UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
_________________
Amendment
No. 2 to the
FORM
SB-2
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
FINDEX.COM,
INC.
(Name of
Small Business Issuer in Its Charter)
|
Nevada |
7372 |
88-0379462 |
|
(State
or other Jurisdiction
Incorporation
or Organization) |
(Primary
Standard Industrial
Classification
Code Number) |
(I.R.S.
Employer
Identification
Number) |
11204
Davenport Street, Suite 100
Omaha,
Nebraska 68154
(402)
333-1900
(Address
and Telephone Number of Principal Executive Offices and Principal Place of
Business)
Steven
Malone
President
and Chief Executive Officer
FINDEX.COM,
INC.
11204
Davenport Street, Suite 100
Omaha,
Nebraska 68154
(402)
333-1900
(Name,
Address and Telephone Number of Agent For Service)
Copies
to:
Michael
M. Membrado, Esq.
M.M.
Membrado, PLLC
115 East
57th Street,
Suite 1006
New York,
New York 10022
Approximate
Date of Proposed Sale to the Public: From time to time after the effective date
of this registration statement until such time that all of the shares of common
stock hereunder have been sold.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended (the “Securities Act”) check the following box. [X]
If this
form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ]
If this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. [ ]
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. [ ]
CALCULATION
OF REGISTRATION FEE
|
TITLE
OF SECURITIES TO BE REGISTERED |
|
AMOUNT
TO BE REGISTERED(1) |
PROPOSED
MAXIMUM OFFERING
PRICE PER
SHARE |
PROPOSED MAXIMUM AGGREGATE
OFFERING
PRICE |
AMOUNT
OF REGISTRATION
FEE | ||||||||||||||
|
Common
Stock, par value |
|||||||||||||||||||
|
$.001
per share |
24,341,666 |
(2) |
|
$ |
0.090
|
(3) |
$ |
2,190,750 |
$ |
277.57 |
| ||||||||
|
Common
Stock, par value |
|||||||||||||||||||
|
$.001
per share |
10,937,500 |
(4) |
|
$ |
0.180
|
(5) |
$ |
1,968,750 |
$ |
249.44 |
| ||||||||
|
Common
Stock, par value |
|||||||||||||||||||
|
$.001
per share |
10,937,500 |
(4) |
|
$ |
0.600
|
(5) |
$ |
6,562,500 |
$ |
831.47 |
| ||||||||
|
Common
Stock, par value |
|||||||||||||||||||
|
$.001
per share |
125,000 |
(4) |
|
$ |
0.148
|
(5) |
$ |
18,500 |
$ |
2.34 |
| ||||||||
|
Common
Stock, par value |
|||||||||||||||||||
|
$.001
per share |
150,000 |
(4) |
|
$ |
0.010
|
(5) |
$ |
1,500 |
$ |
0.19 |
| ||||||||
|
Common
Stock, par value |
|||||||||||||||||||
|
$.001
per share |
250,000 |
(4) |
|
$ |
0.100
|
(5) |
$ |
25,000 |
$ |
3.17 |
| ||||||||
|
Common
Stock, par value |
|||||||||||||||||||
|
$.001
per share |
150,000 |
(4) |
|
$ |
0.022
|
(5) |
$ |
3,300 |
$ |
0.42 |
| ||||||||
|
Common
Stock, par value |
|||||||||||||||||||
|
$.001
per share |
600,000 |
(4) |
|
$ |
0.150 |
(5) |
$ |
90,000 |
$ |
11.40 |
| ||||||||
|
Total |
47,491,666 |
$ |
10,860,300 |
$ |
1,376.00 |
(6) | |||||||||||||
|
|
(1)
|
Pursuant
to Rule 416 under the Securities Act, this registration statement also
covers such indeterminate number of additional shares of common stock as
may be issuable upon exercise of warrants to prevent dilution resulting
from stock splits, stock dividends or similar transactions.
|
|
|
(2)
|
Represents
24,341,666 outstanding shares of our common stock held by our selling
stockholders. |
|
|
(3)
|
Estimated
solely for purposes of calculating the registration fee in accordance with
Rule 457(c) of the Securities Act, based on the average of the closing bid
and asked prices for our common stock as reported on the OTC Bulletin
Board on November 19, 2004. |
|
|
(4)
|
Represents
the number of shares of our common stock issuable upon exercise of certain
warrants held by our selling stockholders. |
|
|
(5)
|
Estimated
solely for purposes of calculating the registration fee in accordance with
Rule 457(g) of the Securities Act, based on the stated exercise price.
|
|
|
(6)
|
The
filing fee of $1,376.00 is offset by the $507.89 credit due to the
Registrant based upon the prior withdrawn registration statement on Form
SB-2 filed with the U.S. Securities & Exchange Commission (the “SEC”)
on August 2, 2001 pursuant
to Rule 457(p) of Regulation C, File No.: 333-66570, less (i) the
fee of $27.17 applied to the registration statement on Form S-8 filed with
the SEC on September 24, 2002, File No.: 333-100035 and (ii) the fee of
$0.82 applied to the registration statement on Form S-8 filed with the SEC
on November 8, 2002, File No.: 333-101092. |
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended or until the registration statement
shall become effective on such date as the Commission, acting pursuant to
Section 8(a), may determine.
This
prospectus is dated June 7, 2005
The
information contained in this prospectus may be updated from time to time by way
of post-effective amendment based on material intervening developments. The
selling stockholders may not sell these securities until this registration
statement filed with the U.S. Securities and Exchange Commission is effective.
This prospectus is not an offer to sell these securities and the selling
stockholders are not soliciting offers to buy these securities in any state
where the offer or sale of these securities is not permitted.
PROSPECTUS
FINDEX.COM,
INC.
47,491,666
SHARES OF COMMON STOCK
OFFERED
BY SELLING STOCKHOLDERS
This
prospectus relates to the resale of up to 47,491,666 shares of our common stock
by certain persons who are either our stockholders, holders of warrants to
purchase our common stock, or both. All of the shares of common stock are being
offered for sale by the selling stockholders at prices established on the OTC
Bulletin Board during the term of this offering, as will fluctuate from time to
time, or as may otherwise be agreed upon in negotiated transactions. We will not
receive any proceeds from the sale of our shares by the selling stockholders. If
the warrants are exercised in full, we would receive proceeds of $8,669,550.
However, because the exercise price of some or all of the warrants may at any
given time be above the current market price of our common stock, (i) they may
never be exercised and, therefore, we may never actually receive these proceeds,
or (ii) if they are exercised, but not for some time, it would not be until then
that we receive any such proceeds. We will use the proceeds from any exercise of
warrants for general working capital purposes consistent with our business
strategy.
Our
common stock is quoted on the OTC Bulletin Board under the symbol “FIND”.
On June 6, 2005, the average of the bid and asked prices of our common
stock was $0.11 per share.
Each of
the selling stockholders may be deemed to be an “underwriter,” as such term is
defined in the Securities Act.
An
investment in our common stock involves a high degree of risk. You should only
invest in our common stock if you can afford to lose your entire investment, and
you should read and consider the “risk factors” beginning on page 3 before
investing in our common stock.
Neither
the SEC nor any state securities commission has approved or disapproved these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The date
of this prospectus is June 7, 2005.
FINDEX.COM,
INC.
11204
Davenport Street, Suite 100
Omaha,
Nebraska 68154
(402)
333-1900
The
following table of contents has been designed to help you find important
information contained in this prospectus. We have included subheadings to aid
you in searching for particular information you might want to return to. We
encourage you to read the entire prospectus.
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F-1 |
-ii-
Unless otherwise specified, the information in this
prospectus is set forth as of June 7, 2005, and we anticipate that changes
in our affairs will occur after such date. We have not authorized any person to
give any information or to make any representations other than as contained in
this prospectus in connection with the offer contained in this prospectus. If
any person gives you any information or makes representations in connection with
this offer, do not rely on it as information we have authorized. This prospectus
is not an offer to sell our common stock in any state or other jurisdiction to
any person to whom it is unlawful to make such offer.
