U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2003
OR
[ ] TRANSITION UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
TS Electronics, Inc.
(formerly named 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)
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 8, 2003: $1,451,817.
As of October 9, 2003, there were 600,000 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 8
Item 3 Legal Proceedings 8
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 11
Item 7 Financial Statements 13
Item 8 Changes In and Disagreements With
Accountants on Accounting and Financial Disclosure 29
Item 9 Directors, Executive Officers, Promoters
and Control Persons 29
Item 10 Executive Compensation 31
Item 11 Security Ownership of Certain Beneficial Owners
and Management 31
Item 12 Certain Relationships and Related Transactions 32
Item 13 Exhibits and Reports on Form 8-K 33
Item 14 Controls and Procedures 34
Signatures 35
iii
Item 1. Description of Business.
Business Development.
----------------------
Our company TS Electronics, (formerly, Softstone, Inc.) 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. Our principal operations began in the quarter ended September 30,
2002. On August 13, 2003 we changed our name to TS Electronics, Inc.
Description of Business
-------------------------
Our focus initially was solely on realizing the commercial benefits of a
process developed for this purpose and patented by our first president,
Frederick Parker. Because we have this process, we have a contract with
Michelin North America's Ardmore tire manufacturing facility that pays us to
take its waste tires.
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. In addition
we have begun an importation business dealing in hard-to-find and specialty
crumb rubber.
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.
1
- Levgum's devulcanized rubber can be produced at significantly less cost
than can other devulcanization technologies or than the cost of virgin rubber.
- We use conventional machines operating at room temperatures. Competing
technologies employ lengthy operations involving grinding, chemical, heating and
mechanical processes.
- The Levgum devulcanization process is non-toxic and eco-friendly. Other
technologies are not.
We 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.
We have attempted to 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 that 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. We have 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 to us 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 we know of. 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 at a cheaper price 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.
We envision utilizing our 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. Sales of specialty crumb rubber.
4. Royalties for the amount of rubber devulcanized with our process and
commissions on sales.
3
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,
- sale of modules,
4
- 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.
Crumb Rubber Importation
--------------------------
In the United States today there exists a demand for several specific
grades of crumb rubber. Until recently these grades had been considered waste
and commonly were landfilled or incorporated in various molded products. Hence,
the lack of value of these materials had limited their production. In the last
three years, however, the crumb rubber industry has seen some significant
changes, predominantly in the areas of playground and landscape. The demand for
5
such material has entered into the hundred million pounds per year sector, and
U.S. production only manufactures approximately 24,000,000 pounds per year of
this specified material. We have gained a presence in the international market
and has located various suppliers world wide to assist us in brokering this
material.
Distribution Methods
---------------------
We have several interested parties for the distribution of our paving
material; however, since we have temporarily shut down this operation, we do not
have the product available for distribution.
Competitive Business Conditions
---------------------------------
Many firms make molded rubber products, including some for patio, horse
trailer and barn applications as well as sell specified crumb rubber. It is our
observation and belief that our products are superior to all others in economics
and durability and we are much more price competitive than our U.S. competition
in regards to sales of crumb rubber.
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. Our earlier operation of the Parker
System was based on Michelin's paying us $0.77 to $0.85 a tire for recycling
purposes. However, in some sectors of the market, specifically the playground
and landscape industries, there is only a limited amount of the needed material
produced in the United States on an annual basis. This has led us to import
crumb rubber from overseas suppliers in India, Sri Lanka and China. We are
currently working on increasing our monthly supply by signing up new
manufacturers from these three areas. This would alleviate a dependence on any
one supplier and level out our monthly revenues.
Dependence on Major Customers or Suppliers
-----------------------------------------------
We are dependent on our international suppliers for our sources of
specified crumb rubber. The supply in the United States of the material we
import is 100% consumed on an annual basis.
We are still in the development stage as far as sales are concerned and are
dependent upon one major customer in St. Louis. There are many other buyers of
the same material in the United States; however, we are currently only supplying
a small percentage of their estimated monthly capacity.
Patents, Trademarks and Licenses
-----------------------------------
The inventors of our patented Parker One System, one of whom is Frederick
Parker, our past president, have assigned the patent to Softstone with no
retained royalty.
We have a 5.5-year exclusive license to the Levgum devulcanization
technology for the Western Hemisphere.
