712
(Increase) decrease of
other current assets 4,473 (4,473) (20,044)
Increase of accounts
receivable (2,583) (2,583)
Increase (decrease) in
accounts payable 22,368 (12,081) 32,497
Increase (decrease) in
accrued expense 8,252 (2,717) 33,488
------------ ------------ ------------
Total adjustments 804,931 74,671 1,452,618
------------ ------------ ------------
Net cash used in
operating activities (299,202) (323,138) (1,355,930)
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of
patents/investment (250,000) - (250,000)
Other - (384) (384)
Purchase of property
and equipment - (31,380) (419,859)
Net cash used in
investing activities (250,000) (31,764) (670,243)
------------ ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Investments by stockholders - 250,941 250,941
Proceeds from borrowings 287,263 75,360 608,015
Payments on borrowings (5,000) (130,937) (160,134)
Issuance of common stock
for cash 254,520 164,640 1,327,605
Receipt of cash for stock
to be issued 999 - 999
------------ ------------ ------------
Net cash provided by
financing activities 537,782 360,004 2,027,426
------------ ------------ ------------
Net increase (decrease) in
cash & cash equivalents (11,420) 5,102 1,253
CASH & CASH EQUIVALENTS,
BEGINNING 12,673 7,571 -
CASH & CASH EQUIVALENTS,
ENDING $ 1,253 $ 12,673 $ 1,253
============ ============ ============
CASH PAID FOR:
Interest $ 31,318 $ 12,953 $ 44,770
============ ============ ============
Income taxes $ 0 $ 0 $ 0
============ ============ ============
The accompanying notes are an integral part of these financial statements.
20
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATIONS AND DESCRIPTION OF BUSINESS
Softstone, Inc. (the "Company"), a development stage company, was formed to
manufacture a patented rubber product used in the road and building
construction industries and has been in the development stage since
inception (October 7, 1998). The Company plans to create rubber modules
entirely from recycled tires which can be used in the construction of
roads, driveways, decks, and other types of walkways. Its principal
activities have consisted of financial planning, establishing sources of
production and supply, developing markets, and raising capital. Its
principal operations have not started and the Company has no present
sources of significant revenues. Realization of a major portion of its
assets and satisfaction of its liabilities is dependent upon the Company's
ability to meet its future financing requirements and the success of future
operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern (see Note 9 for more information
regarding these matters). The financial statements do not include any
adjustments that might arise as a result of this uncertainty.
On October 7, 1998, SoftStone Building Products, Inc. ("SSBI" - an Oklahoma
corporation and predecessor to the Company) was incorporated. Effective May
31, 1999, SSBI was merged into Softstone, Inc. (incorporated January 28,
1999 under the laws of the State of Delaware) and SSBI was subsequently
dissolved. Each share of previously outstanding common stock was converted
into 2,500 shares of common stock of the new entity and the new
capitalization is reflected in the accompanying financial statements as if
it had occurred at the beginning of the period presented.
On July 24, 2001, the Company entered into a plan of reorganization
involving Kilkenny Acquisition Corp. (Kilkenny) whereby the Company is the
survivor and in control of the board of directors. The merger agreement
provided for the exchange of 1,158,387 shares of the Company's common stock
for all the common stock of Kilkenny. In connection with this merger, on
April 4, 2001, certain insider shareholders of the Company contributed
3,947,698 shares of their common stock to the Company effectively reducing
the then outstanding shares of stock to 3,685,992. Subsequent issues of
common stock for cash and services increased the outstanding stock of the
Company to 4,590,646. The issuance of the above mentioned shares of the
Company's common stock on the merger date increased the common stock of the
Company to 5,669,033 with the Company shareholders, prior to the merger,
owning approximately 81% of the outstanding shares of the Company. For
accounting purposes, the transaction between the Company and Kilkenny has
been treated as a re-capitalization of the Company, with the Company as
the accounting acquirer (reverse acquisition), and has been accounted for
in a manner similar to a pooling of interests. Since Kilkenny is a dormant
entity with insignificant assets or liabilities, no pro forma information
is presented.
21
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
Property and equipment
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are charged to expense as incurred. Upon sale, retirement, or
other disposition, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is reflected in
operations for the period. The Company depreciates property and equipment
using the straight-line method over their estimated useful lives ranging
from five to seven years.
