UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB/A
Amendment
No. 4
(Mark
One)
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[X]
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the
fiscal year ended December 31, 2004.
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[_]
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the
transition period from ________ to _________.
Commission
File Number: 0-29963
FINDEX.COM,
INC.
(Name
of
Small Business Issuer in its Charter)
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Nevada
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88-0379462
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(State
or other Jurisdiction of
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(I.R.S.
Employer
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Incorporation
or Organization)
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Identification
No.)
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11204
Davenport Street, Suite 100, Omaha, Nebraska
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68154
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(402)
333-1900
(Issuer’s
Telephone Number, Including Area Code)
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $.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 Exchange Act during the past 12 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 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.
[_]
Revenues
for the fiscal year ended December 31, 2004 totaled $5,422,097.
As
of December 13, 2005, the aggregate market value of the voting and
non-voting common equity held by non-affiliates computed by reference to
the
average of the closing bid and asked prices on such date was approximately
$1,662,000.
At December
13, 2005, the registrant had outstanding 48,619,855 shares of common stock,
of
which there is only a single class.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
Transitional
Small Business Disclosure Format (check one):
Yes
__ No
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Form
10-KSB/A, press releases and certain information provided periodically in
writing or orally by our officers or our agents contain statements which
constitute forward-looking statements. The words “may”, “would”, “could”,
“will”, “expect”, “estimate”, “anticipate”, “believe”, “intend”, “plan”, “goal”,
and similar expressions and variations thereof are intended to specifically
identify forward-looking statements. These statements appear in a number of
places in this Form 10-KSB/A and include all statements that are not statements
of historical fact regarding the intent, belief or current expectations of
us,
our directors or our officers, with respect to, among other things: (i) our
liquidity and capital resources, (ii) our financing opportunities and plans,
(iii) our ability to attract customers to generate revenues, (iv) competition
in
our business segment, (v) market and other trends affecting our future financial
condition or results of operations, (vi) our growth strategy and operating
strategy, and (vii) the declaration and/or payment of dividends.
Investors
and prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. The factors that
might cause such differences include, among others, those set forth in Part
II,
Item 6 of this annual report on Form 10-KSB/A, entitled Management’s
Discussion and Analysis or Plan of Operation, including without limitation
the
risk factors contained therein. Except as required by law, we undertake no
obligation to update any of the forward-looking statements in this Form 10-KSB/A
after the date of this report.
OVERVIEW
We
develop, publish, market, and distribute and directly sell off-the-shelf
consumer and organizational software products for PC and PDA platforms.
We
develop our software products through in-house initiatives supplemented
by
outside developers. We market and distribute our software products
principally
through direct marketing and Internet sales programs, but also through
secular
and non-secular wholesale retailers.
CORPORATE
FORMATION, LEGACY & SUBSIDIARIES
We
were
incorporated in the State of Nevada on November 7, 1997 as EJH Entertainment,
Inc. On December 4, 1997, a predecessor corporation with the same name as
our
own but domiciled in Idaho was merged with and into us. Although the predecessor
Idaho corporation was without material assets or operations as of the time
of
the merger, since being organized in 1968, it had historically been involved
in
mining and entertainment businesses unrelated to our current business.
Beginning
in 1997, and although we were not then a reporting company under the Securities
Exchange Act, our common stock was quoted on the OTC Bulletin Board (originally
under the symbol “TIXX”, which was later changed to “TIXXD”). On May 13, 1999,
we changed our name to FINdex.com, Inc. On March 7, 2000, in an effort
to satisfy a newly imposed NASD Rule eligibility requirement that companies
quoted on the OTC Bulletin Board be fully reporting under the Securities
Exchange Act (thereby requiring recently audited financial statements)
and
current in their filing obligations, we acquired, as part of a share exchange
in
which we issued 150,000 shares of our common stock, all of the outstanding
capital
stock of Reagan Holdings, Inc., a Delaware corporation. At the time of
this
transaction, Reagan Holdings was subject to the requirements of having
to file
reports pursuant to Section 13 of the Securities Exchange Act, had recently
audited financial statements and was current in its reporting obligations.
Having no operations, employees, revenues or other business plan at the
time,
however, it was a public shell company. As a result of this transaction,
Reagan
Holdings, Inc. became our wholly-owned subsidiary and we became the successor
issuer to Reagan Holdings for reporting purposes pursuant to Rule 12g-3
of the
Securities Exchange Act. Shortly thereafter, we changed our stock symbol
to
“FIND”. Though it does not currently have any operations, employees, or
revenues, Reagan Holdings remains our wholly-owned
subsidiary.
In
addition to Reagan Holdings, we also have one other wholly-owned subsidiary,
Findex.com, Inc. (i.e. the same name as our own), a Delaware
corporation. Like Reagan Holdings, this entity, too, does not currently have
any
operations, employees, or revenues. This subsidiary resulted from an acquisition
on April 30, 1999 pursuant to which we acquired all of the issued and
outstanding capital stock of FINdex Acquisition Corp., a Delaware corporation,
from its then stockholders in exchange for 4,700,000 shares of our common stock,
which, immediately following the transaction, represented 55% of our total
outstanding common stock. Our purpose for this acquisition was to broaden our
then-existing stockholder base, an important factor in our effort to develop
a
strong market for our common stock. On May 12, 1999, in exchange for the
issuance of 457,625 shares of FINdex Acquisition Corp. common stock, FINdex.com,
Inc., another Delaware corporation (originally incorporated in December 1995
as
FinSource, Ltd.), was merged with and into FINdex Acquisition Corp., with FINdex
Acquisition Corp. remaining as the surviving entity. Our purpose for this merger
was to acquire a proprietary financial information search engine for the
Internet which was to serve as the cornerstone for a Web-based development-stage
business, but which has since been abandoned. As part of the certificate of
merger relating to this transaction, FINdex Acquisition Corp. changed its name
to FINdex.com, Inc. We currently own 4,700,000 shares of FINdex.com, Inc. (the
Delaware corporation), representing 100% of its total outstanding common stock.
STRATEGY
The
common thread among our current software products is their target constituency,
consumers that share a devotion to or interest in Christianity and faith-based
“inspirational”
values.
Our focus is to become the largest worldwide provider of Bible study and
related faith-based software products through ongoing internal development
of
new products, expansion and upgrade of existing products and strategic product
line and/or corporate acquisitions and licensing. Specifically, our development
strategy includes:
Creating
and
Maintaining Diversity in Our Product Titles, Platforms and Market
Demographic
We
are
committed to creating and maintaining a diversified mix of titles and title
versions to mitigate our operating risks, and broaden market appeal within
our
demographic. Therefore, we strive to develop and publish titles and title
versions spanning a wide range of categories, including bible study, financial
and church management, pastoral products, children’s
software and language tutorials. We may also design our software for use
on
multiple platforms in order to reach a greater potential audience. There
are a
number of factors that we take into consideration when determining the
appropriate platform for each of our titles and title versions, including,
amongst others, economic cost, the platform’s
user
demographics and the competitive landscape at the time of a title or title
version’s release.
Creating,
Acquiring
and Maintaining Strong Brands
We
attempt to focus our development and publishing activities principally
around
software products that are, or have the potential to become, titles and
title
versions possessing sustainable consumer appeal and brand recognition.
To that
end, we are continually in pursuit of intellectual property licensing
opportunities with respect to software titles and title versions that are
strategically aligned with our existing product line and focus. We have
entered
into a number of such strategic relationships with the owners of various
forms
of intellectual property which have allowed us to acquire the rights to
publish
content and develop titles and title versions based upon such intellectual
properties. In addition, we may acquire intellectual property licenses
in the
future for products outside of our current area of focus.
Our
development strategy further includes the pursuit of acquisition and related
strategic growth opportunities involving other companies that sell faith-based
merchandise and services. As part of this strategy, we may acquire businesses
that (i) only recently commenced operations, (ii) are development-stage
enterprises in need of additional funds to expand into new products or
markets,
or (iii) are established businesses that may be experiencing financial
or
operating difficulties and need additional capital. We may also pursue
opportunities to acquire assets of other companies and establish wholly-owned
subsidiaries in various businesses or purchase existing businesses as
subsidiaries. Furthermore, although we have no current intentions or plans
to do
so, we have not ruled out the pursuit of transactional opportunities in
areas
outside the faith-based market demographic.
Because
acquisition and related opportunities may occur in relation to businesses
at
various stages of development, the task of comparative investigation and
analysis of such business opportunities is likely to be extremely difficult
and
complex. We are also likely to incur significant legal and accounting costs
in
connection with our pursuit of such opportunities, including the legal fees
for
preparing acquisition documentation, due diligence investigation costs and
the
costs of preparing reports and filings with the SEC.
Disciplined
Product
Selection and Development Processes
The
success of our business depends, in significant part, on our ability to develop
titles and title versions that will generate appreciable unit volume sales
while
simultaneously meeting our high quality standards. We use a formal control
process for the selection, development, production and quality assurance
of our
titles and title versions. We apply this process to products under development
with external, as well as internal, resources. This control process includes
upfront concept evaluation as well as in-depth reviews of each project on
numerous levels and at various intervals during the development process by
a
team that includes our senior management and a number of our key technical,
marketing and product development personnel.
Internal
and External
Development Groups
We
develop our titles and title versions using a strategic combination of our
internal development group and external, independently contracted developers,
a
team of which are located in the former Soviet Union and several others of
which
are located in the United States.
We
strive
to provide our in-house team the independence and flexibility needed to foster
creativity and teamwork. Employing an in-house development team provides
us with
the following advantages:
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Our
developers work collaboratively, sharing development techniques,
software
tools, software engines and useful experience, to form a strong
collective
and creative environment;
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The
ability to re-focus efforts quickly to meet the changing needs
of key
projects;
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More
control over product quality, scheduling and costs; and
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Our
developers are not subject to the competing needs of other software
publishers.
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In
March
2004, we opened an in-house development office in Naperville, Illinois.
We
select
our external developers based on their track record and expertise in producing
titles and title versions within certain categories. This selection process
allows us to strengthen and leverage the particular expertise of our internal
and external development resources, as well as to scale up and down as
necessary, to maximize the productivity of our development
budget.
PRODUCT
DEVELOPMENT
We
are
committed to the ongoing development of our existing software as well as
the
development of new software titles and title versions. Our product development
methodology is modeled around elements of the consumer packaged goods and
software industry. Within this model, our management assesses the current
market
and establishes a direction for each of our products, while key personnel
monitor quality, delivery schedules, development milestones and budget.
Prior to
final approval, whether developed internally or externally by our third-party
developers, we test all new titles and title versions for bugs.
The
development time for a PC-based title or title version is between three
and twelve
months
and the average development cost ranges from $8,000 to
$450,000.
The
development time for a PDA-based title or version is
between two
and six months
and the average development cost ranges from $30,000 to
$250,000.
Gross
margin percentages for PDA-based software are significantly lower than
the gross
margin percentages for PC-based software and the manufacturing time is
significantly longer than that associated with PC-based software, with
lead time
for PC-based software at approximately one to three weeks from the placement
of
an order, as opposed to four to six weeks for PDA-based software.
OUR
PRODUCTS
Our
focus
is to become the largest worldwide provider of Bible study and related
faith-based software products. To that end, we utilize a brand structure and
market our largest selling titles and title versions under the distinct key
brand: QuickVerse®
and
Membership Plus®.
We
support this strategy through the regularly scheduled introduction of new titles
and title versions featuring this brand. In the twelve months ended
December 31, 2004,
we
released a total of twenty-one
titles
and title versions for PC and PDA platforms. Through the remainder of
fiscal 2005 we currently plan on releasing a total of approximately six
titles
and title version for PC and PDA platforms, including the introduction of titles
and title versions for Macintosh® operating systems beginning in late
spring/early summer 2005.
Our
faith-based software titles and title versions are currently divided among
the
following six categories:
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Bible
Study
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Financial/Office
Management Products for Churches and other Faith-Based
Ministries
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Print
& Graphic Products
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Pastoral
Products
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Children’s
Products
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Language
Tutorial Products.
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Bible
Study
For
the
fiscal year ended December 31, 2004, approximately 63% of our revenues
were
derived from sales of our flagship QuickVerse®,
an
industry-leading Bible-study software now in its 16th
year and
9th
version,
which is available in an array of content package variations ranging in
retail
price from $4.50 to $299.95. Originally introduced into the market in 1989,
QuickVerse®
has sold
over one million copies since its introduction and is currently believed
by us
to be the market leader in its category.
QuickVerse®
simplifies biblical research, allowing users to view multiple reference
materials, including Bibles, dictionaries, commentaries and encyclopedias,
side-by-side on the computer screen. A built-in QuickSearch feature enables
the
user to highlight a word or Bible verse and find all of its occurrences in
a
particular text. Advanced search options also enable users to search by word,
phrase or verse across multiple books. QuickVerse®
2005,
our latest version, is currently available in four CD-Rom editions. Each
edition
of QuickVerse®
contains
several Bible translations (e.g.,
the
King James Version, the American Standard Version, etc.) along with numerous
reference titles (e.g.,
dictionaries, commentaries, encyclopedias, etc.). The QuickVerse®
family
of products includes: the QuickVerse®
Essentials Edition (which includes 9 Bibles and 40 reference titles), the
QuickVerse®
Standard
Edition (which includes 12 Bibles and 56 reference titles), the
QuickVerse®
Expanded
Edition (which includes 14 Bibles and 95 reference titles), and the
QuickVerse®
Deluxe
Edition (which includes 18 Bibles and 144 reference titles). Each
QuickVerse®
purchase
includes access to additional books and content, which can be unlocked or
downloaded and made accessible for an additional fee.
QuickVerse®
PDA, an industry-leading PDA Bible-study software, is compatible on both
Pocket
PC® and Palm® OS operating systems, and is currently in
its 3rd year and 2nd version. This program provides the
same simplified access and many of the personal Bible study features found
in
the desktop QuickVerse® versions. QuickVerse® PDA is
currently available in four editions as a download and in CD-Rom. Each
edition
of QuickVerse® PDA contains several Bible translations
(e.g., the King James Version, the American Standard Version, etc.)
along with numerous reference titles (e.g., dictionaries, commentaries,
encyclopedias, etc.). The QuickVerse® PDA family of products
includes: the Standard Edition (which includes 3 Bibles and 4 reference
titles),
the Deluxe Edition (which includes 5 Bibles and 6 reference titles), the
Life
Application Study Bible (which includes 1 Bible and 11 reference titles)
and a
secular version (which includes 2 Bibles and 4 reference titles). Each
edition
contains 25 scripture reading plans and provides the user with the ability
to
create their own.
QuickVerse Left
Behind®
Series,
a New York Times®
Best-Selling book series and the newest addition to the QuickVerse®
PDA
Bible software family, is compatible on both Pocket PC®
and
Palm®
OS
operating systems and was released in 2004. This program provides a new way
to
read, reference, recall, retrieve, note, search, and study fiction and
non-fiction. QuickVerse Left
Behind®
Series
is currently available in four editions as a download and in CD-Rom. Each
edition contains three volumes from the Left Behind®
Series,
1 Bible translation, 4 reference titles and 36 scripture reading plans.
We
expect
to introduce QuickVerse®
Macintosh beginning in late spring/early summer 2005. QuickVerse®
Macintosh is compatible with Macintosh®
OS X
10.3 or higher operating systems. This program will be available in two
editions
and provide access to several Bible translations (e.g.,
the
King James Version, the American Standard Version, etc.) along with numerous
reference titles (e.g.,
dictionaries, commentaries, encyclopedias, etc.). The QuickVerse®
Macintosh family of products contains numerous Search Panel features, including
user-defined book categorization, desktop books, download books, interactive
workbooks and daily reading plans, as well as an exclusive Preview Drawer,
allowing users to have an unlimited number of books open at any
time.
QuickVerse®customers
include (i) individuals devoted to or otherwise interested in studying
Christianity and (ii) religious and other spiritual organizations including
schools, churches and other faith-based ministries.
In
addition to QuickVerse®,
we also
develop and market certain other Bible study software packages. These include
the Complete Bible Resource Library®,
the
Book®,
The
Life Application Bible®,
A Walk
in the Footsteps of Jesus®,
Adam
Clark’s
Commentary on the Bible®,
and
Dictionaries of the New Testament®.
Although our prices are subject to change from time to time, these titles
currently range in retail price from $9.95 to $99.95 per unit.
Financial/Office
Management Products for Churches and other Christian Faith-Based
Ministries
For
the
fiscal year ended December 31, 2004, approximately 28% of our revenues were
derived from sales of Membership Plus®,
an
industry-leading church management software now in its 9th
version.
Membership Plus®
is
available in each of a standard and a deluxe package at retail prices of
$149.95
and $349.95 respectively. Each of these product packages provides church
database, financial management and church productivity tools, including
those
designed to streamline church office accounting, tasks and scheduling,
track
membership and contributions, organize membership databases, and provide
efficiency in producing targeted mailings, attendance reports and IRS-compliant
contribution receipts. The deluxe package is equipped with a broader
functionality and range of features, including, for example, a number of
templates for legal agreements frequently used by these types of organizations
and a fund based accounting function.
Membership
Plus®
is
designed to serve the unique needs of the churches, “para-church”
organizations and ministries, and non-profit entities. The term “para-church”
has been
developed by the religious community to refer to religious organizations
which
have some of the characteristics of a church, but which are not what most
people
would generally consider to constitute a church, including a defined
congregation.
Some
“para-church”
organizations are treated as churches for some reasons, and as religious
organizations which are not churches for others. A few examples of a
“para-church”
organization are Campus Crusade for Christian Ministry Resources, Promise
Keepers, and Josh McDowell Ministry.
Over
80,000 churches and faith-based organizations have purchased Membership
Plus®
since
its introduction in 1990. Membership Plus®
2005,
our latest version, is currently available in two CD-Rom editions: Membership
Plus®
Standard
and Membership Plus®
Deluxe.
We have approximately 50,000 registered users for this product.
Print
&
Graphic
Products
We
currently sell/distribute ClickArt Christian Publishing®
Suite
III, which is a full desktop publishing package containing over 13,000
Christian
images, icons, maps, Catholic and Jewish imagery and ethnically diverse,
family-oriented illustrations to be used in the creation of a wide range
of
printed materials including newsletters, bulletins, posters, fliers,
mailings,
calendars, and reports. We also publish/distribute Religious ClipArt®
and
Christian Images®.
Both of
these products are CD-Rom Clipart products that contain faith-based and
Christian graphical images that can be used in the production of other
content
related projects. In addition, we also distribute several titles produced
and
distributed by International Microcomputer Software, Inc. (“IMSI”)
a leading developer of software for both professional and home
users,
including ClipArt
& More™
2.5
Million and QuickStart™
Print
Studio Pro Deluxe.
Although our prices are subject to change from time to time, our print and graphic products range in price from $9.99 to $39.99 per unit. In the aggregate, and for the fiscal year ended December 31, 2004, 3% of our revenues were derived from sales of these products.
Pastoral
Products
We
currently produce and distribute/sell a line of pastoral products designed
to
assist faith-based ministries in streamlining sermon development and research
tasks and in organizing responsibilities. These titles include the following:
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Sermon
Builder®
4.0 Deluxe, which is a database compilation of illustrations,
anecdotes,
quotations, proverbs and bits of humor from general topics
like children
and angels to specific Bible passages, which users can
use to bring
messages to a congregation or classroom.
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Ministry
Notebook®
2.0, which is an organizational tool for users to keep
better track of
ministry-related paperwork including sermons, prayer requests,
personal
libraries, telephone contacts, and expense reports.
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Daily
Journal®,
which is a tool for entry and recordation of personal thoughts,
important
family and business events.
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Although
our prices are subject to change from time to time, our pastoral products
range
in price from $9.95 to $49.95 per unit. In the aggregate, and for the fiscal
year ended December 31, 2004, 2% of our revenues were derived from sales
of
these products.
Children’s
Products
We
currently produce and distribute/sell a line of children’s
CD-Rom products designed to appeal to faith-conscious families interested
in
spiritually-enriched entertainment and play-along educational content.
Collectively, these titles include Jonah and the Whale®,
Noah
and the Ark®,
Daniel
in the Lion’s
Den®,
and The
Story of Creation®.
In
addition, we also distribute the Veggie Tales®,
a
popular line of children’s
software programs involving interactive adventures with biblical
themes.
Although
our prices are subject to change from time to time, our children’s
CD-Rom products range in price from $5.95 to $22.98 per unit. In the
aggregate,
and for the fiscal year ended December 31, 2004, less than 1% of our
revenues
were derived from sales of these products.
Language
Tutorial
Products
We
currently produce tutorial software programs for learning Greek and Hebrew,
languages frequently studied in conjunction with a Bible-study curriculum
or by
biblical scholars. Each of these two programs covers all of the essential
language development skills, including letters, vocabulary and grammar.
Although
our prices are subject to change from time to time, our language tutorial
products range in price from approximately $10.00 to approximately $69.95
per
unit. In the aggregate, and for the fiscal year ended December 31, 2004,
3% of
our revenues were derived from sales of these products.
Other
Products
In
addition to our own software products, we resell certain titles and title
versions that we purchase at a discount and that are published by others,
including IMSI®, Veggie Tales, and Webroot®. These are
non-exclusive, purchase-order only type arrangements in connection with
which we
carry only limited inventory. Sales from these titles are derived exclusively
online through our Website and, apart from on our Website, we do not
promote
these products. Although prices are subject to change from time to time,
these
software products range in price from approximately $5.99 to approximately
$39.99 per unit. In
the
aggregate, and for the fiscal year ended December 31, 2004, 2% of our
revenues
were derived from sales of these products.
OUR
MARKET
According
to a Gallup poll released in March 2004, 49.4% of Americans identified
themselves as Protestant, while 23.7% identified themselves as Catholic,
and
9.1% identified themselves as “Other
Christian”.
According to the same survey, more than 60% of Americans say that religion
is
very important to them in their own lives, and another 24% say that religion
is
fairly important in their lives.
A
survey
released in July 2003 by the Christian Bookseller’s
Association (“CBA”)
indicated that Christian-product sales for the year 2002 were
$4.2
billion. The survey also revealed that $2.4 billion of the $4.2 billion
total
was sold through Christian retail, with $1.1 billion sold through general
retail, and $725 million sold direct-to-consumer, and through ministry
sales
channels. The 3,500-store CBA segment includes several different chains,
Family
Christian Stores being the largest with 325 stores. As faith-based retailing
increases, secular stores are offering more faith-based products as evidenced
by
the $1.1 billion sales figure in 2002 as reported by the CBA. It is this
faith-based demographic that we seek to target.
MARKETING
AND
ADVERTISING
In
developing a marketing strategy for our consumer software products,
we seek
brands or titles and title versions that we believe will appeal to
the interests
of our target consumers. We strive to create marketing campaigns which
are
consistent with this strategy and generally market our software
through:
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Our
Website (www.quickverse.com) and the Internet sites of
others;
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Print
advertising;
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Opt-in
e-mail campaigns;
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•
|
Product
sampling through demonstration software;
|
|
|
•
|
In-store
promotions, displays and retailer assisted co-operative advertising;
|
|
|
•
|
Publicity
activities; and
|
|
|
•
|
Trade
shows.
|
SALES
Direct
Marketing /
Online Sales
Direct
sales accounted for approximately 65% of our 2004 fiscal year revenue.
Over the
past two years, we have devoted significant and increasing resources
to the
development of our direct-marketing program. Through this program, we
market our
products directly to consumers and Church and “para-church” organizations
through a combination of direct-mailings and opt-in e-mailings of our
product
title catalogs and brochures. An important aspect of this initiative
is our
online sales. In May of 2004, we launched a full-service online store
with many
of the kinds of features and capabilities that online shoppers have come
to
expect from cutting-edge Internet retailers. We are currently marketing
our
products online through multiple sources including our own www.quickverse.com
Internet Website, other Internet Websites such as www.amazon.com, as
well as
several widely used search engines such as Google® and
Yahoo®. While we market our products through these other Internet
Websites and search engines, we are not substantially dependent upon
these
marketing relationships and have no written agreements with any one or
more of
them. The revenue generated from these Internet Websites and search engines,
excluding our own www.quickverse.com Internet Website, accounted for
less than
approximately 1% of our 2004 fiscal year revenue.
We
anticipate online orders will continue to increase as we expand our software
product base and enhance our marketing efforts in this area.
Retail
Sales
Retail
sales accounted for approximately
35% of our 2004 fiscal year revenue. Our domestic retail sales involve
thousands
of retail stores across the United States through which our products are
sold,
many of which are members of the CBA. These stores vary from small, family-owned
Christian bookstores to large chain bookstores such as LifeWay Christian
Stores,
Family Christian Stores®and Berean Christian Stores. We face the
continuing challenge of reaching these stores on a consistent basis to
keep them
informed of new releases, promotional offers, etc. In addition to advertising
in
trade publications and maintaining visibility at CBA trade shows and events,
we
believe that it is critical to be in direct personal contact with each
customer
routinely in order to maintain or increase our market position. Towards
that
end, our sales representatives are expected to contact each of our customers
as
well as each of the independent stores that are not yet our customers regularly
and present them with the latest in our products and promotions. We believe
our
personalized approach to marketing provides us with an edge over our
competition, which we believe rely predominantly on advertising to maintain
and
develop their relations with CBA customers.
In
the
secular retail market, which includes chains such as Best
Buy™, CompUSA®, and OfficeMax™, we
believe that we continue to be a top seller of Bible study software and
we are
developing additional product offerings and promotions to grow our market
share.
International
Sales
International
sales accounted for approximately 2% of our 2004 fiscal year revenue. We
currently sell to distributors and retailers in Canada, New Zealand, Australia,
Philippines, Hong Kong, the United Kingdom, and Singapore. These distributors
and retailers, in turn, sell our products into both Christian and large,
secular
retail outlets that sell off-the-shelf consumer software packages.
Returns
and Price
Concessions
At
the
time we ship our products we establish reserves, including reserves that
estimate the potential for future product returns and price concessions.
Management makes these estimates and assumptions based on actual historical
experience regarding allowances for estimated price concessions and product
returns. In determining the percentage of sales for product return
reserves, management considers a number of different statistical factors.
First, it reviews the rate of actual product returns (in total) for the
period.
Second, it reviews return rates for the same period(s) of prior years.
Third, it
reviews its sales by individual retail customers to assess any unusual
return
exposure. Fourth, it reviews actual return rates of specific title and
title
versions to determine if there are any unusual trends taking place. Fifth,
the
potential for an increase in actual returns resulting from upcoming new
title or
title version releases is reassessed. Sixth, and finally, management
reviews the
actual returns from the balance sheet date to the date of calculation
to
determine if anything unexpected has taken place.
We
give
all of our distributors and retail customers a written product return
policy
providing for returns, upon written request, within nine months of the
invoice
date for credit only. If a new title or title version release falls within
that
nine month time span, a distributor has 60 days from the announced release
date
to return the old title or title version in exchange for the new title
or title
version only. We provide our end-user consumers with a 45 day satisfaction
guarantee, allowing them to return a title or title version within that
time
frame if for any reason unsatisfied. Our warranty policy for defective
software
is to provide replacement or repair for a period of 45 days from the
invoice
date. We believe that these measurement dates provide a consistent period
for
assessment and the opportunity to adequately estimate channel inventory
levels
for appropriately estimating our return reserves.
We
generally grant price concessions to our wholesale retail customers when we
deem those concessions necessary to maintain our relationships with
those
retailers and maintain continued access to their retail channel customers.
Further, if consumer demand for a specific title falls below expectations
or
significantly declines below previous rates of wholesale retail sell-through,
then a price concession or credit may be requested by our retail customers
to
spur further retail channel sell-through.
Trends
that our returns typically follow include (i) the seasonality of sales,
and (ii)
the fact that, generally, relatively higher return rates occur during
periods of
new title or title version releases. Historically, actual returns have
been
within management’s prior estimates, however, we cannot be certain that any
future write-offs exceeding reserves will not occur or that amounts written
off
will not have a material adverse effect on our business, our financial
condition, including liquidity and profitability, and our results of
operations.
Management continually monitors and adjusts these allowances to take
into
account actual developments and sales results in the marketplace. In
the past,
particularly during title and title version transitions, we have had
to increase
price concessions to our retail customers.
MANUFACTURING
AND
FULFILLMENT
We
prepare a set of master program copies, documentation and packaging
materials
for each platform on which a title or title version is available. All
of our
software products are manufactured through third-party subcontractors,
with
orders for PC-based titles and title versions generally taking seven
to ten
days, and reorders taking three to five days. Packaging, printing and
assembly
are also performed by third-party subcontractors. To date, we have
not
experienced any material returns due to product defects.
We
currently fulfill all of our direct-to-consumer sales out of our own
warehouse
located in Omaha, Nebraska and a third-party fulfillment company, also
located
in Omaha, Nebraska, fulfills our bulk retail sales.
SIGNIFICANT
CUSTOMERS
AND SUPPLIERS
During
the years ended December 31, 2004 and 2003, we had no major customers that
individually accounted for 10% or more of annual sales. As we introduce new
and enhanced software titles into the market, we anticipate our sales to
a
single customer, as a percentage of gross consolidated revenue, will continue
to
remain below 10%.
Also
for
the years ended December 31, 2004 and 2003, product and material purchases
from
IsoDisc accounted for 29% and 3%, respectively, Midlands Packaging Corporation
accounted for 18% and 14%, respectively, Frogs Copy and Graphics accounted
for
17% and 10%, respectively, MicroBytes, Inc. accounted for 12% and 39%,
respectively, and Cedar Graphics accounted for 7% and 17%, respectively,
of the
total product and material purchases made by us. We currently have no
long-term
written agreements with any of these suppliers. The payment terms are
generally
net 30 days, and we are not substantially dependent upon any one or more
of
them; all are easily replaceable with any locally available supplier.
REGULATION
We
are
not currently subject to direct regulation by any government agency, other
than
regulations applicable to businesses generally.
COMPETITION
The
market for our products is rapidly evolving and intensely competitive
as new
software products and platforms are regularly introduced. Competition
in the
software industry is based primarily upon:
|
|
•
|
brand
name recognition;
|
|
|
•
|
availability
of financial resources;
|
|
|
•
|
the
quality of titles;
|
|
|
•
|
reviews
received for a title from independent reviewers who publish
reviews in
magazines, Websites, newspapers and other industry publications;
|
|
|
•
|
publisher’s
access to retail shelf space;
|
|
|
•
|
the
price of each title; and
|
|
|
•
|
the
number of titles then available.
|
We
face
competition from other software publishers, all of which generally sell
through
the same combination of channels that we do, including chain store, secular,
CBA, direct and online sales.
Specifically,
and in relation to our QuickVerse®
products, we believe are the market leader in our category. We currently
compete
with the following companies and products, among others:
|
|
•
|
Logos
Research Systems, Inc. -
Logos Series X®
|
|
|
•
|
Biblesoft,
Inc. -
BibleSoft PC Bible Study®
Version 4
|
|
|
•
|
Thomas
Nelson, Inc. -
Nelson eBible®
|
|
|
•
|
WordSearch
Bible Publishers -
WordSearch®
7
|
|
|
•
|
Zondervan
-
Zondervan Bible Study Library®
|
Although
each of these companies publishes software packages in several different
variations, generally in a range that includes a standard package,
an expanded
package, and a deluxe package (the same way that we do), in each of
these
respective categories we believe that we tend to be the least expensive
but the
most comprehensive in terms of the number of Bibles and reference titles
included. We believe QuickVerse’s®
reputation to be among the most well-respected in its category.
In
relation to our Membership Plus®
products, we currently compete with the following companies and comparable
products, among others:
|
|
•
|
ACS
Technologies®
|
|
|
•
|
CCIS
Church Software®
|
|
|
•
|
Church
Data Master Plus®
|
|
|
•
|
Church
Windows/Computer Helper®
|
|
|
•
|
Church
Office®
|
|
|
•
|
Logos
Management Software®
|
|
|
•
|
Power
Church Software®
|
| • |
Servant
PC®
|
|
| • |
Shelby
Systems®
|
|
| • |
Shepherd’s
Staff®
(Concordia Publishing House)
|
|
| • |
Specialty
Software®
|
We
believe that Membership Plus®
is the
market leader by a margin of over 100% in the church management software
publishing category in terms of registered users. Our Membership
Plus®
packages
are also among the least expensive products in the category.
We
rely
upon our product quality, marketing and sales abilities, proprietary
technology
and product development capability, the depth of our retail distribution
channels and management experience to compete in the software industry.
Although
we believe that we are among the market leaders in each of our two primary
product categories, some of our competitors have longer operating histories,
larger customer bases and greater financial, marketing, service, support,
technical and other resources than we do. Due to these greater resources,
certain of our competitors have the ability to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies, pay higher
fees to
licensors and pay more to third-party software developers than we can.
Moreover,
we believe that competition from new entrants will increase as the market
for
faith-based products and services expands.
INTELLECTUAL
PROPERTY
Overview
We
rely
for our business on a combination of copyrights, trademarks, and trade
secrets
to protect our intellectual property. Our copyrighted software content
and the
brand recognition associated with our related product trademarks are
among the
most important assets that we possess in our present ability to generate
revenues and profits, and we rely very significantly on these intellectual
property assets in being able to effectively compete in our market. Our
intellectual property rights derive from a combination of licenses from
third
parties, internal development and confidentiality and non-disclosure
agreements.
We
cannot
be certain that the precautions we have taken will provide meaningful
protection
from unauthorized use by others. If we must pursue litigation in the
future to
enforce or otherwise protect our intellectual property rights, or to
determine
the validity and scope of the proprietary rights of others, we may
not prevail
and will likely have to make substantial expenditures and divert valuable
resources in the process. Finally, we may not have adequate remedies
if our
proprietary content is appropriated, our proprietary rights are violated
or our
trade secrets are disclosed.