Government Approval of Principal Products or Services
-----------------------------------------------------------
6
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.
Employees
---------
At present we have one full-time employee and no part-time employees.
Exclusive License With Levgum, Ltd.
---------------------------------------
On March 15, 2002 we executed an agreement with Levgum, Ltd. of Tel Aviv,
Israel. Levgum owns patents pertaining to certain technology for the
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.
7
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.
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
8
report. However, we took the following action on August 13, 2003 pursuant to
the written consent of the record holders of a majority of the outstanding
shares of our common stock:
- We changed our name from Softstone Inc. to TS Electronics, Inc.
- We consolidated to 600,000 shares all outstanding shares of our common
stock, effective August 14, 2003.
By written consent of the record holders of a majority of the outstanding
shares, we approved - but have not yet effected - the following actions, subject
to our mailing an Information Statement to the non-consenting shareholders:
- We will issue 5,350,000 shares of our Common Stock to TS Electronics
(China) Corp. in exchange for all its capital stock.
- We will sell to an entity owned by Gene F. Boyd, Betty Sue Boyd and
Keith P. Boyd ("the Boyds"), who are our present controlling
shareholders, in exchange for their paying or obtaining the written
release of approximately $1,032,588 of company debt owed to the Boyds
and other creditors -
- our rubber business and related assets,
- 50,000 shares of post-consolidation stock, and
- 100,000 Common Stock Purchase Warrants exercisable for one year at
$1.25 a warrant.
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 initially was "SOFS." On August 15, 2003 the symbol
was changed to "TSET". The following table shows the quarterly high and low
prices of the stock since it was admitted to trading through June 30, 2003,
which was before the stock symbol change. The prices reflect inter-dealer
quotations without mark-up, mark-down or commissions and may not represent
actual transactions.
High Low
---- ---
Calendar 2002:
2nd Qtr 0.51 0.11
3rd Qtr 0.25 0.06
4th Qtr 0.17 0.05
9
Calendar 2003:
1st Qtr 0.1 0.1
2nd Qtr 0.1 0.05
3rd Qtr 5.4 0.08
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:
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
07/02 to 07/03 293,000 Rule 506 Offering 37,234 Cash
300,000 Settle notes payable 18,000 Extinguish notes payable
----------------------------
(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.
10
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 ended June 30, 2002 and June 30, 2003:
Fiscal Year Ended
-----------------
06-30-2002 06-30-2003
---------- ----------
Sales 100% 100%
Operating expenses 2,007% 241%
------ -----
Income from operations (1,907)% (141)%
Other expenses (1,038)% 64%
------ -----
Net income (loss) (2,945)% (206)%
Net loss per share(1) $(3.90) $(0.69)
----------------------
(1) Based on each 21.8045 shares outstanding on August 14, 2003 being
consolidated to one share.
Sales
Sales of $37,490 for fiscal year 2002 increased by $72,589, or 194 percent,
to sales of $110,079 in fiscal 2003. The increase is due to our importing and
reselling in the U.S. crumb rubber from India.
Operating expenses
Operating expenses decreased to $265,721 in fiscal 2003 from $752,324 in
fiscal 2002. This 65 percent decrease is attributed primarily to fiscal 2002's
purchase of, and research conducted prior to, the purchase of the Levgum
Devulcanization Technology as well as our decision to discontinue our module
manufacturing operations in Ardmore, storing the Parker System at a rent free
facility and our President providing our office rent free at our current
address, 111 Hilltop Lane, Pottsboro, TX.
Net income (loss)
Our net loss of $226,365 in fiscal 2003 is a marked improvement from our
net loss of $1,104,133 in fiscal 2002. This improvement is attributed to the
company's purchasing the rights to a foreign patent for $250,000, which purchase
had to be expensed as the patent has not been appraised, and our discontinuing
our pilot plant operations in Ardmore, Oklahoma and storing our manufacturing
equipment, thus further lowering our operating expenses.
11
Balance sheet items
Current assets of $3,554 on June 30, 2003, compares unfavorably with
current liabilities of $905,815 at that time, an unfavorable current ratio of
..004.