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the related carrying
amount may not be recoverable. When required, impairment losses are
recognized based upon the estimated fair value of the asset. Being a
development stage company, the Company does not believe any of its property
and equipment is impaired.
Patent and patent license agreement
In August 2000, patent rights amounting to $100,000 were acquired, in
exchange for 300,000 shares of common stock, forgiveness of debt and
assumption of additional debt. Patent rights were acquired for the
manufacturing process and had been amortized using the straight-line method
over fifteen years. In March 2002, additional patent rights were purchased
for $125,000. The net book value of $89,444 for the patent purchased in
2000 and the newly purchased patent of $125,000 were written off as
impairment of intangible assets as on June 30, 2002.
Revenue recognition
The Company's revenue recognition policies are in compliance with Staff
Accounting Bulletin (SAB) 101. Revenue is recognized when merchandise is
shipped to a customer. The Company currently has no significant revenues as
it is still in the development stage.
Income taxes
Deferred income taxes are provided on temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements that will result in taxable or deductible amounts in future
years. Deferred income tax assets or liability are determined by applying
the presently enacted tax rates and laws.
22
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Fair value of financial instruments
The carrying amount of all financial instruments at June 30, 2002 and 2001,
which consist of various notes and loans payable, approximate their fair
values.
Earnings per share
Net loss per share is calculated in accordance with the Statement of
financial accounting standards No. 128 (SFAS No. 128), "Earnings per
share". Basic net loss per share is based upon the weighted average number
of common shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options and warrants are assumed to be exercised
at the beginning of the period (or at the time of issuance, if later), and
as if funds obtained thereby were used to purchase common stock at the
average market price during the period.
Weighted average number of shares used to compute basic and diluted loss
per share is the same in this financial statement since the effect of
dilutive securities is anti-dilutive.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Stock-based compensation
SFAS No. 123 prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options,
restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS No. 123 requires compensation expense to be recorded (i) using
the new fair value method or (ii) using the existing accounting rules
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
stock issued to employees" (APB 25) and related interpretations with
proforma disclosure of what net income and earnings per share would have
been had the Company adopted the new fair value method. The Company has
chosen to account for stock-based compensation using Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
has adopted the disclosure only provisions of SFAS 123. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of the grant
over the amount an employee is required to pay for the stock.
The Company accounts for stock-based compensation issued to non-employees
and consultants in accordance with the provisions of SFAS 123 and the
23
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"),
"Accounting for Equity Instruments that are Issued to Other Than Employees
for Acquiring or in Conjunction with Selling, Goods or Services". Valuation
of shares for services is based on the estimated fair market value of the
services performed.
Segment Reporting
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosure About Segments of an Enterprise and Related Information"
requires use of the "management approach" model for segment reporting. The
management approach model is based on the way a company's management
organizes segments within the company for making operating decisions and
assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company. Currently, SFAS 131 has
no effect on the Company's consolidated financial statements as
substantially all of the Company's operations are conducted in one
industry segment.
Accounting developments
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangibles." SFAS No. 142 addresses the initial recognition, measurement
and amortization of intangible assets acquired individually or with a group
of other assets (but not those acquired in a business combination) and
addresses the amortization provisions for excess cost over fair value of
net assets acquired or intangibles acquired in a business combination. The
statement is effective for fiscal years beginning after December 15, 2001,
and is effective July 1, 2001 for any intangibles acquired in a business
combination initiated after June 30, 2001. The Company is evaluating any
accounting effect, if any, arising from the recently issued SFAS No. 142,
"Goodwill and Other Intangibles" on the Company's financial position or
results of operations.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued in August 2001. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001, and addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. The Company is
evaluating any accounting effect, if any, arising from the recently issued
SFAS No. 144, "Goodwill and Other Intangibles" on the Company's financial
position or results of operations.
In May 2002, the Board issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections ("SFAS 145"). SFAS 145 rescinds the automatic treatment of
24
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
gains or losses from extinguishments of debt as extraordinary unless they
meet the criteria for extraordinary items as outlined in APB Opinion No.