Copyrights
Our
copyrights, some of which have been registered and others of which
remain
unregistered, derive from a combination of program and source code
embodied in
software titles that we license from third parties, as well as program
and
source code embodied in software titles that we have internally developed
on our
own.
We
entered into a license agreement in June 1999 with Parsons Technology,
Inc.
which forms the basis of our copyright protection for products that
accounted
for approximately 97% of our revenues in 2004, including those generated
from
sales of QuickVerse®
and
Membership Plus®,
by far
our two largest selling software titles. A copy of the license that
we obtained
from Parsons Technology, which has since been assigned to Riverdeep,
Inc., the
latest licensor-assignee in a succession of assignments by Parsons
Technology
that have occurred since June 1999, is incorporated by reference into
this
annual report on Form 10-KSB/A as Exhibit 10.3.
At the
time, it was acquired as part of a combination of related transactions
involving
ourselves, Parsons Technology, then a wholly-owned subsidiary of Mattel,
Inc.,
and TLC Multimedia Inc., then also a wholly-owned subsidiary of Mattel,
Inc.
Aside from the license, the transactions involved an asset sale, a
product
distribution agreement, and a related services agreement. Taken as
a whole, and
essentially, we had acquired from TLC Multimedia a software publishing
and sales
division (known and referred to by many then as the “Parsons Church Group”). In
accordance with its terms, we agreed to pay a one-time non-recurring
fee of $5
million to obtain the license, which fee was payable over a subsequent
approximate one year period. The related asset sale involved separate
consideration.
The
license that we acquired in 1999 provided us with the right, originally
for a
term of ten years, to publish, use, distribute, sublicense and sell,
exclusively
worldwide in non-secular channels and non-exclusively (with continuing
right retained by Riverdeep, Inc., successor to Parsons Technology) on an
unrestricted basis in secular channels, a collection of 65 individual
top-selling Christian-related software titles owned by Parsons Technology,
including QuickVerse®
and
Membership Plus®,
among
others. The license covered a variety of other add-on content titles
(e.g.,
various
Bible translations, study guides and sermon preparation tools). The license
also
included the right for us to modify the programs (including the source
code) in
order to prepare derivative works and future versions of the programs,
and
stated that we would exclusively own all rights associated with any such
modifications.
Beginning
in 2000, we became involved in a series of mediations arising out of
or
otherwise in connection with the 1999 license. The first of these involved
the
payment terms of the $5 million licensing fee. Rather than making payments
in
accordance with the fee schedule as originally set forth in the agreement,
we
entered into an arrangement with Parsons Technology's direct sales group
whereby
we provided resale products and in turn received an offset credit against
the
balance due under the fee provision in the license. The dispute centered on
the amount of product actually resold, and, therefore, the amount of
offset
credit to which we were entitled. Prior to the resolution of this contest,
a
second dispute arose, naming Parsons Technology and ourselves, among
others, as
parties thereto. The first mediation was set aside, and ultimately resolved
in
conjunction with the latter proceeding as described in the following
paragraph.
In
October 2001, due to being in arrears with respect to certain royalty
payments owed to The Zondervan Corporation then, a content provider
to
QuickVerse®,
we
became party to a second mediation ultimately resulting in a multi-party
settlement agreement, on October 20, 2003, the terms of which provided
for our
payment to Zondervan of $500,000 plus 5% simple interest in installments,
as
well as for our destruction of all inventory containing Zondervan-owned
content,
all of which we satisfied within months thereafter. As part of the
settlement
agreement, we received a covenant in perpetuity with respect to our
rights under
the 1999 license, effectively extending it indefinitely with no continuing
financial obligations owed by us. A copy of the settlement agreement
which
resulted in the effective extension is incorporated by reference
as Exhibit
10.14 to this Form 10-KSB/A for the year ended December 31, 2004.
Since
1999, the developments, including modifications and improvements, that
we have
made to the originally acquired copyrighted programs covered by the
license have
been extensive. We have used both in-house developers and third-party
contractors in these modifications and improvements over which we retain
the exclusive ownership. Given these developments, which have been
made through
four subsequent versions and seven new editions of QuickVerse®, four
subsequent versions and one new edition of Membership Plus®,
and various subsequent versions of some of the other titles to which
we acquired rights under the license (including those in each of the
print and
graphics, pastoral, children’s, and language tutorial product categories), we
believe that the real value of the copyrights associated with these
titles lay
almost exclusively at this point in the improvements that we own rather
than the
base copyrights that we were originally granted and that continue to
be owned by
Riverdeep, Inc. Moreover, it is our belief that the original source
code covered
by the license has been effectively rendered valueless by virtue of
these
subsequent modifications and improvements. Although
we do not believe that any third parties have been granted any rights
to date in
addition to our own to publish or sell these titles into secular channels,
and
do believe that, even if this has occurred or should occur in the future,
the
barriers to entry created by the extensive developments that we have
made and
now own to these otherwise licensed titles would make it practically
infeasible
for any third party to effectively compete with us in relation to these
products
in any market, there can be no assurance that one or more competitors
will not
emerge at some point or that they will not impact on our sales and
revenues.
As
noted
above, our largest-selling title, QuickVerse®,
is one
from which we originally derived our rights under the 1999 license.
One of the
features that make QuickVerse®
such a
popular title is its breadth of content. A very significant percentage
of this
content is licensed by us from various third-party content providers
for
inclusion in QuickVerse®.
We are
therefore responsible for paying royalties on a regular basis to these
providers
in connection with our sales of QuickVerse®.
In
total, we currently have content licensing agreements with 45 different
publishers for approximately 765 individual Bible translations and
other
Biblical or related scholarly works which are incorporated in various
editions
of our QuickVerse®
products, or in some cases sold as stand-alone or add-on content. These
licensing agreements are typically non-exclusive and for a fixed duration
(e.g.,
a term
of 3 or 5 years). Royalties are generally paid within 30 days following
the end
of a quarter and are calculated as a percentage of net sales from a
work
(e.g.,
ranging
from 3% to 10% according to the licensing agreements), based upon factors
such
as value as a stand-alone product as compared to, for example, value
when
bundled with other titles within a collective work. These license agreements
typically cover content in the context of both stand-alone products
and as
bundled works. For
example, consumers who purchase QuickVerse®
pay the
suggested retail price and are in part paying for the technology within
the
program along with the content. QuickVerse®
titles
sold to new consumers or new users are subject to royalties on all
content
within each specific QuickVerse®
title.
However, upgrade sales to existing users are only subject to royalties
on new
content additions of the upgraded version.
In
addition to the copyrights associated with the 1999 license described
above,
copyright protection exists in relation to the software titles that we
resell
published by others. These copyrights, however, are held by the publishers
and/or their respective third-party content providers.
Trademarks
As
part
of the 1999 license, we acquired the unlimited right to use the registered
trademarks associated with the various titles licensed thereunder exclusively
worldwide in non-secular channels and non-exclusively in secular channels.
Because of the fact that each of QuickVerse®
and
Membership Plus®
had been
on the market for approximately ten years by the time we acquired the
license,
and each had a substantial existing user base, the trademarks for these
products
alone were deemed at the time to be of great importance and value. We
believe
that our initiatives in introducing subsequent versions and editions
of these
titles since then, as well as our having maintained extremely high publishing
standards throughout the period that we have been publishing these titles,
have
served to sustain and enhance the importance and value of these
trademarks.
Trade
Secrets
Whenever
we deem it important for purposes of maintaining competitive advantages,
our
policy requires parties with whom we share, or who otherwise are likely
to
become privy to, our trade secrets or other confidential information,
including
source code, to execute and deliver to us confidentiality and/or non-disclosure
agreements prior to their exposure to any such information. Among others,
this
includes employees, consultants and other advisors, including our in-house
and
outsourced software developers and collaborators, each of whom we require
to
execute such an agreement upon commencement of their employment, consulting
or
advisory relationships. These agreements generally provide that all confidential
information developed or made known to the individual by us during the
course of
the individual’s
relationship with us is to be kept confidential and not to be disclosed
to third
parties except in specific circumstances. In the case of employees and
consultants, the agreements provide that all inventions conceived by
the
individual in the course of their employment or consulting relationship
shall be
our exclusive property.
EMPLOYEES
As
of June 7, 2005, we had twenty-eight full-time employees. Of
those twenty-eight, four were part of the senior-level executive and
financial
management team, five were in the product development team, nine were on
the sales team, and ten were in fulfillment, administration, and related
support positions. For the fiscal year ended December 31, 2004, our annual
payroll was $1,523,332, equivalent to 26% of gross revenues. In addition,
we
have engaged the services of several consulting firms who are working
full or
part-time for us in the area of product development and marketing.
We
rely
heavily on our current officers and directors in operating the business.
We are
not subject to any collective bargaining agreements and believe that
our
relationships with our employees are good.
SEASONALITY
Our
business is highly seasonal. More than 50% of our annual sales are expected
to
occur in the five months of September through January; the five months
of April
through August are generally our weakest, generating only about 29% of
our
annual sales.
Our
principal executive offices are located at 11204 Davenport Street,
Suite 100,
Omaha, Nebraska. We lease this 6,500 square foot premises under a five
year
lease agreement with 11204, LLC. Our monthly rent is $7,094.79 and,
as
of June 7, 2005, there were approximately twenty-three months
remaining under the lease.
We
maintain additional leased office space in Naperville, Illinois for
certain
product development activity. We lease this 880 square foot premises
under an
eighteen month lease agreement with Transwestern Commercial Services.
Our
monthly rent is $1,320.00 and there are three months remaining under the
lease.
Three
of our full-time employees work in home offices located in Cedar Rapids,
Iowa. We do not pay for any space associated with these
operations.
In
March
2004, a joint settlement was finalized with The Zondervan Corporation
and TLC
Multimedia, Inc. in connection with then pending litigation surrounding
royalties owed by us. Pursuant to the settlement, we were required to
make
certain payments to The Zondervan Corporation, which obligations, as
of July
2004, were satisfied in full. A stipulation of such settlement has since
been
duly entered and the matter has been discontinued.
As
of the
date of this report, there were no pending material legal proceedings
to which
we were a party and we are not aware that any were contemplated. There
can be no
assurance, however, that we will not be made a party to litigation in
the
future. Moreover, there can be no assurance that our insurance coverage
will
prove adequate to cover all liabilities arising out of any claims that
may be
initiated against us in the future. Any finding of liability imposed
against us
coupled with a lack of corresponding insurance coverage is likely to
have an
adverse effect on our business, our financial condition, including liquidity
and
profitability, and our results of operations.
On
October 15, 2004, we filed a definitive information statement on Schedule
14C
with the SEC. The information statement was mailed to our stockholders
on or
about October 18, 2004 solely for the purpose of informing our stockholders
of
the approval and unanimous consent by our board of directors, and the
affirmative vote on September 9, 2004 of the holders of a majority of
the voting
power to take the following action:
| (i) |
amend
our
articles of incorporation to increase our authorized shares
of common
stock from 50,000,000 to 120,000,000 shares; and
|
| (ii) |
ratify
the designation of our
incumbent directors among the three classes of directors.
|
Of
our
46,153,189 common shares issued and outstanding at the time, the affirmative
vote of the holders of a majority of our voting power was required to
approve
the amendment and to ratify the designation. Both the amendment and the
ratification of designation received the approval of holders owning 32,307,090
shares of our common stock, representing 70% of our then total issued
and
outstanding common stock (51.97% after adjustment for certain voting
restrictions set forth in our articles of incorporation), each by written
consent as permitted by the Nevada Revised Statutes and our bylaws. The
action
approved by the consenting stockholders became effective on November
8, 2004,
which was 20 days after we mailed the information statement to our stockholders.
The amendment to our articles of incorporation was filed and effective
with the
Secretary of State of Nevada on November 10, 2004. We did not solicit
proxies to
vote at a stockholders’ meeting in connection with either the amendment or the
ratification.
No
other
matters were submitted to a vote of our stockholders during the fourth
quarter
of the fiscal year ended December 31, 2004.
RECENT
SALES
OF UNREGISTERED SECURITIES
|
Date
Securities Issued
|
Securities
Title
|
Issued
To
|
Number
of Securities Issued
|
Consideration
*
|
Footnotes
|
|||||||||||
|
Common
Stock Issuances
|
||||||||||||||||
|
12/31/04
|
Common
Stock
|
Business
Investor Services, Inc.
|
466,666
|
$
|
---
|
2B
|
||||||||||
|
11/16/04
|
Common
Stock
|
2030
Investors, LLC
|
1,000,000
|
$
|
---
|
2B
|
||||||||||
|
11/16/04
|
Common
Stock
|
C.
James Jensen
|
1,000,000
|
$
|
---
|
2B
|
||||||||||
|
Common
Stock Warrant Issuances
|
||||||||||||||||
|
11/10/04
|
Common
Stock
|
Barron
Partners, LP
|
10,937,500
|
$
|
838,539
|
1A
|
||||||||||
|
11/10/04
|
Common
Stock
|
Barron
Partners, LP
|
10,937,500
|
$
|
838,539
|
1A
|
||||||||||
|
Convertible
Promissory Note Issuances
|
||||||||||||||||
|
09/30/04
|
Common
Stock
|
2030
Investors, LLC
|
1,000,000
|
$
|
120,000
|
1A
|
||||||||||
|
09/30/04
|
Common
Stock
|
C.
James Jensen
|
1,000,000
|
$
|
120,000
|
1A
|
||||||||||
|
*
Consideration is calculated to be the value of the security
at the date of
issuance.
|
||||||||||||||||
|
1.
Stock issued in connection with issuances of stock, warrants,
and/or
convertible debt.
|
||||||||||||||||
|
2.
Stock issued in connection with conversion of a promissory
note.
|
||||||||||||||||
|
A.
We relied in each case for these unregistered sales on the
private
offering exemption of Section 4(2) of the Securities Act and/or
the
private offering safe harbor provision of Rule 506 of Regulation
D
promulgated thereunder based on the following factors: (i)
the number of
offerees or purchasers, as applicable, (ii) the absence of
general
solicitation, (iii) representations obtained from the acquirors
relative
to their accreditation and/or sophistication (or from offeree
or purchaser
representatives, as applicable), (iv) the provision of appropriate
disclosure, and (v) the placement of restrictive legends on
the
certificates reflecting the securities coupled with investment
representations obtained from the acquirors.
|
||||||||||||||||
|
B.
We relied on Section 3(a)(9) of the Securities Act as the basis
for our
exemption from registration of these offerings.
|
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|
There
were no underwriters or placement agents involved in any of
the issuances
set forth above and no commissions were paid.
|
||||||||||||||||
MARKET
INFORMATION
Our
common stock is traded on the OTC Bulletin Board, a service provided by
the
Nasdaq Stock Market Inc., under the symbol, “FIND”.
The
following table sets forth for the periods indicated the high and low bid
prices
for our common stock as reported each quarterly period within the last
two
fiscal years on the OTC Bulletin Board, and as obtained from BigCharts.com.
The
prices are inter-dealer prices, do not include retail mark-up, markdown
or
commission and may not necessarily represent actual transactions.
|
Common
Stock
|
||||
|
2003
|
High
|
Low
|
||
|
First
Quarter
|
$0.024
|
$0.022
|
||
|
Second
Quarter
|
$0.080
|
$0.022
|
||
|
Third
Quarter
|
$0.070
|
$0.010
|
||
|
Fourth
Quarter
|
$0.040
|
$0.025
|
||
|
2004
|
High
|
Low
|
||
|
First
Quarter
|
$0.055
|
$0.020
|
||
|
Second
Quarter
|
$0.400
|
$0.018
|
||
|
Third
Quarter
|
$0.250
|
$0.090
|
||
|
Fourth
Quarter
|
$0.190
|
$0.060
|
||
As
of June 6, 2005, there were approximately 800 holders of record of our
common stock, with any shares held by persons or companies in street or
nominee
name counted only under such street or nominee name.
DIVIDENDS
During
the last two years, no dividends have been paid on our common stock and
we do
not anticipate paying any dividends in the foreseeable future. Although
it is
our intention to utilize all available funds for the development of our
business, no restrictions are in place that would limit or restrict our
ability
to pay dividends.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY
COMPENSATION PLAN INFORMATION
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and
rights
(b)
|
Number
of Securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|
|
Equity
compensation plans approved by security holders
|
910,000
|
$0.11
|
590,000
|
|
Equity
compensation plans not approved by security holders
|
2,800,000
|
$0.0879
|
---
|
|
Total
|
3,710,000
|
$0.0933
|
590,000
|
Our
1999 Stock Incentive Plan authorizes the issuance of various forms of
stock-based awards including incentive and nonqualified stock options,
stock
appreciation rights attached to stock options, and restricted stock awards
to
our directors, officers and other key employees. The plan has been approved
by our stockholders and as such, provides certain income tax advantages
to
employees as provided under Sections 421, 422, and 424 of the Internal
Revenue
Code. Stock options are granted at an exercise price as determined by our
board at the time the option is granted and may not be less than the
par value
of such shares of common stock. Stock options vest quarterly over three
years
and have a term of up to ten years. The plan authorizes an aggregate
of
1,500,000 shares of common stock that may be issued.
In
addition, we issue various forms of stock-based awards including nonqualified
stock options and restricted stock awards to directors, officers, other
key
employees and third-party consultants, outside of the Stock Incentive
Plan.
Awards granted outside of the plan have been granted pursuant to equity
compensation arrangements that have not been approved by our stockholders.
These awards are granted at an exercise price as determined by our board at
the time of grant and are not less than the par value of such shares
of common
stock. Stock options granted outside of the plan vest as determined by our
board at the time of grant and have a term of up to ten years. Non-employee
directors, though treated as employees for financial reporting purposes
under
Financial Accounting Standards Board Interpretation No. 44, are excluded
from
the income tax advantages afforded employees by the Internal Revenue
Code.
All
issued options, whether under the plan or not, create the obligation
for stock
issuance at the established exercise price.
The
following discussion should be read together with our consolidated
financial statements for the period ended December 31, 2004 and the notes
to the
consolidated financial statements.
CRITICAL
ACCOUNTING POLICIES
Our
critical accounting policies, including the assumptions and judgments
underlying
them, are more fully described in the Notes to the Financial Statements.
We have
consistently applied these policies in all material respects. These
policies
primarily address matters of expense recognition and revenue recognition,
including amortization of software development cost and the calculation of
reserve for returns. Investors are cautioned that these policies
are not
guarantees of future performance and involve risks and uncertainties,
and that
actual results may differ materially. Below are the accounting policies
that we
believe are the most critical in order to gain an understanding of
our financial
results and condition.
Use
of
Estimates
The
preparation of consolidated financial statements in conformity with
Generally
Accepted Accounting Principles requires management to make estimates
and
assumptions that affect the amounts reported in the financial statements
and the
accompanying notes. Significant estimates used in the consolidated
financial
statements include the estimates of (i) doubtful accounts, sales
returns, price
protection and rebates, (ii) provision for income taxes and realizability
of the
deferred tax assets, (iii) the life and realization of identifiable
intangible
assets, and (iv) provisions for obsolete inventory. The amounts we
will
ultimately incur or recover could differ materially from current
estimates.
Royalty
Agreements
We
have entered into certain agreements whereby we are obligated to
pay royalties for content of software published. We generally pay
royalties
based on a percentage of sales on respective products or on a fee
per unit sold
basis. We expense software royalties as product costs during the period
in
which the related revenues are recorded.
Accounts
Receivable
Accounts
receivable arise in the normal course of business. It is the policy
of
management to review the outstanding accounts receivable quarterly,
as well as
the bad debt write-offs experienced in the past, and establish an
allowance for
doubtful accounts for uncollectible amounts. Individual accounts
are charged
against the allowance when they are deemed uncollectible.
Inventory
Inventory,
including out on consignment, consists primarily of software media,
manuals and
related packaging materials and is recorded at the lower of cost
or market
value, determined on a first-in, first-out, and adjusted on a per-item,
basis.
Intangible
Assets
In
accordance with SFAS No. 142, Goodwill
and Other Intangible Assets,
intangible assets with an indefinite useful life are not amortized.
Intangible
assets with a finite useful life are amortized on the straight-line
method over
the estimated useful lives. All intangible assets are tested for
impairment
annually during the fourth quarter.
In
accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased,
or
Otherwise Marketed,
software development costs are expensed as incurred until technological
feasibility and marketability has been established, generally with
release of a
beta version for customer testing. Once the point of technological
feasibility
and marketability is reached, direct production costs (including
labor directly
associated with the development projects), indirect costs (including
allocated
fringe benefits, payroll taxes, facilities costs, and management
supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed,
travel
expenses, material and supplies, and other direct costs) are capitalized
until
the product is available for general release to customers. We amortize
capitalized costs on a product-by-product basis. Amortization for
each period is
the greater of the amount computed using (i) the straight-line basis
over the
estimated product life (generally from 12 to 18 months), or (ii)
the ratio of
current revenues to total projected product revenues.
Capitalized
software development costs are stated at the lower of amortized costs
or net
realizable value. Recoverability of these capitalized costs is determined
at
each balance sheet date by comparing the forecasted future revenues
from the
related products, based on management’s best estimates using appropriate
assumptions and projections at the time, to the carrying amount of
the
capitalized software development costs. If the carrying value is
determined not
to be recoverable from future revenues, an impairment loss is recognized
equal
to the amount by which the carrying amount exceeds the future
revenues.
SFAS
No. 2, Accounting
for Research and Development Costs,
establishes accounting and reporting standards for research and development.
In
accordance with SFAS No. 2, costs we incur to enhance our existing
products
after general release to the public (bug fixes) are expensed in the
period they
are incurred and included in research and development costs.
We
capitalize costs related to the development and maintenance of our
Website in
accordance with Financial Accounting Standard Board’s (“FASB’s”) Emerging Issues
Task Force (“EITF”) Issue No. 00-2, Accounting
for Website Development Costs.
Under EITF Issue No. 00-2, costs expensed as incurred are as
follows:
|
•
|
planning
the Website,
|
|
|
•
|
developing
the applications and infrastructure until technological
feasibility is
established,
|
|
|
•
|
developing
graphics such as borders, background and text colors, fonts,
frames, and
buttons, and
|
|
|
•
|
operating
the site such as training, administration and
maintenance.
|
Capitalized
costs include those incurred to:
|
•
|
obtain
and register an Internet domain name,
|
|
|
•
|
develop
or acquire software tools necessary for the development
work,
|
|
|
•
|
develop
or acquire software necessary for general Website
operations,
|
|
|
•
|
develop
or acquire code for web applications,
|
|
|
•
|
develop
or acquire (and customize) database software and software
to integrate
applications such as corporate databases and accounting
systems into web
applications,
|
|
|
•
|
develop
HTML web pages or templates,
|
|
|
•
|
install
developed applications on the web server,
|
|
|
•
|
create
initial hypertext links to other Websites or other locations
within the
Website, and
|
|
|
•
|
test
the Website applications.
|
We
amortize Website
development costs on a straight-line basis over the estimated life
of the site,
generally 36 months.
Revenue
Recognition
We
derive revenues from the sale of packaged software products, product
support and
multiple element arrangements that may include any combination
of these items.
We recognize software revenue for software products and related
services in
accordance with American
Institute of Certified Public Accountants Statement of Position
(“SOP”)
97-2, Software
Revenue Recognition,
as modified by SOP 98-9, Modification
of SOP 97-2, With Respect to Certain Transactions.
We recognize revenue when persuasive evidence of an arrangement
exists
(generally a purchase order), we have delivered the product, the
fee is fixed or
determinable and collectibility is probable.
-19-
In
some situations, we receive advance payments from our customers.
We defer
revenue associated with these advance payments until we ship the
products or
offer the support.
In
accordance with EITF Issue No. 01-9, Accounting
for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendor’s
Product,
we generally account for cash considerations (such as sales incentives
- rebates
and coupons) that we give to our customers as a reduction of revenue
rather than
as an operating expense.
We
reduce product revenue for estimated returns and price protections
that are
based on historical experience and other factors such as the volume
and price
mix of products in the retail channel, trends in retailer inventory
and economic
trends that might impact customer demand for our products. We also
reduce
product revenue for the estimated redemption of end-user rebates
on certain
current product sales. Our rebate reserves are estimated based on
the terms and
conditions of the specific promotional rebate program, actual sales
during the
promotion, the amount of redemptions received and historical redemption
trends
by product and by type of promotional program.
We
record the amounts we charge our customers for the shipping and handling
of our
software products as product revenue and we record the related costs
as cost of
sales on our consolidated statements of operations.
Derivatives
We
account for warrants issued with shares of common stock in
a private placement
according to EITF Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a
Company’s Own Stock.
In
accordance with accounting mandate, the derivative liability
associated with the
warrants has been and shall continue until our registration
statement on Form
SB-2 originally filed on November 22, 2004 is declared effective
to be adjusted
to fair value (calculated using the Black Scholes method)
at each balance sheet
date and is accordingly reassessed at each such time to determine
whether the
warrants should be classified (or reclassified, as appropriate)
as a liability
or as equity. The corresponding fair value adjustment is
included in the
consolidated statements of operations as other expenses as
the value of the
warrants increases from an increase in our stock price at
the balance sheet date
and as other income as the value of the warrants decreases
from a decrease in
our stock price. At December 31, 2004, the fair value of
the derivative
liability was approximately $1,969,000, and a fair value
adjustment of
approximately $292,000 has been included in other expenses
for the year then
ended. An increase in our stock price by 10% from the year
ended December 31,
2004 would result in a fair value adjustment of approximately
$197,000 as other
expenses, and a decrease in our stock price by 10% from the
year ended December
31, 2004 would result in a fair value adjustment of approximately
$197,000 as
other income.
Income
Taxes
We utilize
SFAS No. 109, Accounting
for Income Taxes.
SFAS No. 109 requires the use of the asset and liability method of
accounting
for income taxes. Under this method, deferred income taxes are provided
for the
temporary differences between the financial reporting basis and the
tax basis
of our assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the
years in which those temporary differences are expected to be recovered
or
settled.
RESULTS
OF
OPERATIONS FOR YEARS ENDED DECEMBER 31, 2004 AND DECEMBER 31,
2003
Our
income before taxes decreased approximately $1,525,000 from an income
of
approximately $1,473,000 for the twelve months ended December 31, 2003
to a loss
of approximately $52,000 for the twelve months ended December 31, 2004,
and our
net income decreased approximately $735,000 from a net income of approximately
$1,699,000 for the twelve months ended December 31, 2003 to a net income
of
approximately $964,000 for the twelve months ended December 31, 2004.
These
decreases are a result of the following items. For the twelve months
ended December 31, 2003, we wrote down accrued royalties of approximately
$584,000 and wrote off a note payable of approximately $650,000 and
the interest
associated with the note of approximately $217,000. Both of these write
down
items are included in other income. We also wrote down a distinct category
of
obsolete inventory of approximately $61,000, which is included in cost
of sales.
For the twelve months ended December 31, 2004, we wrote down the reserve
for
rebates payable from a change in accounting estimate of approximately
$142,000
and wrote down actual rebates payable of approximately $61,000 due
to an
overstatement. Both of these write down items are recognized as an
adjustment to
revenue. We also wrote down a distinct category of obsolete inventory
of
approximately $32,000 which is included in cost of sales, and incurred
an
expense of approximately $155,000 related to a settlement with an institutional
private equity investor which is included in other adjustments. Furthermore,
for
the twelve months ended December 31, 2004, we recognized approximately
a
$1,000,000 gain from extinguishment of debt which is classified as
other income.
The extinguishment of debt is a direct result from settling with various
vendors
and content providers for lump-sum payments at a reduced amount of
balances
owed. Finally,
we recognized a loss of approximately $292,000 related to the fair
value
adjustment of derivatives in other expenses for the twelve months ended
December
31, 2004. Warrants issued with shares of common stock in a private
placement are
considered derivative liabilities. The derivative liability associated
with the
warrants has been adjusted to fair value at each balance sheet date
and is
accordingly reassessed at each such time to determine whether the warrants
should be classified (or reclassified, as appropriate) as a liability
or as
equity. See “Derivatives” below.
Non-cash
expenses related to shares of common stock issued for services increased
by
approximately $126,000. For the year ended December 31, 2004, we recognized
approximately $149,000 in non-cash expenses related to shares of common
stock
and warrants issued for services and approximately $30,000 in non-cash
expenses
related to shares of common stock issued in a settlement agreement.
Comparatively, for the year ended December 31, 2003, we recognized expenses
of
approximately $53,000 relating to shares of common stock issued for services.
Overall, interest expense for the twelve months ended December 31, 2004
decreased by approximately $45,000 compared to 2003. This is due to our
reducing
trade payables and meeting the scheduled terms. Furthermore, the note
liabilities interest was reduced due in part to the reclassification
of the note
payable in the fourth quarter of 2003. Amortization expense for the twelve
months ended December 31, 2004 increased by approximately $15,000 compared
to
2003. This reflects the continual amortization of the software license
along
with the amortization for the launch of our Website, www.quickverse.com,
during
the second quarter of 2004. Amortization expense related to software
development
costs, which is included in cost of sales, increased approximately $220,000
for
the twelve months ended December 31, 2004 compared to 2003. This is a
direct
result from QuickVerse®
8.0
shipping in late December 2003, Membership Plus®
8.0
shipping in January 2004, QuickVerse®
PDA 2005
shipping in September 2004, and QuickVerse®
2005
shipping in early December 2004.
Revenues
We
derive
revenues from the sale of packaged software products, product support
and
multiple element arrangements that may include any combination of these
items.
Revenue is recognized when persuasive evidence of an arrangement exists
(generally a purchase order), we have delivered the product, the fee
is fixed or
determinable and collectibility is probable. For our packaged software
products,
we typically recognize revenue from the sale when we ship the product.
We sell
some of our products on consignment to a limited number of resellers.
We
recognize revenue for these consignment transactions only when the end-user
sale
has occurred. Service revenue resulting from technical support plans
is
recognized over the life of the plan which is generally one year. Revenue
associated with advance payments from our customers is deferred until
we ship
the product or offer the support service. Revenue for software distributed
electronically via the Internet is recognized when the customer has been
provided with the access codes that allow the customer to take immediate
possession of the software on its hardware and evidence of the arrangements
exists. For
revenue arrangements involving multiple products or products and services,
we
allocate and defer revenue for the undelivered products or products and
services
based on their vendor-specific objective evidence of fair value, which
is
generally the price charged when that product or product and service
is sold
separately.
We
reduce
product revenue for estimated returns and price protections that are based
on
historical experience and other factors such as the volume and price mix
of
products in the retail channel, trends in retailer inventory and economic
trends
that might impact customer demand for our products. Estimated returns are
also
based upon a percentage of total retail and direct sales. Direct sales
accounted
for approximately 65% of our 2004 fiscal year revenue. We account for cash
considerations (such as sales incentives - rebates and coupons) that we
give our
customers as a reduction of revenue rather than as an operating expense.
Product
revenue is also reduced for the estimated redemption of end-user rebates
on
certain current product sales. We did not have any rebate programs during
the
twelve months ended December 31, 2003 and 2004, respectively.
Trends
that our returns typically follow include (i) the seasonality of sales,
and (ii)
the fact that, generally, relatively higher return rates occur during
periods of
new title or title version releases. Historically, actual returns have
been
within management’s prior estimates, however, we cannot be certain that any
future write-offs exceeding reserves will not occur or that amounts written
off
will not have a material adverse effect on our business, our financial
condition, including liquidity and profitability, and our results of
operations.
Management continually monitors and adjusts these allowances to take
into
account actual developments and sales results in the marketplace. In
the past,
particularly during title and title version transitions, we have had
to increase
price concessions to our retail customers.
Product
returns from distributors and Christian bookstores are allowed primarily
in
exchange for new products or for credit towards purchases as part of
a
stock-balancing program. These returns are subject to certain limitations
that
may exist in the contract in each case. Under certain circumstances,
such as
termination or when a product is defective, distributors and bookstores
could
receive a cash refund if returns exceed amounts owed. Returns from sales
made
directly to the consumer are accepted within 45 days of purchase and
are issued
a cash refund. Product returns, price protections or price concessions that
exceed our reserves could materially adversely affect our business and
operating
results and could increase the magnitude of quarterly fluctuations in
our
operating and financial results.
Software
products are sold separately, without an obligation of future performance
such
as upgrades, enhancements or additional software products, and are sold
with
post contract customer support services such as customer service and
technical
support assistance. In connection with the sale of certain products,
we provide
a limited amount of free technical support assistance to our customers.
We do
not defer the recognition of any revenue associated with sales of these
products, since the cost of providing this free technical support is
insignificant. The technical support is provided within one year after
the
associated revenue is recognized and free product enhancements (bug fixes)
are
minimal and infrequent. We accrue the estimated cost of providing this
free
support upon product shipment and include it in cost of sales.
Shipping
and handling costs in connection with our software products are expensed
as
incurred and included in cost of sales.
|
Twelve
Months Ended December 31
|
2004
|
%
to Gross Sales
|
2003
|
%
to Gross Sales
|
Change
|
|
%
|
||||||||||||||||
|
Gross
sales
|
$
|
5,786,427
|
100
|
%
|
$
|
4,787,545
|
100
|
%
|
$
|
998,882
|
21
|
%
|
|||||||||||
|
Add
rebate adjustments
|
203,313
|
4
|
%
|
170,154
|
4
|
%
|
33,159
|
19
|
%
|
||||||||||||||
|
Less
reserve for sales returns and allowances
|
(567,643
|
)
|
(10
|
)
|
%
|
(396,788
|
)
|
(8
|
)
|
%
|
(170,855
|
)
|
43
|
%
|
|||||||||
|
Net
sales
|
$
|
5,422,097
|
94
|
%
|
$
|
4,560,911
|
96
|
%
|
$
|
861,186
|
19
|
%
|
Gross
revenues increased approximately $999,000 from approximately $4,788,000
for the
year ended December 31, 2003 to approximately $5,787,000 for the year
ended
December 31, 2004. Such increase is due to our release of an enhanced
version of
Membership Plus®,
during
the first quarter of 2004 and an enhanced version of QuickVerse®,
during
the fourth quarter of 2004. However, delays in duplication, packaging
and
distribution caused our QuickVerse®
2005 to
begin shipping in early-December 2004, long after the holiday season
had been
underway. Due to these delays, we believe we experienced reduced revenues
of
approximately $500,000 for the year ended December 31, 2004. In addition
to the
QuickVerse®
and
Membership Plus®
releases, there were several other new product releases in the year 2004
such as
an enhanced version of our QuickVerse®
PDA.