Liquidity and Capital Resources
During the fiscal year ended June 30, 2003, we financed our net loss of
$226,365 primarily through -
- sales of common stock for $36,235 in cash,
- loans of $22,336,
- the sale of assets totaling $32,576,
- the receipt of $2,515 for stock to be issued,
- depreciation and amortization of $67,271,
- a $17,741 loss on settlement of debt, and
- an increase in accrued expenses of $48,514.
During the fiscal year ended June 30, 2002, we financed our net loss of
$1,104,133 primarily through -
- sales of common stock for $254,520 in cash,
- loans of $287,263,
- the issuance of $346,537 worth of common stock for services and interest,
- depreciation and amortization of $83,307,
- $125,000 loss on an investment, and
- a $214,444 loss on the impairment of assets.
OUTLOOK
We have been unable to raise funds for the renovation of our tire shredder
and the purchase of equipment that produces wire-free chips from shredded tires.
We were able, however, to raise $250,000 from the Boyds to acquire the exclusive
license from Levgum for the Western Hemisphere rights to its devulcanization
technology. We shifted our business emphasis to exploiting such license and to
brokering the sale of crumb rubber manufactured by other manufacturers. We have
not been able to achieve any significant success and have determined that it is
in the best interests of our shareholders to reorganize our company in
accordance with the reorganization agreement with TS Electronics (China)
described herein.
12
Item 7. Financial Statements.
Page
----
Independent Auditors' Report dated September 17, 2003 13
Independent Auditors' Report dated October 15, 2001 14
Balance Sheet June 30, 2003 15
Statements of Operations from October 7, 1998
(Inception) through June 30, 2003 16
Statements of Stockholders' Equity (Deficit)
from October 7, 1998 (Inception) through
June 30, 2003 17
Statements of Cash Flows from October 7, 1998
(Inception) through June 30, 2003 18
Notes to the Financial Statements 19
13
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
TS Electronics, Inc. (formerly, Softstone, Inc.)
We have audited the accompanying balance sheet of TS Electronics, Inc.
(formerly, Softstone, Inc.) as of June 30, 2003 and the related statements of
operations, stockholders' deficit and cash flows for the years ended June 30,
2003 and 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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 audits provide 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 TS Electronics, Inc. as of June
30, 2003 and the results of its operations and its cash flows for the years
ended June 30, 2003 and 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 had accumulated deficit of $3,034,913 through June 03,
2003 and negative working capital of $902,261 at June 30, 2003. These factors,
as discussed in Note 10 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 10. 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 17, 2003
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
TS Electronics, Inc.
(Formerly, Softstone, Inc.)
BALANCE SHEET
June 30, 2003
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 1,789
Accounts receivable 1,765
-----------
Total current assets 3,554
PROPERTY AND EQUIPMENT, net 295,074
-----------
$ 298,628
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 29,311
Accounts payable-related party 160,879
Accrued expenses 76,879
Notes payable - current 638,746
-----------
Total current liabilities 905,815
LONG TERM LIABILITIES
Notes payable - long term 126,773
-----------
Total liabilities 1,032,588
CONTINGENCY
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; 30,000,000
shares authorized; 350,155 shares issued
and outstanding 350
Additional paid-in capital 2,294,088
Shares to be issued 6,515
Accumulated deficit (3,034,913)
-----------
Total stockholders' deficit (733,960)
-----------
$ 298,628
===========
The accompanying notes are an integral part of these financial statements.
16
TS Electronics, Inc.
(Formerly, Softstone, Inc.)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
Year Ended June 30,
2003 2002
----------- ------------
Net revenues $ 110,079 $ 37,490
Operating expenses
General and administrative 265,721 752,324
----------- ------------
Operating loss (155,642) (714,834)
Other income (expense):
Miscellaneous Income 159 -
Interest expense (46,191) (49,855)
Loss on sale of assets (17,741) -
Loss on settlement of debt (6,950) -
Loss on investment - (125,000)
Loss on impairment of intangibles - (214,444)
----------- ------------
Total other income (expense) (70,723) (389,299)
----------- ------------
Net loss $ (226,365) $ (1,104,133)
=========== =============
Basic and diluted weighted average number
of common stock outstanding 326,941 283,176
=========== =============
Basic and diluted net loss per share $ (0.69) $ (3.90)
=========== =============
The accompanying notes are an integral part of these financial statements.
17
TS Electronics, Inc.
(Formerly, Softstone, Inc.)