PROSPECTUS
SUMMARY
This
summary highlights information found in greater detail elsewhere in this
prospectus. You should read the entire prospectus carefully, including the “Risk
Factors” described in pages 3 through 10 and our consolidated financial
statements beginning on page F-1, before making any investment in the shares
offered hereby.
ABOUT
OUR BUSINESS
We
develop, publish, market, distribute and directly sell off-the-shelf consumer
and organizational software products for PC and PDA platforms. The common thread
among our products is a customer constituency that shares a devotion to, or
interest in, Christianity and faith-based “inspirational” values. Our focus is
on becoming 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.
Our
faith-based software titles, all of which are proprietary, are currently divided
among the following six categories:
|
|
• |
Bible
Study |
|
|
• |
Financial/Office
Management Products for Churches and other Faith-Based
Ministries |
|
|
• |
Print
& Graphic Products |
|
|
• |
Pastoral
Products |
|
|
• |
Children’s
Products |
|
|
• |
Language
Tutorial Products |
ABOUT
OUR COMPANY
We were
incorporated in the State of Nevada in 1997 as EJH Entertainment, Inc., which
was later changed to FINdex.com, Inc. Beginning in 1997, and although we were
not then a reporting company under the Securities Exchange Act of 1934, as
amended, our common stock was quoted on the OTC Bulletin Board. On March 7,
2000, we acquired 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. 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. See “Business - Corporate Formation, Legacy and
Subsidiaries”.
We
currently have two wholly-owned subsidiaries, neither of which have any
operations, employees or revenues. They include Findex.com, Inc., a Delaware
corporation, and Reagan Holdings, Inc., also a Delaware corporation.
Our
principal office is located at 11204 Davenport Street, Suite 100, Omaha,
Nebraska 68154. Our main telephone number is (402) 333-1900. See “Where You Can
Find Additional Information”.
THE
OFFERING BY THE SELLING STOCKHOLDERS
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 also received two 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 adjustment
based on the occurrence of certain events. 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, also subject to
adjustment based on the occurrence of certain events. As part of the financing
transaction, we entered into a certain Registration Rights Agreement with Barron
Partners, LP pursuant to which we committed to registering all of the shares
issued as part of such transaction, including those issuable under each of the
two warrants. See “Selling Stockholders” and “Certain Relationships and Related
Transactions”.
In
addition to the shares of our common stock issued to Barron Partners, LP and the
common stock issuable upon exercise of the warrants issued to Barron Partners,
LP, we are also registering the following:
|
|
•
|
2,000,000
shares of our common stock issued as of November 16, 2004 upon conversion
of $240,000 of previously outstanding debt securities;
|
|
• |
466,666 shares of our common stock issued as of December 31, 2004 upon conversion of $23,333 of previously outstanding debt securities; and |
|
|
• |
1,275,000
shares of our common stock issuable upon exercise of warrants previously
issued to a number of our consultants/service providers.
|
Under
this prospectus, the selling stockholders are offering a total of up to
24,341,666 shares of our common stock, and 23,150,000 additional shares of
common stock issuable upon exercise of the warrants described above.
On June 7, 2005, there were 48,619,855 shares of our common stock
outstanding. Upon the exercise of the warrants described above, the number of
shares offered by this prospectus represents 66.2% of our total common stock
outstanding on June 7, 2005.
|
Total
common stock outstanding prior to this offering |
|
|
48,619,855
|
|
|
|
|
|
|
|
|
Total
common stock offered for resale to the public in this
offering |
|
|
47,491,666
|
|
|
|
|
|
|
|
|
Common
stock outstanding after this Offering |
|
|
71,769,855
|
|
|
|
|
|
|
|
|
Percentage
of common stock outstanding following this offering that shares being
offered for resale represent |
|
|
66.2 |
% |
All of
the shares covered by this prospectus are being registered to permit the selling
stockholders and any of their respective successors-in-interest to offer the
respective shares for resale from time to time. The selling stockholders are not
required to sell their shares, and any sales of common stock by the selling
stockholders are entirely at their own discretion.
We will
receive no proceeds from the resale of our common stock in this offering. We
may, however, receive proceeds upon the exercise of some or all of the warrants.
If the warrants are exercised in full, we would receive $8,669,550 in proceeds.
However, because the exercise price of some or all of the warrants may at any
given time be above the current market price of our common stock, (i) they may
never be exercised and, therefore, we may never actually receive these proceeds,
or (ii) if they are exercised, but not for some time, it would not be until then
that we receive any such proceeds. Any proceeds received upon the exercise of
warrants will be used for general working capital purposes consistent with our
business strategy. See “Use of Proceeds”.
TRADING
INFORMATION
Our stock
trades on the OTC Bulletin Board under the symbol “FIND”. On June 6, 2005,
the average of the bid and asked prices of our common stock was $0.11 per share.
An
investment in the common stock being offered for resale by the selling
stockholders is very risky. You should carefully consider the risk factors
described below, together with all other information in this prospectus before
making an investment decision. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks manifest as actual problems for us,
they would likely have a material adverse effect on our business, our financial
condition, including liquidity and profitability, and our results of
operations. In such case, the trading price of our common stock could decline,
and you may lose all or part of your investment.
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 and
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. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources”.
Our
accumulated deficit makes it harder for us to borrow
funds.
As of
March 31, 2005, and as a result of historical losses in prior years, our
accumulated deficit was $5,470,184. 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. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources”.
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:
|
•
|
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,
Christian Bookseller’s Association, 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. See
“Business - Competition”.
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. See “Business - Our Products”.
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 titles 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. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations -
Revenues”.
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 price 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. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Revenues”.
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. See “Management - Directors and
Executive Officers”.
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. Approximately 97% of our revenues in 2004 were derived from the
publishing and sales of software titles (i) the source code copyrights through
1999 and registered product trademarks of which we license on a partially
exclusive basis through a single license agreement from a third-party, and (ii)
the source code and other improvements since 1999 of which we own the
(unregistered) copyrights exclusively. There can be no assurance that our
intellectual property rights in this regard will provide meaningful protection
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. We may not have adequate remedies if our
proprietary content is appropriated. See “Business - Intellectual Property”.
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, or 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 33% 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
Up
to 47,491,666 shares of our common stock will become eligible for public sale as
a result of this registration which is likely to depress our stock
price.
When this
registration statement is declared effective by the SEC, 24,341,666 shares of
our common stock will be eligible for immediate resale on the public market and
23,150,000 shares of our common stock underlying warrants, upon their exercise,
will be eligible for immediate resale on the public market. As a percentage
of our total outstanding common stock as of the date of the prospectus, 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. See “Selling Stockholders” and “Plan of Distribution”.
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:
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deliver
a standardized risk disclosure document that provides information about
penny stocks and the nature and level of risks in the penny stock market;
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provide
the customer with current bid and offer quotations for the penny stock;
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explain
the compensation of the broker-dealer and its salesperson in the
transaction; |
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provide
monthly account statements showing the market value of each penny stock
held in the customer’s
account; and |
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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. See “Market Information”.
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:
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number of securities analysts, market-makers and brokers following our
common stock; |
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changes
in, or failure to achieve, financial estimates by securities analysts;
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new
products introduced or announced by us or our competitors;
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announcements
of technological innovations by us or our competitors;
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our
ability to produce and distribute retail packaged versions of our software
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actual
or anticipated variations in quarterly operating results;
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conditions
or trends in the consumer software and/or Christian products industries;
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announcements
by us of significant acquisitions, strategic partnerships, joint ventures,
or capital commitments; |
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additions
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sales
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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. See “Market Information”.