However, the retail value of the products ranged from $9.95 to $59.95
compared
to $99.95 to $349.95 for the QuickVerse®
and
Membership Plus®
titles.
During the year 2003, we only had one major product release,
QuickVerse®
8.0,
which shipped in late December 2003. During the years of 2003 and 2004,
our
sales efforts were focused on targeting end-users through telemarketing
and
Internet sales. These efforts resulted in more consistent sales during
the two
years. Sales into the retail market (both CBA and secular) continue to
increase;
however, they are not back to the levels of 1999 and 2000.
Sales
returns and allowances increased approximately $171,000 from approximately
$397,000 for the year ended December 31, 2003 to approximately $568,000
for the
year ended December 31, 2004 and increased as a percentage of gross sales
from
approximately 8% for the year ended December 31, 2003 to approximately
10% for
the year ended December 31, 2004. The upward trend in sales returns and
allowances as a percentage is attributable to our release of enhanced
versions
of QuickVerse®
and
Membership Plus®
in late
December of 2003 and January of 2004, respectively. The release of these
two
enhanced products resulted in an increased quantity of sales returns
and
allowances of prior versions as distributors and stores made shelf space
during
the first quarter of 2004. Furthermore, the release of QuickVerse®
8.0 in
late December of 2003 was the only enhancement to the product within
a three
year timeframe. We released QuickVerse®
2005
earlier in the fourth quarter of 2004 with only an eleven month difference
from
the last enhancement. Due to the earlier release, we anticipated stores
would
have more time to return the previous version of QuickVerse®
than
compared to a year ago. Product returns during the other quarters were
consistent. We anticipate the sales return and allowances as a percentage
to
follow a downward trend due to our focused sales efforts to the end-users
and our decreased presence in the retail market, because incidents of
return are
lower for sales direct to the end-user than sales into the retail stores.
We
also wrote down a reserve for rebates payable due to a change in accounting
estimate of approximately $142,000 and approximately $124,000 and wrote
down
actual rebates payable due to an overstatement of approximately $61,000
and
approximately $46,000, both of which are included as an adjustment to
revenue in
accordance with EITF Issue No. 01-09 for the twelve months ended December
31,
2004 and 2003, respectively.
Cost
of Sales
|
Twelve
Months Ended December 31
|
2004
|
%
to Gross Sales
|
2003
|
%
to Gross Sales
|
Change
|
|
%
|
||||||||||||||
|
Direct
costs
|
$
|
579,946
|
10
|
%
|
$
|
539,595
|
11
|
%
|
$
|
40,351
|
7
|
%
|
|||||||||
|
Amortization
of software development costs
|
575,480
|
10
|
%
|
355,283
|
7
|
%
|
220,197
|
62
|
%
|
||||||||||||
|
Royalties
|
417,604
|
7
|
%
|
264,050
|
6
|
%
|
153,554
|
58
|
%
|
||||||||||||
|
Fulfillment
|
74,889
|
1
|
%
|
43,375
|
1
|
%
|
31,514
|
73
|
%
|
||||||||||||
|
Freight-out
|
172,634
|
3
|
%
|
125,680
|
3
|
%
|
46,954
|
37
|
%
|
||||||||||||
|
Cost
of sales
|
$
|
1,820,553
|
31
|
%
|
$
|
1,327,983
|
28
|
%
|
$
|
492,570
|
37
|
%
|
Cost
of
sales consists primarily of royalties to third-party providers of intellectual
property and the direct costs and manufacturing overhead required to
reproduce,
package, fulfill and ship the software products. Direct costs and manufacturing
overhead also include the amortized software development costs and the
non-capitalized technical support wages. The direct costs and manufacturing
overhead increased from 22.2% of gross revenues in 2003 to 24.3% of gross
revenues in 2004. The increase resulted directly from amortization of
software
development costs. The amortization recognized during the twelve months
ended
December 31, 2003 resulted from several new software releases in 2003
including
the then newly released QuickVerse®
8.0.
However, the shorter timeframe between our product upgrades during the
year of
2004 led to an increased amount of amortization recognized. During the
twelve
months ended December 31, 2004 we continued to amortize the costs associated
with QuickVerse®
8.0
along with the newly released Membership Plus®
8.0, the
updated release of QuickVerse®
PDA 2005
and the release of QuickVerse®
2005.
Fulfillment costs from a third-party warehouse and included in the manufacturing
overhead costs noted above, increased approximately $32,000 as we released
three
major product upgrades beginning late December 2003 through December
2004.
Furthermore, the direct costs and manufacturing overhead include the
write downs
of obsolete inventory of approximately $61,000 and approximately $32,000
for the
twelve months ended December 31, 2003 and 2004, respectively. The direct
costs
and manufacturing overhead percentage is expected to continue at the
2004 levels
as working capital remains more consistent and as more development projects
are
implemented in a shortened timeframe.
Royalties
to third-party providers of intellectual property also increased from 5.5%
of gross revenues in 2003 to 7.2% of gross revenues in 2004. The increase
of
royalties reflects the release of the QuickVerse®
8.0
editions in late December 2003 and the release of the QuickVerse®
2005
editions in early December 2004. Furthermore, we sold some of the older
QuickVerse®
versions
to liquidators at a reduced price throughout the year but had no
such sales during the year ended 2003. During the year ended 2004, we
also renegotiated several royalty contracts which resulted in some
cases in a
higher royalty rate along with access to more content. The royalty
rate as a
percentage of gross sales is expected to increase in the future as
the new
QuickVerse®
2005 is
released into the retail market and sales to new users are expected
to increase
significantly. However, upgrade sales will continue to be subject to
royalties
only on content additions of the upgraded version.
Software
development costs are expensed as incurred as research and development
until
technological feasibility and marketability have been established,
at which time
development costs are capitalized until the software title is available
for
general release to customers. Software
development is segregated by title and technology platform. Once a
product has
been successfully released, subsequent revisions and upgrades are considered
development and the costs of the revision and upgrade are capitalized.
Capitalized costs are amortized on a product-by-product basis
using the
greater of straight-line amortization over the estimated life of the
product
or the ratio of current revenues from the product to the total projected
revenue over the life of the product. Generally, we consider technological
feasibility to have been established with the release of a beta version
for
testing. Software development costs are summarized in the table below.
The
software development costs, consisting primarily of direct and indirect
labor
and related overhead charges, capitalized during the twelve months
ended
December 31, 2003 and 2004 were approximately $659,000 and approximately
$692,000, respectively. Accumulated amortization of these development
costs
included in cost of sales totaled approximately $355,000 and approximately
$575,000 for the twelve months ended December 31, 2003 and 2004, respectively.
The increase in both the capitalization and amortization is a direct
result of
the increase in the number of development projects.
| Twelve Months Ended December 31 |
2004
|
2003
|
|||||
|
Beginning
balance
|
$
|
584,706
|
$
|
280,502
|
|||
|
Capitalized
|
692,063
|
659,487
|
|||||
|
Amortized
(cost of sales)
|
575,480
|
355,283
|
|||||
|
Ending
balance
|
$
|
701,289
|
$
|
584,706
|
|||
|
Research
and development expense (General and administrative)
|
$
|
64,653
|
$
|
128,159
|
Sales,
General
and Administrative
|
Twelve
Months Ended December 31
|
2004
|
%
to Gross Sales
|
2003
|
%
to Gross Sales
|
Change
|
%
|
|||||||||||||||
|
Selected
expenses:
|
|||||||||||||||||||||
|
Commissions
|
$
|
814,623
|
14
|
%
|
$
|
570,381
|
12
|
%
|
$
|
244,242
|
43
|
%
|
|||||||||
|
Advertising
and direct marketing
|
455,238
|
8
|
%
|
240,062
|
5
|
%
|
$
|
215,176
|
90
|
%
|
|||||||||||
|
Marketing
and customer service
|
10,900
|
0
|
%
|
5,511
|
---
|
%
|
$
|
5,389
|
98
|
%
|
|||||||||||
|
Total
sales and marketing
|
1,280,761
|
22
|
%
|
815,954
|
17
|
%
|
$
|
464,807
|
57
|
%
|
|||||||||||
|
Research
and development
|
64,653
|
1
|
%
|
128,159
|
3
|
%
|
$
|
(63,506
|
)
|
-50
|
%
|
||||||||||
|
Personnel
costs
|
1,310,506
|
23
|
%
|
986,165
|
21
|
%
|
$
|
324,341
|
33
|
%
|
|||||||||||
|
Legal
|
71,003
|
1
|
%
|
77,037
|
2
|
%
|
$
|
(6,034
|
)
|
-8
|
%
|
||||||||||
|
Rent
|
75,555
|
1
|
%
|
51,039
|
1
|
%
|
$
|
24,516
|
48
|
%
|
|||||||||||
|
Telecommunications
|
149,443
|
3
|
%
|
79,558
|
2
|
%
|
$
|
69,885
|
88
|
%
|
|||||||||||
|
Corporate
services
|
94,000
|
2
|
%
|
---
|
---
|
%
|
$
|
94,000
|
-
|
||||||||||||
|
Other
general and administrative costs
|
544,678
|
9
|
%
|
429,276
|
9
|
%
|
$
|
115,402
|
27
|
%
|
|||||||||||
|
Total
general and administrative
|
2,309,838
|
40
|
%
|
1,751,234
|
37
|
%
|
$
|
558,604
|
32
|
%
|
|||||||||||
Operating
expenses for 2004 include approximately $149,000 in non-cash expenses
related to
shares of common stock and warrants issued for services and approximately
$30,000 in non-cash expenses related to shares of common stock issued
in a
settlement agreement compared with approximately $53,000 for 2003.
With gross
revenues increasing approximately $999,000 from 2003 to 2004, sales
expenses
also increased approximately $465,000 from approximately $816,000 for
2003 to
approximately $1,281,000 for 2004. Included in sales expenses, commissions
to a
third-party telemarketing firm increased approximately $244,000 as
our sales
focus to the direct consumer increased along with the number of new
and enhanced
product releases during 2004 compared with that of 2003; advertising,
and direct
marketing increased approximately $215,000 as we launched a full-service
online
store, began marketing our products online through multiple sources,
attended
more retail conferences, and increased the number of new product upgrades
throughout the year; and marketing and customer service costs increased
approximately $5,000 as our sales efforts continue to be more focused
towards
the consumer instead of the retail store.
Research
and development costs include salaries and benefits of personnel
and third
parties conducting research and development of software products.
Software
development costs expensed as research and development (see table
above)
amounted to approximately $65,000 for the twelve months ended December
31, 2004
compared to approximately $128,000 incurred for the twelve months
ended December
31, 2003. The decrease in 2004 reflects further development of existing
products
whereas in 2003 we had more research and development costs associated
with new
titles such as QuickVerse®
PDA for
both Pocket PC®
and Palm
OS®
operating systems. Research and development expenses are expected
to increase in
future periods as we add new products and versions to our product
mix.
Personnel
costs increased approximately $325,000 from approximately $986,000 for
the
twelve months ended December 31, 2003 to approximately $1,311,000 for
the twelve
months ended December 31, 2004. This increase is primarily from the increase
in
our sales and marketing team and technical support staff and the associated
health care costs. We also recognized approximately $14,000 of expense
related
to 635,000 restricted shares of common stock issued to employees and
approximately $67,000 in expense for upper management year-end bonus
accrual.
Furthermore, the capitalization of direct and indirect labor and related
overhead charges as software development costs and the cost of providing
free
technical support to our customers (see “Cost of Sales” above) decreased by
approximately $23,000 from approximately $557,000 for the twelve months
ended
December 31, 2003 to approximately $534,000 for the twelve months ended
December
31, 2004. This decrease is due to the shortened development time period
for the
new development projects that began during the year 2004. It is anticipated
that
personnel costs will continue to increase in future periods as operating
capital
is available to fund full staffing of our product development team and
expansion
of the direct marketing staff. In addition, interest and penalty fees
related to
back payroll taxes increased approximately $95,000 for the twelve months
ended
December 31, 2004.
Direct
legal costs increased approximately $38,000 for the twelve months ended
December
31, 2004 as the disputes with TLC and Zondervan were finalized in March
2004.
However, approximately $44,000 of legal costs were related to the stock
offering
costs incurred in July 2004 and
the
related preparation of a 14C information statement and SB-2 registration
statement; and therefore was recorded as a reduction to additional
paid-in capital. It
is
anticipated that legal costs will increase as we hold our first annual
meeting
of stockholders later this year and pursue our business plan for growth
by
acquiring companies and software title properties that are synergistic
with our
current product line and customer base. Rent expense increased
approximately $25,000 as we opened a new product development facility
located in
Naperville, IL. The increase is also attributed to the capitalization
of related
overhead charges as software development costs. See “Cost of Sales” above.
Telecommunications costs increased approximately $70,000 as the call
volume
increased in technical support and customer service due to the release
of the
three major product upgrades beginning late December 2003 through December
2004.
Corporate service fees increased approximately $94,000 for the twelve
months
ended December 31, 2004. These fees are related to the recent hire of
an outside
consultant, the expense for an issuance of a warrant to purchase 600,000
shares
of common stock allocated over the term of the consulting contract, and
the
expense for a previous issuance of a warrant to purchase 250,000 shares
of
common stock.
Other
Income and Adjustments
We
recorded an adjustment to the balance of accrued royalties for the year
ended
December 31, 2003 in the amount of approximately $584,000. This adjustment
was a
result of our having reached a settlement with TLC regarding the offset
credit
to which we were entitled against the balance due on the 1999 license.
The
offset credit was related to sales made to TLC that remained in dispute
until
verified by an independent third-party audit of the sales and related royalty
calculations. The royalty liabilities had been accrued based on our sales
to TLC
as originally reported and were part of the calculation of the June 30,
2001 bad
debt provision totaling $2,391,000. This has been included in other
income.
We
also
reclassified as other income proceeds totaling $650,000, and the corresponding
accrued interest payable totaling approximately $217,000, that were previously
recorded as an unsecured note payable. The determination to reclassify
the
obligation was made on the basis of the combined facts that (i) the obligation
exists, if at all, solely pursuant to an oral loan agreement made over
three
years ago in the State of North Carolina with a representative of the
party to
whom the obligation was believed to have been owed, (ii) no party has
ever made
any demand for repayment thereof despite the fact that no payments have
ever
been made on the obligation, (iii) the party believed to be owed the
obligation,
upon inquiry, claims no record of any such obligation, and (iv) the State
of
North Carolina Statute of Limitations applicable to oral agreements,
believed to
govern the continued enforceability of the obligation, has expired.
During
the year ended December 31, 2004, we recognized an approximately $1,000,000
gain from extinguishment of debt which is included in other income. The
extinguishment of debt is a direct result from one-time settlment arrangements
with various vendors and content providers for lump-sum payments ranging
from
approximately 17% to approximately 60% of balances owed at the time.
Vendors who
were offered the settlement had previously provided services and/or goods
to us,
and the content providers were owed royalties from us. We do not anticipate
this
to be a recurring event in the future. Below is a list of the vendors
and
content providers who we settled with:
|
•
|
American
Bible Society (content provider)
|
||
|
•
|
David
Epstein (content provider)
|
||
|
•
|
Depository
Trust Company (corporate services)
|
||
|
•
|
Explorer’s
Bible Study (content provider)
|
||
|
•
|
Genesis
Marketing Group (sales services)
|
||
|
•
|
Historical
Exegetical Electronic Publishing (content provider)
|
||
|
•
|
Innovative
Church Marketing Group (advertising services)
|
||
|
•
|
Interactive
Pictures Corporation (content provider)
|
||
|
•
|
InterVarsity
Press (content provider)
|
||
|
•
|
Ivy
Hill/Warner Media Services (manufacturing services)
|
||
|
•
|
Lernout
& Hauspie Speech Products (content provider)
|
||
|
•
|
MicroBytes,
Inc. (CD duplication services)
|
||
|
•
|
Moody
Publishers (content provider)
|
||
|
•
|
National
Council of the Churches of Christ in the United States of
America (content
provider)
|
||
|
•
|
NavPress
Publishing Group (content provider)
|
||
|
•
|
Oxford
University Press (content provider)
|
||
|
•
|
Pillsbury,
Madison & Sutro LLP (legal services)
|
||
|
•
|
Rutledge
Hill Press (content provider)
|
||
|
•
|
Sonopress
(manufacturing services)
|
||
|
•
|
Standard
Publishing (content provider)
|
||
|
•
|
The
Lockman Foundation (content provider)
|
||
|
•
|
World
Publishing (content provider)
|
||
Furthermore
during the year ended December 31, 2004, we incurred approximately
$155,000 in
expenses related to a settlement agreement with Swartz Private Equity,
an
institutional private equity investor, for early termination of the
agreement.
As part of a settlement agreement, we issued 295,692 shares of common
stock and
paid a cash lump sum of $125,000. The shares were valued at $0.10
per share.
This has been included in other adjustments.
Derivatives
In
November 2004, we issued two warrants to purchase an aggregate
of 21,875,000
shares of our common stock in connection with a certain Stock
Purchase Agreement
completed with Barron Partners, LP, on July 19, 2004. The first
warrant entitles
the holder to purchase up to 10,937,500 shares of our common
stock at a price of
$0.18 per share, and the second warrant entitles the holder
to purchase up to
10,937,500 additional shares of our common stock at a price
of $0.60 per share.
Each warrant is subject to standard adjustment provisions and
each provides for
settlement in registered shares of our common stock and may,
at the option of
the holder, be settled in a cashless, net-share settlement.
These warrants have
been accounted for as a liability according to the guidance
of EITF 00-19,
Accounting
for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a
Company’s Own Stock.
In
accordance with accounting mandate, the derivative liability
associated with
these warrants has been and shall continue until our registration
statement on
Form SB-2 originally filed on November 22, 2004 is declared
effective to be
adjusted to fair value at each balance sheet date and is accordingly
reassessed
at each such time to determine whether the warrants should
be classified (or
reclassified, as appropriate) as a liability or as equity.
The fair value of
each warrant was initially assessed at $2,187,500 ($4,375,000
total) using the
Black-Scholes valuation method. At December 31, 2004, the fair
value of the
derivative liability was approximately $1,969,000, and a fair
value adjustment
of approximately $292,000 has been included in other expenses
for the year then
ended.
Amortization
Amortization
expense increased approximately $15,000 for the twelve months ended December
31,
2004. The software license acquired from TLC in July of 1999 is amortized
over a 10 year useful life. Amortization expense for 2004 reflects the
continual
amortization of the software license along with the amortization for the
launch
of our new Website, www.quickverse.com, during the second quarter of 2004.
Income
Tax
Benefits
Our
effective tax rate differs from the statutory federal rate due to differences
between income and expense recognition prescribed by the Internal Revenue
Code
and Generally Accepted Accounting Principles. We utilize different methods
and
useful lives for depreciating property and equipment. Changes in estimates
(reserves) are recognized as expense for financial reporting but are not
deductible for income tax purposes.
We
have
recognized a net deferred tax asset whose realization depends on generating
future taxable income. At December 31, 2003, management established the
valuation allowance equal to the total deferred tax assets due to the
uncertainty about our ability to continue as a going concern. At December
31,
2004, management adjusted the amount of valuation allowance based on
the
assessment that we will continue as a going concern and will produce
sufficient income in the future to realize our net deferred tax asset. The
resulting deferred tax liability reflects income taxes payable in future
periods
on the net deductible differences related to the 1999 license. We currently
have
net operating loss carryforwards, for income tax purposes, of approximately
$7,648,000. The carryforwards are the result of income tax losses generated
in
2000 ($2,480,000 expiring in 2020) and 2001 ($5,168,000 expiring in 2021).
We
will need to achieve a minimum annual taxable income, before deduction
of
operating loss carryforwards, of approximately $450,000 to fully utilize
the
current loss carryforwards. We believe this is achievable through careful
expense management and continued introduction of new products and enhanced
versions of our existing products.
Although
there can be no assurance, management expects
the deductible temporary differences (reserves) to reverse sometime beyond
the
next fiscal year.
LIQUIDITY
AND
CAPITAL RESOURCES
As
of
December 31, 2004, we had $1,551,447 in current assets, $3,351,893
in current
liabilities and a retained deficit of $6,170,831. We had a loss before
income
taxes of $51,806 and a net income after income taxes of $964,053 for
the year
ended December 31, 2004. Operating expenses for 2004 included approximately
$149,000 in non-cash expenses related to shares of common stock and
warrants
issued for services and approximately $30,000 in non-cash expenses
related to
shares of common stock issued in a settlement agreement. Other income
for 2004
included approximately $1,000,000 from extinguishment of debt, and
other
expenses for 2004 included a loss of approximately $292,000 from the
fair value
adjustment of derivatives. See “Results Of Operations” above.
|
Cash
Flows for Twelve Months Ended December 31
|
2004
|
2003
|
Change
|
|||||||
|
Cash
flows provided (used) by operating activities
|
$
|
(643,668
|
)
|
$
|
882,221
|
$
|
(1,525,889
|
)
|
||
|
Cash
flows (used) by investing activities
|
$
|
(746,932
|
)
|
$
|
(814,457
|
)
|
$
|
67,525
|
|
|
|
Cash
flows provided (used) by financing activities
|
$
|
1,690,291
|
$
|
(64,747
|
)
|
$
|
1,755,038
|
Net
cash
provided by operating activities was approximately $882,000 for the year
ended
December 31, 2003 and net cash used by operating activities was approximately
$644,000 for the year ended December 31, 2004. The increase in cash used
was
primarily due to an increase in the amounts paid to suppliers and employees
which would include all royalty payments to our content providers.
Net
cash
used in investing activities was approximately $814,000 and $747,000
for the
years ended December 31, 2003 and 2004, respectively. The decrease in
cash used
for investing activities results from our merchant banker reserving cash
for a
potential increase in credit card chargebacks due to increased purchases
during
the year ended December 31, 2003, and then refunding or holding only
half of
that original reserve in cash during the year ended December 31,
2004.
Net
cash
used by financing activities was approximately $65,000 for the year ended
December 31, 2003 and net cash provided by financing activities was
approximately $1,690,000 for the year ended December 31, 2004. Cash used
by
financing activities reflects final settlement on our accounts receivable
line
of credit, payments made on debt obligations, and stock offering costs
associated with private placement equity financing. Cash provided by
financing
activities reflects proceeds from issuance of stock and promissory notes.
On
March
19, 2001, we entered into an Accounts Receivable Financing Agreement
with
Alliance Financial Capital, Inc. Pursuant to this agreement, Alliance
agrees to
purchase selected accounts receivable on a discounted basis, including,
without
limitation, full power to collect, compromise, sue for, assign, or
in any manner
enforce collection thereof. The agreement provides for advances of
60% toward
the purchase of the invoices with a credit line of $250,000. The terms
call for
40% to be held in a reserve account from the collection of each invoice.
Invoices not paid by the customer within 90 days of shipment are required
to be
repurchased by us out of the reserve account. The agreement carries
a 12 month
term with a minimum monthly fee equal to one half of one percent (.5%).
The term
renews automatically every 12-months unless a written request for termination
is
received by Alliance at least 30 days before the renewal date. During
the twelve
months ended December 31, 2004, we transferred accounts receivable
totaling
$300,966 to Alliance for cash advances of $180,580. As accounts are
paid, the
collected funds (less the amount advanced and appropriate fees) are
disbursed to
us. The transfer agreement includes a repurchase requirement and, accordingly,
the proceeds were accounted for as a secured borrowing. At December
31, 2004,
the balance of receivables transferred and included in trade receivables
was $0.
The remaining secured borrowing balance included in accrued expenses
was $0. On
July 20, 2004, we terminated the Accounts Receivable Financing Agreement
with
Alliance.
On
July
19, 2004, we completed an equity financing in the amount of $1,750,000
through a
private placement with Barron Partners, LP. Under the terms of
the agreement,
Barron purchased 21,875,000 restricted shares of common stock
at a price of
$0.08 per share. In addition, according to the terms of the agreement,
Barron
received two warrants to purchase common stock. The first warrant
entitles
Barron to purchase up to 10,937,500 shares of common stock at
a price of $0.18
per share and the second warrant entitles Barron to purchase
up to 10,937,500
additional shares of common stock at a price of $0.60 per share;
each warrant is
subject to standard adjustment provisions. These warrants have
been accounted
for as a liability according to EITF 00-19. In accordance with
accounting
mandate, the derivative liability associated with these warrants
has been and
shall continue until our registration statement on Form SB-2
originally filed on
November 22, 2004 is declared effective to be adjusted to fair
value at each
balance sheet date and is accordingly reassessed at each such
time to determine
whether the warrants should be classified (or reclassified, as
appropriate) as a
liability or as equity. The fair value of each warrant was initially
assessed at
$2,187,500 ($4,375,000 total) using the Black-Scholes valuation
method. At
December 31, 2004, the fair value of the derivative liability
was approximately
$1,969,000, and a fair value adjustment of approximately $292,000
has been
included in other expenses for the year then ended. See Exhibits
10.10, 10.11,
10.12 and 10.13.
On
September 30, 2004, we issued promissory notes to each of two different
individuals. Each of these promissory notes was in the principal amount
of
$120,000 and, pursuant to a separate side letter agreement in each
case, was
convertible at the option of the holder into 1,000,000 restricted shares
of
common stock. On November 16, 2004, the holders of the promissory notes
converted those notes into a total of 2,000,000 shares of our common
stock.
We
were in arrears with the Internal Revenue Service for back payroll taxes
and had been paying the payroll taxes in monthly installments previously
approved by the Internal Revenue Service. Subsequent to the financing
received
in July of 2004, we paid all back payroll taxes that were due to the
Internal Revenue Service.
In
July
2004, we made the final payment to Zondervan for $100,000 plus 5% simple
interest. This payment completed all of our obligations that were previously
outlined in the settlement with The Zondervan Corporation and TLC dated
October
2003. See Note 16 - Commitments and Contingencies. In addition, according
to the
settlement agreement, the term of the 1999 license has been effectively
extended
indefinitely. However, we continue to amortize the license using the
original 10
year economic life.
RISK
FACTORS
Several
of the matters discussed in this document contain forward-looking statements
that involve risks and uncertainties. Factors associated with the
forward-looking statements that could cause actual results to differ
from those
projected or forecast are included in the statements below. In addition
to other
information contained in this report, readers should carefully consider
the
following cautionary statements and risk factors.
GENERAL
BUSINESS RISKS
Our
liquidity and capital resources are very limited.
Our
ability to fund working capital and anticipated capital expenditures
will depend
on our future performance, which is subject to general economic
conditions, our customers, actions of our competitors and other
factors that are beyond our control. Our ability to fund operating
activities is
also dependent upon (i) the extent and availability of bank and other
credit
facilities, (ii) our ability to access external sources of financing,
and (iii)
our ability to effectively manage our expenses in relation to revenues.
We
believe that the net proceeds received from our 2004 sales of common
stock,
warrants and convertible promissory notes, together with future cash
flow from
operations, and funds from external sources of credit-based debt financing,
will
be adequate to meet our anticipated liquidity requirements over the
next twelve
months and will provide additional capital for potential acquisitions.
Given our
initiative towards rapid revenue growth, there can be no assurance,
however,
that our operations and access to external sources of financing will
continue to
provide resources sufficient to satisfy our liabilities arising in
the ordinary
course of business.
Our
accumulated deficit makes it harder for us to borrow
funds.
As
of June 30, 2005, and as a result of historical losses in prior years,
our
accumulated deficit was $5,967,127. The fact that we maintain an
accumulated
deficit, as well as the extent of our accumulated deficit relative
to recent
earnings, negatively affects our ability to borrow funds because
lenders
generally view an accumulated deficit as a negative factor in evaluating
creditworthiness. Any inability on our part to borrow funds if and
when
required, or any reduction in the favorability of the terms upon
which we are
able to borrow funds if and when required, including amount, applicable
interest
rate and collateralization, would likely have a material adverse
effect on our
business, our financial condition, including liquidity and profitability,
and
our results of operations.
RISKS
ASSOCIATED WITH OUR BUSINESS AND INDUSTRY
We
face serious competition in our business segment.
The
market for our products is rapidly evolving and intensely competitive
as new
consumer software products and platforms are regularly introduced. Competition
in the consumer software industry is based primarily upon:
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brand
name recognition;
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availability
of financial resources;
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the
quality of titles;
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reviews
received for a title from independent reviewers who publish
reviews in
magazines, Websites, newspapers and other industry publications;
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publisher’s
access to retail shelf space;
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the
price of each title; and
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the
number of titles then available.
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We
face
competition from other software publishers, all of which generally
sell through
the same combination of channels that we do, including chain store,
secular,
CBA, direct and online sales. Specifically, we currently compete with
Logos
Research Systems, Inc., Biblesoft, Inc., Thomas Nelson, Inc., WordSearch
Bible
Publishers and The Zondervan Corporation, among others.
To
remain
competitive in our market segment we rely heavily upon our product
quality,
marketing and sales abilities, proprietary technology and product development
capability. However, some of our competitors have longer operating
histories,
larger customer bases and greater financial, marketing, service, support,
technical and other resources than we do. Due to these greater resources,
certain of our competitors have the ability to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies, pay higher
fees to
licensors and pay more to third-party software developers than we can.
Only a
small percentage of titles introduced into the software market achieve
any
degree of sustained market acceptance. If our titles, including special
editions, are not successful, our business, our financial condition,
including
liquidity and profitability, and our results of operations will be
negatively
impacted. Moreover, we believe that competition from new entrants will
increase
as the market for faith-based products and services continues to expand.
We
depend on only two titles for the overwhelming majority of our
revenue.
In
fiscal
year 2004, approximately 91% of our total revenue was derived from
two software
titles; QuickVerse®,
comprising 63% of total revenue, and Membership Plus®,
comprising 28% of total revenue. We expect that a very limited number
of popular
products will continue to produce a disproportionately large amount
of our
revenue for the foreseeable future. Due to this dependence on a limited
number
of titles, the failure of one or more titles or title versions to
achieve
anticipated results would likely have a material adverse effect on
our business,
our financial condition, including liquidity and profitability, and
our results
of operations.
We
have experienced, and may continue to experience, reduced revenues
and
fluctuations in our quarterly operating results due to delays in
the
introduction and distribution of our
products.
A
significant portion of our revenue for any given quarter is generated
by the
sale of new titles and title versions introduced during that quarter
or shipped
in the immediately preceding quarter. Our inability to timely begin
volume
shipments of a new title or title version in accordance with our
internal
development schedule, as has repeatedly been the case in the past,
will cause
earnings fluctuations and will negatively impact our business, our
financial
condition, including liquidity and profitability, and our results
of operations.
Timely introduction of a new title or title version is largely contingent
upon
the timing of a variety of other factors. Included amongst these
are development
processes themselves, debugging, approval by third-party content
licensors and
duplication and packaging processes. Furthermore, the complexity
of
next-generation systems (such as PDA) has resulted in longer development
cycles,
higher development expenditures and the need to more carefully monitor
and plan
development processes associated with these products.
We
cannot be certain that we will be able to meet planned release dates
for some or
all of our new titles or title versions. In the past, we have experienced
significant delays in our introduction of some new titles and title
versions.
For instance, delays in duplication, packaging and distribution caused
our
QuickVerse®
2005 to begin shipping in early-December 2004, long after the holiday
season had
been underway. As a result, we experienced fewer sales than we might
otherwise
have had the product been available before the holiday selling season
began,
which we believe had a material adverse effect on our results of
operations for
the 2004 fourth quarter. It is likely in the future that delays will
continue to
occur and that some new title or title versions will not be released
in
accordance with our internal development schedule or the expectations
of public
market analysts and investors, having a negative impact on our business,
our
financial condition, including liquidity and profitability, and our
results of
operations in that period.
We
have experienced, and may continue to experience, reduced revenues
and
fluctuations in our quarterly operating results due
to the limited life cycle of our products.
The
average life cycle of a new title ranges anywhere from a few years to
indefinitely, and the average life cycle of a new title version ranges
anywhere
from twelve to upwards of eighteen months. The majority of sales
for a new title or title version occur within the first thirty to
one hundred
and twenty days following release and net revenue associated with
the initial
introduction generally constitutes a high percentage of the total
net revenue
over the life of the title or title version. Factors such as competition,
market
acceptance, seasonality and technological, developmental and/or promotional
expenses associated with a title or title version can shorten the
life cycle of
older titles and title versions and increase the importance of our
ability to
regularly release new titles and title versions. Consequently, if
net revenue in
a given period is below expectation, our business, our financial
condition,
including liquidity and profitability, and our results of operations
in that
period are likely to be negatively affected, as has repeatedly occurred
in the
past.
Product
returns, price protections or concessions that exceed our anticipated
reserves
could result in worse than expected operating
results.
At
the
time we ship our products we establish reserves, including reserves
that
estimate the potential for future product returns and price concessions.
In the
past, particularly during title version transitions, we have had
to increase
price concessions to our wholesale retail customers. If consumer demand for
a specific title or title version falls below expectations or significantly
declines below previous rates of retail sell-through, then a price
concession or
credit may be requested by our wholesale retail customers to spur
further retail
channel sell-through. Coupled with more competitive pricing, if
product
returns, price protections or price concessions exceed our reserves
the magnitude of quarterly fluctuations will increase and our operating
and
financial results will be negatively impacted. Furthermore, if
we incorrectly
assess the creditworthiness of any one of our wholesale customers
who take
delivery of our products on credit, we could be required to significantly
increase reserves previously established.