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
Common Stock Additional Stock Total
-----------------
Number of Paid-In to be Unearned Accumulated Stockholders'
shares Amount Capital issued Compensation Deficit Deficit
--------- ------ ------------ ---------- ------------ ------------ -------------
Balance July 1, 2001 205,740 $ 4,486 $1,632,528 $ - $ - $(1,704,415) $ (67,401)
Share issued for cash
($8.72/shr) 11,158 243 97,077 - - - 97,320
Shares issued for cash
($10.90/shr) 13,272 290 144,410 - - - 144,700
Shares issued for cash
($21.80/shr) 573 13 12,487 - - - 12,500
Share issued for service
($7.85/shr) 11,790 257 92,290 - - - 92,547
Share issued for service
($8.72/shr) 24,903 543 216,657 - - - 217,200
Share issued for service
($10.90/shr) 1,147 25 12,475 - - - 12,500
Share issued for interest
($9.81/shr) 2,396 52 24,238 - - - 24,290
Shares issued for merger 53,126 1,158 - - - - 1,158
Shares to be issued
for cash ($7.20/shr) - - - 999 - - 999
Shares to be issued
for loan incentive
($8.72/shr) - - - 2,000 - - 2,000
Cancellation of shares (1,147) (25) - - - - (25)
Net loss - - - - - (1,104,133) (1,104,133)
--------- ------ ------------ ---------- ------------ ------------ -------------
Balance June 30, 2002 322,959 7,042 2,232,162 2,999 - (2,808,548) (566,345)
Reverse stock split
21.8045:1 on
August 14, 2003 - (7,288) 7,288 - - - -
Shares issued for cash 12,841 280 35,955 - - - 36,235
Stock issued for
settlement of notes
payable 13,759 300 17,700 - - - 18,000
344 Shares of common
stock to be issued
for cash - - - 2,515 - - 2,515
Shares issued for
cash included in
the prior period 138 3 996 (999) - - -
Adjustment to
share price 459 13 (13) - - - -
1147 Shares of
common stock to
be issued for
loan incentive - - - 2,000 - - 2,000
Net loss - - - - - (226,365) (226,365)
------- ------- ---------- ------- ----------- ----------- ----------
Balance June 30, 2003 350,155 $ 350 $2,294,088 $ 6,515 $ - $(3,034,913) $ (733,960)
======= ======= ========== ======= =========== =========== ==========
The accompanying notes are an integral part of these financial statements.
18
TS Electronics, Inc.
(Formerly, Softstone, Inc.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2003 AND 2002
Year Ended Year Ended
June 30, June 30,
2003 2002
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (226,365) $ (1,104,133)
Adjustments to reconcile net loss
to net cash used in operating activities:
Loss on sale of assets 17,741 -
Loss on settlement of debt 6,950 -
Depreciation and amortization 67,271 83,307
Issuance of common stock for compensation - -
Issuance of common stock for
services and interest - 346,537
Issuance of common stock for merger - 1,133
Shares to be issued for loan incentive 2,000 2,000
Loss on investment - 125,000
Loss on impairment of assets - 214,444
Write-off of samples - -
Decrease of other current assets - 4,473
(Increase) decrease of accounts
receivable 818 (2,583)
Increase (decrease) of accounts payable (10,055) 22,368
Increase in accrued expense 48,514 8,252
---------- ------------
Total adjustments 133,239 804,931
---------- ------------
Net cash used in operating activities (93,126) (299,202)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of patents/investment - (250,000)
Other - -
Receipt of cash on disposal
of property and equipment 32,576 -
---------- ------------
Net cash provided (used) in
investing activities 32,576 (250,000)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 22,336 287,263
Payments on borrowings - (5,000)
Issuance of common stock for cash 36,235 254,520
Receipt of cash for stock to be issued 2,515 999
---------- ------------
Net cash provided by financing activities 61,086 537,782
---------- ------------
Net increase (decrease) in cash & cash equivalents 536 (11,420)
CASH & CASH EQUIVALENTS, BEGINNING 1,253 12,673
---------- ------------
CASH & CASH EQUIVALENTS, ENDING $ 1,789 $ 1,253
========== ============
The accompanying notes are an integral part of these financial statements.