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. See “Market Information”.
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.
We
have relied on the private placement exemption to raise substantial amounts of
capital and could suffer substantial losses if that exemption is determined not
to have been properly relied upon.
We have
raised substantial amounts of capital in private placements from time to time.
The securities offered in such private placements were not registered with the
SEC or any state agency in reliance upon exemptions from such registration
requirements. Qualification under some such exemptions involves a degree of
uncertainty and if we inadvertently failed to comply with the requirements of
any of such exemptive provisions, investors would have the right to rescind
their purchase of our securities or otherwise sue for damages. If one or more
investors were to successfully seek such rescission or institute any such suit,
we could face severe financial demands that could materially and adversely
affect our financial position. See “Selling Stockholders”.
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.
This
registration statement, as well as our other reports filed with the SEC and our
press releases and other communications, contain forward-looking statements.
Forward-looking statements include all statements regarding our expected
financial position, results of operations, cash flows, dividends, financing
plans, strategy, budgets, capital and other expenditures, competitive positions,
growth opportunities, benefits from new technology, plans and objectives of
management, and markets for stock. These forward-looking statements are based
largely on our expectations and, like any other business, are subject to a
number of risks and uncertainties, many of which are beyond our control. The
risks include those stated in the “Risk Factors” section of this registration
statement and economic, competitive and other factors affecting our operations,
markets, products and services, expansion strategies and other factors discussed
elsewhere in this registration statement and the other documents we have filed
with the SEC. In light of these risks and uncertainties, there can be no
assurance that the forward-looking information contained in this registration
statement will in fact prove accurate, and our actual results may differ
materially from the forward-looking statements.
We will
not receive any proceeds from the resale of our common stock pursuant to this
offering. We may, however, receive proceeds upon the exercise of the warrants,
the underlying common shares of which are being registered hereunder. If all of
the warrants are exercised we estimate that we would realize net proceeds of
approximately $8,599,550. Net proceeds are determined after deducting all of the
expenses associated with this offering (estimated to be approximately $70,000).
However, because the exercise price of some or all of the warrants may at any
given time be above the current market price of our common stock, (i) they may
never be exercised and, therefore, we may never actually receive these proceeds,
or (ii) if they are exercised, but not for some time, it would not be until then
that we receive any such proceeds.
If
all of the warrants are exercised, we would realize $8,599,550 in net proceeds,
and although there can be no assurance, we intend to use the net proceeds from
this offering as follows:
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Product
Development |
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2,000,000 |
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Marketing
and Promotion |
500,000 |
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Other
Working Capital Needs |
5,599,550 |
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New
Content License Acquisitions |
500,000 |
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Total
Net Proceeds |
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8,599,550 |
The
amounts that we actually expend on each of the items listed above will vary
significantly depending on a number of factors, including our future results of
operations. As a result, we will retain broad discretion in the allocation of
the net proceeds of this offering. Pending the use of any proceeds as discussed
above, we intend to invest these funds in short-term, interest-bearing
investment-grade obligations or accounts.
This
information should be read in conjunction with our consolidated financial
statements for the period ended March 31, 2005 and the notes to those
consolidated financial statements.
Management
Overview
During
the first quarter of 2005, and for the second consecutive year, we released an
upgrade to our top-selling financial and data management software, Membership
Plus®. As a result of this release, as well as our release in
December 2004 of our most recent upgrade to QuickVerse®, our first
quarter 2005 revenues were slightly higher than those during the first quarter
of 2004. Also during the first quarter of 2005, we introduced two new
QuickVerse® editions, QuickVerse® 2005 Essentials and
QuickVerse® 2005 Platinum. QuickVerse® 2005 Essentials
appeals to those customers who are seeking their first Bible study software and
it is a great way to begin a Bible study software collection. It has a suggested
retail price of $49.95. QuickVerse® 2005 Platinum is the most
comprehensive Bible study edition we have to offer and appeals to scholars who
are serious about Bible study. It has a suggested retail price of $799.95. We
believe that the unique features of these two new editions will provide us with
an opportunity to broaden our customer base as they appeal not only to those
just beginning their journey into Bible study but also to the scholars who are
searching for an in-depth knowledge of the Bible. Our performance during the
first quarter of 2005 marks the fourth straight year in which we have increased
our gross revenues during our first quarter. Although there can be no assurance,
we believe that we can sustain our revenue growth through the second and third
quarters based upon our anticipated introduction during the second quarter of
our QuickVerse® Macintosh edition, which was announced during the
first quarter 2005. We believe that this introduction will make us the only
publisher of Bible reference software for each of Windows®,
Macintosh®, Pocket PC® and Palm OS®.
During
the three months ended March 31, 2004, we had a one-time, non-recurring
write down of a distinct category of obsolete inventory of approximately $32,000
which is included in cost of sales. This non-recurring item had no effect on the
cash flow statement. Our net income decreased approximately $110,000 from a net
income of approximately $272,000 for the three months ended March 31, 2004 to a
net income of approximately $162,000 for the three months ended March 31, 2005.
For the three months ended March 31, 2004 and 2005 we did not recognize any
non-cash expenses related to common shares of stock and warrants issued for
services.
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 arrangement
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
three months ended March 31, 2004 and 2005, respectively.
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.
Gross
revenues increased approximately $269,000 from approximately $1,715,000 for the
three months ended March 31, 2004 to approximately $1,984,000 for the three
months ended March 31, 2005. Such increase is due to our release of an
enhanced version of Membership Plus® during the first quarter of
2005 and an enhanced version of QuickVerse® during late fourth
quarter of 2004. During the fourth quarter of 2004 when QuickVerse®
2005 was released, it was available in three editions ranging in price from
$99.95 to $299.95. During the first quarter of 2005, we released an
enhanced version of the QuickVerse® Essentials edition which retails
for $49.95. In addition, we released a new edition to the QuickVerse®
family, the QuickVerse® Platinum edition, which contains the most
Bible translations and reference titles of any QuickVerse® edition
and retails for $799.95. Comparatively, during the three months ended March 31,
2004, we had the product release of Membership Plus® 8.0 which ranged
in price from $199.95 to $299.95 and the late December 2003 release of
QuickVerse® 8.0 which ranged in price from $99.95 to $299.95.
Sales
returns and allowances increased approximately $102,000 from approximately
$209,000 for the three months ended March 31, 2004 to approximately $311,000 for
the three months ended March 31, 2005 and increased as a percentage of gross
sales from approximately 12% for the three months ended March 31, 2004 to
approximately 16% for the three months ended March 31, 2005. The increase in
sales returns and allowances as a percentage is attributable to our release of
enhanced versions of QuickVerse® and Membership Plus® in
December of 2004 and February of 2005, 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 2005. Furthermore, the timeframe between the last
enhancements for both of these titles was approximately one year. In the past,
product enhancements were typically extended over two to three years. Although
we expect to continue to release enhanced versions of our
products annually, we anticipate the sales return and allowances as a
percentage to decrease due to the increased focus of our sales efforts
to the end-user and our decreased presence in the retail market because
incidents of return are lower for sales direct to end-users than sales into
the retail stores.
Cost of
sales consists primarily of royalties to third party intellectual property
content providers, the direct costs and manufacturing overhead required to
reproduce, package and ship the software products, and the amortized software
development costs. The direct costs and manufacturing overhead increased
approximately $42,000 from approximately $275,000 for the three months ended
March 31, 2004 to approximately $317,000 for the three months ended March 31,
2005 and remained steady at approximately 16% of gross revenues for the
three months ended March 31, 2004 and 2005, respectively. The consistent
percentage of cost of sales reflects the continual software development cycle of
enhancing our two major product lines within a one year timeframe and the
amortization of those software development costs. The amortization recognized
during the three months ended March 31, 2004 resulted from several new software
releases in late 2003 and early 2004 including QuickVerse® 8.0 and
Membership Plus® 8.0. Similarly, the amortization recognized during
the three months ended March 31, 2005 resulted from the December 2004 release of
QuickVerse® 2005 and the February 2005 release of Membership
Plus® 2005. The direct costs and manufacturing overhead percentage
are expected to continue at the 2005 levels as working capital remains more
consistent and as more development projects are implemented in a shortened
timeframe.