Typically
we experience the highest reserves at the end of the first quarter
and fourth
quarter and the lowest at the end of the third quarter. Historically,
actual
returns have been within management’s
prior
estimates, however, we cannot be certain that any future write-offs
exceeding
reserves will not occur or that amounts written off will not have
a material
adverse effect on our business, our financial condition, including
liquidity and
profitability, and our results of operations.
Errors
or defects in our software products may cause a loss of market acceptance
and
result in fewer sales of our products.
Our
products are complex and may contain undetected errors or defects when
first
introduced or as new versions are released. In the past, we have discovered
software errors in some of our new products and enhancements after
their
introduction into the market. Because our products are complex, we
anticipate
that software errors and defects will be present in new products or
releases in
the future. To date we have not discovered any material errors, however,
future
errors and defects could result in adverse product reviews and a loss
of, or
delay in, market acceptance of our products.
We
may not have available funds to develop products that consumers
want.
The
Bible-study, inspirational content and organizational management software
markets are subject to rapid technological developments. Although the
life of
most of our titles may be quite long, the life of any given version tends
to be
relatively short, in many cases less than three years. To develop products
that
consumers, church and other faith-based organizations desire, we must
continually improve and enhance our existing products and technologies
and
develop new products and technologies that incorporate these technological
developments. Our
inability to do this would likely have a material adverse effect on our
business, our financial condition, including liquidity and profitability,
and
our results of operations.
We
focus
our development and publishing activities principally on new versions
of our
existing titles. We cannot, however, be certain that we will have the
financial
and technical resources available to continue to develop these new
title
versions particularly since we must undertake these initiatives while
remaining
competitive in terms of performance and price. This will require substantial
investments in research and development, often times well in advance
of the
widespread release of a product into the market and any revenues these
products
may generate.
Our
cash
outlays for product development for the fiscal year ended December
31, 2004 were
higher than the fiscal year ended December 31, 2003. Our product development
cash outlays may increase in the future as a result of the higher costs
associated with releasing more software titles or new title versions
across
multiple user interface platforms, and the complexity of developing
such titles
and title versions for next-generation systems, among other reasons.
We
anticipate that our profitability will continue to be impacted by the
levels of
research and development expenditures relative to revenue and by fluctuations
relating to the timing of development in anticipation of future user
interface
platforms.
The
loss of any of our key executives could have a material adverse effect
on our
business.
Our
success depends to a large degree upon the skills of our three
key
executives, Steven Malone, Kirk R. Rowland and William Terrill. We
presently do not maintain key person life insurance on any of our
three key
executives. Although we have employment agreements with each of
our three key
executives, there can be no assurance that we will be able to retain
our
existing key personnel or attract and retain additional key personnel.
The loss
of any one of our three key executives would likely have a material
adverse
effect on our business, our financial condition, including liquidity
and
profitability, and our results of operations.
The
successful development of our products depends on our ability to attract,
integrate, motivate and retain highly skilled
personnel.
Our
success depends to a large extent on our ability to attract, hire and
retain
skilled software developers, programmers and other highly skilled technical
personnel. The software industry is characterized by a high level of
employee
mobility and aggressive recruiting among competitors for personnel
with
programming, technical and product development skills. We may not be
able to
attract and retain skilled personnel or may incur significant costs
in order to
do so. If we are unable to attract additional qualified employees or
retain the
services of key personnel, our business, our financial condition, including
liquidity and profitability, and our results of operations could be
negatively
impacted.
Our
intellectual property may not be adequately protected from unauthorized
use by
others, which could increase our litigation costs and adversely affect
our
sales.
Our
copyrighted software content and the brand recognition associated with
our
related product trademarks are the most important assets that we possess
in our
ability to generate revenues and profits, and we rely very significantly
on
these intellectual property assets in being able to effectively compete
in our
market. There can be no assurance that these intellectual property
assets will
provide meaningful protection to us from unauthorized use by others,
which could
result in an increase in competing products and a reduction in our
own sales. If
we must pursue litigation in the future to enforce or otherwise protect
our
intellectual property rights, or to determine the validity and scope
of the
proprietary rights of others, we may not prevail and will likely have
to make
substantial expenditures and divert valuable resources in any case.
This is
particularly true given the fact that the copyrights that we own to
the source
code and other improvements made to our largest-selling products since
1999 have
not been registered, which means that we may not rely upon the otherwise
existing advantage of a rebuttable presumption of ownership in the
event of, and
in connection with, any such litigation.
Our
exclusive rights to publish and sell our largest-selling titles are
limited to
non-secular channels.
Approximately
97% of our revenues in 2004, including those generated from sales
of
QuickVerse®
and
Membership Plus®,
by far
our two largest selling software titles, were derived from the publishing
and
sales of software titles to which we have only the exclusive license
to publish
and sell into non-secular channels. Although we do not believe that
any third
parties have been granted any rights to date in addition to our own
to publish
or sell these titles into secular channels, and do believe that,
even if this
has occurred or should occur in the future, the barriers to entry
created by the
extensive developments that we have made and now own to these otherwise
licensed
titles would make it practically infeasible for any third party to
effectively
compete with us in relation to these products in any market, there
can be no
assurance that one or more competitors will not emerge at some point
or that
they will not impact on our sales and revenues.
If
our products infringe any proprietary rights of others, a lawsuit may
be brought
against us that could require us to pay large legal expenses and judgments
and
redesign or discontinue selling one or more of our
products.
We
are
not aware of any circumstances under which our products infringe
upon any valid
existing proprietary rights of third parties. Any infringement
claims, however,
whether or not meritorious, could result in costly litigation
or require us to
enter into royalty or licensing agreements. If we are found to
have infringed
the proprietary rights of others, we could be required to pay
damages, redesign
the products or discontinue their sale. Any of these outcomes,
individually or
collectively, could have a material adverse effect on our business,
our
financial condition, including liquidity and profitability, and
our results of
operations.
New
Internet access devices may change the way information is displayed
requiring us
to change our products.
Recent
increases in the use of Internet devices to access inspirational
content and the
continued development of Internet devices as a medium for the delivery
of
network-based information, content, and services may require us to
change our
products. Our success depends on our ability to understand the method
upon which
our search engines operate and our ability to service new and emerging
devices
to access the Internet, such as browser phones, personal digital
assistants, and
other wireless devices. To the extent these new Internet access devices
change
the way that information is displayed to the end-user or causes a
change in the
medium that is searched, we may be required to revise the methodology
of our
products. We cannot predict the impact that new devices will have
on our
services across the entire spectrum of developing technologies, and
any required
product adaptations may result in loss of revenue and goodwill, increased
expenses, and reduced operating margins.
Revenue
varies due to the seasonal nature of consumer software purchases.
Our
business is highly seasonal. More than 50% of our annual sales
are expected to
occur in the five months of September through January; the five
months of April
through August are generally our weakest, generating only about
29% of our
annual sales. The seasonal pattern is due primarily to the increased
consumer
demand for software during the year-end holiday selling season
and the reduced
demand for software during the summer months. Our earnings vary
significantly
and are materially affected by releases of popular titles and
title versions
and, accordingly, may not necessarily reflect the seasonal patterns
of the
industry as a whole. We expect that operating results will continue
to fluctuate
seasonally in the future.
RISKS
ASSOCIATED WITH AN INVESTMENT IN OUR COMMON
STOCK
We
face serious financial penalties for any continuing failure to meet
our
registration obligations to Barron Partners, LP.
On
July
19, 2004, we entered into a certain Stock Purchase Agreement pursuant
to which
we agreed to issue and sell 21,875,000 restricted shares of our common
stock,
and warrants to purchase another 21,875,000 shares of our common stock,
to
Barron Partners, LP, a New York based institutional investor. As part
of the
financing transaction, we also entered into a certain Registration
Rights
Agreement with Barron Partners, LP pursuant to which we became committed
to
registering all of the shares issued as part of such transaction, including
those issuable under the warrants. On November 22, 2004, we filed a
registration
statement on Form SB-2 covering the shares issued to Barron Partners,
as well as
the shares underlying the warrants issued to Barron Partners. Under
the terms of
the Registration Rights Agreement, as amended, we had until April 22,
2005 to
cause such registration statement to be declared effective by the SEC.
In
accordance with the terms of the Registration Rights Agreement, any
delays in
meeting this obligation subject us to liability to Barron Partners, LP in
an amount equal to $1,726 per day for the duration of any such delay.
As
of the
date of this filing, the registration statement filed on November
22, 2004 had
not yet been declared effective. Pursuant
to a tentative verbal agreement reached with Barron Partners in
April 2005,
wherein, in relation to the associated accruing penalties, we agreed
to pay
Barron Partners an amount in cash equal to $100,000 to toll the
accrual of
further penalties until June 21, 2005. Although this amount has
been paid in
full,
in two
equal installments of $50,000 on each of April 22, 2005 and July
8,
2005,
penalties in the amount of $1,726 per day continue to accrue from
June 21, 2005
until the registration statement is declared effective.
We have
experienced ongoing delays in effectiveness of the registration
statement due
principally to ongoing efforts made necessary by our determination
to restate
certain of our historical financials information. Although there
can be no
assurance, management is hopeful that we will be able to cause the
registration statement to be declared effective within the next
several months
and that, because of their interest in our financial prosperity,
we will be able
to obtain an agreement with Barron Partners with respect to accruing
penalties
such that any amounts owed by us as of the time the registration
statement is
declared effective can be paid by us in installments over time
on the basis of a
schedule that we will be able to meet without undue financial hardship.
If we
are unsuccessful in causing the registration statement to be declared
effective
by the SEC in the near future, however, it is likely to have a
very material
adverse effect on our business, our financial condition, including
liquidity and
profitability, and our results of operations.
We
may incur derivative liabilities in an as yet unknown amount
in connection with
our issuance of two common stock warrants.
In
November 2004 we issued two warrants to purchase an aggregate
of 21,875,000
shares of our common stock in connection with a certain Stock
Purchase Agreement
completed with Barron Partners, LP, on July 19, 2004. The first
warrant entitles
the holder to purchase up to 10,937,500 shares of our common
stock at a price of
$0.18 per share, and the second warrant entitles the holder to
purchase up to
10,937,500 additional shares of our common stock at a price of
$0.60 per share.
Each warrant is subject to standard adjustment provisions and
each provides for
settlement in registered shares of our common stock and may,
at the option of
the holder, be settled in a cashless, net-share settlement.
The
fair
value of each warrant was initially assessed at $2,187,500 ($4,375,000
total)
using the Black-Scholes valuation method. In accordance with
accounting mandate,
the derivative liability associated with these warrants has been
and shall
continue until our registration statement on Form SB-2 originally
filed on
November 22, 2004 is declared effective to be adjusted to fair
value at each
balance sheet date and is accordingly reassessed at each such
time to determine
whether the warrants should be classified (or reclassified, as
appropriate) as a
liability or as equity. At December 31, 2004, the fair value
of the derivative
liability was approximately $1,969,000, and a fair value adjustment
of
approximately $292,000 has been included in other expenses for
the year then
ended. The fair value of the derivative liability is directly
related and will
fluctuate in response to the share price of our common stock.
In the event that
the fair value of the derivative liability exceeds the amount
of any cashless,
net-share settlement under the warrants, we may
find
it necessary to compensate the holder through cash payments,
which would have a
material adverse effect on our business, our financial condition,
including
liquidity and profitability, and our results of operations, including
a
corresponding reduction in our net income and the likelihood
of a net loss for
the year. See
“Management’s Discussion and Analysis of Financial Condition and Results
of
Operations—Derivatives”.
Up
to 47,491,666 shares of our common stock are likely to become eligible
for
public sale as a result of a resale registration statement filing which
is
likely to depress our stock price.
As
of the
date of filing of this annual report with the SEC on Form 10-KSB/A,
we also have
a registration statement filed with the SEC on Form SB-2 which, once
declared
effective by the SEC, will cause to
be
eligible for immediate resale on the public market 24,341,666
shares of our common stock and an additional 23,150,000
shares of our common stock underlying warrants (the
resale offering of which shall only be made by means of a separate
prospectus).
As a
percentage of our total outstanding common stock, this represents
66.2%. If a
significant number of shares are offered for sale simultaneously,
which is
likely to occur, it would have a depressive effect on the trading
price of our
common stock on the public market. Any such depressive effect may
encourage
short positions and short sales, which could place further downward
pressure on
the price of our common stock. Moreover, all of the shares sold in
the offering
will be freely transferable thereafter without restriction or further
registration under the Securities Act (except for any shares purchased
by our
“affiliates”,
as
defined in Rule 144 of the Securities Act), which could place even
further
downward pressure on the price of our common stock. Furthermore,
should a
simultaneous sell-off occur, and due to the thinly-traded market
for our common
stock, stockholders may have difficulty selling shares of our common
stock, at
or above the price paid, at a fair market value or even at
all.
Unless
an active trading market develops for our common stock, you may not
be able to
sell your shares.
We
are a
reporting company and our common stock is listed on the OTC Bulletin
Board
(owned and operated by the Nasdaq Stock Market, Inc.), however, there
is no
active trading market for our common stock. There can be no assurance
that an
active trading market will ever develop for our common stock or,
if it does
develop, that it will be maintained. Failure to develop or maintain
an active
trading market will have a generally negative effect on the price
of our common
stock, and you may be unable to sell your shares or any attempted
sale of such
shares may have the effect of lowering the market price, and therefore
your
investment could be a complete or partial loss.
Since
our common stock is thinly traded, it is more susceptible to extreme
rises or
declines in price, and you may not be able to sell your shares at or
above the
price you paid.
You
may
have difficulty reselling shares of our common stock, either at or above
the
price you paid, or even at a fair market value. The stock markets often
experience significant price and volume changes that are not related
to the
operating performance of individual companies, and because our common
stock is
thinly traded, it is particularly susceptible to such changes. These
broad
market changes may cause the market price of our common stock to decline
regardless of how well we perform as a company, and, depending on when
you
determine to sell, you may not be able to obtain a price at or above
the price
you paid.
Trading
in our common stock on the OTC Bulletin Board may be limited thereby
making it
more difficult for you to resell any shares you may
own.
Our
common stock trades on the OTC Bulletin Board owned and operated by the
Nasdaq
Stock Market, Inc. The OTC Bulletin Board is not an exchange and, because
trading of securities on the OTC Bulletin Board is often more sporadic
than the
trading of securities listed on a national exchange or on the Nasdaq
National
Market, you may have difficulty reselling any of the shares of our common
stock
that you purchase from the selling stockholders.
Our
common stock is subject to the “penny stock” regulations, which is likely to
make it more difficult to sell.
Our
common stock is considered a “penny stock”, which generally is a stock trading
under $5.00 and not registered on national securities exchanges or quoted
on the
Nasdaq National Market. The SEC has adopted rules that regulate broker-dealer
practices in connection with transactions in penny stocks. This regulation
generally has the result of reducing trading in such stocks, restricting
the
pool of potential investors for such stocks, and making it more difficult
for
investors to sell their shares. Prior to a transaction in a penny stock,
a
broker-dealer is required to:
|
|
•
|
deliver
a standardized risk disclosure document that provides
information about
penny stocks and the nature and level of risks in the
penny stock
market;
|
|
|
•
|
provide
the customer with current bid and offer quotations for
the penny
stock;
|
|
|
•
|
explain
the compensation of the broker-dealer and its salesperson
in the
transaction;
|
|
|
•
|
provide
monthly account statements showing the market value of
each penny stock
held in the customer’s
account; and
|
|
|
•
|
make
a special written determination that the penny stock
is a suitable
investment for the purchaser and receive the purchaser’s written agreement
to the transaction.
|
These
requirements may have the effect of reducing the level of trading activity
in
the secondary market for a stock that is subject to the penny stock
rules. Since
our common stock is subject to the penny stock rules, investors in
our common
stock may find it more difficult to sell their shares.
Our
stock price could be volatile, and your investment could suffer a decline
in
value.
The
trading price of our common stock is likely to be highly volatile and
could be
subject to extreme fluctuations in price in response to various factors,
many of
which are beyond our control, including:
|
|
•
|
the
trading volume of our
shares;
|
|
|
•
|
the
number of securities analysts, market-makers and brokers
following our
common stock;
|
|
|
•
|
changes
in, or failure to achieve, financial estimates by securities
analysts;
|
|
|
•
|
new
products introduced or announced by us or our
competitors;
|
|
|
•
|
announcements
of technological innovations by us or our
competitors;
|
|
|
•
|
our
ability to produce and distribute retail packaged versions
of our software
in advance of peak retail selling seasons;
|
| • |
actual
or anticipated variations in quarterly operating
results;
|
|
| • |
conditions
or trends in the consumer software and/or Christian products
industries;
|
|
| • |
announcements
by us of significant acquisitions, strategic partnerships,
joint ventures,
or capital commitments;
|
|
| • |
additions
or departures of key personnel;
|
|
| • |
sales
of our common stock; and
|
|
| • |
stock
market price and volume fluctuations of publicly-traded,
particularly
microcap, companies
generally.
|
The
volatility of our common stock is illustrated by reference to the fact
that,
during fiscal year 2004, our trading price fluctuated from a low of $0.018
to a
high of $0.40 per share.
The
stock
market has recently experienced significant price and volume fluctuations.
Volatility in the market price for particular companies has often been
unrelated
or disproportionate to the operating performance of those companies.
These broad
market and industry factors may seriously harm the market price of
our common
stock, regardless of our operating performance. In addition, securities
class
action litigation has often been initiated following periods of volatility
in
the market price of a company’s
securities. A securities class action suit against us could result
in
substantial costs, potential liabilities and the diversion of
management’s
attention and resources from our business. Moreover, and as noted above,
our
shares are currently traded on the OTC Bulletin Board and, further,
are subject
to the penny stock regulation. Price fluctuations in such shares are
particularly volatile and subject to manipulation by market-makers,
short-sellers and option traders.
Future
sales of our common stock by our officers or directors may depress
our stock
price.
Although
our officers and directors are contractually obligated to refrain from
selling
any of their shares until July 20, 2005, following that date, any shares
owned
by our officers or directors which are registered in another registration
statement, or which otherwise may be sold in the future without registration
under the Securities Act to the extent permitted by Rule 144 or other
exemptions
under the Securities Act, may be sold. Because of the perception by
the
investing public that a sale by such insiders may be reflective of
their own
lack of confidence in our prospects, the market price of our common
stock could
decline as a result of a sell-off following sales of substantial amounts
of
common stock by our officers and directors into the public market,
or the mere
perception that these sales could occur.
Future
issuances of our common or preferred stock may depress our stock price
and
dilute your interest.
We
may
want to issue additional shares of our common stock in future financings
and may
grant stock options to our employees, officers, directors and consultants
under
our stock incentive plan. Any such issuances could have the effect of
depressing
the market price of our common stock and, in any case, would dilute the
interests of our common stockholders. In addition, we could issue serial
preferred stock having rights, preferences and privileges senior to those
of our
common stock, including the right to receive dividends and/or preferences
upon
liquidation, dissolution or winding-up in excess of, or prior to, the
rights of
the holders of our common stock. This could depress the value of our
common
stock and could reduce or eliminate the amounts that would otherwise
have been
available to pay dividends on our common stock (which
are unlikely in any case) or to make distributions on
liquidation.
If
you require dividend income, you should not rely on an investment in
our common
stock.
Because
we have very limited cash resources and a substantial accumulated deficit
relative to recent earnings, we have not declared or paid any dividends
on our
common stock since our inception and we do not anticipate declaring
or paying
any dividends on our common stock in the foreseeable future. Rather,
we intend
to retain earnings, if any, for the continued operation and expansion
of our
business. It is unlikely, therefore, that holders of our common stock
will have
an opportunity to profit from anything other than potential appreciation
in the
value of our common stock held by them. If you require dividend income,
you
should not rely on an investment in our common stock.
The
lack of a majority of independent directors on our board of directors
may affect
our ability to be listed on a national securities exchange or quotation
system.
We
are
not currently subject to the listing requirements of any national securities
exchange or quotation system. The listing standards of the national securities
exchanges and automated quotation systems require that a company’s board of
directors consist of a majority of directors who are independent as defined
by
the Sarbanes-Oxley Act of 2002 and as defined by applicable listing standards,
and that the audit committee of the board of directors must consist of
at least
three members, all of whom are independent. Similarly, the compensation
and nominating committees of company boards of directors must also consist
of
independent directors. Currently, only two of our directors, who are the
only members of our audit committee, meet the definition of an “independent”
director as defined by the Sarbanes-Oxley Act of 2002 and as defined
by listing
standards. Further, two of our four directors are currently executive
officers and thereby do not satisfy these independence standards. There is
no guarantee that we will be able to appoint an additional director who
will
satisfy these independence requirements. If we are unable to appoint an
additional independent director to our board, we will be precluded from
listing
any of our capital stock on a national securities exchange or quotation
system.
The
even number of members on each of our board of directors, audit committee
and
compensation committee could result in a stalemate on important company
matters.
The
fact that we currently have four members on our board of directors,
and two
members on each of our board of directors’ audit and compensation committees,
could result in a tie vote on company matters, including those involving
highly
material corporate governance issues. Moreover, we do not currently
have any
duly adopted resolution procedures in place that would provide a means
for
resolving any stalemate that might occur in this regard. Although we
are
currently in the process of considering potential alternative procedures
in
order to be prepared for having to face such a potential situation,
our current
lack of any such procedure could result in our inability to be able
to act under
circumstances in which the failure to act or any delay in acting could
have a
material adverse effect on our business, our financial condition, including
liquidity and profitability, and our results of operations.
There
may exist a potential conflict of interest between us and each of our
former and
current counsel.
In
the
past we have issued, and we may continue in the future to issue, warrants
to
purchase our common stock as equity compensation for legal and other
services
rendered in connection with the preparation of our securities filings.
Specifically, we have issued warrants to the law firm of Membrado & Montell,
LLP, and to Michael M. Membrado, our corporate counsel. Due to these
issuances,
there exists the potential for a conflict of interest between us and
each of our
current and former counsel insofar as the recipients may have been
or may be
motivated by personal interests that are not necessarily aligned with
our
own.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of Findex.com, Inc.:
We
have
audited the accompanying consolidated balance sheets of Findex.com,
Inc. as of
December 31, 2004 and 2003 and the related consolidated statements
of
operations, stockholders’ equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan
and perform the audits to obtain reasonable assurance about whether
the
consolidated financial statements are free of material misstatement.
The Company
has determined that it is not required to have, nor were we engaged
to perform,
an audit of its internal control over financial reporting. Our
audit
included consideration of internal control over financial reporting
as a basis
for designing audit procedures that are appropriate in the circumstances,
but
not for the purpose of expressing an opinion on the effectiveness
of the
Company’s internal control over financial reporting. Accordingly, we express
no
such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements.
An audit also includes assessing the accounting principles used and
significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above
present fairly,
in all material respects, the consolidated financial position of
Findex.com,
Inc. as of December 31, 2004 and 2003 and the results of its operations
and cash
flows for the years then ended in conformity with U.S. Generally
Accepted
Accounting Principles.
As
discussed in Note 19 to the consolidated financial statements,
there were errors
in reporting the Company’s settlement agreement for the software license, errors
in reporting some of the classifications, errors in reporting
the rebate reserve
adjustment, and errors in reporting the warrants issued in connection
with a
private placement in the balance sheets and the statements of
operations that
were discovered by management as a result of a regulatory review.
Accordingly,
the consolidated financial statements have been restated to correct
the
errors.
Chisholm,
Bierwolf & Nilson, LLC
Bountiful,
UT
February
18, 2005 except
for Notes 1, 5, 8, 9, 10, 11, 12, 13, 15, 16, and 19 dated December
13, 2005
F-1
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
December
31, 2004 and 2003
|
|||||||
|
|
|||||||
|
|
2004
|
2003
|
|||||
|
|
(Restated)
|
(Restated)
|
|
||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
341,359
|
$
|
41,668
|
|||
|
Accounts
receivable, trade (Note 2)
|
566,819
|
365,803
|
|||||
|
Inventories
(Note 3)
|
234,000
|
272,600
|
|||||
|
Deferred
income taxes, net (Note 8)
|
300,191
|
---
|
|||||
|
Other
current assets
|
109,078
|
21,920
|
|||||
|
Total
current assets
|
1,551,447
|
701,991
|
|||||
|
Property
and equipment, net (Note 4)
|
131,019
|
65,603
|
|||||
|
Software
license, net (Note 5)
|
2,265,783
|
2,769,291
|
|||||
|
Capitalized
software development costs, net (Note 1)
|
701,289
|
584,706
|
|||||
|
Deferred
income taxes, net (Note 8)
|
157,840
|
---
|
|||||
|
Restricted
cash
|
50,354
|
100,354
|
|||||
|
Other
assets
|
94,101
|
63,818
|
|||||
|
Total
assets
|
$
|
4,951,833
|
$
|
4,285,763
|
|||
|
|
|||||||
|
Liabilities
and stockholders’ equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Notes
payable (Note 6)
|
$
|
---
|
$
|
89,999
|
|||
|
Current
maturities of long-term debt (Note 7)
|
35,495
|
126,876
|
|||||
|
Accrued
royalties
|
287,514
|
1,499,006
|
|||||
|
Accounts
payable, trade
|
621,804
|
989,354
|
|||||
|
Accrued
payroll
|
209,984
|
216,767
|
|||||
|
Reserve
for sales returns
|
100,180
|
57,572
|
|||||
|
Rebates
payable
|
29,561
|
233,189
|
|||||
|
Payroll
taxes payable
|
8,235
|
221,600
|
|||||
|
Derivatives (Notes
1 and 9)
|
1,968,750 | --- | |||||
|
Other
current liabilities
|
90,370
|
89,554
|
|||||
|
Total
current liabilities
|
3,351,893
|
3,523,917
|
|||||
|
Long-term
debt (Note 7)
|
42,972
|
73,763
|
|||||
|
Deferred
income taxes, net (Note 8)
|
157,840
|
717,151
|
|||||
|
Commitments
and contingencies (Note 18)
|
|||||||
|
Stockholders’
equity (Note 9):
|
|||||||
|
Preferred
stock, $.001 par value
|
|||||||
|
5,000,000
shares authorized
|
|||||||
|
Series
A: -0- and 11,400 shares issued and outstanding,
respectively
|
---
|
11
|
|||||
|
Series
B: -0- and 40,000 shares issued and outstanding,
respectively
|
---
|
40
|
|||||
|
Common
stock, $.001 par value
|
|||||||
|
120,000,000
and 50,000,000 shares authorized, respectively
|
|||||||
|
48,619,855
and 21,011,438 shares issued and outstanding,
respectively
|
48,620
|
21,011
|
|||||
|
Paid-in
capital
|
7,521,339
|
7,080,629
|
|||||
|
Retained
(deficit)
|
(6,170,831
|
)
|
(7,130,759
|
)
|
|||
|
Total
stockholders’ equity
|
1,399,128
|
(29,068
|
)
|
||||
|
Total
liabilities and stockholders’ equity
|
$
|
4,951,833
|
$
|
4,285,763
|
|||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
|
Findex.com,
Inc.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|||||||
|
|
|||||||
|
Year
Ended December 31
|
2004
|
2003
|
|||||
|
|
(Restated)
|
(Restated)
|
|
||||
|
Revenues,
net of reserves and allowances (Notes 11 and 19)
|
$
|
5,422,097
|
$
|
4,560,911
|
|||
|
Cost
of sales (Note 19)
|
1,820,553
|
1,327,983
|
|||||
|
Gross
profit
|
3,601,544
|
3,232,928
|
|||||
|
Operating
expenses:
|
|||||||
|
Sales
and marketing
|
1,280,761
|
815,954
|
|||||
|
General
and administrative
|
2,309,838
|
1,751,234
|
|||||
|
Bad
debt expense
|
22,778
|
23,208
|
|||||
|
Amortization
expense
|
519,850
|
504,427
|
|||||
|
Depreciation
expense
|
44,478
|
43,224
|
|||||
|
Total
operating expenses
|
4,177,705
|
3,138,047
|
|||||
|
Earnings
(loss) from operations
|
(576,161
|
)
|
94,881
|
|
|||
|
Interest
income
|
1,378
|
9,727
|
|||||
|
Other
income (Note 10)
|
1,011,366
|
1,458,121
|
|||||
|
Other
adjustments (Note 10 )
|
(154,569
|
)
|
---
|
||||
| (Loss) on fair value adjustment of derivatives (Note 9) | (291,672 | ) | --- | ||||
|
(Loss)
on disposition of assets
|
(141
|
)
|
(2,659
|
)
|
|||
|
Interest
expense
|
(42,007
|
)
|
(87,144
|
)
|
|||
|
Income
(loss) before income taxes
|
(51,806
|
) |
1,472,926
|
||||
|
Provision
for income taxes (Note 8)
|
1,015,859
|
226,461
|
|||||
|
Net
income
|
$
|
964,053
|
$
|
1,699,387
|
|||
|
|
|||||||
|
Basic
earnings per share (Note 12):
|
|||||||
|
Basic
|
$
|
0.03
|
$
|
0.08
|
|||
|
Diluted
|
$
|
0.03
|
$
|
0.08
|
|||
|
|
|||||||
|
Weighted
average shares outstanding (Note 12):
|
|||||||
|
Basic
|
34,520,754
|
20,411,438
|
|||||
|
Diluted
|
35,195,840
|
22,365,438
|
|||||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||
|
|
Retained
|
|
||||||||||||||||||||
|
|
Preferred
Stock
|
Common
Stock
|
Paid-In
|
Earnings
|
||||||||||||||||||
|
|
Series
A
|
Series
B
|
Shares
|
Amount
|
Capital
|
(Deficit)
|
|
Total
|
||||||||||||||
|
|
||||||||||||||||||||||
|
Balance,
December 31, 2002 (Restated)
|
$
|
11
|
$
|
40
|
19,811,438
|
$
|
19,811
|
$
|
7,029,079
|
$
|
(8,830,146
|
)
|
$
|
(1,781,205
|
)
|
|||||||
|
Common
stock issued for services
|
---
|
---
|
1,200,000
|
1,200
|
51,550
|
---
|
52,750
|
|||||||||||||||
|
Net
income, December 31, 2003 (Restated)
|
---
|
---
|
---
|
---
|
---
|
1,699,387
|
1,699,387
|
|||||||||||||||
|
Balance,
December 31, 2003 (Restated)
|
$
|
11
|
$
|
40
|
21,011,438
|
$
|
21,011
|
$
|
7,080,629
|
$
|
(7,130,759
|
)
|
$
|
(29,068
|
)
|
|||||||
|
Common
stock issued for services
|
---
|
---
|
2,774,105
|
2,774
|
100,445
|
---
|
103,219
|
|||||||||||||||
|
Common
stock warrants issued for services
|
---
|
---
|
---
|
---
|
75,715
|
---
|
75,715
|
|||||||||||||||
|
Common
stock cancelled
|
---
|
---
|
(48,387
|
)
|
(48
|
)
|
48
|
---
|
---
|
|||||||||||||
|
Preferred
Series A common stock dividend
|
---
|
---
|
56,356
|
56
|
4,069
|
(4,125
|
)
|
---
|
||||||||||||||
|
Conversion
of preferred stock
|
(11
|
)
|
(40
|
)
|
484,677
|
485
|
(434
|
)
|
---
|
---
|
||||||||||||
|
Common
stock issued in connection with
|
||||||||||||||||||||||
|
private
placement, net of $51,047 of issuance costs
|
---
|
---
|
21,875,000
|
21,875
|
---
|
---
|
21,875
|
|||||||||||||||
|
Conversion
of notes payable
|
---
|
---
|
2,466,666
|
2,467
|
260,867
|
---
|
263,334
|
|||||||||||||||
|
Net
income, December 31, 2004 (Restated)
|
---
|
---
|
---
|
---
|
---
|
964,053
|
964,053
|
|||||||||||||||
|
Balance,
December 31, 2004 (Restated)
|
$
|
---
|
$
|
---
|
48,619,855
|
$
|
48,620
|
$
|
7,521,339
|
$
|
(6,170,831
|
)
|
$
|
1,399,128
|
||||||||
|
|
||||||||||||||||||||||
|
See
accompanying notes.
|
||||||||||||||||||||||
|
Findex.com,
Inc.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||
|
|
|||||||
|
Year
Ended December 31
|
2004
|
2003
|
|||||
|
|
(Restated)
|
(Restated)
|
|
||||
|
Cash
flows from operating activities:
|
|||||||
|
Cash
received from customers
|
$
|
5,062,396
|
$
|
4,228,649
|
|||
|
Cash
paid to suppliers and employees
|
(5,673,088
|
)
|
(3,364,838
|
)
|
|||
|
Other
operating receipts
|
9,276
|
7,977
|
|||||
|
Interest
paid
|
(37,928
|
)
|
(43,203
|
)
|
|||
|
Interest
received
|
1,378
|
9,727
|
|||||
|
Income
taxes (paid) refunded
|
(5,702
|
)
|
43,909
|
||||
|
Net
cash provided (used) by operating activities
|
(643,668
|
)
|
882,221
|
||||
|
Cash
flows from investing activities:
|
|||||||
|
Acquisition
of property, plant and equipment
|
(58,247
|
)
|
(18,433
|
)
|
|||
|
Software
development costs
|
(692,063
|
)
|
(659,486
|
)
|
|||
|
Website
development costs
|
(31,838
|
)
|
(35,684
|
)
|
|||
|
Deposits
refunded (paid)
|
35,216
|
(100,854
|
)
|
||||
|
Net
cash (used) by investing activities
|
(746,932
|
)
|
(814,457
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds
from (payments on) line of credit, net
|
(20,935
|
)
|
14,657
|
||||
|
Payments
made on long-term notes payable
|
(227,727
|
)
|
(79,404
|
)
|
|||
|
Proceeds
from convertible notes payable
|
240,000
|
---
|
|||||
|
Proceeds
from issuance of stock and warrants
|
1,750,000
|
---
|
|||||
|
Stock
offering costs paid
|
(51,047
|
)
|
---
|
||||
|
Net
cash provided (used) by financing activities
|
1,690,291
|
(64,747
|
)
|
||||
|
Net
increase in cash and cash equivalents
|
299,691
|
3,017
|
|||||
|
Cash
and cash equivalents, beginning of year
|
41,668
|
38,651
|
|||||
|
Cash
and cash equivalents, end of year
|
$
|
341,359
|
$
|
41,668
|
|||
|
|
|||||||
|
Reconciliation
of net income to cash flows from operating activities:
|
|||||||
|
Net
income
|
$
|
964,053
|
$
|
1,699,387
|
|||
|
Adjustments
to reconcile net income to net cash
|
|||||||
|
provided
(used) by operating activities:
|
|||||||
|
Software
development costs amortized
|
575,481
|
355,282
|
|||||
|
Stock
and warrants issued for services
|
178,929
|
52,750
|
|||||
|
Rebate
reserve adjustment
|
(142,039
|
)
|
(124,262
|
) | |||
|
Provision
for bad debts
|
22,778
|
23,208
|
|||||
|
Depreciation
& amortization
|
564,328
|
547,651
|
|||||
|
Debt
forgiveness
|
(1,002,090
|
)
|
(650,000
|
)
|
|||
|
Loss
on fair value adjustment of derivative
|
291,672 | --- | |||||
|
Loss
on disposal of property, plant and equipment
|
141
|
2,659
|
|||||
|
Change
in assets and liabilities:
|
|||||||
|
(Increase)
in accounts receivable
|
(223,794
|
)
|
(160,770
|
)
|
|||
|
Decrease
in inventories
|
38,600
|
144,100
|
|||||
|
(Increase)
decrease in refundable income taxes
|
(2,948
|
)
|
43,909
|
||||
|
(Increase)
decrease in prepaid expenses
|
(84,211
|
)
|
20,869
|
||||
|
(Decrease)
in accrued royalties
|
(324,360
|
)
|
(631,607
|
)
|
|||
|
Increase
(decrease) in accounts payable
|
(271,198
|
)
|
81,793
|
||||
|
(Decrease)
in income taxes payable
|
(1,270
|
)
|
---
|
||||
|
(Decrease)
in deferred taxes
|
(1,017,343
|
)
|
(226,463
|
)
|
|||
|
(Decrease)
in other liabilities
|
(210,397
|
)
|
(296,285
|
)
|
|||
|
Net
cash provided (used) by operating activities
|
$
|
(643,668
|
)
|
$
|
882,221
|
||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
Notes
to Consolidated Financial Statements
December
31, 2004
and
2003
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Restated)
ORGANIZATION
Findex.com,
Inc. was incorporated under the laws of the State of Nevada on November
7,
1997, as EJH Entertainment, Inc. On December 4, 1997, we acquired EJH
Entertainment, Inc., an Idaho corporation, in a stock-for-stock transaction.