30, Reporting the Results of Operations, Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 145 also requires sale-leaseback
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions and makes various technical
corrections to existing pronouncements. The provisions of SFAS 145 related
to the rescission of FASB Statement 4 are effective for fiscal years
beginning after May 15, 2002, with early adoption encouraged. All other
provisions of SFAS 145 are effective for transactions occurring after May
15, 2002, with early adoption encouraged. The Company does not anticipate
that adoption of SFAS 145 will have a material effect on its earnings or
financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit cost,
as defined, was recognized at the date of an entity's commitment to an exit
plan. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002 with earlier
application encouraged. The Company does not expect adoption of SFAS No.
146 to have a material impact, if any, on its financial position or
results of operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2002:
Furniture and computer equipment $ 43,529
Production and other equipment 522,318
Vehicles 59,869
---------
625,716
Less: Accumulated depreciation
and amortization (203,879)
--------
$ 421,837
========
25
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
4. NOTES PAYABLE
Notes payable consist of the following at June 30, 2002:
Revolving note payable to bank;
interest due 7/5/02, prime + 1%,
maturing December 5, 2002 $100,035
Notes payable to stockholder, 8% & 12%
interest rates 541,537
Bank term loan; 3.9% interest rate;
maturing September 24, 2002
The fair value of the loan at current
market rate of 9% would be
approximately $64,000. 64,570
Note payable to finance vehicle, 9.5%
interest rate, maturing July 15,
2005, collaterized by vehicle 16,202
Refinanced bank term loan; payable on
demand or in semiannual payments of
$6,485, including interest at 10.75%
(variable); collateralized by
equipment accounts receivable and
intangibles and guaranteed by the
principal stockholder of the Company,
due July 15, 2004 30,839
Note payable to bank, collateralized
by tractor, 9%, variable payable in
60 monthly installments beginning
July 29, 2001 8,973
Note payable to stockholder; interest
free; due on demand 160,879
--------
923,035
Less: current portion 604,484
--------
Long-term debt $318,551
========
26
The following is a summary of maturities of principal under long-term debt
for years ending June 30:
2004 $ 262,537
2005 16,202
2006 39,812
----------
$ 318,551
==========
The notes payable has been classified in the balance sheet at June 30, 2002
as per follows:
Accounts payable - related part $ 160,879
Loans current 443,605
Current liabilities 604,484
Notes Payable 56,014
Loans related parties - non current 262,537
----------
$ 923,035
==========
5. COMMON STOCK AND WARRANTS
On January 28, 1999, the Company issued 395,000 warrants and on July 1,
1999, issued 275,000 additional warrants to several stockholders of the
Company. Each warrant gives the holder the right to purchase one share of
common stock at a price of $.50 per share at any time on or before January
28, 2004. The fair value of each warrant, estimated on the date of grant
using the minimum value method, is nominal.
During October 1999, the Company issued warrants to purchase 150,000 shares
of common stock at $.50 per share to two employees. The warrants vest over
a five-year period and resulted in compensation of $75,000, of which
$63,750 was unearned at June 30, 2000, and will be recognized over the
remaining vesting period. The fair value of these warrants does not exceed
the compensation cost recognized for financial reporting. During the fiscal
year end June 30, 2001, the one employee terminated and another exercised
his warrants with paid-in capital charged for the unearned compensation. At
June 30, 2001, a total of 145,000 warrants remained outstanding.
During August 2000, the Company purchased office equipment by issuing
18,000 shares of its common stock and recording the office equipment at its
estimated fair value based on invoiced cost of $1.03 for each share of
stock issued. The Company also issued 300,000 shares of its common stock to
acquire all the patent rights for its production process, recording as cost
of the newly acquired rights the estimated predecessor cost of the patent
rights acquired, and stockholders exercised their rights to acquire 675,000
shares of common stock at par value.
27
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
In April 2001, pursuant to the merger agreement discussed in Note 8 certain
insider stockholders contributed back to the Company 3,947,698 shares of
their common stock, and this common stock was cancelled, and 522,961 shares
of common stock valued at $ .10 was issued to consultants and an attorney
for services rendered in acquiring capital and facilitating the merger.