19
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATIONS AND DESCRIPTION OF BUSINESS
TS Electronics, Inc. (formerly, Softstone, Inc.) (the "Company"), a
Delaware corporation, was incorporated on October 7, 1998. The Company was
formed to manufacture a patented rubber product used in the road and
building construction industries. Its principal activities have consisted
of financial planning, establishing sources of production and supply,
developing markets, and raising capital. Prior to July 2002, the Company
was in the development stage as defined Statement of Financial Accounting
Standards No. 7 "Accounting and Reporting by Development Stage
Enterprises". Its principal operations began in the quarter ended September
30, 2002. On August 13, 2003, the Company changed its name to TS
Electronics, Inc.
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.
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.
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
20
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
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 in the year ended June 30,, 2002 as the
Company decided against selling the items under patent rights.
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.
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.
Fair value of financial instruments
The carrying amount of all financial instruments at June 30, 2003 and 2002,
which consist of various notes and loans payable, approximate their fair
values.
Accounts payable - related party
The Company has an amount payable to a shareholder amounting $160,879 for
certain equipment purchased in prior years. The amounts are due on demand,
unsecured and interest free.
21
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
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.
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
Emerging Issues Task Force consensus in Issue No. 96-18, "Accounting for
Equity Instruments that are Issued to Other Than Employees for Acquiring or
in Conjunction with Selling, Goods or Services". Valuation of shares for
services is based on the estimated fair market value of the shares issued.
As of June 30, 2003, the Company does not have any option for share
purchase or warrant outstanding.
22
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
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 December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock Based Compensation", to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based employee compensation and the
effect of the method used, on reported results. The Statement is
effective for the Companies' interim reporting period ending January 31,
2003. The adoption of SFAS 148 does not have a material effect on the
earnings or financial position of the Company.
On April 30, the FASB issued FASB Statement No. 149 (FAS 149), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. FAS 149
amends and clarifies the accounting guidance on (1) derivative instruments
(including certain derivative instruments embedded in other contracts) and
(2) hedging activities that fall within the scope of FASB Statement No. 133
(FAS 133), Accounting for Derivative Instruments and Hedging Activities.
FAS 149 also amends certain other existing pronouncements, which will
result in more consistent reporting of contracts that are derivatives in
their entirety or that contain embedded derivatives that warrant separate
accounting. FAS 149 is effective (1) for contracts entered into or modified
after June 30, 2003, with certain exceptions, and (2) for hedging
relationships designated after June 30, 2003. The guidance is to be applied
prospectively. The Company does not expect the adoption of SFAS No. 149 to
have a material impact on its financial position or results of operations
or cash flows.
On May 15, 2003, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 150 (FAS 150), Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. FAS 150
changes the accounting for certain financial instruments that, under
previous guidance, could be classified as equity or "mezzanine" equity, by
now requiring those instruments to be classified as liabilities (or assets
in some circumstances) in the statement of financial position. Further, FAS
150 requires disclosure regarding the terms of those instruments and
settlement alternatives. FAS 150 affects an entity's classification of the
following freestanding instruments: a) Mandatorily redeemable instruments
b) Financial instruments to repurchase an entity's own equity instruments
c) Financial instruments embodying obligations that the issuer must or
could choose to settle by issuing a variable number of its shares or other
equity instruments based solely on (i) a fixed monetary amount known at
inception or (ii) something other than changes in its own equity
instruments d) FAS 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety. The guidance in FAS
150 is generally effective for all financial instruments entered into or
23
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
modified after May 31, 2003, and is otherwise effective at the beginning of
the first interim period beginning after June 15, 2003. For private
companies, mandatorily redeemable financial instruments are subject to the
provisions of FAS 150 for the fiscal period beginning after December 15,
2003. The Company does not expect the adoption of SFAS No. 150 to have a
material impact on its financial position or results of operations or cash
flows.