EJH
Idaho was incorporated on June 21, 1968, as Alpine Silver, Inc. Alpine
changed its name to The Linked Companies, Inc. on December 4, 1992. On
September 9, 1996, The Linked Companies acquired Worldwide Entertainment,
Inc.,
a Delaware corporation, in a stock-for-stock transaction and changed
its name to
Worldwide Entertainment, Inc. On June 27, 1997, Worldwide Entertainment
changed
its name to EJH Entertainment, Inc.
On
April
30, 1999, we acquired Findex Acquisition Corporation, a Delaware
corporation in
a stock-for-stock transaction and our name of was changed to
Findex.com, Inc.
Findex Acquisition Corporation is a wholly-owned subsidiary without
current
business operations. It was incorporated on February 19, 1999
and acquired
FinSource Ltd., a Delaware corporation in April 1999, in a stock-for-stock
transaction. The mergers with Findex Acquisition Corporation
and FinSource were
treated as reorganization mergers with the accounting survivor
being
FinSource.
On
March
7, 2000, we acquired Reagan Holdings, Inc., a Delaware corporation
in a
stock-for-stock transaction. Reagan was incorporated on July
27, 1999 and is a
wholly-owned subsidiary without current business operations.
We
are a
retail, wholesale and Internet supplier of personal computer
software products
to business and religious organizations and individuals around
the world. In
July 1999, we completed a license agreement with Parsons Technology,
Inc., a
subsidiary of TLC Multimedia, LLC, formerly Mattel Corporation,
for the Parsons
Church Division of Mattel. In so doing, we obtained the right
to market, sell
and continue to develop several Bible study software products.
We develop and
publish church and Bible study software products designed to
simplify biblical
research and streamline church office tasks.
ACCOUNTING
METHOD
We
recognize income and expenses on the accrual basis of accounting.
PRINCIPLES
OF
CONSOLIDATION
The
consolidated financial statements include the accounts of the company
and its
wholly-owned subsidiaries after eliminations.
USE
OF
ESTIMATES
The
preparation of consolidated financial statements in conformity with
Generally
Accepted Accounting Principles requires management to make estimates
and
assumptions that affect the amounts reported in the financial statements
and the
accompanying notes. Significant estimates used in the consolidated
financial
statements include the estimates of (i) doubtful accounts, sales
returns, price
protection and rebates, (ii) provision for income taxes and realizability
of the
deferred tax assets, (iii) the life and realization of identifiable
intangible
assets, and (iv) provisions for obsolete inventory. The amounts we
will
ultimately incur or recover could differ materially from current
estimates.
Financial
instruments that potentially subject us to concentrations of credit
risk consist
of cash and cash equivalents and accounts receivable. We place our
cash and cash
equivalents at well-known, quality financial institutions. We currently
maintain
our cash balances in one financial institution located in Omaha,
Nebraska. The
balances are insured by the Federal Deposit Insurance Corporation
up to
$100,000. At December 31, 2004, our uninsured cash balance totaled
$268,380.
We
sell a
majority of our products to end-users through distributors, Christian
bookstores, Internet and direct marketing efforts. Although we
attempt to
prudently manage and control accounts receivable and perform
ongoing credit
evaluations in the normal course of business, we generally require
no collateral
on our product sales. During the years ended December 31, 2004
and 2003, we had
no major customers that individually accounted for 10% or more
of the annual
sales.
During
the year ended December 31, 2004, we derived 63% of our total
revenue from sales
of QuickVerse®,
28%
from sales of Membership Plus®,
and 9%
from sales of other software titles.
During
the years ended December 31, 2004 and 2003, five vendors provided
purchases
individually of 10% or more of the total product and material
purchases as
follows: Vendor A accounted for 29% and 3%, respectively, Vendor
B accounted for
18% and 14%, respectively, Vendor C accounted for 17% and 10%,
respectively,
Vendor D accounted for 12% and 39%, respectively, and Vendor
E accounted for 7%
and 17%, respectively. Accounts payable relating to Vendors A,
B, C, D, and E
were $40,234 and $20, $18,426 and $14,379, $34,931 and $26,194,
$-0- and
$39,431, and $2,020 and $-0-, as of December 31, 2004 and 2003
respectively.
ROYALTY
AGREEMENTS
We
have
entered into certain agreements whereby we are obligated to pay royalties
for
content of software published. We generally pay royalties based on
a percentage
of sales on respective products or on a fee per unit sold basis.
We expense
software royalties as product costs during the period in which the
related
revenues are recorded.
CASH
AND CASH
EQUIVALENTS
We consider
all highly liquid investments purchased with an original maturity
of three
months or less to be cash equivalents.
RESTRICTED
CASH
Restricted
cash represents cash held in reserve by our merchant banker to allow
for a
potential increase in credit card chargebacks from increased consumer
purchases.
The cash held in reserve by our merchant banker will be unrestricted
when
consumer sales and chargeback volumes stabilize.
ACCOUNTS
RECEIVABLE
Accounts
receivable arise in the normal course of business. It is the policy
of
management to review the outstanding accounts receivable quarterly,
as well as
the bad debt write-offs experienced in the past, and establish an
allowance for
doubtful accounts for uncollectible amounts. Individual accounts
are charged
against the allowance when they are deemed uncollectible.
INVENTORY
Inventory,
including out on consignment, consists primarily of software media,
manuals and
related packaging materials and is recorded at the lower of cost
or market
value, determined on a first-in, first-out, and adjusted on a per-item,
basis.
PROPERTY
AND
EQUIPMENT
Property
and equipment are recorded at cost. Furniture, fixtures and computer
equipment
are depreciated over five years using the straight-line method. Software
is
depreciated over three years using the straight-line method. Expenditures
for
maintenance, repairs and other renewals of items are charged to expense
when
incurred.
ACCOUNTING
FOR LONG-LIVED ASSETS
We
review
property and equipment and intangible assets for impairment whenever
events or
changes in circumstances indicate that the carrying amount of an
asset may not
be recoverable. Recoverability is measured by comparison of our carrying
amount
to future net cash flows the assets are expected to generate. If
such assets are
considered to be impaired, the impairment to be recognized is measured
by the
amount by which the carrying amount of the asset exceeds its fair
market value.
Property and equipment to be disposed of are reported at the lower
of the
carrying amount or fair value less costs to sell.
INTANGIBLE
ASSETS
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,
Goodwill
and Other Intangible Assets,
intangible assets with an indefinite useful life are not amortized.
Intangible
assets with a finite useful life are amortized on the straight-line
method over
the estimated useful lives. All intangible assets are tested for
impairment
annually during the fourth quarter.
SOFTWARE
DEVELOPMENT COSTS
In
accordance with SFAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed,
software development costs are expensed as incurred until technological
feasibility and marketability has been established, generally with
release of a
beta version for customer testing. Once the point of technological
feasibility
and marketability is reached, direct production costs (including
labor directly
associated with the development projects), indirect costs (including
allocated
fringe benefits, payroll taxes, facilities costs, and management
supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed,
travel
expenses, material and supplies, and other direct costs) are capitalized
until
the product is available for general release to customers. We amortize
capitalized costs on a product-by-product basis. Amortization for
each period is
the greater of the amount computed using (i) the straight-line basis
over the
estimated product life (generally from 12 to 18 months), or (ii)
the ratio of
current revenues to total projected product revenues. Total cumulative
capitalized software development costs were $1,748,735 and $1,056,672,
less
accumulated amortization of $1,047,446 and $471,966 at December 31,
2004 and
2003, respectively.
Capitalized
software development costs are stated at the lower of amortized
costs or net
realizable value. Recoverability of these capitalized costs is
determined at
each balance sheet date by comparing the forecasted future revenues
from the
related products, based on management’s best estimates using appropriate
assumptions and projections at the time, to the carrying amount
of the
capitalized software development costs. If the carrying value is
determined not
to be recoverable from future revenues, an impairment loss is recognized
equal
to the amount by which the carrying amount exceeds the future revenues.
To date,
no capitalized costs have been written down to net realizable
value.
SFAS
No.
2, Accounting
for Research and Development Costs,
established accounting and reporting standards for research and
development. In
accordance with SFAS No. 2, costs we incur to enhance our existing
products
after general release to the public (bug fixes) are expensed
in the period they
are incurred and included in research and development costs.
Research and
development costs incurred prior to determination of technological
feasibility
and marketability and after general release to the public and
charged to expense
were $64,653 and $128,159 for the years ended December 31, 2004
and 2003,
respectively.
We
capitalize costs related to the development of computer software
developed or
obtained for internal use in accordance with the American Institute
of Certified
Public Accountants Statement of Position (“SOP”) 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for
Internal
Use.
Software obtained for internal use has generally been enterprise
level business
and finance software that we customize to meet our specific operational
needs.
We have not sold, leased, or licensed software developed for
internal use to our
customers and have no intention of doing so in the future.
We
capitalize costs related to the development and maintenance of
our Website in
accordance with FASB’s EITF Issue No. 00-2, Accounting
for Website Development Costs.
Under
EITF Issue No. 00-2, costs expensed as incurred are as follows:
|
|
•
|
planning
the Website,
|
|
|
•
|
developing
the applications and infrastructure until technological
feasibility is
established,
|
|
|
•
|
developing
graphics such as borders, background and text colors,
fonts, frames, and
buttons, and
|
|
|
•
|
operating
the site such as training, administration and
maintenance.
|
Capitalized
costs include those incurred to:
|
|
•
|
obtain
and register an Internet domain name,
|
|
|
•
|
develop
or acquire software tools necessary for the development
work,
|
|
|
•
|
develop
or acquire software necessary for general Website
operations,
|
|
|
•
|
develop
or acquire code for web applications,
|
|
|
•
|
develop
or acquire (and customize) database software and
software to integrate
applications such as corporate databases and accounting
systems into web
applications,
|
|
|
•
|
develop
HTML web pages or templates,
|
|
|
•
|
install
developed applications on the web server,
|
|
|
•
|
create
initial hypertext links to other Websites or other
locations within the
Website, and
|
|
|
•
|
test
the Website applications.
|
We
amortize Website development costs on a straight-line basis over
the estimated
life of the site, generally 36 months. Total cumulative Website
development
costs, included in other assets on our consolidated balance sheets,
were $86,500
and $54,662, less accumulated amortization of $18,795 and $2,452
at December 31,
2004 and 2003, respectively.
NET
REVENUE
We
derive
revenues from the sale of packaged software products, product support
and
multiple element arrangements that may include any combination
of these items.
We recognize software revenue for software products and related
services in
accordance with SOP 97-2, Software
Revenue Recognition,
as
modified by SOP 98-9,
Modification of SOP 97-2, With Respect to Certain Transactions.
We
recognize revenue when persuasive evidence of an arrangement exists
(generally a
purchase order), we have delivered the product, the fee is fixed
or determinable
and collectibility is probable.
In
some
situations, we receive advance payments from our customers. We
defer revenue
associated with these advance payments until we ship the products
or offer the
support.
In
accordance with EITF Issue No. 01-9, Accounting
for Consideration Given by a Vendor to a Customer or a Reseller
of the Vendor’s
Product,
we
generally account for cash considerations (such as sales incentives
- rebates
and coupons) that we give to our customers as a reduction of
revenue rather than
as an operating expense.
Product
Revenue
We
typically recognize revenue from the sale of our packaged software
products when
we ship the product. We sell some of our products on consignment
to a limited
number of resellers. We recognize revenue for these consignment
transactions
only when the end-user sale has occurred. Revenue for software
distributed
electronically via the Internet is recognized when the customer
has been
provided with the access codes that allow the customer to take
immediate
possession of the software on its hardware and evidence of the
arrangement
exists (web order).
We
reduce
product revenue for estimated returns and price protections that
are based on
historical experience and other factors such as the volume and
price mix of
products in the retail channel, trends in retailer inventory
and economic trends
that might impact customer demand for our products. We also reduce
product
revenue for the estimated redemption of end-user rebates on certain
current
product sales. Our rebate reserves are estimated based on the
terms and
conditions of the specific promotional rebate program, actual
sales during the
promotion, the amount of redemptions received and historical
redemption trends
by product and by type of promotional program. We did not offer
any rebate
programs to our customers during 2004 or 2003 and maintain a
reserve for rebate
claims remaining unpaid from 2000.
Service
Revenue
We
offer
several technical support plans and recognize support revenue over
the life of
the plans, generally one year.
Multiple
Element
Arrangements
We
also
enter into certain revenue arrangements for which we are obligated
to deliver
multiple products or products and services (multiple elements).
For these
arrangements, which include software products, we allocate and
defer revenue for
the undelivered elements based on their vendor-specific objective
evidence
(“VSOE”) of fair value. VSOE is generally the price charged when that
element is
sold separately.
In
situations where VSOE exists for all elements (delivered and undelivered),
we
allocate the total revenue to be earned under the arrangement among
the various
elements, based on their relative fair value. For transactions
where VSOE exists
only for the undelivered elements, we defer the full fair value
of the
undelivered elements and recognize the difference between the total
arrangement
fee and the amount deferred for the undelivered items as revenue
(residual
method). If VSOE does not exist for undelivered items that are
services, we
recognize the entire arrangement fee ratably over the remaining
service period.
If VSOE does not exist for undelivered elements that are specified
products, we
defer revenue until the earlier of the delivery of all elements
or the point at
which we determine VSOE for these undelivered elements.
We
recognize revenue related to the delivered products or services
only if: (i) the
above revenue recognition criteria are met; (ii any undelivered
products or
services are not essential to the functionality of the delivered
products and
services; (iii) payment for the delivered products or services
is not contingent
upon delivery of the remaining products or service; and (iv)
we have an
enforceable claim to receive the amount due in the event that
we do not deliver
the undelivered products or services.
Shipping
and Handling
Costs
We
record
the amounts we charge our customers for the shipping and handling
of our
software products as product revenue and we record the related
costs as cost of
sales on our consolidated statements of operations.
Customer
Service and
Technical Support
Customer
service and technical support costs include the costs associated
with performing
order processing, answering customer inquiries by telephone and
through
Websites, e-mail and other electronic means, and providing technical
support
assistance to our customers. In connection with the sale of certain
products, we
provide a limited amount of free technical support assistance to
customers. We
do not defer the recognition of any revenue associated with sales
of these
products, since the cost of providing this free technical support
is
insignificant. The technical support is provided within one year
after the
associated revenue is recognized and free product enhancements
(bug fixes) are
minimal and infrequent. We accrue the estimated cost of providing
this free
support upon product shipment and are recorded as cost of
sales.
ADVERTISING
Advertising
costs, including direct response advertising costs, are charged to
operations as
incurred. We have determined that direct response advertising costs
are
insignificant. Total advertising costs for the years ended December
31, 2004
and
2003
were
approximately, $448,000
and
$240,000,
respectively.
STOCK-BASED
COMPENSATION
As
permitted under SFAS No. 123, Accounting
for Stock-based Compensation,
and
amended under SFAS No. 148, Accounting
for Stock-based Compensation-Transition and Disclosure,
we have
elected to follow the intrinsic value based method of accounting
prescribed by
Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued
to Employees, in accounting for stock-based awards to employees (see
Note 13)
and, accordingly, does not recognize compensation cost when employee
stock-option grants are made at fair-market value.
F-10
LEGAL
COSTS RELATED TO LOSS CONTINGENCIES
We
accrue
legal costs expected to be incurred in connection with a loss contingency
as
they occur.
INCOME
TAXES
We
utilize SFAS No. 109, Accounting
for Income Taxes.
SFAS
No. 109 requires the use of the asset and liability method of accounting
for
income taxes. Under this method, deferred income taxes are provided
for the
temporary differences between the financial reporting basis and the
tax basis of
our assets and liabilities. Deferred tax assets and liabilities are
measured
using enacted tax rates expected to apply to taxable income in the
years in
which those temporary differences are expected to be recovered or
settled.
EARNINGS
PER
SHARE
We
follow
SFAS No. 128, Earnings
Per Share,
to
calculate and report basic and diluted earnings per share (“EPS”). Basic EPS is
computed by dividing income available to common stockholders by the
weighted
average number of shares of common stock outstanding for the period.
Diluted EPS
is computed by giving effect to all dilutive potential shares of
common stock
that were outstanding during the period. For us, dilutive potential
shares of
common stock consist of the incremental shares of common stock issuable
upon the
exercise of stock options and warrants for all periods, convertible
notes
payable and the incremental shares of common stock issuable upon
the conversion
of convertible preferred stock.
When
discontinued operations, extraordinary items, and/or the cumulative
effect of an
accounting change are present, income before any of such items
on a per share
basis represents the “control number” in determining whether potential shares of
common stock are dilutive or anti-dilutive. Thus, the same number
of potential
shares of common stock used in computing diluted EPS for income
from continuing
operations is used in calculating all other reported diluted EPS
amounts. In the
case of a net loss, it is assumed that no incremental shares would
be issued
because they would be anti-dilutive. In addition, certain options
and warrants
are considered anti-dilutive because the exercise prices were above
the average
market price during the period. Anti-dilutive shares are not included
in the
computation of diluted EPS, in accordance with SFAS No. 128.
COMPREHENSIVE
INCOME (LOSS)
We
have
adopted SFAS No. 130, Reporting
Comprehensive Income.
SFAS
No. 130 establishes standards of reporting and displaying comprehensive
income
and its components of net income and “other comprehensive income” in a full set
of general-purpose financial statements. “Other comprehensive income” refers to
revenues, expenses, gains and losses that are not included in net
income, but
rather are recorded directly in stockholders’ equity. The adoption of this
Statement had no impact on our net income or loss or stockholders’ equity.
TRANSFER
OF
FINANCIAL ASSETS
We
have
adopted SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.
SFAS
No. 140 provides accounting and reporting standards for transfers
and servicing
of financial assets and extinguishments of liabilities and provides
consistent
standards for distinguishing transfers of financial assets that are
sales from
transfers that are secured borrowings. The adoption of this standard
did not
have a material effect on our results of operations or financial
position.
FAIR
VALUE OF
FINANCIAL INSTRUMENTS
Unless
otherwise indicated, the fair values of all reported assets and
liabilities that
represent financial instruments (none of which are held for trading
purposes)
approximate the carrying values of such instruments because of
the short
maturity of those instruments.
F-11
DERIVATIVES
We
account for warrants issued with shares of common stock in
a private placement
according to EITF Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a
Company’s Own Stock.
In
accordance with accounting mandate, the derivative liability
associated with the
warrants has been and shall continue until our registration
statement on Form
SB-2 originally filed on November 22, 2004 is declared effective
to be adjusted
to fair value (calculated using the Black Scholes method)
at each balance sheet
date and is accordingly reassessed at each such time to determine
whether the
warrants should be classified (or reclassified, as appropriate)
as a liability
or as equity. The
corresponding fair value adjustment is included in the consolidated
statements
of operations as other expenses as the value of the warrants
increases from an
increase in our stock price at the balance sheet date and
as other income as the
value of the warrants decreases from a decrease in our stock
price.
RECLASSIFICATIONS
Certain
accounts in the 2003 financial statements have been reclassified
for comparative
purposes to conform with the presentation in the 2004 financial statements.
NOTE
2 - ACCOUNTS RECEIVABLE
At
December
31, 2004
and
2003,
accounts receivable consisted of the following (see Note 1 -
Concentrations):
|
2004
|
2003
|
||||||
|
Trade
receivables
|
$
|
584,819
|
$
|
384,803
|
|||
|
Less:
Allowance for doubtful accounts
|
18,000
|
19,000
|
|||||
|
Accounts
receivable, trade
|
$
|
566,819
|
$
|
365,803
|
|||
During
the years ended December 31, 2004 and 2003, we transferred accounts
receivable
totaling $300,966 and $320,533 to Alliance for cash advances of $180,580
and
$192,320, respectively. As accounts are paid, the collected funds
(less the
amount advanced and appropriate fees) are disbursed to us. The transfer
agreement includes a repurchase requirement and, accordingly, the
proceeds were
accounted for as a secured borrowing. The agreement was terminated
in July 2004.
At December 31, 2004 and 2003, the balance of receivables transferred
and
included in trade receivables was $-0- and $34,893, respectively.
The remaining
secured borrowing balances of $-0- and $20,936 are included in accrued
expenses
at December 31, 2004 and 2003, respectively.
NOTE
3 - INVENTORIES
At
December
31, 2004
and
2003,
inventories consisted of the following:
|
2004
|
2003
|
||||||
|
Raw
materials
|
$
|
111,300
|
$
|
75,000
|
|||
|
Finished
goods
|
122,700
|
197,600
|
|||||
|
Inventories
|
$
|
234,000
|
$
|
272,600
|
|||
During
the years ended December 31, 2004 and 2003, we wrote-off distinctly
different
categories of obsolete inventory with a carried cost totaling $32,396
and
$60,792, respectively. These have been recognized in cost of sales.
NOTE
4 - PROPERTY AND EQUIPMENT, NET
At
December
31, 2004
and
2003,
property and equipment consisted of the following:
|
2004
|
2003
|
||||||
|
Computer
equipment
|
$
|
84,009
|
$
|
61,905
|
|||
|
Computer
software
|
62,861
|
41,297
|
|||||
|
Office
equipment
|
77,947
|
24,099
|
|||||
|
Office
furniture and fixtures
|
62,594
|
51,119
|
|||||
|
Warehouse
equipment
|
23,150
|
23,150
|
|||||
|
310,561
|
201,570
|
||||||
|
Less:
Accumulated depreciation
|
179,542
|
135,967
|
|||||
|
Property
and equipment, net
|
$
|
131,019
|
$
|
65,603
|
|||
At
December 31, 2004, Office equipment contained telephone equipment
under a
capital lease obligation with a cost basis of $51,788. See Notes
7 and
14.
NOTE
5 - SOFTWARE LICENSE, net (Restated)
In
July
1999, we completed an exclusive license agreement with Parsons Technology,
Inc.,
a subsidiary of The Learning Company, Inc. (“TLC”), for the perpetual and
fully-paid up right and license to publish, use, distribute and sublicense
the
programs incorporating the trademarks (i.e. QuickVerse, Membership
Plus)
throughout the world and also in the licensed media, for sale, resale
and/or
license to churches or other places of worship, religious schools
and companies
or individuals for which the majority of sales revenue is derived
from sales of
religious, Christian or Bible products (the “Church Channel”). In addition, the
license agreement provided us the non-exclusive, perpetual and fully-paid
up
right and license to publish, use, distribute and sublicense the
programs
incorporating the trademarks throughout the world and also in the
licensed
media, for sale, resale and/or license into all channels other than
the Church
Channel. This original license agreement carried a 10 year economic
life.
During
the year ended December 31, 2002 we reached tentative settlement
in a dispute
with TLC which called for the extension of the term of the license
from 10 years
to 50 years.
On
October 20, 2003, we reached settlement in a dispute with The Zondervan
Corporation and TLC which extended indefinitely the term of the
software license
agreement.
As
required by SFAS No. 142, management periodically evaluates the
remaining useful
life of the license agreement and revises the amortization period
if it is
determined that the useful life is longer or shorter than originally
estimated.
Amortization expense, determined using the straight-line method,
has been
calculated using the original 10 year economic life. The software
license is
tested for impairment annually during the fourth quarter.
At
December 31, 2004 and 2003, the software license consisted of the
following:
|
2004
|
2003
|
||||||
|
Software
license cost
|
$
|
5,135,574
|
$
|
5,135,574
|
|||
|
Less:
Accumulated amortization
|
2,869,791
|
2,366,283
|
|||||
|
Software
license, net
|
$
|
2,265,783
|
$
|
2,769,291
|
|||
Amortization
expense related to this intangible asset was $503,508 for both
years.
Amortization expense for the next five years is expected to be
$503,508 each
year through 2008 and $251,751 for 2009. See Note 19 - Restatement
and
Reclassification.
NOTE
6 - NOTES PAYABLE
At
December
31, 2004
and
2003,
notes
payable consisted of the following:
|
2004
|
2003
|
||||||
|
Note
payable to a corporation, due May 31, 2003, with interest
compounded
monthly at 1.5%. Unsecured. Convertible at the option of
the holder into
666,667 restricted shares of common stock.
|
$
|
---
|
$
|
33,333
|
|||
|
Note
payable to a corporation, due May 31, 2003, with interest
compounded
monthly at 1.5%. Unsecured. Convertible at the option of
the holder into
666,667 restricted shares of common stock.
|
---
|
33,333
|
|||||
|
Note
payable to a corporation, due May 31, 2003, with interest
compounded
monthly at 1.5%. Unsecured. Convertible at the option of
the holder into
466,666 restricted shares of common stock. See Notes 15
and
18.
|
---
|
23,333
|
|||||
|
Notes
payable
|
$
|
---
|
$
|
89,999
|
|||
In
September 2004, we borrowed a total of $240,000 from two individuals.
Both notes
were unsecured, carried an annual interest rate of 7.5%, were due
August 2005,
and were convertible at the option of the holder into a total of
2,000,000
restricted shares of common stock. Both notes were converted in November
2004 at
the election of the respective holder. See Notes 9 and 15.
During
the year ended December 31, 2003, we reclassified as other income
(see Note 10)
proceeds totaling $650,000, and the corresponding accrued interest
payable,
received in late 1999 and early 2000 that were previously recorded
as an
unsecured note payable.
NOTE
7 - LONG-TERM DEBT
At
December 31, 2004 and 2003, long-term debt consisted of the
following:
|
2004
|
2003
|
||||||
|
Unsecured
term note payable to a corporation due October 2004 in
monthly
installments of $5,285, including interest at 8%.
|
$
|
26,679
|
$
|
53,975
|
|||
|
Term
note payable to a corporation due December 2005 in monthly
installments of
$6,833, including interest at 8%. Secured by inventory.
See Notes 3 and
10.
|
---
|
146,664
|
|||||
|
Capital
lease obligation payable to a corporation due November
2009 in monthly
installments of $1,144, including interest at 11.7%.
Secured by telephone
equipment. See Notes 4 and 14.
|
51,788
|
---
|
|||||
|
78,467
|
200,639
|
||||||
|
Less:
Current maturities
|
35,495
|
126,876
|
|||||
|
Long-term
debt
|
$
|
42,972
|
$
|
73,763
|
|||
Principal
maturities at December 31, 2004 are as follows:
|
2005
|
$
|
35,495
|
||
|
2006
|
9,186
|
|||
|
2007
|
10,318
|
|||
|
2008
|
11,591
|
|||
|
2009
|
11,877
|
|||
|
Total
|
$
|
78,467
|
NOTE
8 - INCOME TAXES (Restated)
The
provision (benefit) for taxes on income from continuing operations
for the years
ended December 31, 2004 and 2003 consisted of the following:
|
2004
|
2003
|
||||||
|
Current:
|
|||||||
|
Federal
|
$
|
---
|
$
|
---
|
|||
|
State
|
1,484
|
---
|
|||||
|
1,484
|
---
|
||||||
|
Deferred:
|
|||||||
|
Federal
|
(1,009,939
|
)
|
(185,213
|
)
|
|||
|
State
|
(7,404
|
)
|
(41,248
|
)
|
|||
|
(1,017,343
|
)
|
(226,461
|
)
|
||||
|
Total
tax provision (benefit)
|
$
|
(1,015,859
|
)
|
$
|
(226,461
|
)
|
|
The
reconciliation of income tax computed at statutory rates of income
tax benefits
is as follows:
|
2004
|
2003
|
||||||
|
(Benefit)
Expense at Federal statutory rate - 25% and 34%
|
$
|
(12,952
|
) |
$
|
458,546
|
||
|
State
tax effects, net of Federal taxes
|
(4,069
|
)
|
(27,224
|
)
|
|||
|
Nondeductible
expenses
|
236,009
|
1,764
|
|||||
|
Taxable
temporary differences
|
(73,533
|
)
|
185,213
|
||||
|
Deductible
temporary differences
|
356,278
|
(4,449
|
)
|
||||
|
Deferred
tax asset valuation allowance
|
(1,517,592
|
)
|
(840,311
|
)
|
|||
|
Income
tax benefit
|
$
|
(1,015,859
|
)
|
$
|
(226,461
|
)
|
|
Deferred
income taxes reflect the net tax effects of temporary differences
between the
carrying amounts of assets and liabilities for financial reporting
purposes and
the amounts used for income tax purposes. Our total and net deferred
tax assets,
deferred tax asset valuation allowances and deferred tax liabilities
at December
31, 2004 and 2003 are as follows:
|
For
the year ended December 31, 2004
|
Federal
|
State
|
Total
|
|||||||
|
Current
Deferred Income Taxes
|
||||||||||
|
Reserve
for sales returns
|
$
|
34,061
|
$
|
8,014
|
$
|
42,075
|
||||
|
Reserve
for technical support costs
|
13,362
|
3,144
|
16,506
|
|||||||
|
Accrued
compensation costs
|
50,734
|
11,937
|
62,671
|
|||||||
|
Deferred
revenue
|
14,807
|
3,484
|
18,291
|
|||||||
|
Reserve
for bad debts
|
6,120
|
1,440
|
7,560
|
|||||||
|
Operating
loss carryforwards
|
285,600
|
1,054
|
286,654
|
|||||||
|
404,684
|
29,073
|
433,757
|
||||||||
|
Less:
Valuation allowance
|
129,005
|
4,561
|
133,566
|
|||||||
|
Deferred
income tax asset, net
|
$
|
275,679
|
$
|
24,512
|
$
|
300,191
|
||||
|
Non-current
Deferred Income Taxes
|
||||||||||
|
Property
and equipment, net
|
$
|
2,312
|
$
|
544
|
$
|
2,856
|
||||
|
Reorganization
costs
|
1,700
|
400
|
2,100
|
|||||||
|
State
deferred tax liabilities
|
53,665
|
---
|
53,665
|
|||||||
|
Operating
loss carryforwards
|
2,555,351
|
3,957
|
2,559,308
|
|||||||
|
2,613,028
|
4,901
|
2,617,929
|
||||||||
|
Less:
Valuation allowance
|
1,774,631
|
4,901
|
1,779,532
|
|||||||
|
Deferred
income tax asset, net
|
838,397
|
---
|
$
|
838,397
|
||||||
|
Software
development costs
|
(238,438
|
)
|
(56,103
|
)
|
$
|
(294,541
|
)
|
|||
|
Website
costs
|
(23,020
|
)
|
(5,416
|
)
|
(28,436
|
)
|
||||
|
Software
license fees
|
(409,360
|
)
|
(96,321
|
)
|
(505,681
|
)
|
||||
|
State
deferred tax assets
|
(32,726
|
)
|
---
|
(32,726
|
)
|
|||||
|
Deferred
income tax liability
|
(680,557
|
)
|
(157,840
|
)
|
$
|
(838,397
|
)
|
|||
|
Deferred
income tax asset, net
|
$
|
157,840
|
||||||||
|
Deferred
income tax liability, net
|
$
|
(157,840
|
)
|
|||||||
|
For
the year ended December 31, 2003
|
Federal
|
State
|
Total
|
|||||||
|
Current
Deferred Income Taxes
|
||||||||||
|
Reserve
for sales returns
|
$
|
19,574
|
$
|
4,606
|
$
|
24,180
|
||||
|
Reserve
for technical support costs
|
12,580
|
2,960
|
15,540
|
|||||||
|
Accrued
compensation costs
|
60,781
|
14,301
|
75,082
|
|||||||
|
Reserve
for bad debts
|
6,460
|
1,520
|
7,980
|
|||||||
|
Operating
loss carryforwards
|
102,000
|
24,000
|
126,000
|
|||||||
|
201,395
|
47,387
|
248,782
|
||||||||
|
Less:
Valuation allowance
|
201,395
|
47,387
|
248,782
|
|||||||
|
Deferred
income tax asset, net
|
$
|
---
|
$
|
---
|
$
|
---
|
||||
|
Non-current
Deferred Income Taxes
|
||||||||||
|
Property
and equipment, net
|
$
|
614
|
$
|
144
|
$
|
758
|
||||
|
Reorganization
costs
|
11,900
|
2,800
|
14,700
|
|||||||
|
State
deferred tax liabilities
|
46,444
|
---
|
46,444
|
|||||||
|
Operating
loss carryforwards
|
2,435,074
|
684,932
|
3,120,006
|
|||||||
|
2,494,032
|
687,876
|
3,181,908
|
||||||||
|
Less:
Valuation allowance
|
2,494,032
|
687,876
|
3,181,908
|
|||||||
|
Deferred
income tax asset, net
|
$
|
---
|
$
|
---
|
---
|
|||||
|
Software
license fees
|
$
|
(580,551
|
)
|
$
|
(136,600
|
)
|
(717,151
|
)
|
||
|
Deferred
income tax liability
|
$
|
(580,551
|
)
|
$
|
(136,600
|
)
|
(717,151
|
)
|
||
|
Deferred
income tax liability, net
|
$
|
(717,151
|
)
|
|||||||
A valuation allowance has been recorded primarily related to tax benefits associated with income tax operating loss carryforwards. Adjustments to the valuation allowance will be made if there is a change in management’s assessment of the amount of the deferred tax asset that is realizable. At December 31, 2001, in accordance with SFAS No. 109, Accounting for Income Taxes, management established the valuation allowance equal to the total deferred tax assets due to the uncertainty about our ability to continue as a going concern. At December 31, 2004, management adjusted the amount of valuation allowance based on the assessment that we will continue as a going concern and will produce sufficient income in the future to realize our net deferred tax asset. The valuation allowance for deferred tax assets was decreased by $1,602,090 during the year ended December 31, 2004 and decreased by $231,911 during the year ended December 31, 2003.