Compensation
During August 1999, the Company entered into employment contracts with two
key employees, resulting in the issuance of 250,000 shares of the Company's
common stock. Such contracts are for a term of 12 months and contain a
vesting provision requiring the employees, in the event of early
termination of employment, to either surrender to the Company the pro rata
unearned portion of the stock issued or to purchase the stock at a price of
$.85 per share. Additionally, the Company issued 22,500 shares of stock to
another employee in exchange for a vehicle and services that vested
immediately. Also, the Company issued 210,000 shares of stock to employees
and non-employees in exchange for services that vested immediately. These
agreements result in compensation expense of approximately $432,500
recognized by the Company during fiscal 2000.
Stock Offering
Pursuant to Rule 504 of Regulation D ("504 offering") of the Securities Act
of 1933, the Company offered for sale 400,000 shares of its common stock
for $1.00 per share under an Offering Memorandum dated August 24, 1999. The
Company offered 480,000 shares of common stock under a second 504 offering
for $1.25 per share, of which 423,190 have been sold as of June 30, 2000.
During the fiscal year ended June 30, 2001, an additional 42,500 shares
were sold for $53,125 in connection with the second offering.
In May 2001, the Company, pursuant to Rule 504, offered 625,000 shares of
common stock at $.40 per share and prior to June 30, 2001, 277,100 shares
were issued. Offering costs of this offering totaled $62,896 of which
$52,296 related to the shares of stock issued for services mentioned above.
6. INCOME TAXES
The Company's effective income tax benefit differed from the benefit
computed using the federal statutory tax rate as follows:
28
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Period from
October 7, 1998
Year Ended June 30, (inception) through
2002 2001 June 30, 2002
---------- --------- --------------------
Income tax benefit at
federal statutory rate $ 375,405 $ 135,256 $ 954,907
Nondeductible expenses (2,100) (1,700) 7,970
Other, including
graduated rates - - 23,321
Change in valuation
allowance (373,305) (133,556) (981,998)
---------- ---------- ---------
$ - $ - -
========== ======== =========
Components of deferred tax assets at June 30, 2002, are as follows:
Assets
Net operating loss carryforward $ 981,998
Valuation allowance (981,998)
---------
$ -
=========
The valuation allowance increase $373,305 for the year ended June 30, 2002,
and $133,556 for the year ended June 30, 2001.
A valuation allowance is provided for deferred tax assets when it is more
likely than not that some portion or all of the deferred tax assets will
not be realized. At June 30, 2002 and 2001, the Company had a net deferred
tax asset mainly related to a net operating loss carryforward from
operating losses incurred. As such carryforward can only be used to offset
future taxable income, management has fully reserved this net deferred tax
asset with a valuation allowance until it is more likely than not that
taxable income will be generated. Net operating loss carryforwards can be
carried forward for fifteen years for federal tax purpose subject to
certain limitations and they will expire in the year 2017.
7. RELATED PARTY TRANSACTIONS
In August 2000, the Company completed its acquisition of the patent rights
to its production process. This transaction involved the issuance of
300,000 shares of common stock to a corporation owned by stockholders of
the Company. Office equipment was acquired from a stockholder for the
issuance of common stock and certain shareholders contributed their common
stock, which was cancelled to facilitate the merger discussed in Note 8.
Most of the equipment used in the Company manufacturing process was
purchased from a company controlled by a shareholder of the Company.
29
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
8. MERGER & ACQUISITION
The Company has agreed to participate in a plan of reorganization involving
Kilkenny Acquisition Corp. (Kilkenny) whereby the Company, upon merger, is
the survivor and controls the board of directors. To facilitate the merger
and acquire additional capital, the Company is committed to issue certain
of the Company stock for all the common stock of Kilkenny. In connection
with this merger, on April 4, 2001, certain insider shareholders of the
Company contributed 3,947,686 of their common stock to the Company and
effectively reduced the then outstanding shares of stock to 3,685,992.
Subsequent issues of common stock for cash and services increased the
outstanding stock of the Company to 4,590,646. The issuance of the above
mentioned shares of the Company's common stock on the merger date, July 24,
2001, increased the Common stock of the Company to 5,669,033 with the
Company shareholders, prior to the merger, owning approximately 81% of the
outstanding shares of the merged Company.