Royalties
to third party intellectual property content providers increased
approximately $55,000 from approximately $80,000 for the three months ended
March 31, 2004 to approximately $135,000 for the three months ended March 31,
2005. Royalties also increased as a percentage of gross revenues from
approximately 4.7% for the three months ended March 31, 2004 to approximately
6.8% for the three months ended March 31, 2005. The increase of royalties
reflects the release of the QuickVerse® 2005 editions in early
December 2004, and the two additional QuickVerse® editions,
specifically QuickVerse® Essentials and QuickVerse®
Platinum, which were released in early March of 2005. Furthermore, we sold some
of the older QuickVerse® versions to liquidators at a reduced price
throughout the first quarter of 2005 but had no such sales during the
first quarter of 2004. During the year ended 2004, we 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 sales to new users are expected to
increase and as more development projects are implemented for new and/or
enhanced products. 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 until technological feasibility and
marketability has been established, at which time development costs are
capitalized until the software title is available for general release to
customers. Development costs include 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). 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 (a) the straight-line amortization over the estimated life of the product
(generally from 12 to 18 months) or (b) 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 three months ended March 31, 2004 and 2005 were
approximately $74,000 and approximately $265,000, respectively. Accumulated
amortization of these development costs included in cost of sales totaled
approximately $152,000 and approximately $183,000 for the three months ended
March 31, 2004 and 2005, respectively. The increase in both the capitalization
and amortization is a direct result of the increase in the number of development
projects and the consistent one year turn around on enhanced versions of our
two best-selling product lines QuickVerse® and Membership
Plus®.
|
Three
Months Ended | |||||||
|
|
March
31, | ||||||
|
2005 |
2004 |
||||||
|
Beginning
balance |
$ |
701,289 |
$ |
584,706 |
|||
|
Capitalized |
264,649 |
73,628 |
|||||
|
Amortized
(cost of sales) |
182,688 |
152,213 |
|||||
|
Ending
balance |
$ |
783,250 |
$ |
506,121 |
|||
|
Research
and development expense (General and administrative) |
$ |
37,080 |
$ |
16,174 |
|||
With
gross revenues increasing approximately $269,000 for the first quarter of 2005
from the first quarter of 2004, sales expenses also increased approximately
$221,000 from approximately $217,000 for the three months ended March 31, 2004
to approximately $438,000 for the three months ended March 31, 2005. Included in
sales expenses, commissions to a third-party telemarketing firm increased
approximately $105,000 from approximately $166,000 for the three months ended
March 31, 2004 to approximately $271,000 for the three months ended March 31,
2005. Commissions also increased as a percentage of gross revenues from
approximately 9.7% to approximately 13.7% for the three months ended March 31,
2004 and 2005, respectively. This increase is attributed to the increased focus
of our sales to the direct consumer along with the number of new and enhanced
product releases during the first quarter of 2005 compared with just one product
release during the first quarter of 2004. Fulfillment costs from a third-party
warehouse decreased approximately $20,000 from approximately $35,000 for the
three months ended March 31, 2004 to approximately $15,000 for the three months
ended March 31, 2005 as we moved our retail fulfillment to a new outside entity.
Advertising and direct marketing costs increased approximately $84,000 from
approximately $73,000 for the three months ended March 31, 2004 to approximately
$157,000 for the three months ended March 31, 2005 and increased as a percentage
of gross revenues from approximately 4% to 8%, respectively. This increase is a
direct result of continuing to market our products online through multiple
sources, continuing to increase and focus more on our direct marketing efforts,
and the increased number of publication advertisements due to the new product
enhancements of QuickVerse® and Membership Plus®.
Research
and development costs include 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). Software development
costs expensed as research and development (see table above) amounted to
approximately $16,000 for the three months ended March 31, 2004 compared to
approximately $37,000 incurred for the three months ended March 31, 2005. The
increase in 2005 reflects more research and development costs associated with
maintenance issues on titles after they are released to the general public along
with exploring new platforms for future products. Research and development
expenses are expected to increase in future periods as we add new products and
versions to our product mix.
Total
personnel costs decreased approximately $12,000 from approximately $395,000 for
the three months ended March 31, 2004 to approximately $383,000 for the three
months ended March 31, 2005. Direct salaries and wages increased approximately
$65,000 from approximately $356,000 for the three months ended March 31, 2004 to
approximately $421,000 for the three months ended March 31, 2005 but remained
consistent as a percentage of gross revenues at approximately 21%. This includes
approximately $6,000 in expense for upper management year-end bonus accrual.
This increase in salaries and wages is a result of increasing our sales and
marketing team, technical support staff and development staff. However, the
associated health care costs decreased approximately $15,000 from approximately
$48,000 for the three months ended March 31, 2004 to approximately $33,000 for
the three months ended March 31, 2005 as we restructured our health benefits
plans. The capitalization of direct and indirect labor and related overhead
charges as software development costs (see “Cost of Sales” above) increased by
approximately $52,000 from approximately $45,000 for the three months ended
March 31, 2004 to approximately $97,000 for the three months ended March 31,
2005. This increase is due to the addition of development staff and the
increased amount of new development projects. It is anticipated that personnel
costs will increase in future periods as operating capital is available to fund
full staffing of our product development team and expansion of the direct sales
staff.
Direct
legal costs increased approximately $30,000 for the three months ended March 31,
2005 as we continue to work through the registration process for this SB-2
registration statement. It is anticipated that legal costs will continue to
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.
Telecommunications costs decreased approximately $23,000 for the three months
ended March 31, 2005 as we switched our local and long distance carriers in
order to take advantage of the provider’s current technology. Our increased call
volume enabled us to change our service to dedicated T-1 lines which in turn
reduced the long distance charges. Furthermore, we invested in Internet protocol
phones for our remote locations which reduced the overall local and long
distance charges in our Illinois and Iowa locations. The increased call volume
in the technical support and customer service departments resulted from the
release of the two major product upgrades beginning in December 2004 through
March 2005. Corporate service fees increased approximately $33,000 for the three
months ended March 31, 2005. These fees are related to the hiring of an outside
consultant and the expense for a 2004 issuance of a warrant to purchase 600,000
shares of common stock allocated over the term of the consulting contract.
Interest expense for the three months ended March 31, 2005 decreased by
approximately $11,000 compared to 2004. This is due to our continuing efforts to
reduce our trade payables and meet the scheduled terms and the reduced loans and
long-term note payables.
As a
result of the settlement with The Zondervan Corporation in October 2003 we
were forced to destroy inventory that was not technologically obsolete, but
had been produced for resale prior to our receiving notice to cease and desist
selling Zondervan content. Therefore, during the three months ended March 31,
2004, we wrote-off this distinct category of inventory with a carried cost
totaling approximately $32,000. This has been included in cost of sales.
Amortization
of the 1999 software license did not take place during the three months ended
March 31, 2004 and 2005. Upon final settlement in October of 2003, the term of
that license agreement was effectively extended indefinitely. In addition to the
technology of the program engine, user interface, source and object code, etc.,
the license also granted us the exclusive, perpetual and fully-paid up right to
use the trademarks associated with the programs. We believe that the right to
use the trademarks is the true economic value of the license and is not subject
to technological obsolescence. We believe the history of the products, the
existing and projected markets, the competition and the economy provides
sufficient evidence that these trademarks will continue to generate cash flows
for the remainder of the life of the license, which is now indefinite. This
effectively changed the substance of the 1999 license from an amortizable
intangible asset with a finite useful life to an unamortizable intangible asset
with an indefinite useful life. Amortization expense, determined using the
straight-line method, was previously calculated through the settlement date of
October 20, 2003. Amortization expense for 2005 reflects the launch of our new
Website, www.quickverse.com, during the second quarter of 2004.