At
December 31, 2004, we had available net operating loss carryforwards
of
approximately $7,648,000 for federal income tax purposes that
expire in 2021.
The federal carryforwards resulted from losses generated in
1996 through 2002.
We also had net operating loss carryforwards available from
various state
jurisdictions ranging from approximately $39,000 to approximately
$841,000 that
expire in 2021.
See
Note
19 - Restatement and Reclassification.
NOTE
9 - STOCKHOLDERS’ EQUITY (Restated)
COMMON
STOCK
In
July
2003, we issued 250,000 shares of common stock to an employee as
settlement of a
2002 signing bonus. These shares were valued at $0.04 per share,
the value on
the date the settlement was accepted by the employee.
In
July
2003, we issued a total of 600,000 shares of common stock to the
external board
of directors in lieu of cash and meeting fees for the period April
2002 through
June 2003. These shares were valued at $0.045 per share.
In
July
2003, we issued a total of 150,000 shares of common stock to three
independent
contractors as a bonus for their performance on our software development
projects. These shares were valued at $0.045 per share.
In
July
2003, we issued a total of 200,000 shares of common stock to
an independent
contractor for past and future performance on preparing written
corporate
materials. These shares were valued at $0.045 per share.
In
April
2004, we issued a total of 1,519,349 restricted shares of common
stock to the
executive management team as payment of the 2003 accrued performance
bonus.
These shares were valued at $0.022 per share.
In
April
2004, we resolved to issue 637,500 restricted shares of common
stock to the
non-executive employees as additional compensation pursuant
to an incentive and
retention bonus program. In July, 2004, we removed 2,500 restricted
shares of
common stock from the resolution due to voluntary separation
from service by a
part-time employee. These shares were valued at $0.022 per
share.
In
June
2004, we issued 324,074 restricted shares of common stock to the
outside board
of directors in lieu of cash and meeting fees for the period from
July 2003
through August 2004. These shares were valued at $0.081 per share.
In
July
2004, the holders of 11,400 shares of Series A Preferred Stock
and the holders
of 40,000 shares of Series B Preferred Stock elected to convert
such shares into
218,000 shares of common stock and 266,667 shares of common stock,
respectively.
In addition, the holders converted $4,125 unpaid accumulated Series
A Preferred
Stock dividends into 56,353 shares of common stock.
In
July
2004, we issued 295,692 non-restricted shares of common stock in
settlement of
an agreement with an institutional private equity investor. These
shares were
valued at $0.10 per share. A warrant dated March 26, 2001 to purchase
510,000
shares of common stock exercisable at $0.23 per share was cancelled
in the
settlement. See Note 10.
In
July
2004, we issued 21,875,000 restricted shares of common stock for
proceeds of
$1,750,000 through a private placement with a New York based private
investment
partnership. In connection with this issuance, we incurred $51,047
in legal and
other direct costs. These costs have been recorded as a reduction
to additional
paid-in capital. In addition, according to the terms of the agreement,
the
investor received two warrants to purchase shares of common stock.
The first
warrant entitles the holder to purchase up to 10,937,500 shares
of common stock
at a price of $0.18 per share, and the second warrant entitles
the holder to
purchase up to 10,937,500 additional shares of common stock at
a price of $0.60
per share;
each
warrant is subject to standard adjustment provisions.
In
July
2004, we removed 48,387 previously resolved but un-issued shares
of common stock
associated with an unexecuted 2001 stock subscription agreement.
In
October 2004, we increased the number of our authorized shares
of common stock
from 50,000,000 to 120,000,000.
In
November 2004, we issued 2,000,000 restricted shares of common
stock to holders
of convertible promissory notes who exercised their options to
convert. See Note
6.
COMMON
STOCK
OPTIONS
In
June
2003, we granted an employee 500,000, fully vested stock options
with an
exercise price of $0.05 per share. These options expire in June
2013. In
addition, 667 unvested stock options with an exercise price of
$1.00 and 6,250
unvested stock options with an exercise price of $0.11 were forfeited
upon
termination and 16,250 vested stock options with an exercise price
of $1.00 and
30,000 vested stock options with an exercise price of $0.11 expired
after
termination. There was no effect on the financial statements resulting
from
these transactions. See Note 13.
In
July
2004, we cancelled 190,200 vested stock options with an exercise
price of $1.00
per share and 525,000 vested stock options with an exercise price
of $1.03 per
share. In addition, 100,000 vested stock options with an exercise
price of $0.11
were voluntarily forfeited by management and 1,333 vested stock
options with an
exercise price of $1.00 and 38,750 vested stock options with an
exercise price
of $0.11 expired after termination. We apply APB Opinion No. 25
and related
interpretations in accounting for our stock options. Accordingly,
no
compensation cost has been recognized for these stock options and
therefore,
there was no effect on the financial statements resulting from
these
cancellations. See Note 13. We did not grant any options or other
stock-based
awards to any of the individuals for which the options were canceled,
during the
six months prior to and after the option cancellation.
COMMON
STOCK
WARRANTS
In
April
2004, we issued a warrant for 150,000 shares of common stock with
an exercise
price of $0.022 per share to our corporate counsel as payment for
$3,300 of
accrued legal services.
In
May
2004, we issued a warrant for 600,000 shares of common stock with
an exercise
price of $0.15 per share to a consultant for corporate business
planning,
financing, and merger and acquisition assistance. This warrant
was valued at
$63,215 using the Black-Scholes method and recorded as an expense.
In
July
2004, we cancelled a warrant for 510,000 shares of common stock
with an exercise
price of $0.23 per share with an institutional private equity investor
in
connection with a settlement in which 295,692 non-restricted shares
of common
stock were issued. See Note 10.
In
November 2004, we issued two warrants to purchase an aggregate
of 21,875,000
shares of our common stock in connection with a certain Stock
Purchase Agreement
completed with a New York based private investment partnership,
on July 19,
2004. The first warrant entitles the holder to purchase up
to 10,937,500 shares
of our common stock at a price of $0.18 per share, and the
second warrant
entitles the holder to purchase up to 10,937,500 additional
shares of our common
stock at a price of $0.60 per share. Each warrant is subject
to standard
adjustment provisions and each provides for settlement in
registered shares of
our common stock and may, at the option of the holder, be
settled in a cashless,
net-share settlement. The maximum number of shares of our
common stock to be
received for each warrant in a net-share settlement would
be 10,937,500 but the
actual number of shares settled would likely be significantly
less and would
vary based on the last reported sale price (as reported by
Bloomberg) of our
common stock on the date immediately preceding the date of
the exercise notice.
These warrants are accounted for as a liability according
to the guidance of
EITF 00-19 and the fair value of each warrant was initially
assessed at
$2,187,500 ($4,375,000 total) using the Black-Scholes valuation
method. The fair
value of each warrant was estimated on the date of commitment
with the following
assumptions:
|
|
Warrant
A
|
Warrant
B
|
|||||
|
Expected
term - years
|
5
|
5
|
|||||
| Stock price on date of commitment (July 19, 2004) | $ | 0.20 | $ | 0.20 | |||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
|||
|
Expected
stock price volatility
|
490
|
%
|
490
|
%
|
|||
|
Risk-free
interest rate
|
3.80
|
%
|
3.80
|
%
|
|||
|
Fair
value of warrants on commitment date (July 19,
2004)
|
$
|
4,375,000
|
||||||
|
Less:
Net proceeds received
|
||||||||
|
Gross
proceeds received for stock and warrants
|
$
|
1,750,000
|
||||||
|
Par
value of common stock issued
|
(21,875
|
)
|
||||||
|
Stock
offering costs
|
(51,047
|
)
|
$
|
1,677,078
|
||||
|
Loss
on fair value adjustment of derivatives
|
$
|
2,697,922
|
The
warrants are revalued at each balance sheet date by using
the parameters above,
reducing the expected term to reflect the passing of time
(4.55 years at
December 31, 2004), and using the stock price at the balance
sheet date ($0.09
at December 31, 2004). A net fair value adjustment of $291,672
($1,968,750,
December 31, 2004 fair value, less $1,677,078, net proceeds
received) has been
included in other expenses on the consolidated statements
of operations for the
year ended December 31, 2004.
See
Note
19 - Restatement and Reclassification.
SERIES
A
CONVERTIBLE PREFERRED STOCK
The
rights, preferences and privileges of our Series A Preferred Stock,
none of
which currently remain outstanding, were as follows:
Dividends
Holders
of Series A Preferred Stock were entitled to receive common stock
dividends of
$0.50 per share per annum, in preference to any payment of cash
dividends
declared or paid on shares of common stock. Dividends on Series
A Preferred
Stock were fully cumulative and was payable as determined by
our board of
directors. As of December 31, 2004, no dividends had been declared.
Series A
Preferred Stock dividends, however, were paid to a stockholder as a
conversion incentive.
Liquidation
Holders
of Series A Preferred Stock were entitled to liquidation preferences
over common
stockholders to the extent of $10.00 per Series A Preferred share,
plus all
declared but unpaid dividends. If funds were sufficient to make
a complete
distribution to the preferred stockholders, such stockholders
would have shared
in the distribution of our assets on a pro rata basis in proportion
to the
aggregate preferential amounts owed each stockholder. After payment
would have
been made to the preferred stockholders, any remaining assets
and funds would
have been distributed equally among the holders of our common
stock based upon
the number of shares of common stock held by each.
Conversion
Each
share of Series A Preferred Stock would have been convertible into
shares of
common stock at the rate of 10 shares of common stock for each share
of Series A
Preferred Stock, subject to adjustment.
During
the year ended December 31, 2004, all shares of Series A Preferred
Stock were
converted into shares of common stock.
Redemption
At
the
election of our board of directors, we were able to redeem all or
part of the
shares of the Series A Preferred Stock at any time (pro rata based
upon the
total number of shares of the Preferred Stock held by each holder)
by paying in
cash a sum per share equal to $10.00 plus accrued and unpaid dividends
per
annum.
Voting
Rights
The
holder of each share of Series A Preferred Stock was not entitled
to vote except
as required by law.
SERIES
B
CONVERTIBLE PREFERRED STOCK
The
rights, preferences and privileges of our Series B Preferred Stock,
none of
which currently remains outstanding, were as follows:
Dividends
The
holders of Series B Preferred Stock were entitled to receive cumulative
cash
dividends at the rate of $1.60 per annum per share. As of December
31, 2004, no
dividends had been declared.
Liquidation
The
Series B Preferred stockholders were entitled to a liquidation
preference in an
amount equal to the dividends accrued and unpaid, whether or not
declared,
without interest, and a sum equal to $20.00 per share before any
payment was to
be made or any assets distributed to the holders of our common
stock or any
other class or series of our capital stock ranking junior as to
liquidation
rights to the Series B Preferred Stock.
Conversion
Each
share of Series B Preferred Stock had been convertible into shares
of common
stock at the rate of 1 share of common stock for each share of
Series B
Preferred Stock, subject to adjustment.
During
the year ended December 31, 2004, all shares of Series B
Preferred Stock were
converted into shares of common stock.
Redemption
Subject
to restrictions, shares of the Series B Preferred Stock were redeemable
at our
option at any time at the redemption price of $20.00 per share plus,
in each
case, an amount equal to the dividends accrued and unpaid thereon
to the
redemption date. We did not have the right to redeem any shares of
Series B
Preferred Stock unless the current market value of our common stock
immediately
prior to the redemption date was not less than $18.00 per share.
Voting
Rights
The
holder of each share of Series B Preferred Stock was not entitled
to vote,
except as required by law and as a class. Voting as a class, the
holders were
entitled to elect one director to fill one directorship.
NOTE
10 - OTHER INCOME AND ADJUSTMENTS (Restated)
We
recorded an adjustment to the balance of accrued royalties for the
year ended
December 31, 2003 in the amount of $583,628. This adjustment was
a result of our
having reached a settlement with TLC regarding the offset credit
to which we
were entitled against the balance due on the 1999 license. The offset
credit was
related to sales made to TLC that remained in dispute until verified
by an
independent third-party audit of the sales and related royalty calculations.
The
royalty liabilities had been accrued based on our sales to TLC as
originally
reported and were part of the calculation of the June 30, 2001 bad
debt
provision totaling $2,391,000. This has been included in other income.
During
the year ended December 31, 2003, we reclassified as other income
- proceeds
totaling $650,000, and the corresponding accrued interest payable
totaling
$216,516, that were previously recorded as an unsecured note payable.
The
proceeds were originally recorded as an unsecured note payable
based upon an
oral understanding with an employee of a third-party consultant
in 1999. We had
historically accrued interest on the outstanding balance at 9%,
the rate deemed
reasonable by management at the time of the oral agreement. We
continued to
accrue interest on the proceeds until we made the determination
to reclassify
the proceeds and accumulated accrued interest (from December 1999
through
September 2003). The determination to reclassify the obligation,
and related
accrued interest, was made on the basis of the combined facts that
(i) the
obligation exists, if at all, solely pursuant to an oral loan agreement
made
over three years ago (in 1999) in the State of North Carolina with
a
representative of the party to whom the obligation was believed
to have been
owed, (ii) no party has ever made any demand for repayment thereof
despite the
fact that no payments have ever been made on the obligation, (iii)
the party
believed to be owed the obligation, upon inquiry, claims no record
of any such
obligation, and (iv) the State of North Carolina Statute of Limitations
applicable to oral agreements, believed to govern the continued
enforceability
of the obligation, has expired. This transaction has been reflected
in the
Consolidated Statements of Cash Flows as “Debt forgiveness” and “(Decrease) in
other current liabilities”.
During
the year ended December 31, 2004, we settled with various vendors
and content
providers for lump-sum payments ranging from approximately 17%
to approximately
60% of balances owed. The difference between the balance owed and
the settlement
amount, totaling $1,002,090, has been treated as gain from extinguishment
of
debt and included in other income.
During
the year ended December 31, 2004, we settled an agreement with
Swartz Private
Equity, an institutional private equity investor, for early termination
of the
agreement. We issued 295,692 shares of common stock valued at $0.10
per share
and paid a cash lump sum of $125,000. A total of $154,569 has been
treated as
expenses incurred in a withdrawn public offering. See Note 9. This
has been
included in other adjustments.
See
Note
19 - Restatement and Reclassification.
NOTE
11 - REBATE RESERVE ADJUSTMENT
(Restated)
During
the years ended December 31, 2004 and 2003, we recorded adjustments
to our
rebates reserve in the amounts of $142,039 and $124,262, respectively;
$266,301
in the aggregate. Our reserve balance properly reflects open rebate
programs and
the estimated balance of each that management expects to pay. These
adjustments
are the result of, among other things, an internal review of the
amount owed and
of our ability to reach intended rebate recipients, as properly reflected
by
historical response rates. These adjustments to our rebate reserves
have been
recognized as an adjustment to revenue in accordance with EITF Issue
No.
01-09.
See
Note
19 - Restatement and Reclassification.
NOTE
12 - EARNINGS PER COMMON SHARE (Restated)
Earnings
per common share are computed by dividing net income by the weighted
average
number of shares of common stock and common stock equivalents outstanding
during
the year. Common stock equivalents are the net additional number
of shares that
would be issuable upon the exercise of the outstanding common stock
options (see
Note 13), assuming that we reinvested the proceeds to purchase
additional shares
at market value.
The
following table shows the amounts used in computing earnings
per common share
and the effect on income and the average number of shares of
dilutive potential
common stock:
|
For
the Year Ended December 31
|
2004
|
2003
|
|||||
|
Net
Income
|
$
|
964,053
|
$
|
1,699,387
|
|||
|
Common
stock dividend on Preferred Series A
|
(4,125
|
)
|
---
|
||||
|
Net
income available to common shareholders
|
$
|
959,928
|
$
|
1,699,387
|
|||
|
Basic
weighted average shares outstanding
|
34,520,754
|
20,411,438
|
|||||
|
Dilutive
effect of:
|
|||||||
|
Stock
options
|
429,824
|
---
|
|||||
|
Convertible
notes payable
|
---
|
1,800,000
|
|||||
|
Convertible
Preferred Series A
|
---
|
114,000
|
|||||
|
Convertible
Preferred Series B
|
---
|
40,000
|
|||||
|
Warrants
|
245,262
|
---
|
|||||
|
Diluted
weighted average shares outstanding
|
35,195,840
|
22,365,438
|
|||||
A
total
of 24,315,000 and 4,075,273 dilutive potential securities for the
years ended
December 31, 2004 and 2003, respectively, have been excluded from
the
computation of diluted earnings per common share, as their inclusion
would be
anti-dilutive.
See
Note
19 - Restatement and Reclassification.
NOTE
13 - STOCK-BASED COMPENSATION (Restated)
Our
1999 Stock Incentive Plan authorizes the issuance of various forms of
stock-based awards including incentive and nonqualified stock options,
stock
appreciation rights attached to stock options, and restricted stock
awards to
our directors, officers and other key employees. The plan has been
approved
by our stockholders and as such, provides certain income tax advantages
to
employees as provided under Sections 421, 422, and 424 of the Internal
Revenue
Code. Stock options are granted at an exercise price as determined
by our
board at the time the option is granted and may not be less than the par
value of such shares of common stock. None of the options granted
under the plan
have been granted with an exercise price less than fair value of
the common
stock on the date of grant. Stock options vest quarterly over three
years and
have a term of up to ten years. The plan authorizes an aggregate
of 1,500,000
shares of common stock may be issued. We did not grant any options
under the
plan during 2004 or 2003.
In
addition, we issue various forms of stock-based awards including
nonqualified
stock options and restricted stock awards to directors, officers,
other key
employees and third-party consultants, outside of the plan. Awards
granted
outside of the plan have been granted pursuant to equity compensation
arrangements that have not been approved by our stockholders. These awards
are granted at an exercise price as determined by our board at the time of
grant and are not less than the par value of such shares of common
stock. None
of the options granted outside of the plan have been granted with
an exercise
price less than fair value of the common stock on the date of grant.
Stock
options granted outside of the plan vest as determined by our board at the
time of grant and have a term of up to ten years. Non-employee
directors, though
treated as employees for financial reporting purposes under FASB
Interpretation
No. 44, are excluded from the income tax advantages afforded employees
by the
Internal Revenue Code. We did not grant any options outside of
the plan during
2004 and granted 500,000 nonqualified, fully vested stock options
outside of the
plan to an officer during 2003.
We
apply
APB Opinion No. 25 and related interpretations in accounting for
our stock
options. Accordingly, no compensation cost has been recognized
for outstanding
stock options. Had compensation cost for our outstanding stock
options been
determined based on the fair value at the grant date (calculated
using the
Black-Scholes Option-Pricing Model) for those options consistent
with SFAS No.
123, our net income and primary and diluted earnings per share
would have
differed as reflected by the pro forma amounts indicated below:
|
2004
|
2003
|
||||||
|
Net
income, as reported
|
$
|
964,053
|
$
|
1,699,387
|
|||
|
Pro
Forma compensation charge under SFAS No. 123
|
---
|
(59,722
|
)
|
||||
|
Pro
Forma net income
|
$
|
964,053
|
$
|
1,639,665
|
|||
|
Earnings
per share:
|
|||||||
|
Basic
- as reported
|
$
|
0.03
|
$
|
0.08
|
|||
|
Basic
- pro forma
|
$
|
0.03
|
$
|
0.08
|
|||
|
Diluted
- as reported
|
$
|
0.03
|
$
|
0.08
|
|||
|
Diluted
- pro forma
|
$
|
0.03
|
$
|
0.07
|
|||
The
fair
value of each option grant was estimated on the date of grant using
the
Black-Scholes option-pricing model with the following assumptions:
|
Expected
dividend yield
|
0
|
%
|
||
|
Expected
stock price volatility
|
490
|
%
|
||
|
Risk-free
interest rate
|
3.80
|
%
|
Activity
under our stock option plans is summarized as follows:
|
Outstanding
Options
|
|||||||
|
Number
of Shares
|
Weighted-Average
Exercise Price
|
||||||
|
Balance
at December 31, 2002
|
2,843,450
|
$
|
0.33
|
||||
|
Granted
|
500,000
|
$
|
0.05
|
||||
|
Exercised
|
---
|
---
|
|||||
|
Expired
or forfeited
|
(53,167
|
)
|
$
|
0.39
|
|||
|
Canceled
|
---
|
---
|
|||||
|
Balance
at December 31, 2003
|
3,290,283
|
$
|
0.29
|
||||
|
Granted
|
---
|
---
|
|||||
|
Exercised
|
---
|
---
|
|||||
|
Expired
or forfeited
|
(140,083
|
)
|
$
|
0.12
|
|||
|
Canceled
|
(715,200
|
)
|
$
|
1.02
|
|||
|
Balance
at December 31, 2004
|
2,435,000
|
$
|
0.09
|
||||
No
stock
options, or any other form of stock-based awards, were granted
to the
individuals for whom the options were cancelled, during the six
months prior to
and after the cancellation.
The
following table summarizes information about stock options outstanding
at
December 31, 2004:
|
Outstanding
Options
|
Exercisable
Options
|
|||||||||||||||
|
Range
of Exercise Prices
|
Outstanding
at December 31, 2004
|
Weighted-Average
Remaining Contractual Life (Years)
|
|
Weighted-Average
Exercise Price
|
Exercisable
at December 31, 2004
|
Weighted-Average
Exercise Price
|
||||||||||
|
$0.00
to $0.11
|
2,435,000
|
7.1
|
$
|
0.0854
|
2,435,000
|
$
|
0.0854
|
|||||||||
The
following table summarizes other equity instruments issued during
2004 to
acquire goods and services (see Note 9):
|
Number
of Shares
|
Weighted-Average
Exercise Price
|
||||||
|
Common
stock
|
2,774,115
|
$
|
0.0372
|
||||
|
Common
stock warrants
|
750,000
|
$
|
0.1244
|
||||
See
Note
19 - Restatement and Reclassification.
NOTE
14 - RENTAL AND LEASE INFORMATION
OPERATING
LEASES
We
lease
office space/warehouse facilities in Omaha, Nebraska under an operating
lease
with a third-party with terms extending through 2007. We are responsible
for all
taxes, insurance and utility expenses associated with this lease.
There is no
lease renewal option contained in the lease.
We
lease
office space in Naperville, Illinois under an operating lease with
a third-party
with terms extending through September 2005. We are responsible
for all
insurance expenses associated with this lease.
Rental
expense for the years ended December 31, 2004 and 2003 amounted
to $75,555 and
$51,039, respectively. Rental expenses are included in capitalized
software
development costs. See Note 1 - Software Development Costs.
At
December 31, 2004, the future minimum rental payments required
under these
leases are as follows:
|
2005
|
$
|
77,261
|
||
|
2006
|
65,491
|
|||
|
2007
|
27,288
|
|||
|
Total
future minimum rental payments
|
$
|
170,040
|
CAPITAL
LEASES
We
lease
telephone equipment under a capital lease expiring in November
2009. The asset
and liability under the capital lease are recorded at the present
value of the
minimum lease payments. The asset is depreciated over a 5 year
life.
Depreciation of the asset under the capital lease is included in
depreciation
expense for 2004.
The
following table summarizes property held under capital leases at
December
31, 2004:
|
Office
equipment
|
$
|
51,788
|
||
|
Less:
Accumulated depreciation
|
1,726
|
|||
|
Net
property and equipment under capital lease
|
$
|
50,062
|
Minimum
future lease payments under capital leases as of December
31, 2004
for each
of the next five years and in the aggregate, are:
|
2005
|
$
|
14,870
|
||
|
2006
|
13,726
|
|||
|
2007
|
13,726
|
|||
|
2008
|
13,726
|
|||
|
2009
|
12,582
|
|||
|
Total
minimum lease payments
|
68,630
|
|||
|
Less:
Amount representing interest
|
16,842
|
|||
|
Total
obligations under capital lease
|
51,788
|
|||
|
Less:
Current installments of obligations under capital lease
|
8,816
|
|||
|
Long-term
obligation under capital lease
|
$
|
42,972
|
NOTE
15 - SUPPLEMENTAL CASH FLOW INFORMATION (Restated)
We
incurred the following non-cash investing and financing activities
during the
years ended December 31, 2004 and 2003, respectively:
|
2004
|
2003
|
||||||
|
Property
and equipment acquired under capital lease
|
$
|
51,788
|
$
|
---
|
|||
|
Conversion
of notes payable into common stock. See Note 6.
|
$
|
263,334
|
$
|
---
|
|||
|
Common
stock dividend on Preferred Series A
|
$
|
4,125
|
$
|
---
|
|||
|
Preferred
stock converted into common stock
|
$
|
470
|
$
|
---
|
|||
|
Common
stock and warrants issued for services
|
$
|
178,929
|
$
|
52,750
|
|||
See
Note
19 - Restatement and Reclassification.
NOTE
16 - COMMITMENTS AND CONTINGENCIES
(Restated)
We
are
subject to legal proceedings and claims that arise in the ordinary
course of our
business. In the opinion of management, the amount of ultimate liability
with
respect to these actions will not materially affect our financial
statements
taken as a whole.
We
entered into a license agreement in June 1999 with Parsons Technology,
Inc., a
copy of which has since been assigned to Riverdeep, Inc., the
latest
licensor-assignee in a succession of assignments that have occurred
since the
original agreement. The license, as we acquired it in 1999, provided
us with the
right, for a term of ten years, to publish, use, distribute,
sublicense and
sell, exclusively worldwide in non-secular channels and non-exclusively
in
secular channels, a collection of top-selling Christian-related
software titles
and content owned by Parsons Technology, including certain intellectual
properties owned by The Zondervan Corporation.
In
October 2001, due to a shortage in working capital, we fell in
arrears with
certain royalty payments due under the Parsons Agreements. Thereafter
we became
party with, among others, Zondervan, Parsons and Riverdeep, to
a court
supervised mediation arising out of a content royalty claim.
A multi-party
settlement was reached on October 20, 2003, providing for our
payment to
Zondervan of $500,000 plus 5% simple interest in installments
over a period of
nine months from November 2003 to July 2004, as well as for the
destruction of
all inventory containing Zondervan-owned content. We have fully
complied with
the terms of the agreement and, upon satisfaction, received a
covenant in
perpetuity with respect to our rights under the Parsons Agreement,
effectively
extending the agreement indefinitely.
We
were
in arrears with the Internal Revenue Service for back payroll
taxes and had been
paying the payroll taxes in monthly installments previously approved
by the
Internal Revenue Service. In July of 2004, we paid all back payroll
taxes that
were due to the Internal Revenue Service and remain current with
all payroll tax
deposits and filings.
Our
employment agreements with our management team each contain a provision
for an
annual bonus equal to 1% of our net income (3% total). We accrue
this bonus on a
quarterly basis. Our
management team consists of our Chief Executive Officer (with a
base annual
salary of $150,000), our Chief Financial Officer (with a base annual
salary of
$110,000), and our Chief Technology Officer (with a base annual
salary of
$150,000). In addition to the bonus provisions and annual base
salary, each
employment agreement provides for payment of all accrued base salaries,
bonuses
($66,575 included in Other current liabilities at December 31,
2004), and any
vested deferred compensation ($30,349 included in Other current
liabilities at
December 31, 2004) for termination by reason of disability. The
agreements also
provide for severance compensation equal to the then base salary
until the later
of (i) the expiration of the term of the agreement as set forth
therein or
(ii) one year, when the termination is other than for cause (including
termination by reason of disability). There is no severance compensation
in the
event of voluntary termination or termination for cause.
In
2003
and 2004, we reduced our reserve for rebates payable based, in
part, on our
ability to meet the financial obligation of claims carried forward
from our last
rebate program in 2001. As such, we may have a legal obligation
to pay rebates
in excess of the liability recorded.
On
July
19, 2004, we entered into a certain Stock Purchase Agreement pursuant
to which
we agreed to issue and sell 21,875,000 restricted shares of our
common stock to
Barron Partners, LP, a New York based institutional investor, at
a price of
$0.08 per share. Under the terms of transaction, Barron received
two of our
common stock purchase warrants. The first warrant entitles the
holder, for a
period of up to five years, to purchase up to 10,937,500 common
shares at a
price of $0.18 per share,
subject
to standard adjustment provisions. The second warrant entitles the
holder, also for a period of up to five years, to purchase up to
10,937,500
additional common shares at a price of $0.60 per share,
subject
to standard adjustment provisions.
As
part
of the financing transaction, we also entered into a certain Registration
Rights
Agreement with Barron pursuant to which we became committed to
registering all
of the shares issued as part of such transaction, including those
issuable under
the warrants. On November 22, 2004, we filed a registration statement on
Form SB-2 covering the shares issued to Barron, as well as the
shares underlying
the warrants issued to Barron. Under the terms of the Registration
Rights
Agreement, as amended, we had until April 22, 2005 to cause such
registration
statement to be declared effective by the SEC. In accordance with
the terms of
the Registration Rights Agreement, any delays in meeting this obligation
subjected us to liability to Barron in an amount equal to $1,726 per day
for the duration of any such delay. We
continue to accrue $1,726 ($630,000 per year/365 days) per day
in penalties
until the registration statement is declared effective. If we are
unable to
cause the registration statement to be declared effective by December
31, 2005,
we will incur total penalties of approximately $437,000 (April
23, 2005 through
December 31, 2005) which will directly decrease our net income
and possibly
cause a net loss for the December 31, 2005 year then
ending.
See
Note
19 - Restatement and Reclassification.
NOTE
17 - RISKS AND UNCERTAINTIES
Our
future operating results may be affected by a number of factors.
We are
dependent upon a number of major inventory and intellectual property
suppliers.
If a critical supplier had operational problems or ceased making
material
available to us, operations could be adversely affected.
NOTE
18 - SUBSEQUENT EVENTS
Subsequent
to December 31, 2004 we restored a stale check (outstanding more
than six
months) in the amount of $23,333 to unrestricted cash. The stale
check was
issued to a corporation as payment in full of a note payable (see
Note 6).
Communication with the payee resulted in conversion of the note into
466,666
shares of common stock. The transaction has been reflected in unrestricted
cash,
common stock and paid-in capital at December 31, 2004. We have stopped
payment
on the check.
As
of the
date of this filing, the registration statement filed on November
22, 2004 had
not yet been declared effective. Pursuant to an agreement reached
with the New
York based private investment partnership in relation to the
associated accruing
penalties, we have agreed to pay the New York based private investment
partnership an amount in cash equal to $100,000 in two equal
installments of
$50,000 between April 22, 2005 and May 22, 2005 (paid April 22,
2005 and July 8,
2005), with no additional penalty obligations accruing for at
least 60 days from
April 22, 2005. Although there can be no assurance, management
believes that the
prospects of our being able to cause the registration statement
to be declared
effective by June 21, 2005 are good. If we are unsuccessful in
causing the
registration statement to be declared effective by the SEC by
June 21, 2005,
however, and depending on how long any such delay in causing
effectiveness to be
declared by the SEC continues thereafter, it is likely to have
a very material
adverse effect on our business, our financial condition, including
liquidity and
profitability, and our results of operations.
NOTE
19 - RESTATEMENT AND RECLASSIFICATION
We
have
restated our financial statements for the year ended December 31,
2004 to
reflect issues identified during a regulatory review of our financial
statements
associated with a certain registration statement filed with the SEC
on November
22, 2004 on Form SB-2. Management and the board of directors concluded
these
restatements were necessary to reflect the changes described below.