In March 2002, the Company entered into a purchase agreement with Levgum,
Ltd. (Levgum) of Tel Aviv, Israel, where the Company received 83 shares
with 1.00 par value representing 10% of outstanding capital, for $250,000.
The Company also received the right to use their technology for rubber
devulcanization and right to sublicense as part of this purchase agreement.
The recorded its investment in Levgum for $125,000 and license agreement
acquired through acquisition at $125,000. On June 30, 2002, the Company
evaluated its investment and patents rights according to FASB 121 and
recognized an impairment loss equal to the book value of these intangible
assets.
9. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting
contemplates the recovery of the Company's assets and the satisfaction of
its liabilities in the normal course of business. Through June 30, 2002,
the Company had incurred cumulative losses of $2,808,548 and negative
working capital of $667,631. The Company's successful transition from a
development stage company to attaining profitable operations is dependent
upon obtaining financing adequate to fulfill its research and development
activities, production of its equipment and achieving a level of revenues
adequate to support the Company's cost structure. Management's plan of
operations anticipates that the cash requirements for the next twelve
months will be met by obtaining capital contributions through the sale of
common stock and cash flow from operations. However, there is no assurance
that the Company will be able to implement its plan.
10. SUBSEQUENT EVENT
Effective August 7, 2002, the Company ventured a business agreement to sell
specified tire bufflings with $42,500 advance payment and $42,500 upon
delivery.
30
SOFTSTONE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
The Company received stock subscriptions to purchase 3,500 shares of
restricted common stock for $1,165 subsequent to June 30, 2002.
31
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
On September 5, 2002 Hogan & Slovacek of Oklahoma City and Tulsa, the
principal independent accountants of Softstone Inc., resigned. Hogan & Slovacek
had been engaged as Softstone's principal independent accountants since August
22, 2001, when it replaced Grant Thornton LLP as Softstone's principal
independent accountants. See Softstone's Form 8-K filed with the Commission on
August 27, 2001 (Commission File No. 000-29523).
The report of Hogan & Slovacek on the financial statements of Softstone for
its fiscal year ended June 30, 2001 contained no adverse opinions or disclaimers
of opinion, and, other than raising substantial doubt about Softstone's ability
to continue as a going concern for the fiscal year ended June 30, 2001, were not
otherwise modified as to uncertainty, audit scope, or accounting principles
during the period of its engagement (August 22, 2001 to September 5, 2002) or
the interim period to September 5, 2002, the date of resignation. Similarly,
the reports of Grant Thornton on the financial statements of Softstone contained
no adverse opinions or disclaimers of opinion, and, other than raising
substantial doubt about Softstone's ability to continue as a going concern for
each of the fiscal years ended June 30, 2000 and 1999, were not modified as to
uncertainty, audit scope, or accounting principles during such past two years or
the interim period to August 21, 2001, the date of resignation.
During the past two years or interim periods prior to September 5, 2002,
there were no disagreements between Softstone and either Grant Thornton or Hogan
& Slovacek, whether or not resolved, on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which,
if not resolved to Grant Thornton's or Hogan & Slovacek's satisfaction, would
have caused it to make reference to the subject matter of the disagreements in
connection with its reports.
On September 5, 2002, Softstone engaged Kabani & Company, Inc. of Fountain
Valley, California as its new principal accountant to audit its consolidated
financial statements.
The decision to change accountants was recommended and approved by the
board of directors.
Item 9. Directors, Executive Officers, Promoters and Control Persons.
A list of the current officers, directors and significant employees of
Softstone, Inc. appears below. The directors are elected annually by the
shareholders. The officers serve at the pleasure of the board of directors.
The directors do not presently receive fees or other remuneration for their
services.
32
Office Held Term of
Person Office Since Office
------------------------------------------------------------------------------
Keith P. Boyd, 28 President 2001 May 2002
Director 2001 May 2002
Frederick W. Parker, 67 Director 1999 May 2002
Gene F. Boyd, 64 Secretary 1999 May 2002
Chairman of the Board
of Directors 1999 May 2002
Jim Miller, 65 Vice President 2001 May 2002
Joseph J. Johnston, 58 Chief Financial Officer 2001 May 2002
Keith P. Boyd. Mr. Boyd has spent most of his adult life assisting his
father, Gene Boyd, with the family interests, Meinecke-Boyd, Inc., located near
Ardmore, Oklahoma. After a year in college, he joined the U.S. Navy and ended
his naval career as a petty officer - machinist mate 3rd class - aboard the USS
Chicago, SSN 721, a nuclear-powered, fast-attack submarine. In late 1998, Mr.