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 March 31, 2005, management established the valuation
allowance based on the assessment that we 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.
Our
primary need for liquidity and capital resources are the funding of our
continued operations, which includes the ongoing internal development of new
products and expansion and upgrade of existing products and our pursuit of
future strategic product line and/or corporate acquisitions and licensing.
As of
March 31, 2005, we had $1,403,529 in current assets, $1,235,198 in current
liabilities and a retained deficit of $5,470,184. We had an income before income
taxes of $80,071 for the three months ended March 31, 2005.
Net cash
provided by operating activities was approximately $82,000 for the three months
ended March 31, 2004 and approximately $248,000 for the three months ended March
31, 2005. The increase in cash provided was primarily due to an increase in the
amounts received from customers resulting from increased sales.
Net cash
used in investing activities was approximately $92,000 for the three months
ended March 31, 2004 and approximately $279,000 for the three months ended March
31, 2005. The increase in cash used for investing activities results from
capitalizing costs associated with software development and upgrading our
internal computer equipment and software in order to increase our operating
efficiency capabilities.
Net cash
used by financing activities was approximately $1,000 for the three months ended
March 31, 2004 and approximately $27,000 for the three months ended March 31,
2005. Cash used by financing activities reflects payments made on long-term note
payables.
On July
19, 2004, we completed an equity financing in the amount of $1,750,000 through a
private placement with Barron Partners, L.P. 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 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. The original terms of the agreement called for the
exercise price associated with each of the warrants to be subject to downward
adjustment based on the occurrence or non-occurrence of certain events. An
amendment to the Barron Stock Purchase Agreement was entered into on September
30, 2004 which voided these provisions. See Exhibits 10.10, 10.11, 10.12, and
10.13.
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.
During
the years of 2003 and 2004, we had several non-recurring items take place. For
the twelve months ended December 31, 2003, we had a one-time, non-recurring
write down to accrued royalties of approximately $584,000, we wrote down a
distinct category of obsolete inventory of approximately $61,000, and we wrote
off a note payable of approximately $650,000 and the interest associated with
the note of approximately $217,000. For the twelve months ended December 31,
2004, we wrote down the reserve for rebates payable from a change in accounting
estimate of approximately $266,000, we wrote down a distinct category of
obsolete inventory of approximately $32,000, and we incurred a non-recurring
expense of approximately $155,000 related to a settlement with an institutional
private equity investor. 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 an extraordinary item. 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. The non-recurring
expense is a direct result of our coming to terms with an institutional
private equity investor for early termination of a certain investment agreement,
originally entered into in June 2001. These non-recurring items had no effect on
the cash flow statement.
Our
income before taxes and the extraordinary item decreased approximately
$1,674,000 from an income of approximately $1,808,000 for the twelve months
ended December 31, 2003 to a loss of approximately $134,000 for the twelve
months ended December 31, 2004. However, our net income increased approximately
$376,000 from a net income of approximately $1,842,000 for the twelve months
ended December 31, 2003 to a net income of approximately $2,218,000 for the
twelve months ended December 31, 2004. This increase is a result of increased
gross revenues along with the non-recurring items noted above.
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 us reducing
our trade payables and meeting the scheduled terms. Furthermore, the note
liabilities interest was reduced due to the reclassification of the note payable
in the fourth quarter of 2003. Amortization expense related to the 1999 license
decreased for the twelve months ended December 31, 2004 compared to 2003 as a
result of the final settlement in October 2003, which effectively extended the
life of the license indefinitely. Amortization expense related to software
development costs 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
for 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 |
% | ||||||
|
Less
reserve for sales returns and allowances |
567,643
|
10 |
% |
396,788
|
8 |
% |
170,855
|
43 |
% | |||||||||
|
Net
sales |
$ |
5,218,784 |
90 |
% |
$ |
4,390,757 |
92 |
% |
$ |
828,027 |
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 of 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 increase 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® 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 decrease due to our focused sales efforts
to 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.
|
Cost
of Sales for 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 |
% | |||||||||
|
Freight-out |
172,634
|
3 |
% |
125,680
|
3 |
% |
46,954
|
37 |
% | |||||||||
|
Cost
of sales |
$ |
1,745,664 |
30 |
% |
$ |
1,284,608 |
27 |
% |
$ |
461,056 |
36 |
% |
Cost of
sales consists primarily of royalties to third-party intellectual property
content providers, the direct costs and manufacturing overhead required to
reproduce, package and ship the software products, the amortized software
development costs and the cost to provide free technical support to our
customers. The direct costs and manufacturing overhead increased from 18.7% of
gross revenues in 2003 to 20.0% 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.
Furthermore, the direct cost and manufacturing overhead include the
non-recurring write downs of obsolete inventory as well as the estimated cost of
providing free technical support to our customers. 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 intellectual property content providers 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 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 compared to no sales to liquidators 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. However, upgrade
sales will continue to be subject to royalties only on content additions of the
upgraded version.
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 Costs for 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 |
% | ||||||
|
Fulfillment |
74,889
|
1 |
% |
43,376
|
1 |
% |
$ |
31,513 |
73 |
% | ||||||||
|
Advertising
and direct marketing |
393,964
|
7 |
% |
194,169
|
4 |
% |
$ |
199,795 |
103 |
% | ||||||||
|
Marketing
and customer service |
10,900
|
0 |
% |
5,511
|
0 |
% |
$ |
5,389 |
98 |
% | ||||||||
|
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 |
% |
-
|
0 |
% |
$ |
94,000 |
-
|
|||||||||
|
Interest |
42,007
|
1 |
% |
87,144
|
2 |
% |
$ |
(45,137 |
) |
-52 |
% |
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 $481,000 from approximately $813,000 for 2003 to
approximately $1,294,000 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; fulfillment costs from
a third-party warehouse increased approximately $32,000 as we released three
major product upgrades beginning late December 2003 through December 2004;
advertising, rebates, and direct marketing increased approximately $200,000 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 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.
We wrote-off
distinctly different categories of obsolete inventory with a carried cost
totaling approximately $61,000 during the twelve months ended December 31, 2003
and approximately $32,000 during the twelve months ended December 31, 2004. The
2004 inventory write-off was a direct result of the March 2004 settlement
with Zondervan, which forced us to destroy inventory that was not
technologically obsolete but had been produced for resale prior to our receiving
notice to cease and desist selling Zondervan consent. These have been recognized
in cost of sales.
During
the year ended December 31, 2004, we incurred approximately $155,000 in
expenses related to a settlement agreement with 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
treated as expenses incurred in connection with a withdrawn public offering.
During
the year ended December 31, 2003, we reclassified as other income -
nonrecurring items 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 adjusted the reserve for rebates by
approximately $266,000 in order to more properly reflect open rebate programs
and the estimated balance of each that management expects to pay. The remaining
reserve balance was estimated based on historical response rates.
Amortization
of the 1999 license decreased approximately $29,000 from approximately $45,000
for the twelve months ended December 31, 2003 to approximately $16,000 for the
twelve months ended December 31, 2004. Upon final settlement in October of 2003,
the term of the 1999 license was effectively extended indefinitely. This
effectively changed the substance from an amortizable intangible asset with a
finite useful life to an unamortizable intangible asset with an indefinite
useful life. Amortization expense, determined using the straight-line method,
was calculated through the settlement date of October 20, 2003. Amortization
expense for 2004 reflects the launch of our new Website,
www.quickverse.com, during the second quarter.
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.