Revisions
affecting the consolidated statements of operations:
| • |
During
the quarter ended June 30, 2002, we reached a tentative
settlement
agreement in our arbitration with TLC. The tentative
settlement agreement
forgave the final, unpaid installment due on a certain
software
license we originally acquired in July 1999 and extended
the 1999 license term from 10 years to 50 years. We originally
recorded the final, unpaid installment of $1,051,785
under the 1999
license as an offset against the recorded historical
cost of
that 1999 license and recalculated the amortization based
on this
reduced amount and the extension of the useful life to
50 years. Although
paragraph 6 of SFAS No. 141, Business
Combinations,
which guides the recognition and measurement of intangible
assets,
provides that the measurement of assets in which the
consideration given
is cash are measured by the amount of cash paid, management
has concluded
that too much time had passed between the date of the
agreement (June
1999) and the date of the tentative settlement (May 2002)
for such an
offset to be proper. Therefore, we recognized the extinguishment
of the
liability owed to TLC as income ($1,051,785) in the statement
of
operations for the year ended December 31, 2002. This
adjustment reduced
the retained deficit by $856,685, net of additional amortization
and
related income taxes, at December 31, 2003 and 2004 from
that originally
reported and had no effect on the consolidated statements
of operations or
consolidated statements of cash flows for the years then
ended.
|
| • |
During
the quarter ended December 31, 2003, we reached a final
settlement
agreement in our dispute with Zondervan and TLC. This
final settlement
extended the life of the 1999 license, and the trademarks
included
therein, indefinitely. We originally reassessed the useful
life of
the 1999 license to be indefinite, based on the guidelines
provided by paragraphs 53 and 11 of SFAS No. 142, Goodwill
and Other Intangible Assets.
Management has now concluded a 10 year life is appropriate
based on our
going concern opinion for 2002 and 2003. Therefore, we
restored the
estimated economic useful life to the original 10 years
and have
recalculated annual amortization accordingly. This adjustment
increased
the retained deficit at December 31, 2003 (for the prior
years’
amortization and related income tax effects) and decreased
net income by
$856,685, net of additional amortization and related
income taxes, for the
year ended December 31, 2004. There was no net effect
on the consolidated
statements of cash flows for the years ended December
31, 2003 and 2004,
respectively.
|
| • |
We
erroneously treated the 2004 rebates reserve adjustment
of $266,301 as an
expense recovery in operating expenses. The correct
presentation is as an
adjustment to revenue, as provided by EITF Issue
No. 01-09, Accounting
for Consideration Given by a Vendor to a Customer
(Including a Reseller of
the Vendor’s Products). In
addition, we reassessed the adequacy of our rebates reserve at
December 31, 2003 and allocated $124,262 of the
total adjustment to fiscal
year 2003 with the remaining $142,039 allocated to fiscal year
2004. See Note 11 - Rebate Reserve
Adjustment.
|
| • |
We
erroneously treated the warrants issued to
a New York based private
investment partnership in connection with a
private placement as equity.
The correct presentation is as a liability
adjusted for changes in fair
value, at each balance sheet date, through
the consolidated statements of
operations, as provided by EITF 00-19, Accounting
for Derivative Financial Instruments Indexed
to, and Potentially Settled
in, a Company’s Own Stock.
We
reclassified the initial fair value of the
warrants ($4,375,000 at July
19, 2004) as a current liability ($1,968,750
at December 31, 2004) and
have included the net change in fair value
through December 31, 2004
($291,672) in Other Expenses on the consolidated
statements of operations.
See Note 9 - Stockholders’
Equity.
|
| • |
During
the year ended December 31, 2003, we made the decision
to no longer
provide support for certain of our products and destroyed
all remaining
inventory of those products. We originally recorded this
as a
non-recurring item in the “Other income (expense)” section of the
consolidated statements of operations. We revised the
consolidated
statement of operations for the year ended December 31,
2003 to reflect
this obsolete inventory ($60,792) in cost of
sales.
|
| • |
During
the year ended December 31, 2003, we reached a final
settlement agreement
in our dispute with Zondervan and TLC. As part of the
settlement process,
we conducted an internal audit (verified by an independent
auditor
provided by TLC) of the accrued royalties owed Zondervan.
The audit
provided that accrued royalties were overstated due to
the 2001 bad debt
recognition of the trade accounts receivable balance
of TLC, which had
been accumulated since July 1999. The amount overstated
had remained part
of the dispute with Zondervan and remained in our liabilities
until the
final settlement was reached in 2003 due to the uncertainty
of the settled
amount. We originally reported the adjustment of $583,628
as a
non-recurring item in the “Other income (expense)” section of the
consolidated statement of operations. The revised consolidated
statement
of operations for the year ended December 31, 2003 reflects
the adjustment
as “Other income” in the “Other income (expense)” section.
|
| • |
During
the year ended December 31, 2003, we reclassified loan
proceeds, and the
corresponding accrued interest payable, that were previously
recorded as
an unsecured note payable. The proceeds were initially
recorded as an
unsecured note payable based on an oral understanding
with an employee of
a third-party consultant in 1999. We had historically
accrued interest on
the outstanding balance at 9%, the rate deemed reasonable
by management at
the time of the oral agreement. We continued to accrue
interest on the
proceeds until we made the determination to reclassify
the proceeds and
accumulated accrued interest. The determination to reclassify
the
obligation, and related accrued interest, was made on
the basis of the
combined facts that (i) the obligation exists, if at
all, solely pursuant
to an oral loan agreement made in 1999 in the State of
North Carolina with
a representative of the party to whom the obligation
was believed to have
been owed, (ii) no party has ever made any demand for
repayment thereof
despite the fact that no payments have ever been made
on the obligation,
(iii) the party believed to be owed the obligation, upon
inquiry, claims
no record of any such obligation, and (iv) the State
of North Carolina
Statute of Limitations applicable to oral agreements,
believed to govern
the continued enforceability of the obligation, had expired.
We originally
reported the reclassification as a non-recurring item
of $866,516 in the
“Other income (expense)” section of the consolidated statement of
operations. The revised consolidated statement of operations
for the year
ended December 31, 2003 reflects the adjustment as “Other income” in the
“Other income (expense)” section.
|
| • |
During
the three months ended March 31, 2004, and as a direct
result of the
settlement with Zondervan and TLC, we wrote-off inventory
containing
content from Zondervan. Though not technologically obsolete,
we were
unable to sell the inventory under the terms of the settlement.
We
originally recorded the $32,396 as a non-recurring item in the “Other
income (expense)” section of the consolidated statement of operations.
The
revised condensed consolidated statement of operations
for the year ended
December 31, 2004 reflects this inventory adjustment
in cost of sales.
|
| • |
During
the three months ended September 30, 2004, we settled
an agreement with
Swartz Private Equity for early termination. In connection
therewith, we
issued 295,692 shares of common stock valued at $0.10
per share and paid a
cash lump sum of $125,000. We originally recorded this
transaction as
expenses incurred in a withdrawn public offering and
reflected it as a
non-recurring item of $154,569 in the consolidated statement
of
operations. The revised condensed consolidated statement
of operations for
the year ended December 31, 2004 reflects this transaction
as “Other
expenses” in the “Other income (expense)” section.
|
| • |
During
the three months ended September 30, 2004, we negotiated
settlement with
several of our creditors. The debt extinguishment ($1,002,090
total) was
originally reported as an extraordinary item, net of
income tax effects
($601,216), on the consolidated statement of operations.
The revised
condensed consolidated statement of operations for the
year ended December
31, 2004 includes this transaction in “Other
income”.
|
We
also
expanded footnote disclosures for stockholders’ equity (major assumptions used
in valuation of the warrants using the Black-Scholes valuation
method),
supplemental cash flow information (property and equipment acquired
under
capital lease) and commitments and contingencies (employment agreements
and
potential additional rebate liability).
A
summary of the effects of these changes is as
follows:
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||||||||||
|
December
31, 2004
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Current
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
341,359
|
$
|
341,359
|
$
|
---
|
||||||||||
|
Accounts
receivable, trade
|
566,819
|
566,819
|
---
|
|||||||||||||
|
Inventories
|
234,000
|
234,000
|
---
|
|||||||||||||
|
Deferred
income taxes, net
|
300,191
|
300,191
|
---
|
|||||||||||||
|
Other
current assets
|
109,078
|
109,078
|
---
|
|||||||||||||
|
Total
current assets
|
1,551,447
|
1,551,447
|
---
|
|||||||||||||
|
Property
and equipment, net
|
131,019
|
131,019
|
---
|
|||||||||||||
|
Software
license, net
|
2,513,158
|
2,265,783
|
(247,375
|
)
|
(a)
|
|||||||||||
|
Capitalized
software development costs, net
|
701,289
|
701,289
|
---
|
|||||||||||||
|
Deferred
income taxes, net
|
253,968
|
157,840
|
(96,128
|
)
|
(b)
|
|||||||||||
|
Restricted
cash
|
50,354
|
50,354
|
---
|
|||||||||||||
|
Other
assets
|
94,101
|
94,101
|
---
|
|||||||||||||
|
Total
assets
|
$
|
5,295,336
|
$
|
4,951,833
|
$
|
(343,503
|
)
|
|||||||||
|
|
||||||||||||||||
|
Liabilities
and stockholders’ equity
|
||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||
|
Current
maturities of long-term debt
|
$
|
35,495
|
$
|
35,495
|
$
|
---
|
||||||||||
|
Accrued
royalties
|
287,514
|
287,514
|
---
|
|||||||||||||
|
Accounts
payable, trade
|
621,804
|
621,804
|
---
|
|||||||||||||
|
Accrued
payroll
|
209,984
|
209,984
|
---
|
|||||||||||||
|
Reserve
for sales returns
|
100,180
|
100,180
|
---
|
|||||||||||||
|
Rebates
payable
|
29,561
|
29,561
|
---
|
|||||||||||||
|
Payroll
taxes payable
|
8,235
|
8,235
|
---
|
|||||||||||||
|
Derivatives
|
--- | 1,968,750 | 1,968,750 |
(d)
|
||||||||||||
|
Other
current liabilities
|
90,373
|
90,370
|
(3
|
)
|
(c)
|
|||||||||||
|
Total
current liabilities
|
1,383,146
|
3,351,893
|
1,968,747
|
|
||||||||||||
|
Long-term
debt
|
42,972
|
42,972
|
---
|
|||||||||||||
|
Deferred
income taxes, net
|
253,968
|
157,840
|
(96,128
|
)
|
(b)
|
|||||||||||
|
Stockholders’
equity (Note 9):
|
||||||||||||||||
|
Common
stock
|
48,620
|
48,620
|
---
|
|||||||||||||
|
Paid-in
capital
|
9,198,417
|
7,521,339
|
(1,677,078
|
) |
(d)
|
|||||||||||
|
Retained
(deficit)
|
(5,631,787
|
)
|
(6,170,831
|
)
|
(539,044
|
)
|
(a)
|
|||||||||
|
Total
stockholders’ equity
|
3,615,250
|
1,399,128
|
(2,216,122
|
)
|
||||||||||||
|
Total
liabilities and stockholders’ equity
|
$
|
5,295,336
|
$
|
4,951,833
|
$
|
(343,503
|
)
|
|||||||||
|
|
||||||||||||||||
|
(a)
Decrease
from reclassification of 2002 debt forgiveness
and additional accumulated
amortization.
|
||||||||||||||||
|
(b)
Decrease
from effects of recognizing additional
amortization.
|
||||||||||||||||
|
(c)
Rounding
difference.
|
||||||||||||||||
| (d) Reclassification of common stock warrants as a derivative under EITF 00-19. Liability adjusted to fair value. | ||||||||||||||||
|
Findex.com,
Inc.
|
||||||||||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||||||||||
|
December
31, 2003
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Current
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
36,339
|
$
|
41,668
|
$
|
5,329
|
(a)
|
|||||||||
|
Accounts
receivable, trade
|
365,803
|
365,803
|
---
|
|||||||||||||
|
Inventories
|
272,600
|
272,600
|
---
|
|||||||||||||
|
Other
current assets
|
21,920
|
21,920
|
---
|
|||||||||||||
|
Total
current assets
|
696,662
|
701,991
|
5,329
|
|||||||||||||
|
Property
and equipment, net
|
65,603
|
65,603
|
---
|
|||||||||||||
|
Software
license, net
|
2,513,158
|
2,769,291
|
256,133
|
(b)
|
||||||||||||
|
Capitalized
software development costs, net
|
584,706
|
584,706
|
---
|
|||||||||||||
|
Restricted
cash
|
105,683
|
100,354
|
(5,329
|
)
|
(a)
|
|||||||||||
|
Other
assets
|
63,818
|
63,818
|
---
|
|||||||||||||
|
Total
assets
|
$
|
4,029,630
|
$
|
4,285,763
|
$
|
256,133
|
||||||||||
|
|
||||||||||||||||
|
Liabilities
and stockholders’ equity
|
||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||
|
Notes
payable (Note 6)
|
$
|
89,999
|
$
|
89,999
|
$
|
---
|
||||||||||
|
Current
maturities of long-term debt
|
126,876
|
126,876
|
---
|
|||||||||||||
|
Accrued
royalties
|
1,499,006
|
1,499,006
|
---
|
|||||||||||||
|
Accounts
payable, trade
|
989,354
|
989,354
|
---
|
|||||||||||||
|
Accrued
payroll
|
216,767
|
216,767
|
---
|
|||||||||||||
|
Reserve
for sales returns
|
57,572
|
57,572
|
---
|
|||||||||||||
|
Reserve
for rebates payable
|
357,451
|
233,189
|
(124,262
|
) |
(e)
|
|||||||||||
|
Payroll
taxes payable
|
221,600
|
221,600
|
---
|
|||||||||||||
|
Other
current liabilities
|
89,554
|
89,554
|
---
|
|||||||||||||
|
Total
current liabilities
|
3,648,179
|
3,523,917
|
(124,262
|
) | ||||||||||||
|
Long-term
debt (Note 7)
|
73,764
|
73,763
|
(1
|
)
|
(c)
|
|||||||||||
|
Deferred
income taxes, net (Note 8)
|
1,051,327
|
717,151
|
(334,176
|
)
|
(d)
|
|||||||||||
|
Commitments
and contingencies (Note 18)
|
||||||||||||||||
|
Stockholders’
equity (Note 9):
|
||||||||||||||||
|
Preferred
stock
|
51
|
51
|
---
|
|||||||||||||
|
Common
stock
|
21,011
|
21,011
|
---
|
|||||||||||||
|
Paid-in
capital
|
7,080,629
|
7,080,629
|
---
|
|||||||||||||
|
Retained
(deficit)
|
(7,845,331
|
)
|
(7,130,759
|
)
|
714,572
|
|||||||||||
|
Total
stockholders’ equity
|
(743,640
|
)
|
(29,068
|
)
|
714,572
|
|||||||||||
|
Total
liabilities and stockholders’ equity
|
$
|
4,029,630
|
$
|
4,285,763
|
$
|
256,133
|
||||||||||
|
|
||||||||||||||||
|
(a)
Reclassify
cash held for repurchase of invoices assigned to factor
as corresponding
liability classified
as current liability.
|
||||||||||||||||
|
(b)
Decrease
from reclassification of 2002 debt forgiveness and additional
accumulated
amortization.
|
||||||||||||||||
|
(c)
Rounding
difference.
|
||||||||||||||||
|
(d)
Decrease
from effects of recognizing additional
amortization.
|
||||||||||||||||
| (e) Decrease from reassessment of reserve balance. | ||||||||||||||||
F-30
|
Findex.com,
Inc.
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||||||
|
Year
Ended December 31, 2004
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Revenues,
net of reserves and allowances
|
$
|
5,218,784
|
$
|
5,422,097
|
$
|
203,313
|
(a)
|
|||||||||
|
Cost
of sales
|
1,745,664
|
1,820,553
|
74,889
|
(b)
|
||||||||||||
|
Gross
profit
|
3,473,120
|
3,601,544
|
128,424
|
|||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Sales
and marketing
|
1,294,377
|
1,280,761
|
(13,616
|
)
|
(c)
|
|||||||||||
|
General
and administrative
|
2,309,837
|
2,309,838
|
1
|
(d)
|
||||||||||||
|
Rebate
reserve adjustment
|
(266,301
|
)
|
---
|
266,301
|
(a)
|
|||||||||||
|
Bad
debt expense
|
22,778
|
22,778
|
---
|
|||||||||||||
|
Amortization
expense
|
16,343
|
519,850
|
503,507
|
(e)
|
||||||||||||
|
Depreciation
expense
|
44,478
|
44,478
|
---
|
|||||||||||||
|
Total
operating expenses
|
3,421,512
|
4,177,705
|
756,193
|
|||||||||||||
|
Earnings
(loss) from operations
|
51,608
|
(576,161
|
)
|
(627,769
|
)
|
|||||||||||
|
Interest
income
|
1,378
|
1,378
|
---
|
|||||||||||||
|
Other
income
|
9,276
|
1,011,366
|
1,002,090
|
(f)
|
||||||||||||
|
Nonrecurring
items
|
(154,569
|
)
|
---
|
154,569
|
(g)
|
|||||||||||
|
Other
adjustments
|
---
|
(154,569
|
)
|
(154,569
|
)
|
(g)
|
||||||||||
| Loss on fair value adjustment of derivatives | --- | (291,672 | ) | (291,672 | ) |
(k)
|
||||||||||
|
Loss
on disposition of assets
|
(141
|
)
|
(141
|
)
|
---
|
|||||||||||
|
Interest
expense
|
(42,007
|
)
|
(42,007
|
)
|
---
|
|||||||||||
|
Loss
before income taxes
|
(134,455
|
)
|
(51,806
|
) |
82,649
|
|||||||||||
|
Provision
for income taxes
|
1,750,908
|
1,015,859
|
(735,049
|
)
|
(h)
|
|||||||||||
|
Income
before extraordinary item
|
1,616,453
|
964,053
|
(652,400
|
)
|
||||||||||||
|
Extraordinary
item, net of applicable taxes
|
601,216
|
---
|
(601,216
|
)
|
(i)
|
|||||||||||
|
Net
income
|
$
|
2,217,669
|
$
|
964,053
|
$
|
(1,253,616
|
)
|
|||||||||
|
Basic
earnings per share:
|
||||||||||||||||
|
Basic
|
$
|
0.06
|
$
|
0.03
|
$
|
(0.03
|
)
|
(j)
|
||||||||
|
Diluted
|
$
|
0.06
|
$
|
0.03
|
$
|
(0.03
|
)
|
(j)
|
||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||
|
Basic
|
34,520,754
|
34,520,754
|
---
|
|||||||||||||
|
Diluted
|
35,195,840
|
35,195,840
|
---
|
|||||||||||||
|
(a)
Reclassification
of adjustment to reserve for rebates from sales and
marketing and other
operating expenses.
|
||||||||||||||||
|
(b)
Reclassification
of fulfillment expenses from sales and marketing
expenses.
|
||||||||||||||||
|
(c)
Reclassification
of fulfillment expenses and rebates expense to sales
and cost of
sales.
|
||||||||||||||||
|
(d)
Rounding
difference.
|
||||||||||||||||
|
(e)
Increase
from changing software license agreement from indefinite
life to 10 year
life.
|
||||||||||||||||
|
(f)
Increase
from reclassification of debt forgiveness from Extraordinary
item.
|
||||||||||||||||
|
(g)
Reclassification
of Non-recurring items as Other adjustments.
|
||||||||||||||||
|
(h)
Deferred
tax effects of changes to software license
agreement.
|
||||||||||||||||
|
(i)
Reclassification
of debt forgiveness as other income and the related
income tax
effects.
|
||||||||||||||||
|
(j)
Reduction
in EPS from net effect of above revisions.
|
||||||||||||||||
| (k) Adjustment to fair value of derivatives per EITF 00-19. | ||||||||||||||||
|
Findex.com,
Inc.
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||||||
|
Year
Ended December 31, 2003
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Revenues,
net of reserves and allowances
|
$
|
4,390,757
|
$
|
4,560,911
|
$
|
170,154
|
(a)
|
|||||||||
|
Cost
of sales
|
1,284,608
|
1,327,983
|
43,375
|
(b)
|
||||||||||||
|
Gross
profit
|
3,106,149
|
3,232,928
|
126,779
|
|||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Sales
and marketing
|
813,438
|
815,954
|
2,516
|
(c)
|
||||||||||||
|
General
and administrative
|
1,751,235
|
1,751,234
|
(1
|
)
|
(d)
|
|||||||||||
|
Nonrecurring
items
|
(583,628
|
)
|
---
|
583,628
|
(e)
|
|||||||||||
|
Bad
debt expense
|
23,208
|
23,208
|
---
|
|||||||||||||
|
Amortization
expense
|
45,157
|
504,427
|
459,270
|
(f)
|
||||||||||||
|
Depreciation
expense
|
43,224
|
43,224
|
---
|
|||||||||||||
|
Total
operating expenses
|
2,092,634
|
3,138,047
|
1,045,413
|
|||||||||||||
|
Earnings
from operations
|
1,013,515
|
94,881
|
|
(918,634
|
)
|
|||||||||||
|
Interest
income
|
9,727
|
9,727
|
---
|
|||||||||||||
|
Other
income
|
7,977
|
1,458,121
|
1,450,144
|
(e)
|
||||||||||||
|
Nonrecurring
items
|
866,516
|
---
|
(866,516
|
)
|
(e)
|
|||||||||||
|
Loss
on disposition of assets
|
(2,659
|
)
|
(2,659
|
)
|
---
|
|||||||||||
|
Interest
expense
|
(87,144
|
)
|
(87,144
|
)
|
---
|
|||||||||||
|
Income
before income taxes
|
1,807,932
|
1,472,926
|
(335,006
|
)
|
||||||||||||
|
Provision
for income taxes
|
33,567
|
226,461
|
192,894
|
(g)
|
||||||||||||
|
Net
income
|
$
|
1,841,499
|
$
|
1,699,387
|
$
|
(142,112
|
)
|
|||||||||
|
Basic
earnings per share:
|
||||||||||||||||
|
Basic
|
$
|
0.09
|
$
|
0.08
|
$
|
(0.01
|
)
|
(h)
|
||||||||
|
Diluted
|
$
|
0.08
|
$
|
0.08
|
$
|
---
|
|
|
||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||
|
Basic
|
20,411,438
|
20,411,438
|
---
|
|||||||||||||
|
Diluted
|
22,365,438
|
22,365,438
|
---
|
|||||||||||||
|
(a)
Reclassification
of adjustment to reserve for rebates from sales and marketing
expenses.
|
||||||||||||||||
|
(b)
Reclassification
of fulfillment expense from sales and marketing
expenses.
|
||||||||||||||||
|
(c)
Reclassification
of adjustment to reserve for rebates to revenues and
fulfillment expense
to cost of sales.
|
||||||||||||||||
|
(d)
Rounding
difference.
|
||||||||||||||||
|
(e)
Reclassification
of Nonrecurring items as Other income.
|
||||||||||||||||
|
(f)
Increase
from changing software license agreement from indefinite
life to 10 year
life.
|
||||||||||||||||
|
(g)
Deferred
tax effects of changes to software license
agreement.
|
||||||||||||||||
|
(h)
Reduction
in EPS from net effect of above
revisions.
|
||||||||||||||||
F-32
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||||||
|
Year
Ended December 31, 2004
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||||||
|
Cash
received from customers
|
$
|
5,062,396
|
$
|
5,062,396
|
$
|
---
|
||||||||||
|
Cash
paid to suppliers and employees
|
(5,673,088
|
)
|
(5,673,088
|
)
|
---
|
|||||||||||
|
Other
operating receipts
|
9,276
|
9,276
|
---
|
|||||||||||||
|
Interest
paid
|
(37,928
|
)
|
(37,928
|
)
|
---
|
|||||||||||
|
Interest
received
|
1,378
|
1,378
|
---
|
|||||||||||||
|
Income
taxes (paid) refunded
|
(5,702
|
)
|
(5,702
|
)
|
---
|
|||||||||||
|
Net
cash (used) by operating activities
|
(643,668
|
)
|
(643,668
|
)
|
---
|
|||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||
|
Acquisition
of property, plant and equipment
|
(58,247
|
)
|
(58,247
|
)
|
---
|
|||||||||||
|
Software
development costs
|
(692,063
|
)
|
(692,063
|
)
|
---
|
|||||||||||
|
Website
development costs
|
(31,838
|
)
|
(31,838
|
)
|
---
|
|||||||||||
|
Deposits
refunded
|
40,545
|
35,216
|
(5,329
|
)
|
(a)
|
|||||||||||
|
Net
cash (used) by investing activities
|
(741,603
|
)
|
(746,932
|
)
|
(5,329
|
)
|
||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||
|
Payments
made on line of credit, net
|
(20,935
|
)
|
(20,935
|
)
|
---
|
|||||||||||
|
Payments
made on long-term notes payable
|
(227,727
|
)
|
(227,727
|
)
|
---
|
|||||||||||
|
Proceeds
from convertible notes payable
|
240,000
|
240,000
|
---
|
|||||||||||||
|
Proceeds
from issuance of stock and warrants
|
1,750,000
|
1,750,000
|
---
|
|||||||||||||
|
Stock
offering costs paid
|
(51,047
|
)
|
(51,047
|
)
|
---
|
|||||||||||
|
Net
cash provided by financing activities
|
1,690,291
|
1,690,291
|
---
|
|||||||||||||
|
Net
increase in cash and cash equivalents
|
305,020
|
299,691
|
(5,329
|
)
|
||||||||||||
|
Cash
and cash equivalents, beginning of year
|
36,339
|
41,668
|
5,329
|
(a)
|
||||||||||||
|
Cash
and cash equivalents, end of year
|
$
|
341,359
|
$
|
341,359
|
$
|
---
|
||||||||||
|
Reconciliation
of net income to cash flows from operating activities:
|
||||||||||||||||
|
Net
income
|
$
|
2,217,669
|
$
|
964,053
|
$
|
(1,253,616
|
)
|
(b)
|
||||||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||||||||
|
(used)
by operating activities:
|
||||||||||||||||
|
Software
development costs amortized
|
575,481
|
575,481
|
---
|
|||||||||||||
|
Stock
and warrants issued for services
|
178,929
|
178,929
|
---
|
|||||||||||||
|
Rebate
reserve adjustment
|
266,301
|
(142,039
|
)
|
(408,340
|
)
|
(c)
|
||||||||||
|
Provision
for bad debts
|
22,778
|
22,778
|
---
|
|||||||||||||
|
Depreciation
& amortization
|
60,821
|
564,328
|
503,507
|
(d)
|
||||||||||||
|
Loss
on disposal of property, plant and equipment
|
141
|
141
|
---
|
|||||||||||||
|
Loss
on fair value adjustment of derivative
|
--- | 291,672 | 291,672 |
(g)
|
||||||||||||
|
Debt
forgiveness
|
---
|
(1,002,090
|
)
|
(1,002,090
|
)
|
(e)
|
||||||||||
|
Extraordinary
item
|
(1,002,090
|
)
|
---
|
1,002,090
|
(e)
|
|||||||||||
|
Change
in assets and liabilities:
|
||||||||||||||||
|
(Increase)
in accounts receivable
|
(223,794
|
)
|
(223,794
|
)
|
---
|
|||||||||||
|
Decrease
in inventories
|
38,600
|
38,600
|
---
|
|||||||||||||
|
(Increase)
in refundable income taxes
|
(2,948
|
)
|
(2,948
|
)
|
---
|
|||||||||||
|
(Increase)
in prepaid expenses
|
(84,211
|
)
|
(84,211
|
)
|
---
|
|||||||||||
|
(Decrease)
in accrued royalties
|
(324,360
|
)
|
(324,360
|
)
|
---
|
|||||||||||
|
(Decrease)
increase in accounts payable
|
(271,198
|
)
|
(271,198
|
)
|
---
|
|||||||||||
|
(Decrease)
in income taxes payable
|
(1,270
|
)
|
(1,270
|
)
|
---
|
|||||||||||
|
(Decrease)
in deferred taxes
|
(1,351,518
|
)
|
(1,017,343
|
)
|
334,175
|
(f)
|
||||||||||
|
(Decrease)
in other liabilities
|
(742,999
|
)
|
(210,397
|
)
|
532,602
|
(c)
|
||||||||||
|
Net
cash (used) by operating activities
|
$
|
(643,668
|
)
|
$
|
(643,668
|
)
|
$
|
---
|
||||||||
|
(a)
Reclassify
cash held for repurchase of invoices assigned to
factor as corresponding
liability classified
as current liability.
|
||||||||||||||||
|
(b)
Net
changes made to net income.
|
||||||||||||||||
|
(c)
Correction
in classification of adjustment to reserve for rebates
from adjustment to
operating expense to adjustment
to revenue.
|
||||||||||||||||
|
(d)
Additional
amortization from change to economic life of software
license
agreement.
|
||||||||||||||||
|
(e)
Reclassification
from Extraordinary item to Debt forgiveness.
|
||||||||||||||||
|
(f)
Decrease
from tax effects of recognizing additional
amortization.
|
||||||||||||||||
| (g) Adjustment to fair value of derivatives per EITF 00-19. | ||||||||||||||||
|
Findex.com,
Inc.
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||||||
|
Year
Ended December 31, 2003
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||||||
|
Cash
received from customers
|
$
|
4,228,649
|
$
|
4,228,649
|
$
|
---
|
||||||||||
|
Cash
paid to suppliers and employees
|
(3,364,838
|
)
|
(3,364,838
|
)
|
---
|
|||||||||||
|
Other
operating receipts
|
7,977
|
7,977
|
---
|
|||||||||||||
|
Interest
paid
|
(43,203
|
)
|
(43,203
|
)
|
---
|
|||||||||||
|
Interest
received
|
9,727
|
9,727
|
---
|
|||||||||||||
|
Income
taxes refunded
|
43,909
|
43,909
|
---
|
|||||||||||||
|
Net
cash provided by operating activities
|
882,221
|
882,221
|
---
|
|||||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||
|
Acquisition
of property, plant and equipment
|
(18,433
|
)
|
(18,433
|
)
|
---
|
|||||||||||
|
Software
development costs
|
(659,486
|
)
|
(659,486
|
)
|
---
|
|||||||||||
|
Website
development costs
|
(35,684
|
)
|
(35,684
|
)
|
---
|
|||||||||||
|
Deposits
paid
|
(500
|
)
|
(100,854
|
)
|
(100,354
|
)
|
(a)
|
|||||||||
|
Net
cash (used) by investing activities
|
(714,103
|
)
|
(814,457
|
)
|
(100,354
|
)
|
||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||
|
Proceeds
from line of credit, net
|
14,657
|
14,657
|
---
|
|||||||||||||
|
Payments
made on long-term notes payable
|
(79,404
|
)
|
(79,404
|
)
|
---
|
|||||||||||
|
Net
cash (used) by financing activities
|
(64,747
|
)
|
(64,747
|
)
|
---
|
|||||||||||
|
Net
increase in cash and cash equivalents
|
103,371
|
3,017
|
(100,354
|
)
|
(a)
|
|||||||||||
|
Cash
and cash equivalents, beginning of year
|
(67,032
|
)
|
38,651
|
105,683
|
(c)
|
|||||||||||
|
Cash
and cash equivalents, end of year
|
$
|
36,339
|
$
|
41,668
|
$
|
5,329
|
(b)
|
|||||||||
|
Reconciliation
of net income to cash flows from operating activities:
|
||||||||||||||||
|
Net
income
|
$
|
1,841,499
|
$
|
1,699,387
|
$
|
(142,112
|
)
|
|||||||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||||||||
|
provided
by operating activities:
|
||||||||||||||||
|
Software
development costs amortized
|
355,282
|
355,282
|
---
|
|||||||||||||
|
Stock
and warrants issued for services
|
52,750
|
52,750
|
---
|
|||||||||||||
|
Rebate
reserve adjustment
|
--- | (124,262 | ) | (124,262 | ) |
(g)
|
||||||||||
|
Provision
for bad debts
|
23,208
|
23,208
|
---
|
|||||||||||||
|
Depreciation
& amortization
|
88,381
|
547,651
|
459,270
|
(d)
|
||||||||||||
|
Loss
on disposal of property, plant and equipment
|
2,659
|
2,659
|
---
|
|||||||||||||
|
Debt
forgiveness
|
---
|
(650,000
|
)
|
(650,000
|
)
|
(e)
|
||||||||||
|
Non-cash
non-recurring item
|
(650,000
|
)
|
---
|
650,000
|
(e)
|
|||||||||||
|
Change
in assets and liabilities:
|
||||||||||||||||
|
(Increase)
in accounts receivable
|
(160,770
|
)
|
(160,770
|
)
|
---
|
|||||||||||
|
Decrease
in inventories
|
144,100
|
144,100
|
---
|
|||||||||||||
|
Decrease
in refundable income taxes
|
43,909
|
43,909
|
---
|
|||||||||||||
|
Decrease
in prepaid expenses
|
20,869
|
20,869
|
---
|
|||||||||||||
|
(Decrease)
in accrued royalties
|
(631,607
|
)
|
(631,607
|
)
|
---
|
|||||||||||
|
Increase
in accounts payable
|
81,793
|
81,793
|
---
|
|||||||||||||
|
(Decrease)
in deferred taxes
|
(33,567
|
)
|
(226,463
|
)
|
(192,896
|
)
|
(f)
|
|||||||||
|
(Decrease)
in other liabilities
|
(296,285
|
)
|
(296,285
|
)
|
---
|
|||||||||||
|
Net
cash provided by operating activities
|
$
|
882,221
|
$
|
882,221
|
$
|
---
|
||||||||||
|
(a)
Reclassify
cash held by merchant banker as a deposit from restricted
cash.
|
||||||||||||||||
|
(b)
Reclassify
cash held for repurchase of invoices assigned to factor
as corresponding
liability classified as a current liability.
|
||||||||||||||||
|
(c)
Net
cash reclassification.
|
||||||||||||||||
|
(d)
Additional
amortization from change to economic life of software
license
agreement.
|
||||||||||||||||
|
(e)
Reclassification
of non-cash non-recurring item as debt forgiveness.
|
||||||||||||||||
|
(f)
Decrease
from tax effects of recognizing additional
amortization.
|
||||||||||||||||
| (g) Adjustment from reassessment of rebate reserve adequacy. | ||||||||||||||||
There
were no reportable events under this Item 8 during the year ended December
31,
2004.