Boyd raised the first investor capital for Softstone. He has considerable
mechanical skills and abilities and assisted with the design and fabrication of
Softstone's Parker System machine. He formulated Softstone's sales and
marketing effort and has been responsible to date for all of its sales. In June
2001 he was elected president and CEO of Softstone, Inc. (the company's third)
and then merged the company with a 12G reporting shell, making Softstone an
SEC-reporting public corporation. Mr. Boyd negotiated our contract with Levgum,
Ltd., of Israel and restructured the company to incorporate the devulcanization
technology. Keith Boyd has initiated the beginnings of a global market strategy
through his research of product applications as well as market entries. He
devotes 100 percent of his time to the affairs of Softstone.
Frederick W. Parker. Mr. Parker attended the University of Southern
California and the University of Wyoming. From December 1969 to May 1980 he was
employed as an executive and wholesaler of drilling fund securities of Canadian
American Securities, a subsidiary of American Quasar Petroleum. From May 1980
to June 1982 he founded and operated ENEX Securities and the ENEX Income Funds.
From 1982 to November 1984 he owned and operated Parker Energy Funding, a coal
methane gas company. From 1986 to 1987 he was a consultant to several oil and
gas production companies regarding deep well injection of hazardous oil field
waste. From June 1987 to October 1990 he was the executive vice president of
Princeton Clearwater Corporation. From 1990 to 1999 he operated the consulting
firm of Donner-Gray, primarily regarding oil and gas and real estate activities.
From May 1996 to September 1998 he was the director of marketing of VE
Enterprises, a manufacturing concern. From October 1998 until June 1999 when it
was merged with Softstone, Inc., he was the president and owner of Softstone
International LLC, which owned the patented technology for the manufacture of
rubber modules, which patent was assigned to Softstone, Inc. Upon the
incorporation of Softstone, Inc. on January 28, 1999, he became its president
and a director. He is still a director of Softstone but resigned his position
as president in May 2001.
33
Gene F. Boyd. Mr. Boyd , a 1960 graduate of Texas Tech, has been the
president of Meinecke-Boyd, Inc., an Oklahoma ranching and investment
corporation, since January 1979. As the operator of a 3600-acre Simmental cattle
ranch at Tishomingo, Oklahoma, Mr. Boyd practiced (and preached) holistic
resource management, which included rotational grazing to enhance the natural
recycling of soil and grasses. He also served as vice-president of the Oklahoma
Simmental Association and as a board member of soil and water conservation
districts. Intrigued by the potential and the need for recycled rubber products,
Mr. Boyd and his wife moved to Ardmore, Oklahoma after 26 years on the ranch, so
that he could be a full-time participant in the start-up and development of
Softstone, Inc. Upon the incorporation of Softstone, Inc., on January 28,
1999, Mr. Boyd became its secretary and its chairman of the board of directors,
positions he still holds.
34
Jim Miller. Mr. Miller has years of experience in the areas of
manufacturing and equipment automation. Mr. Miller formerly worked as head of
operations for Amusements of America, where he built - from blue print -
carnival rides for the amusement Industry. Prior to his employment with
Amusements of America, he owned and operated Miller Manufacturing of Lubbock,
Texas, developing amusement rides. He completed the automation of Softstone's
Parker System I, tripling its production capabilities. Mr. Miller is developing
for Softstone a fully automated tire de-beader machine. He is continuing to
devote his time to this project and Softstone.
Joseph J. Johnston. From May 1997 until 1999 Mr. Johnston was the
president, chief financial officer and chairman of the board of directors of
Creative Restaurant Concepts, Inc., an Oklahoma City owner and manager of
several restaurants. From 1999 until 2002 he was a restaurant business
consultant for Monroe Advisers, Inc., an Oklahoma City business consulting firm.
Item 10. Executive Compensation.