During
the year ended December 31, 2004, we recognized approximately a $1,000,000
gain from extinguishment of debt which is classified as an extraordinary item.
The extinguishment of debt is a direct result from one-time settling
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. Income taxes allocated and subtracted from the total gain were
approximately $401,000, or approximately 40%. 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) |
As of
December 31, 2004, we had $1,551,447 in current assets, $1,383,146 in
current liabilities and a retained deficit of $5,631,787. We had a net loss
before income taxes of $134,455 for the year ended December 31, 2004. However,
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. 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 |
$ |
(741,603 |
) |
$ |
(714,103 |
) |
$ |
(27,500 |
) | ||
|
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 $714,000 and $742,000 for the
years ended December 31, 2003 and 2004, respectively. The increase in cash used
for investing activities results from capitalizing costs associated with
software development and upgrading our internal computer equipment and software
in order to increase our operating efficiency capabilities.
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 the private placement financing. Cash provided by financing
activities reflects proceeds from issuance of stock and convertible 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. 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 Partners
received two warrants to purchase 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. The
original terms of the agreement called for the exercise price associated with
each of the warrants to be subject to adjustment based on the occurrence or
non-occurrence of certain events. An amendment to the Barron Partners, LP Stock
Purchase Agreement was entered into on September 30, 2004 which removed these
provisions. See Exhibits 10.10 and 10.11.
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 18 - Commitments and Contingencies. In addition,
according to the settlement agreement, the term of the 1999 license has been
effectively extended indefinitely.
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 for
reserve of 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 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.
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 (a) the
straight-line basis over the estimated product life (generally from 12 to 18
months), or (b) 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 2,
Accounting for Research and Development Costs, established accounting
and reporting standards for research and development. In accordance with SFAS 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 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.
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.
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.
We
develop, publish, market, 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.
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.
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. |
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.
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 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. |
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 a 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
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. |
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®, The Story of
Creation®, Amazon Trail® (3rd Edition), and
Oregon Trail® (4th Edition). 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 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, sales of these software products constituted approximately 2% of our
2004 annual revenues.
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 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.
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; |
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In-store
promotions, displays and retailer assisted co-operative advertising;
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Publicity
activities; and |
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Trade
shows. |
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
Christian Bookseller’s Association. 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.
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.
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.
We are
not currently subject to direct regulation by any government agency, other than
regulations applicable to businesses generally.
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:
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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. |
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,
Christian Bookseller’s Association, direct and online sales.
Specifically,
and in relation to our QuickVerse® products, we believe that we are
the market leader in our category. We currently compete with the following
companies and products, among others:
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Logos
Research Systems, Inc. - Logos Series X®
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Biblesoft,
Inc.- BibleSoft PC Bible Study®
Version 4 |
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Thomas
Nelson, Inc. - Nelson eBible®
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WordSearch
Bible Publishers - WordSearch® 7
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Zondervan
- Zondervan Bible Study Library®
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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:
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ACS
Technologies® |
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CCIS
Church Software® |
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Church
Data Master Plus® |
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Church
Windows/Computer Helper®
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Church
Office® |
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Logos
Management Software® |
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Power
Church Software® |
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Servant
PC® |
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Shelby
Systems® |
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Shepard’s
Staff®
(Concordia Publishing House) |
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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. 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.
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 that have occurred since June
1999, is incorporated by reference into this prospectus 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 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 around 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 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 our 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. 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.
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
makes 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 intellectual property 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%), 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.
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 intellectual property 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.
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 in operating the business. We are not subject to
any collective bargaining agreements and believe that our relationships with our
employees are good.
As of the
date of this prospectus, 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.
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.
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 33% of our
annual sales.
The
following persons are our current directors and executive officers:
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 the company 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 (CBA) Sales from July
1999 to April 2002. Mr. Edwards has been in the Christian Booksellers
Association (CBA) 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 our audit committee and our compensation committee.
Since
December 2000, we have maintained 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, we have maintained a compensation committee. The two 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.
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 Awards |
||||||||||||||||||||||
|
Annual
Compensation |
Awards |
Payouts |
||||||||||||||||||||
|
Name
and
Principal
Position |
Year
|
Salary |
Bonus |
Other
Annual
Compensation
|
Restricted
Stock
Awards |
|
Securities
Underlying
Options/
SARs
(#) |
|
LTIP
Payouts |
|
All
Other Compensation | |||||||||||
|
Steven
Malone, |
2004 |
$ |
150,000 |
$ |
22,192 |
$ |
-0- |
$ |
-0- |
-0- |
$ |
-0- |
$ |
-0- | ||||||||
|
President
and |
2003 |
$ |
150,000 |
$ |
18,079 |
$ |
-0- |
$ |
-0- |
-0- |
$ |
-0- |
$ |
-0- | ||||||||
|
Chief
Executive Officer |
2002 |
$ |
150,000 |
$ |
2,203 |
$ |
-0- |
$ |
37,306 |
-0- |
$ |
-0- |
$ |
-0- | ||||||||
|
William
Terrill |
2004 |
$ |
150,000 |
$ |
22,192 |
$ |
-0- |
$ |
-0- |
-0- |
$ |
-0- |
$ |
-0- | ||||||||
|
Chief
Technology |
2003 |
$ |
150,000 |
$ |
18,079 |
$ |
-0- |
$ |
14,536 |
500,000 |
$ |
-0- |
$ |
-0- | ||||||||
|
Officer |
2002 |
$ |
72,115 |
$ |
2,203 |
$ |
-0- |
$ |
-0- |
500,000 |
$ |
-0- |
$ |
-0- | ||||||||
|
Kirk
R. Rowland |
2004 |
$ |
108,846 |
$ |
22,192 |
$ |
-0- |
$ |
-0- |
-0- |
$ |
-0- |
$ |
-0- | ||||||||
|
Chief
Financial |
2003 |
$ |
82,306 |
$ |
18,079 |
$ |
-0- |
$ |
-0- |
-0- |
$ |
-0- |
$ |
-0- | ||||||||
|
Officer |
2002 |
$ |
80,000 |
$ |
-0- |
$ |
-0- |
$ |
31,807 |
-0- |
$ |
-0- |
$ |
-0- | ||||||||
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 ($.001).
We did
not grant stock options during the fiscal year ended December 31, 2004. No
executive exercised any stock options during the fiscal year 2004.
Option/SAR
Grants in Last Fiscal Year
|
Name |
Number
of Securities Underlying
Options/SARs Granted
(#) |
|
Percent
of Total Options/SARs
Granted to Employees
in Fiscal Year |
Exercise
or
Base Price($/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
- |
Mr.
Malone is employed by us 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 for anything other than 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 by us 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 common shares at the market price of $0.04 per share, the
quoted trading price on the date the agreement was reached. In the event Mr.
Terrill is terminated by us for anything other than 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 by us 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 for anything other than 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.
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 common shares 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 common shares valued at $.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.
Nevada
law authorizes a Nevada corporation to indemnify its officers and directors
against claims or liabilities arising out of such person’s conduct as officers
or directors if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the company for which
they serve. Our articles of incorporation provide for indemnification of our
directors. In addition, our Bylaws provide for indemnification of our directors,
officers, employees or agents. In general, these provisions provide for
indemnification in instances when such persons acted in good faith and in a
manner they reasonably believed to be in or not opposed to our best interests.
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 in 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, all of
which are presently exercisable and 21,875,000 common shares 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 |
8,988,223
|
12.5 |
|||||
|
as
a group (5 persons) |
|
|
(1)
|
Consists
of stock options to acquire up to 250,000 shares of common stock, all of
which are presently exercisable, 1,719,111 common shares directly owned,
and stock options to acquire up to 50,000 shares of common stock all of
which are presently exercisable and 124,000 common shares 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 common shares 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 common shares 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 common shares 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 common shares 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. 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.