Reclassifications
Certain amounts in the 2002 financial statements have been reclassified to
conform with the 2003 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2003:
Furniture and computer equipment $ 42,198
Production and other equipment 450,063
Vehicles 29,381
----------
521,642
Less: Accumulated depreciation
and amortization (226,568)
----------
$ 295,074
==========
4. NOTES PAYABLE
Notes payable consist of the following at June 30, 2003:
Revolving note payable to bank;
interest rate 7.5%, due on December 05, 2005 $ 88,468
Notes payable to stockholder, 8% & 12%
interest rates and due on demand 600,889
Bank term loan; 6.78% interest rate;
Maturing September 13, 2003 37,857
Note payable to finance vehicle, 9.5%
interest rate, maturing September 23, 2005,
collaterized by vehicle 12,974
Bank term loan; interest at 6.25%
(variable); collateralized by
equipment, accounts receivable
and intangibles and guaranteed
by the principal stockholder
of the Company, due July 15, 2005 25,331
24
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
Note payable to stockholder; interest
free; due on demand 160,879
---------
926,398
Less: current portion 799,625
---------
Long-term debt $ 126,773
=========
The following is a summary of maturities of principal under long-term debt
for years ending June 30:
2006 $ 126,773
=========
The notes payable has been classified in the balance sheet at June 30, 2003
as per follows:
Accounts payable - related parties $ 160,879
Notes payable- current 638,746
---------
Current liabilities 799,625
Notes Payable - long term 126,773
---------
$ 926,398
=========
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method
as defined under the Financial Accounting Standard No. 95.
The Company paid $0 for income tax during the year ended June 30, 2003 and
2002. The Company paid $13,898 and $31,318 interest during the year ended
June 30, 2003 and 2002, respectively.
Supplemental disclosure of non-cash investing and financing activities:
The cash flow statements do not include following non-cash investing and
financing activities:
During the year ended June 30, 2003, the Company issued 13,759 shares of
common stock valued at $18,000 for settlement of short-term notes payable
amounting $11,050 resulting in a loss of $6,950 on settlement of debt.
6. STOCKHOLDERS' EQUITY
Common stock
During the year ended June 30, 2003, the Company issued common stocks in
exchange of various services to following parties:
25
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
During the year ended June 30, 2003, the Company issued 12,841 shares of
common stock for cash of $36,235 received during this period and issued 138
shares for cash amounting $999 received in the prior year.
During the year ended June 30, 2003, the Company issued 13,759 shares of
common stock valued at $18,000 for settlement of short-term notes payable
amounting $11,050 resulting in a loss of $6,950 on settlement of debt.
During the year ended June 30, 2003, the Company received cash of $2,515
for 344 shares to be issued.
During the year ended June 30, 2003, the Company issued 459 shares of
common stock for the adjustment to share price in the prior year.
At June 30, 2003, the Company has 1,147 shares of common stock amounting
$2,000 to be issued for the extension of the due date for the loan.
7. INCOME TAXES
The Company's effective income tax benefit differed from the benefit
computed using the federal statutory tax rate as follows:
Period from
Year Ended June 30,
2003 2002
---------- ---------
Income tax benefit at
federal statutory rate $ 90,546 $ 375,405
Nondeductible expenses (443) (2,100)
Other, including graduated rates - -
Change in valuation allowance (90,103) (373,305)
---------- ---------
$ - $ -
========== =========
Components of deferred tax assets at June 30, 2003, are as follows:
Assets
Net operating loss carryforward $ 1,072,101
Valuation allowance (1,072,101)
-----------
$ -
===========
The valuation allowance increased $90,103 for the year ended June 30, 2003,
and $373,305 for the year ended June 30, 2002.
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
26
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
not be realized. At June 30, 2003 and 2002, 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 2018.
8. IMPAIREMENT OF INVESTMENT
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 Company 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 amounting $125,000.
9. BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share for the six-month period ended June
30, 2003 and 2002 were determined by dividing net loss for the periods by
the weighted average number of basic and diluted shares of common stock
outstanding. Weighted average number of shares used to compute basic and
diluted loss per share is the same since the effect of dilutive securities
is anti-dilutive.
10. GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which contemplate
continuation of the company as a going concern. However, the Company has an
accumulated deficit of $3,034,913 at June 30, 2003 and a negative working
capital of $902,261 at June 30, 2003. In view of the matters described
above, recoverability of a major portion of the recorded asset amounts
shown in the accompanying balance sheet is dependent upon continued
operations of the company, which in turn is dependent upon the Company's
ability to raise additional capital, obtain financing and succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
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.
27
TS ELECTRONICS, INC.
(Formerly, Softstone, Inc.)