No executive officer of the company has received total compensation in any
of the last three years that exceeds $100,000. The table below sets forth all
compensation awarded to, earned by, or paid to the presidents of the company
during the last three fiscal years:
Annual Compensation Awards
---------------------------------- --------------------------
Securities
Other Underlying
Fiscal Annual Restricted Options/ LTIP
Name Year Salary Bonus Compensation Stock Awards SARS Payouts
---------- ------ ------ ----- ------------ ------------- ----------- -------
Keith Boyd 2002 $36,000 0 0 $50,000 0 0
Keith Boyd 2001 $36,000 0 0 $20,000 0 0
Frederick
Parker 2001 0 0 0 0 0 0
Tom Brewer 2000 20,833 0 0 0 0 0
Frederick
Parker 2000 0 0 0 0 0 0
Tom Brewer 1999 18,750 0 0 0 0 0
Employment Contracts.
----------------------
As of September 30, 2002, Softstone has no long-term compensation plans or
employment agreements with any of its officers or directors.
There are no employment contracts, compensatory plans or arrangements,
including payments to be received from Softstone, with respect to any director
or executive officer of Softstone which would in any way result in payments to
any such person because of his or her resignation, retirement or other
termination of employment with Softstone or its subsidiaries, any change in
control or Softstone, or a change in the person's responsibilities following a
change in control of Softstone.
35
Stock Options.
---------------
There have been no stock options granted to the officers and directors of
Softstone, nor have there been any other forms of compensation paid to the
officers and directors of the company.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding beneficial
ownership of the common stock of Softstone as of September 30, 2002, by each
officer and director of Softstone, by each individual who is known to Softstone,
as of the date of this filing, to be the beneficial owner of more than five
percent of Softstone's common stock, its only voting security, and by the
officers and directors of Softstone as a group:
Amount and
Name and Address of Nature of Percent
Beneficial Owner Beneficial of of
Ownership Class Office
---------------------------------------------------------------------------------
Keith P. Boyd 532,150 7.5 President
P.O. Box 2365 Director
Ardmore, OK 73402
Frederick W. Parker (1) 775,419 11.0 Director
811 N. Rockford Place
Ardmore, OK 73401
Gene F. Boyd (2) 750,296 10.6 Secretary
Route 2, Box 437 Director
Tishomingo, OK 73460
Jim Miller 55,000 0.8 Vice
906 Oak Tree Loop President
Ardmore, OK 73401
Officers and Directors as
a Group (4 persons) 2,112,865 30.0
(1) Mr. Parker's shares are held of record by the Frederick W. Parker Family
Limited Partnership.
(2) Of these shares, 712,745 are held of record by the Gene F. Boyd
Revocable Living Trust, 10,000 shares are held of record by Meinecke/Boyd,
Inc., a company under the control of Mr. Boyd, and 27,551 are held of
record by the Betty Sue Boyd Revocable Living Trust.
Item 12. Certain Relationships and Related Transactions.
36
On June 29, 1999 Softstone acquired a license to the U.S. patent rights to
the manufacturing process now employed in the company's plant in Joshua, Texas.
The license was acquired from Softstone International LLC, an entity under the
control of Frederick Parker, a co-inventor of the patented process and who was
at that time the chief executive officer and a director of Softstone, Inc. The
cost of the license was $100,000 and was financed by a promissory note due
December 31, 2000. Subsequently, on July 31, 2000 Softstone bought all rights
to the patent through the issuance of 300,000 shares of common stock to
Softstone International LLC, and the $100,000 promissory note was cancelled.