(a)
Formation
of Disclosure Controls and Procedures Officer Committee
Our
Disclosure Controls and Procedures Officer Committee (the “Disclosure Policy
Committee”) was formed in September 2002 and reports directly to our Chief
Executive Officer and Chief Financial Officer. The Disclosure Policy
Committee
has implemented disclosure controls and procedures that meet the
standards
established by Rule 13a-15 of the Exchange Act. These controls
and procedures
have been reviewed and adopted by the audit committee of our board
of
directors.
Disclosure
Controls and Procedures
The
Disclosure Policy Committee is primarily responsible for establishing
and
maintaining disclosure controls and procedures designed to ensure that
the
information required to be disclosed in our reports filed or submitted
under the
Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized
and reported in a timely manner as specified in the rules and forms
set forth by
the United States SEC. These controls and procedures are designed to
ensure that
the information required to be disclosed in our reports is accumulated
and
communicated to our management, including our principal executive and
principal
financial officers, or other persons performing similar functions,
as
appropriate to allow timely decisions regarding required
disclosure.
Internal
Control over
Financial Reporting
The
Disclosure Policy Committee is also responsible for establishing and
maintaining
our internal controls over financial reporting. These controls are
effectuated
by our board of directors, management and other company personnel,
to provide
reasonable assurance regarding the reliability of our financial reporting
and
the preparation of our financial statements for external purposes in
accordance
with Generally Accepted Accounting Principles. These internal controls
and
procedures pertain to: (i) the maintenance of reasonably detailed records
that
accurately and fairly reflect transactions with respect to and the
disposition
of our assets; (ii) provide reasonable assurance that transactions
are recorded
as necessary so as to permit the preparation of financial statements
in
accordance with Generally Accepted Accounting Principles; (iii) provide
reasonable assurance that receipts and expenditures are being made
in accordance
with the authorization of our board of directors and management; and
(iv)
provide reasonable assurance regarding the prevention or timely detection
of the
unauthorized acquisition, use or disposition of our assets, that could
have a
material effect on our financial statements.
(b)
Evaluation of Disclosure Controls and Procedures and Annual Report
on Internal
Control over Financial Reporting
The
Disclosure Policy Committee meets quarterly within one week of the
last day of
the period in which a given report is due. Members provide information
that is
documented in the Quarterly Control and Procedures Report for the period
in
which a quarterly 10-QSB or annual 10-KSB report is due. This report
contains
attestations and documentation in regard to the following:
|
|
•
|
The
fact that internal controls have been reviewed as
of the end of the period covered by a given
report;
|
|
|
•
|
Any
concerns regarding weaknesses in internal
control;
|
|
|
•
|
Any
concerns relating to events that may require
disclosure;
|
|
|
•
|
Any
concerns relating to internal fraud/defalcation;
|
|
|
•
|
Potential
material losses;
|
|
|
•
|
New
off-balance sheet arrangements;
|
|
|
•
|
Material
amounts not reflected on the general
ledger.
|
The
Quarterly Control and Procedures Report is completed, signed and presented
to
the CEO and CFO prior to completion of the first draft of each 10-QSB
and
10-KSB. Because material issues may occur between regularly scheduled
quarterly
meetings, this report is to be generated by the disclosure policy appropriate
officers at anytime warranted. The CEO and CFO will consult with our
Disclosure
Policy Committee to determine any action that is necessary.
Our
CEO
and CFO have evaluated the effectiveness of the design and operation
of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Exchange Act) as of the end of the fiscal quarter covered by this
annual report on Form 10-KSB/A. Based on this evaluation, our CEO and
CFO have
concluded that these disclosure controls and procedures are effective
and
designed to ensure that the information required to be disclosed in
our reports
filed or submitted under the Exchange, is recorded, processed, summarized
and reported within the requisite time periods.
Our
CEO
and CFO have evaluated the effectiveness of the design and operation
of our
internal control over financial reporting (as defined in Rule 13a-15(f)
under
the Exchange Act) as of the end of the fiscal year covered by this annual
report on Form 10-KSB/A. Based on this evaluation, our CEO and CFO
have
concluded that these internal controls over financial reporting are
effective
and provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of our financial statements for external
purposes
in accordance with Generally Accepted Accounting Principles.
During
the course of their evaluation our CEO and CFO did not discover any
fraud
involving management or any other personnel who play a significant
role in our
disclosure controls and procedures or internal controls over financial
reporting. Furthermore, because there were no significant deficiencies
and/or
material weaknesses discovered no remedial measures were necessary
or taken
during the period covered by this report to correct any such
deficiencies.
(c) Changes
in Internal Control over Financial Reporting
No
changes in our disclosure controls and procedures, internal controls
over
financial reporting or other factors have occurred during the fiscal
quarter
covered by this report that would materially affect or be reasonably
likely to
materially affect our disclosure controls and procedures or internal
controls
over financial reporting.
There
were no reportable events under this Item 8B during the year ended
December 31,
2004.
Our
directors and executive officers and their ages as of June 7, 2005 were as
follows:
|
Name
|
Age
|
Position
|
||
|
Steven
Malone
|
38
|
Director,
Chairman of the Board and President
|
||
|
Henry
M. Washington, Ph.D.
|
61
|
Director
|
||
|
John
A. Kuehne, CA
|
48
|
Director
|
||
|
Kirk
R. Rowland, CPA
|
45
|
Director
and Chief Financial Officer
|
||
|
William
Terrill
|
48
|
Chief
Technology Officer
|
||
|
Brittian
Edwards
|
42
|
Vice
President, CBA Sales and Licensing
|
||
|
Chad
Grosse-Rhode
|
35
|
Vice
President, Sales and Marketing
|
Steven
Malone - Chairman of the Board of Directors, President and Chief Executive
Officer
Mr.
Malone has served as our President and Chief Executive Officer since
March 2001
and as a director and Chairman of the Board since February 2002. Between
July
2000 and March 2001, Mr. Malone was Senior Vice President and between
June 1999
and July 2000 he was a Vice President. Mr. Malone possesses over seventeen
years
of experience in the computer industry, with the last eleven focused
on software
sales. As a National Account Manager from 1992 to 1996 for Grolier
Interactive,
he was responsible for their largest retail and distribution accounts.
As
Director of Corporate Sales from 1996 to 1998 for Software Publishing
Corporation, he was responsible for the on-going sales growth of premiere
corporate products, such as the award winning Harvard Graphics, as
well as the
introduction of several new products to the corporate marketplace.
As Director
of Sales from 1998 to 1999 for InfoUSA, he was responsible for sales
and
marketing of InfoUSA’s products to retail, distribution, OEM and corporate
accounts.
Henry
M.
Washington, Ph.D. - Director
Dr.
Washington has served as one of our directors since December 2000.
He is also
presently President of Wren Enterprises Corporation, a position that
he has held
since January 2005.
Wren
Enterprises is a private manufacturing solutions company working with
automotive, non-automotive, agricultural markets, utilities and government
agencies providing plastic, metal and fabrication. Prior to his position
with
Wren, Dr. Washington served as the interim President for Jamestown
Plastic
Molders Corporation from January 2001 to April 2004. During the year
of 2000,
Dr. Washington served as Managing Director of Rilas & Rogers, LLC, an
international consulting firm located in Detroit. Dr. Washington has
held
short-term assignments with the U.S. Department of Commerce, where
he was
Executive Director from 1995
to 1998
of the
Department’s Minority Business Opportunity Committee. He currently serves on
several national organizations including the American Association of
Christian
Counselors, The Black Caucus International Think Tank, and the International
Trade and Development Organization dealing with global security issues.
Dr.
Washington holds a Bachelor of Management and Metaphysics degree, a
Masters of
Metaphysics and Theology degree, and a Doctorate degree in Metaphysical
Counseling, in each case from the University of Metaphysics, and in
each case
which are accredited by The International Metaphysical Ministry for
use by its
Ministry and for membership in The American Metaphysical Doctors Association.
John
A.
Kuehne, CA - Director
Mr.
Kuehne has served as one of our directors since December 2000. He
is also
currently a management consultant and the President of SmallCap Corporate
Partners Inc., (www.smallcap.ca),
a
corporate finance and investor communications advisory firm for microcap
public
companies. He has held this position since August 2003. Prior to
SmallCap, Mr.
Kuehne served as a management consultant with Alliance Corporate
Services Inc.
from July 2000 through to June 2003. Mr. Kuehne worked in finance
and accounting
for Deloitte & Touche for eight years. He also has industry experience,
including over seven years with Doman Industries Limited (1990 to
1999), a large
private Canadian forest products company, where he eventually became
Chief
Financial Officer. As the CFO of Doman Industries, Mr. Kuehne gained
practical
experience in corporate finance and mergers and acquisitions, completing
a US
$125 million senior note issue through Bear Stearns and the $140
million
acquisition of Pacific Forest Products. Mr. Kuehne holds a Bachelor
of Commerce
degree from the University of Alberta (1984) and a Masters of Management
from
the J.L.Kellogg Graduate School of Management at Northwestern University
(1990).
From June 2000 to May 2004 he served as a director of Prospector
Consolidated
Resources Inc., a Canadian public company. From January 2003 to November
2004 he
served as a director of Beau Pre Explorations Ltd., also a Canadian
public
company. Mr. Kuehne qualified as a Canadian Chartered Accountant
in 1983 and as
an American Certified Public Accountant in 1985.
Kirk
R.
Rowland, CPA - Chief Financial Officer
Mr.
Rowland has served as our Chief Financial Officer and as one of
our directors since April 2002. He served as our Vice President of Finance
from March 2001 to April 2002, and as our Director of Finance from
December 1999
through March 2001. Mr. Rowland has over seventeen years of experience
in public
accounting working in a multitude of industries, including insurance,
manufacturing, and agriculture. Most recently, and from 1992 to 1999
he was a
partner in Manning & Associates, P.C. a local Nebraska accounting firm. From
1984 to 1988, Mr. Rowland was a Senior Staff Accountant with KMG
Main Hurdman
(now KPMG), an international accounting firm, and from 1988 to 1992
he was an
Audit Supervisor with Sommer, Magnuson, & Dawson, P.C.
William
Terrill - Chief Technology Officer
Mr.
Terrill rejoined us in July 2002 as our Chief Technology Officer
after having
been involved with us from July 1999 to July 2000. He has over 25 years of
experience managing software divisions and technology efforts for
us, The
Learning Company, Mindscape, and The Software Toolworks. As Vice
President of
the Parsons Church Division for The Learning Company, from January
1999 to July
1999, Mr. Terrill managed a 30% annual revenue increase and shared
responsibilities in the transaction that resulted in our acquiring
that
division. Mr. Terrill was the Senior Vice President Reference Products
Division
for Mindscape from 1989 to 1995 managing revenues exceeding $14 million.
He has
extensive experience managing international software development
teams in China,
Singapore, United Kingdom, India, and Russia. Mr. Terrill has experience
with
joint ventures, spin-offs, mergers, IPOs, and corporate acquisitions.
In
addition, Mr. Terrill has lead software product marketing teams and
content/media acquisition efforts for over ten years. As
a
consultant from 1996 to 1998, Mr. Terrill has extensive experience
leading
large-scale product development and information technology efforts
for Navistar,
Nalco Chemical, American Express, Motorola, and IBM Global Services.
From July
2000 to July 2002, Mr. Terrill served as the IT Integration Program
Manager for
Blue Diamond Joint Venture between Ford Motor Company and International
Truck
and Engine Corporation.
Brittian
Edwards - Vice President of CBA Sales and Licensing
Mr.
Edwards has served as our Vice President of CBA Sales and Licensing since
July
2004. Mr. Edwards served as our Vice President of Sales from April 2002
to July
2004 and director of Christian Booksellers Association Sales from July
1999 to
April 2002. Mr. Edwards has been in the Christian Booksellers
Association marketplace for more than 17 years. He began his career in 1988
with LifeWay Christian Resources as LifeWay Christian Stores retail manager.
He
then worked successfully for Genesis Marketing Group from 1994 to 1995
as a
Sales Manager for Texas, Oklahoma, Louisiana and New Mexico. From there
he
served as a Product Manager for the largest Christian distributor, Spring
Arbor,
which is now owned by Ingram Book Group. He left Spring Arbor as National
Sales
Manager in 1988 to become the National Sales Manager for Parsons Technology,
then owned by Broderbund.
Chad
Grosse-Rhode - Vice President of Sales and Marketing
Mr.
Grosse-Rhode joined us in August 2004 as our Vice President of Sales and
Marketing. Mr. Grosse-Rhode was most recently with Summitsoft Corporation,
(www.summisoftcorp.com), from July 2003 to July 2004, where he served
as the
Vice President of Sales and Marketing. Summitsoft produces a full line
of small
business software products, which are available in both PC and
Macintosh®
platforms and are sold in most major secular retail outlets. Prior to
Summitsoft, Mr. Grosse-Rhode was General Manager of NewLeadsUSA from
April 1995
to June 2003, which is a subsidiary of InfoUSA. In this role, Mr. Grosse-Rhode
managed the compilation, production, marketing and sales of multiple
direct
marketing databases. Mr. Grosse-Rhode has over 10 years of senior management
experience in both sales and marketing.
Board
of Directors
Committees
There
are
currently two standing committees comprised of members of our board
of
directors. These include the audit committee and the compensation
committee.
Since
December 2000, we have had an audit committee. The current members
of our audit
committee include John A. Kuehne and Dr. Henry M. Washington. We currently
have
one member, John A. Kuehne, who is a “financial expert” (as defined in
Regulation 228.401(e)(1)(i)(A) of Regulation S-B) serving on our audit
committee. Mr. Kuehne and Dr. Washington both qualify as “independent” directors
under Item 7(d)(3)(iv) of Schedule 14A of the Securities Exchange Act
of
1934.
Since
July 2003, there have been two members on our board of directors standing
compensation committee. The current members of our compensation committee
include Dr. Henry M. Washington and John A. Kuehne.
The
fact
that we currently have four members on our board of directors, and
two members
on each of our board of directors’ audit and compensation committees, could
result in a tie vote on company matters, including those involving
highly
material corporate governance issues. We do not currently have any
duly adopted
resolution procedures in place that would provide a means for resolving
any
stalemate that might occur in this regard, but are currently in the
process of
considering potential alternative procedures in order to be prepared
for having
to face such a potential situation.
Disclosure
Policy
Committee
Since
September 2002, we have had a Disclosure Controls and Procedure
Officer Committee (the “Disclosure Policy Committee). The current members of the
Disclosure Policy Committee include Steven Malone, John A. Kuehne,
and Kirk R.
Rowland. The Disclosure Policy Committee has implemented disclosure
controls and
procedures that meet the standards established by Rule 13a-15 of the
Securities
Exchange Act.
Code
of
Ethics
We
have
adopted the Code of Ethics attached as Exhibit 14.1 to this Form 10-KSB/A
for our senior financial officers and the principal executive
officer.
Compliance
with
Section 16(a)
Section
16(a) of the Exchange Act requires our directors and executive officers,
and
persons who own more than ten percent of a registered class of our
equity
securities, to file with the SEC initial reports of ownership and reports
of
changes in ownership of our common stock and other equity securities
of ours.
Officers, directors and greater than ten percent stockholders are required
by
the SEC’s regulations to furnish us with copies of all Section 16(a) forms
they
filed.
The
following table sets for the compliance reporting under Section 16(a)
during the
last fiscal year.
|
Number
of Late
Reports
|
Number
of
Transactions
Not
Timely
Reported
|
Failure
to
File
|
|||
|
Henry
M. Washington
|
1
|
1
|
---
|
||
|
William
Terrill
|
1
|
1
|
---
|
||
| Barron Partners, LP |
---
|
---
|
2
|
SUMMARY
COMPENSATION TABLE
The
following table sets forth the total compensation paid to each of our
executive
officers who earned compensation of $100,000 or more during any such
year.
Steven Malone has served as our President and Chief Executive Officer
since
March 2001. William Terrill has served as our Chief Technology Officer
since
July 2002. Kirk R. Rowland has served as our Chief Financial Officer
and
director since April 2002. No other individuals employed by us earned
a salary
and bonus in excess of $100,000 during 2004.
|
Long
Term Compensation
|
||||||||||
|
Annual
Compensation
|
Awards
|
|||||||||
|
|
Restricted
|
Securities
|
||||||||
|
|
Stock
|
Underlying
|
||||||||
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Awards
|
Options/SARs
(#)
|
|||||
|
Steven
Malone,
|
2004
|
$150,000
|
$22,192
|
-0-
|
-0-
|
|||||
|
President
and Chief Executive
|
2003
|
$150,000
|
$18,079
|
-0-
|
-0-
|
|||||
|
Officer
|
2002
|
$150,000
|
$2,203
|
$37,306
|
-0-
|
|||||
|
William
Terrill
|
2004
|
$150,000
|
$22,192
|
-0-
|
-0-
|
|||||
|
Chief
Technology Officer
|
2003
|
$150,000
|
$18,079
|
$14,536
|
500,000
|
|||||
|
2002
|
$72,115
|
$2,203
|
-0-
|
500,000
|
||||||
|
Kirk
R. Rowland
|
2004
|
$108,846
|
$22,192
|
-0-
|
-0-
|
|||||
|
Chief
Financial Officer
|
2003
|
$82,306
|
$18,079
|
-0-
|
-0-
|
|||||
|
2002
|
$80,000
|
-0-
|
$31,807
|
-0-
|
||||||
INFORMATION
CONCERNING STOCK OPTIONS
Our
Stock
Incentive Plan, adopted in 1999, authorizes the issuance of various
forms of
stock-based awards including incentive and nonqualified stock options,
stock
appreciation rights attached to stock options, and restricted stock
awards to
our directors, officers and other key employees. In accordance with
the terms of
the Stock Incentive Plan, stock options are granted at an exercise
price as
determined by our board of directors at the time any such option is
granted but
which may not be less than the par value of our common shares ($0.001).
We
did
not grant stock options during the fiscal year ended December 31, 2004.
No
executive exercised any stock options during the fiscal year 2004.
Option/SAR
Grants in Last Fiscal Year
|
Name
|
Number
of Securities
Underlying
Options/SARs
Granted
(#)
|
Percent
of Total
Options/SARs
Granted to
Employees
in Fiscal Year
|
Exercise
or
Base
Price
($/Sh)
|
Expiration
Date
|
||||
|
Steven
Malone
|
-0-
|
-0-
|
-0-
|
N/A
|
||||
|
William
Terrill
|
-0-
|
-0-
|
-0-
|
N/A
|
||||
|
Kirk
R. Rowland
|
-0-
|
-0-
|
-0-
|
N/A
|
The
following table sets forth the number of stock options/SARs held by the
executive officers named in the Summary Compensation Table as of December
31,
2004 and the value of unexercised “in-the-money” options/SARs held which
represents the positive difference between the exercise price and the
market
price at fiscal year end. No such executive exercised any options/SARs
during
the fiscal year 2004.
Aggregated
Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR
Values
|
Name
|
Shares
Acquired
on
Exercise
(#)
|
Value
Realized
($)
|
Number
of Unexercised
Options/SARs
at
Fiscal
Year End (#)
|
Value
of Unexercised
“In-the-Money”
Options/
SARs
at Fiscal Year End ($)
|
||||
|
Steven
Malone
|
-0-
|
-0-
|
250,000
|
-0-
|
||||
|
William
Terrill
|
-0-
|
-0-
|
1,000,000
|
$15,000
|
||||
|
Kirk
R. Rowland
|
-0-
|
-0-
|
150,000
|
-0-
|
Pursuant
to authority granted under our Article III, Section 13 of our bylaws,
non-officer directors are entitled to such compensation as our board
of
directors shall from time to time determine. On July 25, 2003, we resolved
to
issue each of our outside directors 300,000 shares of common stock valued
at
$0.045 per share in lieu of cash and meeting fees, for the period April
1, 2002
through June 30, 2003. On June 4, 2004, we resolved to issue our outside
directors a total of 324,074 shares of common stock valued at $0.081
per share
in lieu of cash and meeting fees, for the period July 1, 2003 through
August 31,
2004. These shares were issued on September 9, 2004. We
have
accrued $7,500 for our outside directors’ fees, for the period September 1, 2004
through December 31, 2004.
EMPLOYMENT
AGREEMENTS
Mr.
Malone is employed pursuant to a three-year employment agreement, which
commenced on July 25, 2003. The agreement provides for a base annual
salary
equal to $150,000 and an annual bonus equal to 1% of our net income.
In the
event Mr. Malone is terminated by us, other than for cause, we
are required to pay him his then base salary until the later of (i) the
expiration of the employment agreement or (ii) one year. Mr. Malone has
agreed
to refrain from competing with us for a period of one year following
the
termination of his employment.
Mr.
Terrill is employed pursuant to a three-year employment agreement, which
commenced on June 7, 2002. The agreement provides for a base annual salary
equal
to $150,000, an annual bonus equal to 1% of our net income, 500,000 stock
options upon his start date at an exercise price of $0.05 per share,
and an
additional 500,000 stock options upon the one year anniversary of his
start date
based on performance criteria outlined in a separate agreement. The agreement
also included a signing cash bonus of $10,000, which was converted on
July 25,
2003 into 250,000 shares of common stock at the market price of $0.04
per share,
the value on the date the settlement was accepted. In the event Mr. Terrill
is
terminated by us, other than for cause, we are required to pay
him his then base salary until the later of (i) the expiration of the
employment
agreement or (ii) one year. Mr. Terrill has agreed to refrain from competing
with us for a period of one year following the termination of his
employment.
Mr.
Rowland is employed pursuant to a two-year employment agreement, which
commenced
on July 25, 2003. The agreement provides for a base annual salary equal
to
$110,000 and an annual bonus equal to 1% of our net income. In the event
Mr.
Rowland is terminated by us, other than for cause, we are required to
pay him his then base salary until the later of (i) the expiration of
the
employment agreement or (ii) one year. Mr. Rowland has agreed to refrain
from
competing with us for a period of one year following the termination
of his
employment.
The
tables below set forth information regarding the beneficial ownership
of our
common stock as of June 7, 2005. The information in these tables provides
the ownership information for:
|
|
•
|
each
person known by us to be the beneficial owner of
more than 5% of our
common stock;
|
|
|
•
|
each
of our directors and executive officers;
and
|
|
|
•
|
all
of our directors and executive officers as a
group.
|
Beneficial
ownership has been determined in accordance with the rules and
regulations of
the SEC and includes voting or investment power with respect to
our common stock
and those rights to acquire additional shares within sixty days.
Unless
otherwise indicated, the persons named in the table below have
sole voting and
investment power with respect to the number of shares of common
stock indicated
as beneficially owned by them, except to the extent such power
may be shared
with a spouse. Common stock beneficially owned and percentage ownership
are
based on 71,769,855 shares of common stock currently outstanding
(reflects a
1-for-50 reverse stock-split of our common stock that occurred
in 1997 and a
1-for-20 reverse stock-split of our common stock that occurred
on March 18,
1998) and 23,150,000 additional shares potentially acquired within
sixty days.
The address of each person listed is in care of Findex.com, Inc.,
11204
Davenport Street, Suite 100, Omaha, Nebraska 68154.
|
Name
of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class
|
||
|
Barron
Partners, LP (1)
|
43,750,000
|
61.0%
|
| (1) |
Consists
of warrants to acquire up to 21,875,000 shares of common stock
and
21,875,000 shares of common stock directly
owned.
|
|
Name
of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class
|
||
|
Steven
Malone (1)
|
2,143,111
|
3.0%
|
||
|
Henry
M. Washington (2)
|
1,583,025
|
2.2%
|
||
|
John
A. Kuehne (3)
|
1,691,849
|
2.4%
|
||
|
Kirk
R. Rowland (4)
|
1,819,111
|
2.5%
|
||
|
William
Terrill (5)
|
1,751,127
|
2.4%
|
||
|
All
officers and directors
as
a group (5 persons)
|
8,988,223
|
12.5%
|
| (1) |
Consists
of stock options to acquire up to 250,000 shares of common
stock, all of
which are presently exercisable, 1,719,111 shares of common
stock directly
owned, and stock options to acquire up to 50,000 shares of
common stock
all of which are presently exercisable and 124,000 shares of
common stock
indirectly owned through spouse.
|
| (2) |
Consists
of stock options to acquire up to 175,000 shares of common
stock, all of
which are presently exercisable and 1,408,025 shares of common
stock
directly owned.
|
| (3) |
Consists
of stock options to acquire up to 175,000 shares of common
stock, all of
which are presently exercisable and 1,516,849 shares of common
stock
directly owned.
|
| (4) |
Consists
of stock options to acquire up to 150,000 shares of common
stock, all of
which are presently exercisable and 1,669,111 shares of common
stock
directly owned.
|
| (5) |
Consists
of stock options to acquire up to 1,000,000 shares of common
stock, all of
which are presently exercisable and 751,127 shares of common
stock
directly owned.
|
On
July
19, 2004, we entered into a certain Stock Purchase Agreement pursuant
to which
we agreed to issue and sell 21,875,000 restricted shares of our
common stock to
Barron Partners, LP, a New York based institutional investor, at
a price of
$0.08 per share. Under the terms of transaction, Barron Partners,
LP received
two of our common stock purchase warrants. The first warrant entitles
the holder, for a period of up to five years, to purchase up to
10,937,500
common shares at a price of $0.18 per share,
subject
to standard adjustment provisions. The second warrant entitles the
holder, also for a period of up to five years, to purchase up to
10,937,500
additional common shares at a price of $0.60 per share,
subject
to standard adjustment provisions.
As
part
of the financing transaction, we also entered into a certain Registration
Rights
Agreement with Barron Partners, LP pursuant to which we became
committed to
registering all of the shares issued as part of such transaction,
including
those issuable under the warrants. On November 22, 2004, we filed a
registration statement on Form SB-2 covering the shares issued
to Barron
Partners, as well as the shares underlying the warrants issued
to Barron
Partners. Under the terms of the Registration Rights Agreement,
as amended, we
had until April 22, 2005 to cause such registration statement to
be declared
effective by the SEC. In accordance with the terms of the Registration
Rights
Agreement, any delays in meeting this obligation subjected us to liability
to Barron Partners, LP in an amount equal to $1,726 per day for
the duration of
any such delay. As
of the date of this filing, we had accrued a total of $100,000 in
registration rights penalties for not causing the registration statement to
be declared effective by the SEC.
As
of the
date hereof, Barron Partners, LP owns 45.43% of our outstanding common
stock
and, subject to the restrictions contained in Article VII, subsection
B of our
articles of incorporation, controls the vote associated with such
shares.
|
No.
|
Description
of Exhibit
|
|
|
|
|
2.1
|
Share
Exchange Agreement between Findex.com, Inc. and the stockholders
of Reagan
Holdings, Inc. dated March 7, 2000, incorporated by reference
to Exhibit
2.1 on Form 8-K filed March 15, 2000.
|
|
|
|
|
3(i)(1)
|
Articles
of Incorporation of Findex.com, Inc., incorporated by reference
to Exhibit
3.1 on Form 8-K filed March 15, 2000.
|
|
|
|
|
3(i)(2)
|
Amendment
to Articles of Incorporation of Findex.com, Inc. dated November
12, 2004
incorporated by reference to Exhibit 3.1(ii) on Form 10-QSB
filed November
12, 2004.
|
|
|
|
|
3(ii)
|
By-Laws
of Findex.com, Inc., incorporated by reference to Exhibit
3.3 on Form 8-K
filed March 15, 2000.
|
|
|
|
|
10.1
|
Stock
Incentive Plan of Findex.com, Inc. dated May 7, 1999,
incorporated by
reference to Exhibit 10.1 on Form 10-KSB/A filed May
13,
2004.
|
|
|
|
|
10.2
|
Share
Exchange Agreement between Findex.com, Inc. and the
stockholders of Reagan
Holdings Inc., dated March 7, 2000, incorporated by
reference to Exhibit
2.1 on Form 8-K filed March 15, 2000.
|
|
|
|
|
10.3
|
License
Agreement between Findex.com, Inc. and Parsons Technology,
Inc. dated June
30, 1999, incorporated by reference to Exhibit 10.3
on Form 10-KSB/A filed
May 13, 2004.
|
|
|
|
|
10.4
|
Employment
Agreement between Findex.com, Inc. and Steven Malone
dated July 25, 2003,
incorporated by reference to Exhibit 10.4 on Form
10-KSB/A filed May 13,
2004.
|
|
|
|
|
10.5
|
Employment
Agreement between Findex.com, Inc. and Kirk Rowland
dated July 25, 2003,
incorporated by reference to Exhibit 10.5 on Form
10-KSB/A filed May 13,
2004.
|
|
|
|
|
10.6
|
Employment
Agreement between Findex.com, Inc. and William Terrill
dated June 7, 2002,
incorporated by reference to Exhibit 10.6 on Form
10-KSB/A filed May 13,
2004.
|
|
|
|
|
10.7
|
Restricted
Stock Compensation Agreement between Findex.com,
Inc. and John A. Kuehne
dated July 25, 2003, incorporated by reference to
Exhibit 10.7 on Form
10-KSB/A filed May 13, 2004.
|
|
|
|
|
10.8
|
Restricted
Stock Compensation Agreement between Findex.com,
Inc. and Henry M.
Washington dated July 25, 2003, incorporated by reference
to Exhibit 10.8
on Form 10-KSB/A filed May 13, 2004.
|
|
|
|
|
10.9
|
Restricted
Stock Compensation Agreement between Findex.com,
Inc. and William Terrill
dated July 25, 2003, incorporated by reference to
Exhibit 10.9 on Form
10-KSB/A filed May 13, 2004.
|
|
|
|
|
10.10
|
Stock
Purchase Agreement, including the form of warrant
agreement, between
Findex.com, Inc. and Barron Partners, LP dated July
19, 2004, incorporated
by reference to Exhibit 10.1 on Form 8-K filed July
28,
2004.
|
|
|
|
|
10.11
|
Amendment
No. 1 To Barron Partners, LP Stock Purchase Agreement
dated September 30,
2004, incorporated by reference to Exhibit 10.3 on
Form 8-K filed October
6, 2004.
|
|
|
|
|
10.12
|
Registration
Rights Agreement between Findex.com, Inc. and Barron
Partners, LP dated
July 26, 2004, incorporated by reference to Exhibit
10.2 on Form 8-K filed
July 28, 2004.
|
| 10.13 | Waiver certificate between Findex.com, Inc. and Barron Partners, LP dated September 16, 2004, incorporated by reference to Exhibit 10.4 on Form 8-K filed October 6, 2004. |
| 10.14 |
Settlement
Agreement between Findex.com, Inc., The
Zondervan Corporation, Mattel,
Inc., TLC Multimedia, Inc., and Riverdeep,
Inc. dated October 20, 2003.
FILED HEREWITH.
|
|
14.1
|
Code
of Ethics, adopted by Board of Directors December 14, 2005.
FILED HEREWITH.
|
|
21.1
|
Share
Exchange Agreement between Findex.com,
Inc. and the stockholders of Reagan
Holdings Inc., dated March 7, 2000, incorporated
by reference to Exhibit
2.1 on Form 8-K filed March 15, 2000.
|
|
31.1
|
Certification
of Findex.com, Inc. Chief Executive Officer,
Steven Malone, required by
Rule 13a-14(a) or Rule 15d-14(a), and dated December 14, 2005. FILED
HEREWITH.
|
|
31.2
|
Certification
of Findex.com, Inc. Chief Financial Officer,
Kirk R. Rowland, required by
Rule 13a-14(a) or Rule 15d-14(a), and dated December 14, 2005. FILED
HEREWITH.
|
|
32.1
|
Certification
of Findex.com, Inc. Chief Executive Officer,
Steven Malone, required by
Rule 13a-14(b) or Rule 15d-14(b) and Section
1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350),
and dated December 14,
2005. FILED HEREWITH.
|
|
32.2
|
Certification
of Findex.com, Inc. Chief Financial Officer,
Kirk R. Rowland, required by
Rule 13a-14(b) or Rule 15d-14(b) and Section
1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350),
and dated December 14,
2005. FILED HEREWITH.
|
Summarized
below is the aggregate amount of various professional fees billed by
our
principal accountants with respect to our last two fiscal years:
|
2004
|
2003
|
|||
|
Audit
fees
|
$14,390
|
$14,237
|
||
|
Audit-related
fees
|
$---
|
$---
|
||
|
Tax
fees
|
$---
|
$---
|
||
|
All
other fees
|
$---
|
$---
|
||
|
All
other fees, including tax consultation and preparation
|
$---
|
$---
|
All
audit
fees are approved by our audit committee and board of directors. Chisholm,
Bierwolf & Nilson, LLC
does not
provide any non-audit services to us.
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.
|
FINDEX.COM,
INC.
|
|||
|
By:
/s/ Steven Malone
|
|||
|
Steven
Malone
|
|||
|
President
and Chief Executive Officer
|
Date: December
14, 2005
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this
report has
been signed below by the following persons on behalf of the registrant
and in
the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Steven Malone
|
Chairman
of the Board, President and Chief
|
December
14, 2005
|
||
|
Steven
Malone
|
Executive
Officer (principal executive officer)
|
|||
|
/s/
John A. Kuehne
|
Director
|
December 14,
2005
|
||
|
John
A. Kuehne
|
||||
|
/s/
Henry M. Washington
|
Director
|
December 14,
2005
|
||
|
Henry
M. Washington
|
||||
|
/s/
Kirk R. Rowland
|
Director
and Chief Financial Officer
|
December 14,
2005
|
||
|
Kirk
R. Rowland
|
(principal
financial and accounting officer)
|