NOTES TO THE FINANCIAL STATEMENTS
11. SUBSEQUENT EVENT & CONTINGENT LIABILTY
On July 31, 2003, the Company entered in to a reorganization agreement with
TS Electronics Corporation (TSEC), a Delaware corporation. Under the
reorganization agreement, TSEC shareholders shall purchase from the
Company, 5,350,000 shares of its common stock in a private placement under
rule 506 of the Regulation D of the Securities Act of 1933, in exchange of
for the transfer to the Company of all the capital stock of TSEC. Under the
agreement, all of the directors of the Company will be replaced by present
designee of TSEC to fill this vacancy and become the director of the
Company.
Per the agreement, TSEC and its shareholders shall be indemnified by the
Company against any liabilities arising either from a failure of the
Company or its current president to discharge all liabilities of the
Company. The closing of the agreement will be effective subject to
compliance of Securities and Exchange filing rules and regulations.
Pursuant to the reorganization agreement, on August 13, 2003, the Company
filed its Certificate of Amendment to Certificate of Incorporation with the
Secretary of State of the State of Delaware changing its name to "TS
Electronics, Inc." and consolidating the common stock of the corporation.
The stock consolidation to 600,000 shares, $0.001 par value, effective
August 14, 2003, consolidates each 21.8045 outstanding shares to one share,
with fractional shares being rounded up or down to the nearest whole
number.
28
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
On September 5, 2002 Hogan & Slovacek of Oklahoma City and Tulsa, our
principal independent accountants, resigned. Hogan & Slovacek had been engaged
as our principal independent accountants since August 22, 2001, when it replaced
Grant Thornton LLP as our 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
(our earlier name) 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, we engaged Kabani & Company, Inc. of Fountain Valley,
California as our new principal accountant to audit our 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 our current officers, directors and significant employees appears
below. The directors are elected annually by the shareholders. The officers
serve at the pleasure of the board of directors. The directors do not presently
receive fees or other remuneration for their services.
29
Office Held Term of
Person Office Since Office
------ ------ ----------- --------
Keith P. Boyd, 30 President 2001 October 2003
Director 2001 October 2003
Frederick W. Parker, 68 Director 1999 October 2003
Gene F. Boyd, 65 Secretary 1999 October 2003
Chairman of the Board
of Directors 1999 October 2003
Keith P. Boyd. Mr. Boyd has spent most of his adult life assisting his
father, Gene Boyd, with the family interests, Meinecke-Boyd, Inc., located near
Ardmore, Oklahoma. After a year in college, he joined the U.S. Navy and ended
his naval career as a petty officer - machinist mate 3rd class - aboard the USS
Chicago, SSN 721, a nuclear-powered, fast-attack submarine. In late 1998, Mr.
Boyd raised the first investor capital for Softstone. He has considerable
mechanical skills and abilities and assisted with the design and fabrication of
Softstone's Parker System machine. He formulated Softstone's sales and
marketing effort and has been responsible to date for all of its sales. In June
2001 he was elected president and CEO of Softstone, Inc. (the company's third)
and then merged the company with a 12G reporting shell, making Softstone an
SEC-reporting public corporation. Mr. Boyd negotiated our contract with Levgum,
Ltd., of Israel and restructured the company to incorporate the devulcanization
technology. Keith Boyd has initiated the beginnings of a global market strategy
through his research of product applications as well as market entries. He
devotes 100 percent of his time to the affairs of our company.
Frederick W. Parker. Mr. Parker attended the University of Southern
California and the University of Wyoming. From December 1969 to May 1980 he was
employed as an executive and wholesaler of drilling fund securities of Canadian
American Securities, a subsidiary of American Quasar Petroleum. From May 1980
to June 1982 he founded and operated ENEX Securities and the ENEX Income Funds.
From 1982 to November 1984 he owned and operated Parker Energy Funding, a coal
methane gas company. From 1986 to 1987 he was a consultant to several oil and
gas production companies regarding deep well injection of hazardous oil field
waste. From June 1987 to October 1990 he was the executive vice president of
Princeton Clearwater Corporation. From 1990 to 1999 he operated the consulting
firm of Donner-Gray, primarily regarding oil and gas and real estate activities.
