|
Recommendation: AVOID
Basis for Recommendation:
Although the concept underlying the Ideas & Associates/Freesoftwareclub.com business plan initially appeared viable, as we began our research on this company, we quickly encountered a number of significant questions for which no answers seemed to be available. As we progressed, we uncovered even more issues, raising concerns as to whether this stock is currently an appropriate investment for even the most speculative of portfolios.
· Although the company had issued a number of press releases and its CEO had been interviewed in several different "web-casts," we frequently encountered major discrepancies in the information provided.
· Even though the company announced three acquisitions during the first half of April, it has failed to file the legally required reports with the SEC to provide full public disclosure. As a result, we are unable to make any assessments of the potential impact of these reputed acquisitions.
· Recently, we have contacted various people and entities associated in one way or another with this company. As a result, we have received additional, but unconfirmed, reports that paint a potentially disturbing picture of the company.
· Much but by no means all of this new information has now become public as the result of two extensive articles in the Montreal Gazette. The June 13, 2002, issue reveals that the company has now laid off most of its staff, having reportedly lost its last client in January, while the June 22, 2002, issue confirms a number of other points. None of these facts were ever publicly disclosed, either in the company's SEC filings or otherwise.
In our view, investors should not hold this stock in their portfolios until additional information becomes available. Thus, our current recommendation is "Avoid."
History:
Ideas & Associates/Freesoftwareclub.com (OTCBB:FSWC) has a fairly complicated corporate history, as it is the result of a reverse merger of Ideas & Associates, an apparently once-successful privately held company, into Freesoftwareclub.com, a publicly-held but semi-dormant company listed on the OTC Bulletin Board. The apparent purpose of this reverse-merger was to convert Ideas & Associates into a publicly held company.
· Ideas & Associates began operations in 1999, as "3608948 CANADA INC.", a Canadian "number corporation." A Montreal-based provider of Information Technology (IT) outsourcing services and solutions, it reportedly combined world-class development methodologies with the reduced cost and higher level of security gained by operating from Canada.
Based on its financial reports, as audited by KPMG a well-known public accounting firm, the company was an almost immediate success, generating profits and a positive cash flow in its first seven months of operations, and calendar year 2000 saw a substantial increase in revenues and net income versus its base period. Revenues in 2001 grew 94%, generating 30% increases in net income.
The company's calendar year financial results are summarized in Table 1. It is important to note that, although the company had been operating cash-flow positive in 2000, its operating cash flows turned negative in 2001 ' a trend change that raised questions about the "quality" of its reported net income.
| Table #1 |
|
|
| Source: SEC Documents |
Calendar Year
|
$ Canadian
|
|
2001
|
2000
|
|
|
|
| Revenue |
6,010,113
|
3,101,068
|
| Pre-Tax Income |
692,182
|
613,571
|
| Net Income |
567,113
|
439,043
|
|
|
|
| Cash Flows from Operations |
(766,596)
|
460,636
|
During this three-year period, the company reportedly carried out approximately 20 major development projects for clients such as AT&T, Hewlett-Packard, Microsoft and Publicis.
· FreeSoftwareClub.com, Inc. (OTCBB:FSWC), as of the end of its third fiscal quarter on December 31, 2001, was a development-stage corporation with no significant assets and no operating businesses. Before the reverse merger, the company had 16,947,500 shares outstanding, of which it appears that approximately 4.3 million were in the public float.
The Reverse-Merger:
The transaction by which this reverse merger would be carried out was initially described in a "Pre 14-C Stockholder Information Statement" filed with the SEC on January 28 by FreeSoftwareClub.com.
This transaction would include a reverse split of FSWC's stock, FSWC's acquisition of all of the outstanding Ideas & Associates stock, a name-change to "Ideas and Associates, Inc.", the election of a new Board of Directors, an increase in the number of shares available for management stock options, the injection of additional equity capital into the now-combined company, and lastly, the sale of the assets of the FreeSoftwareClub.com business to its original stockholders.
To quote this January 28 Information Statement, "After the Closing, Ideas will be a wholly-owned subsidiary of the company and the company will be controlled by the former stockholders of Ideas."
Although this transaction was not made public until late January, it was approved by FSWC's previous Board of Directors on November 28, 2001, using a "written consent" of a majority of its stockholders, a legal alternative to a special stockholders meeting.
The company announced the finalization of this reverse merger in a March 7 press release headlined "FreeSoftwareClub.com, Inc. Acquires Ideas and Associates and Refocuses It's Business." This release affirmed "FreeSoftwareClub.com will now refocus its business on IT services. The combined company will conduct its IT services business under the Ideas and Associates name."
On March 26, the company filed an 8-K Report with the SEC, which made public the specific details of the final transaction:
On March 7, 2002, the Company acquired 3608948 Canada Inc. dba Ideas and Associates ("Ideas"), a Montreal-based information technology consulting firm pursuant to a Stock Exchange Agreement (the "Agreement"). Pursuant to the Agreement, the company issued 30,000,000 newly issued shares of common stock in exchange for all of the issued and outstanding shares of Ideas, making Ideas a wholly-owned subsidiary of the company.
It appears that the proposed reverse split of the company's stock has been deferred until some time in the future.