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 45.0% 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.
The
validity of the securities being registered by this registration statement is
being passed upon for the registrant by the legal firm of M.M. Membrado, PLLC,
corporate counsel to the Registrant. Membrado has, in the past, either directly
or through its affiliates, received warrants to purchase 150,000 shares of
common stock at an exercise price of $0.01 per share and 150,000 shares of
common stock at an exercise price of $0.022 per share. These warrants expire
between March 7, 2006, May 11, 2006, and April 7, 2009.
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. The Regulation D Rule 506 private placement transaction, which
closed on July 26, 2004, resulted in gross equity financing proceeds to us
in the amount of $1,750,000. As of the date hereof, Barron Partners, LP owns
45.0% 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. Under the terms of transaction (as subsequently
amended), 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 from November 10, 2004, to purchase up to 10,937,500 common shares at a
price of $0.18 per share, subject to adjustment based on the occurrence of
certain events. The second warrant entitles the holder, also for a period of up
to five years from November 10, 2004, to purchase up to 10,937,500 additional
common shares at a price of $0.60 per share, also subject to adjustment based on
the occurrence of certain events.
In
addition to the shares of our common stock issued to Barron Partners, LP and the
common stock issuable upon exercise of the warrants issued to Barron Partners,
LP, we are also registering the following:
|
• |
2,000,000
shares of our common stock issued as of November 16, 2004 upon conversion
of $240,000 of previously outstanding debt securities; | |
| • |
466,666
shares of our common stock issued as of December 31, 2004 upon
conversion of $23,333 of previously outstanding debt securities;
and |
|
•
|
1,275,000
shares of our common stock issuable upon exercise of warrants previously
issued to a number of our consultants/service providers.
|
The
following table sets forth the following information as of the date of this
prospectus, with respect to Barron Partners, LP and the other selling
stockholders for whom we are registering shares for resale to the public: (1)
the name of each selling stockholder, (2) the number of shares of our common
stock beneficially owned by each selling stockholder, including the number of
shares purchasable upon exercise within 60 days of warrants, (3) the number of
shares of common stock registered for sale pursuant to this prospectus, (4) the
number of shares of common stock that the selling stockholders would own if they
sold all of their shares registered by this prospectus, and (5) the percentage
of our outstanding common stock that would be beneficially owned by such selling
stockholder if they sold all of their shares registered by this prospectus.
Except as
set forth below, none of the selling stockholders currently is an affiliate of
ours, and none of them has had a material relationship with us during the past
three years. An asterisk in the table indicates a corresponding common stock
ownership of less than one percent (1%).
|
Selling
Stockholder |
Number
of Shares
Beneficially
Owned
Prior to
Offering
|
Number
of Shares
Being Registered
For Sale
in this Prospectus
|
Number
of Shares
to be Beneficially
Owned
After the
Offering
|
Percentage
of
Outstanding
Shares
to be
Owned
After the
Offering(1) |
| ||||||||
|
Barron
Partners, LP (2) |
43,750,000
|
43,750,000
|
--
|
* |
|||||||||
|
|
|||||||||||||
|
C.
James Jensen (3) |
1,000,000
|
1,000,000
|
--
|
* |
|||||||||
|
|
|||||||||||||
|
2030
Investors, LLC (4) |
1,000,000
|
1,000,000
|
--
|
* |
|||||||||
|
|
|||||||||||||
|
Robert
Chamberlain (5) |
62,500
|
62,500
|
--
|
* |
|||||||||
| Kevin Reagan (6) | 62,500 | 62,500 | -- | * | |||||||||
|
|
|||||||||||||
|
Membrado
& Montell, LLP (7) |
150,000
|
150,000
|
--
|
* |
|||||||||
|
|
|||||||||||||
|
Michael
M. Membrado (8) |
150,000
|
150,000
|
--
|
* |
|||||||||
|
|
|||||||||||||
|
Ronald
Ardt (9) |
1,891,599
|
716,666
|
1,174,933
|
1.60 |
|||||||||
|
|
|||||||||||||
|
Joseph
Abrams (10) |
600,000
|
600,000
|
--
|
* |
|||||||||
|
|
|||||||||||||
|
Total |
48,666,659
|
47,491,666
|
1,174,933
|
1.60 |
*
Represents less than one percent.
|
|
(1)
|
Assumes
that the selling stockholders will resell all of the registered shares.
Because the selling stockholders may sell all, some or none of their
shares or may acquire or dispose of other shares of common stock, no
reliable estimate can be made of the aggregate number of shares that will
be sold pursuant to this offering or the number or percentage of shares of
common stock that each stockholder will own upon completion of this
offering. |
|
|
(2)
|
Includes
21,875,000 unregistered common shares issued to an accredited investor
pursuant to 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, for consideration in the
amount of $1,750,000, as based on the value of our securities on the date
of issuance. Further includes two unregistered common stock warrants each
issued to an accredited investor pursuant to 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, each for consideration in the amount of $576,042, as based on
the value of our securities on the date of issuance. The first warrant
would entitle the holder to purchase up to 10,937,500 common shares at a
price of $0.18 per share and the second warrant would entitle the holder
to purchase up to 10,937,500 additional common shares at a price of $0.60
per share. By virtue of these holdings, Barron Partners, LP is deemed to
be an “affiliate” of ours and is therefore subject to certain regulations
not otherwise applicable. Voting and/or investment power over these common
shares and warrants is held by Andrew Barron Worden, a principal in the
general partnership of Barron Partners, LP. Barron
Partners, L.P. has represented to us that it was neither a broker-dealer
nor an affiliate of any broker-dealer at the time of the acquisition and
had no agreements, understandings or arrangements with any other persons,
either directly or indirectly, to dispose of any of the securities being
registered
hereunder. |
|
|
(3)
|
Includes
1,000,000 unregistered common shares acquired as of November 16, 2004 upon
conversion of a promissory note, in accordance with Section 3(a)(9), which
note was originally issued September 30, 2004 to an accredited investor
pursuant to 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, for consideration in the
amount of $120,000, as based on the value of our securities on the date of
issuance, in connection with a loan to us in the same amount. C. James
Jensen has represented to us that he was not affiliated with any
broker-dealer at the time of the acquisition and had no agreements,
understandings or arrangements with any other persons, either directly or
indirectly, to dispose of any of the securities being registered
hereunder. |
|
|
(4)
|
Includes
1,000,000 unregistered common shares acquired as of November 16, 2004 upon
conversion of a promissory note, in accordance with Section 3(a)(9) of the
Securities Act, which note was originally issued September 30, 2004
pursuant to 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, for consideration in the
amount of $120,000, as based on the value of our securities on the date of
issuance, in connection with a loan to us in the same amount. Voting
and/or investment power over these common shares is held by Ellison Morgan
of 2030 Investors, LLC. 2030
Investors, LLC has represented to us that it was neither a broker-dealer
nor an affiliate of any broker-dealer at the time of the acquisition and
had no agreements, understandings or arrangements with any other persons,
either directly or indirectly, to dispose of any of the securities being
registered
hereunder. |
|
|
(5)
|
Includes
a single unregistered warrant to purchase a total of 62,500 common shares
at a price of $0.148 per share issued as of February 19, 2001 under 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, in partial consideration of certain business
consulting services. The value attributed to the warrant was $19,750, as
based on the value of our securities on the date of issuance. Mr.