From May 1996 to September 1998 he was the director of marketing of VE
Enterprises, a manufacturing concern. From October 1998 until June 1999 when it
was merged with Softstone, Inc., he was the president and owner of Softstone
International LLC, which owned the patented technology for the manufacture of
rubber modules, which patent was assigned to Softstone, Inc. Upon the
incorporation of Softstone, Inc. on January 28, 1999, he became its president
and a director. He is still a director but resigned his position as president
in May 2001.
Gene F. Boyd. Mr. Boyd, a 1960 graduate of Texas Tech, has been the
president of Meinecke-Boyd, Inc., an Oklahoma ranching and investment
corporation, since January 1979. As the operator of a 3600-acre Simmental
cattle ranch at Tishomingo, Oklahoma, Mr. Boyd practiced (and preached) holistic
resource management, which included rotational grazing to enhance the natural
30
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.
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:
Securities
Other Underlying
Fiscal Annual Restricted Options/ LTIP
Name Year Salary Bonus Compensation Stock Awards SARS Payouts
---- ------ ------ ----- ------------ ------------ ---------- -------
Keith Boyd 2003 $36,000 0 0 0 0 0
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
Employment Contracts
We have no long-term compensation plans or employment agreements with any
of our officers or directors.
There are no employment contracts, compensatory plans or arrangements,
including payments to be received from our company, with respect to any director
or executive officer which would in any way result in payments to any such
person because of his or her resignation, retirement or other termination of
employment, any change in control, or a change in the person's responsibilities
following a change in control of our company.
Stock Options
There have been no stock options granted to the officers and directors of
our company, nor have there been any other forms of compensation paid to the
officers and directors of the company.
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, 2003 (giving
effect to the one-for-each-21.8045 shares of stock consolidation), by each
officer and director of our company, by each individual who is known, as of the
date of this filing, to be the beneficial owner of more than five percent of our
common stock, its only voting security, and by the officers and directors as a
group:
31
Amount and
Name and Address of Nature of Percent
Beneficial Owner Beneficial of Office
Ownership Class
------------------- ------------ ------- ------
Keith P. Boyd 74,129 12.4 President
111 Hilltop Lane Director
Pottsboro, TX 75076
Frederick W. Parker 35,562 5.9 Director
811 N. Rockford Place
Ardmore, OK 73401
Gene F. Boyd 200,122 33.4 Secretary
712 Franklin Court Director
Ardmore, OK 73401
Betty Sue Boyd 25,015 4.2
612 Franklin Court
Ardmore, OK 73401
Officers and Directors as a Group
(3 persons)
334,828 55.9
(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.
During fiscal years 2002 and 2003, the following outstanding notes payable
were either issued or renewed from earlier years. In each instance, the notes
were either guaranteed by Gene Boyd, who is a director and the secretary of our
company, or were issued to him and his spouse, Betty Sue Boyd, in exchange for
loans of money to the company by them:
Revolving note payable to bank; interest
rate 7.5%, due on December 05, 2005 $ 88,468
Notes payable to stockholder, 8% & 12%
interest rates and due on demand 600,889
32
Bank term loan; 6.78% interest rate;
Maturing September 13, 2003 37,857
Bank term loan; interest at 6.25%
(variable); collateralized by equipment,
accounts receivable and intangibles
and guaranteed by the principal
stockholder of the Company, due July 15, 2005 25,331
Note payable to stockholder; interest
free; due on demand 160,879
All of the liabilities represented by the above notes shall be released as
a condition of the reorganization.
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.***
33
31 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.1 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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 August 13, 2003, reporting Item 5 - Other Events, and Item
7(b) - Exhibits (Commission File #000-29523, EDGAR Accession
#0001060830-03-000169 filed August 18, 2003).
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.
34
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: October 10, 2003 TS Electronics, Inc. (formerly named
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: October 10, 2003 ----------------------------------------
Keith Boyd, President, Chief Executive
Officer and Director
/s/ Gene Boyd
Date: October 10, 2003 ----------------------------------------
Gene Boyd, Secretary and Director
/s/ Keith Boyd
Date: October 10, 2003 ----------------------------------------
Keith Boyd, Chief Financial Officer
35
2
TS ELECTRONICS, INC.
Commission File Number 0-29523
Index to Exhibits to
Form 10-KSB 06-30-03
The following exhibits are filed, by incorporation by reference, as part of this
Form 10-KSB:
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.***
31 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.1 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99 United States Patent No. 5,714,219.*
1
* 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.
2