Softstone's Transactions with Management. In fiscal year 2002 Softstone
borrowed money from the following persons on the following terms for operating
capital:
Lender Relationship to Softstone Principal Amount Interest Rate Maturity Date
Gene Boyd Secretary and Director $ 80,000 8%% 3-11-03
Meinecke
Boyd,
Inc. Corporation of Gene and $125,000 8% 12-02-02
Betty Boyd
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following exhibits are filed, by incorporation by reference, as
part of this Form 10-KSB:
Exhibit Item
2 Agreement and Plan of Reorganization of July 24, 2001 between
Softstone, Inc. and Kilkenny Acquisition Corp.*
3 Certificate of Incorporation of Softstone Inc.*
3.1 Bylaws of Softstone, Inc.*
10 Lease Agreement of February 1, 2000, between Ardmore
Development Authority, as lessor, and Softstone, Inc., as
lessee.*
10.1 Scrap Tire Disposal Agreement of January 11, 2000, between
Michelin North America, Inc., and Softstone, Inc.*
10.2 Letter of intent of May 1, 2001, of Little Elm Independent
School District regarding the Little Elm Walking Trail.*
10.3 Agreement of March 15, 2002 with Levgum, Inc. concerning
exclusive license to Western Hemisphere for Levgum's
devulcanization technology.**
16.1 Letter of September 9, 2002 of Hogan & Slovacek agreeing
with the statements made in Form 8-K by Softstone Inc.,
concerning Softstone's change of principal independent
accountants.***
37
99 United States Patent No. 5,714,219.*
* Previously filed with Form 8-K August 8, 2001 Commission File No.
000-29523; incorporated by reference.
** Previously filed with Form 10-QSB May 20, 2002 Commission File No.
000-29523; incorporated by reference.
*** Previously filed with Form 8-K September 11, 2002 Commission File No.
000-29523; incorporated by reference.
(b) Forms 8-K
Form 8-K dated September 5, 2002, reporting Item 4 - Change in Registrant's
Certifying Accountant (Commission File #000-29523, EDGAR Accession
#0001060830-02-000155 filed September 11, 2002).
Item 14. Controls and Procedures
Evaluation of disclosure controls and procedures. We maintain controls and
procedures designed to ensure that information required to be disclosed in this
report is recorded, processed, accumulated and communicated to our management,
including our chief executive officer and our chief financial officer, to allow
timely decisions regarding the required disclosure. Within the 90 days prior to
the filing date of this report, our management, with the participation of our
chief executive officer and chief financial officer, carried out an evaluation
of the effectiveness of the design and operation of these disclosure controls
and procedures. Our chief executive officer and chief financial officer
concluded, as of fifteen days prior to the filing date of this report, that
these disclosure controls and procedures are effective.
Changes in internal controls. Subsequent to the date of the above
evaluation, we made no significant changes in our internal controls or in other
factors that could significantly affect these controls, nor did we take any
corrective action, as the evaluation revealed no significant deficiencies or
material weaknesses.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: January 27, 2003 Softstone Inc.
By:/s/ Keith Boyd
-----------------------------------
Keith Boyd, President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Keith Boyd
Date: January 27, 2003 --------------------------------------
Keith Boyd, President, Chief
Executive Officer and Director
/s/ Gene Boyd
Date: January 27, 2003 --------------------------------------
Gene Boyd, Secretary and Director
/s/ Joseph J. Johnston
Date: January 22, 2003 --------------------------------------
Joseph J. Johnston, Chief Financial
Officer
38
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Keith Boyd, Chief Executive Officer of the registrant, certify that:
1. I have reviewed this annual report on Form 10-KSB of Softstone Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 27, 2003 /s/ Keith Boyd
Keith Boyd
Chief Executive Officer
39
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
I, Joseph J. Johnston, Chief Financial Officer of the registrant, certify that:
1. I have reviewed this annual report on Form 10-KSB of Softstone Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: January 22, 2003 /s/ Joseph J. Johnston
Joseph J. Johnston
Chief Financial Officer
40
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the accompanying Annual Report of Softstone Inc. (the
"Company") on Form 10-KSB for the fiscal year ended June 30, 2002 (the
"Report"), I, Keith Boyd, Chief Executive Officer of the Company, hereby certify
that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Keith Boyd
Dated: January 27, 2003
Keith Boyd
President and Chief Executive Officer
The above certification is furnished solely pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) and is not being filed as part of
the Form 10-K or as a separate disclosure document.
41
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the accompanying Annual Report of Softstone Inc. (the
"Company") on Form 10-KSB for the fiscal year ended June 30, 2002 (the
"Report"), I, Joseph J. Johnston, Chief Financial Officer of the Company, hereby
certify that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Joseph J. Johnston
Dated: January 22, 2003
Joseph J. Johnston
Chief Financial Officer
The above certification is furnished solely pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) and is not being filed as part of
the Form 10-K or as a separate disclosure document.
42