Subsequent Events:
· Since the beginning of March 2002, the company had twice issued press releases announcing that it had entered into agreements with different investment bankers to raise funding for its acquisition program. However, we were unable to independently confirm that these relationships were still in place, and the June 22 issue of the Montreal Gazette states 'both firms - IC Capital Corp. and Attkisson Carter & Co. - told The Gazette this week that they cut ties with Ideas soon after the announcements.'
· Although the company laid out the general details of its business plan in two non-public documents that it prepared during March and April of 2002, the company's planned structure and overall direction changed substantially during the month between the publications of the first and second documents. This sudden shift raised serious questions in our minds about the company's overall focus and consistency.
· The company announced three acquisitions during the first half of April: Digital Voice Technologies Inc., A for Effort, Inc., and the Ethnic Media Network. However, it has failed to file the required reports with the SEC, due within 15 days of the completion of the transaction. As a result, the company could face delisting from the OTC Bulletin Board.
· There is reason to believe that the company has not fully consummated at least one of these acquisitions. According to an 8-K Report filed by the company with the SEC on May 28:
The company acquired a private company, Digital Voice Technologies Inc., pursuant to the terms of a share purchase agreement dated March 28, 2002. The purchase price includes the issuance of common shares and US$300,000 in cash. The acquisition will be accounted for as a purchase.
However, the June 22 issue of the Montreal Gazette has confirmed that the checks issued by FSWC to the former Digital Voice Technologies shareholders 'bounced' ' they were not honored by the company's bank. Reportedly, FSWC has also failed to provide these former DVT stockholders with the 'issuance of common shares' to which they are legally entitled.
· On April 18, the company issued a press release in which it announced 'Record Earnings for Its First Quarter.' To quote this release, 'Revenues for the first quarter increased to $1,917,408, up 38.7% from $1,382,760 in the same period last year.' However, according to the June 13 issue of the Montreal Gazette, 'Ideas lost its lone client -an online lottery site called Free Lotto - in January.' This raises serious ' and unanswered - questions as to the validity of this revenue recognition.
· An article in the Business Section of the June 13 issue of the Montreal Gazette states that Ideas & Associates has now laid off all of its employees, many of who are currently owed substantial amounts of back pay. "After a hiring spree this year, Ideas started laying off workers. The single biggest firing occurred on May 14, when 14 workers were turfed." "Yesterday, Ideas' eight remaining employees - down from 50 in January - were told the company was closing." We have also received independent confirmation of this situation.
Likewise, we have independently learned that payroll checks issued by the company to employees of its recently acquired Digital Voice Technologies subsidiary have also "bounced," and DVT's suppliers have not been paid.
Lacking any recent financial information from Ideas & Associates (OTCBB:FSWC), we will not include any financial analysis or modeling with this report. However, we will continue to track this company's progress in overcoming its current difficulties, and will update this report if new information becomes available.
Analyst:
Robert M. Davis
Mr. Davis has 15 years of experience as the Chief Financial Officer of two different NASDAQ companies, and for the last five years has been the editor of the highly regarded Napeague Letter, and is currently co-editor of The Securities Sleuth. Forbes magazine has named both of these E-zines to its 'Best of the Web' list. From 1987 to 1995, he was the Chief Financial Officer of Total Research Corporation (NASDAQ:TOTL), a marketing research and consulting firm in Princeton, NJ. Prior to this he was the was the Corporate Controller for Waverly Press Inc. (NASDAQ:WAVR), a medical and scientific printing and publishing company, and then co-founder, CFO and divisional general manager of a privately-held company in the transportation services industry. He received a BA degree from Rutgers University and an MBA from the Harvard Business School. Mr. Davis is applying for membership in the Philadelphia Society of Security Analysts, and the AIMR.
Contact:
Ideas and Associates, Yves Dufresne, 2050 de Bleury St., Suite 740,
Montreal, Quebec Canada H3A 2J5. Tel: (514) 940-2891, ext. 256, [email protected],
www.ideasandassociates.com
J.M.Dutton & Associates, LLC. John M. Dutton, President
and Supervisory Analyst, 1129 Manning Drive, Suite 310, El Dorado Hills, CA 95762
Phone (916) 941-4985, Fax (978) 418-6422 Email: [email protected] Web
site: www.JMDutton.com
Information, opinions or recommendations
contained in this research report are submitted solely for advisory
and information purposes. The information used and statements of
fact made have been obtained from sources considered reliable but
we neither guarantee nor represent the completeness or accuracy.
Such information and the opinions expressed are subject to change
without notice. This research note is not intended as an offering
or a solicitation of an offer to buy or sell the securities mentioned
or discussed. Neither the Firm, its principals, nor the assigned
analysts own or trade shares of any company covered. The Firm does
not accept any equity compensation. Anyone may enroll a company
for research coverage, which costs US $25,000 prepaid for one-year.
Reports are performed on behalf of the public, and are not a service
to any company. The analysts are responsible only to the public,
and are paid in advance to eliminate pecuniary interests and insure
independence. Please read full disclosure and other reports and
notes on the Company at www.JMDutton.com.
' Copyright, 2002, by J.M. Dutton & Associates,
LLC.
|