Chamberlain has represented to us that he was not affiliated with any
broker-dealer at the time of the acquisition and had no agreements,
understandings or arrangements with any other persons, either directly or
indirectly, to dispose of any of the securities being registered
hereunder. |
|
|
(6)
|
Includes
a single unregistered warrant to purchase a total of 62,500 common shares
at a price of $0.148 per share issued as of February 19, 2001 under 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, in partial consideration of certain business
consulting services. The value attributed to the warrant was $19,750, as
based on the value of our securities on the date of issuance. Mr. Reagan
has represented to us that he was not affiliated with any broker-dealer at
the time of the acquisition and had no agreements, understandings or
arrangements with any other persons, either directly or indirectly, to
dispose of any of the securities being registered
hereunder. |
|
|
(7)
|
Includes
two unregistered warrants to purchase a total of 150,000 common shares at
a price of $0.01 per share issued as of March 7, 2001 and May 11, 2001,
respectively, and each issued pursuant to 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, each
in consideration of the granting of extension of payment terms on amounts
previously owed. The values attributable to the warrants were $13,464, as
based on the value of our securities on the date of issuance. Membrado
& Montell, LLP served as corporate legal counsel to us from early 2000
through 2003. Voting and/or investment power over these warrants is held
by Michael M. Membrado and Scott Montell, formerly of Membrado &
Montell, LLP, in equal portions. Membrado
& Montell, LP has represented to us that it was neither a
broker-dealer nor an affiliate of any broker-dealer at the time of the
acquisition and had no agreements, understandings or arrangements with any
other persons, either directly or indirectly, to dispose of any of the
securities being registered
hereunder. |
|
|
(8)
|
Includes
a single unregistered warrant to purchase up to 150,000 common shares at a
price of $0.022 per share issued as of April 7, 2004 pursuant to 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, in consideration of the granting of extension of
payment terms on amounts previously owed. The value attributable to the
warrant was $3,300, as based on the value of our securities on the date of
issuance. Mr. Membrado is the sole principal of M.M. Membrado, PLLC our
corporate legal counsel. Voting and/or investment power over this warrant
is held by Michael M. Membrado of M.M. Membrado, PLLC. Mr.
Membrado has represented to us that he was not affiliated with any
broker-dealer at the time of the acquisition and had no agreements,
understandings or arrangements with any other persons, either directly or
indirectly, to dispose of any of the securities being registered
hereunder. |
|
|
(9)
|
Includes
the following:
(a)
668,625 common shares beneficially owned directly, including (i) 35,500
common shares acquired as of April 28, 2000 pursuant to 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, in consideration of a cash investment of $71,000
($2.00 per share), (ii) an additional 22,875 common shares acquired as of
April 28, 2000 pursuant to 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, in consideration of part
of a 15% placement agent commission payable in connection with a previous
private offering by us (based on $2.00 per share), (iii) 10,000 common
shares acquired as of August 18, 2000 pursuant to 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, in consideration of a certain corporate development consulting
agreement, (iv) 204,000 common shares acquired as of March 7, 2002
pursuant to 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, in consideration of a
settlement of a claim by Mr. Ardt for failure on our part to have
fulfilled certain registration obligations associated with common shares
previously sold to him, (v) a warrant to purchase up to 250,000 common
shares, acquired as of June 3, 2002 pursuant to 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, in consideration of the satisfaction of $ 27,917.68 in
consulting fees then due, (vi) 137,250 common shares acquired as of
September 20, 2002 pursuant to 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, in further
consideration of the settlement for failure on our part to have fulfilled
certain registration obligations associated with common shares previously
sold to Mr. Ardt, and (vii) an additional 9,000 common shares acquired as
of September 20, 2002 pursuant to 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, in
consideration of delays in issuing shares associated with the settlement
for failure on our part to have fulfilled certain registration obligations
associated with common shares previously sold to Mr. Ardt.
(b)
901,666 common shares beneficially owned through Business Investor
Services, Inc., including (i) 60,000 common shares acquired as of April
28, 2000 pursuant to 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, in consideration of a cash
investment of $71,000 ($2.00 per share), (ii) 15,000 common shares
acquired as of August 18, 2000 pursuant to the private offering exemption
of Section 4(2) of the Securities Act and/or the private offering safe
harbor provision of Regulation D promulgated thereunder, in consideration
of a certain corporate development consulting agreement, (iii) 360,000
common shares acquired as of March 7, 2002 pursuant to 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, in consideration of a settlement of a claim by
Business Investor Services, Inc. for failure on our part to have fulfilled
certain registration obligations associated with common shares previously
sold to it, and (iv) 466,666 common shares acquired pursuant to Section
3(a)(9) under the Securities Act as of December 31, 2004 upon partial
conversion (in the amount of $23,333.33) of a convertible promissory note
in the original face amount of $33,333 originally issued on May 31, 2002
pursuant to 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.
(c)
321,308 common shares beneficially owned through Ardt Investment
Management, Inc., including (i) 25,000 common shares acquired as of August
18, 2000 pursuant to the private offering exemption of Section 4(2) of the
Securities Act and/or the private offering safe harbor provision of
Regulation D promulgated thereunder, in consideration of a certain
corporate development consulting agreement, and (ii) a warrant to purchase
up to 296,308 common shares acquired as of November 8, 2002 pursuant to
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, in consideration of the satisfaction
of $8,869 in consulting fees then due.
Voting
and/or investment power over all of these securities is held by Ronald
Ardt. At the time of each of these acquisitions except for that one
occurring in 2004, Mr. Ardt was the owner and securities principal of
Travis Morgan Securities, Inc. then an NASD registered broker-dealer,
and was a securities principal in an OSJ (Office of Supervisory
Jurisdiction) with RichMark Capital Corporation, also then an NASD
registered broker-dealer, up until July 16, 2000. Since 2003, Mr. Ardt has
been a securities principal with Worth Securities Inc. (formerly ProMark
Securities Inc.). Also at the time of these acquisitions, Mr. Ardt had no
agreements, understandings or arrangements with any other persons, either
directly or indirectly, to dispose of any of the securities being
registered
hereunder. |
|
|
(10)
|
Includes
a single unregistered warrant to purchase up to 600,000 common shares at a
price of $0.15 per share issued as of May 21, 2004 under 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, in consideration of certain business consulting
services in an amount equal to $59,915, as based on the value of our
securities on the date of issuance. Joseph Abrams has represented to us
that he was not an affiliate of any broker-dealer at the time of the
acquisition and had no agreements, understandings or arrangements with any
other persons, either directly or indirectly, to dispose of any of the
securities being registered
hereunder. |
Each
selling stockholder is free to offer and sell his or her shares of our common
stock at such times, in such manner and at such prices as he or she may
determine. The types of transactions in which the shares of our common stock are
sold may include transactions in the over-the-counter market (including block
transactions), negotiated transactions, the settlement of short sales of our
common stock, or a combination of such methods of sale. The sales will be at
market prices prevailing at the time of sale or at negotiated prices. Such
transactions may or may not involve brokers or dealers. The selling stockholders
have advised us that they have not entered into agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
shares. The selling stockholders do not have an underwriter or coordinating
broker acting in connection with the proposed sale of our common stock.
The
selling stockholders may sell their shares directly to purchasers or to or
through broker-dealers, which may act as agents or principals. These
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders. They may also receive compensation
from the purchasers of our common stock for whom such broker-dealers may act as
agents or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
Barron
Partners, LP is, and each of the other selling stockholders and any
broker-dealer that assists in the sale of our common stock may be deemed to be,
an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act.
Any commissions received by such broker-dealers and any profit on the resale of
the shares of our common stock sold by them while acting as principals might be
deemed to be underwriting discounts or commissions. The selling stockholders may
agree to indemnify broker-dealers for transactions involving sales of our common
stock against certain liabilities, including liabilities arising under the
Securities Act.
Because
Barron Partners, LP is, and each of the other selling stockholders may be deemed
to be, an underwriter within the meaning of Section 2(a)(11) of the Securities
Act, Barron Partners, LP, and the other selling stockholders will be subject to
prospectus delivery requirements.
Prior to
any sales of the shares being registered hereunder, we will have informed Barron
Partners, LP that the anti-manipulation rules of the SEC, including Regulation M
promulgated under the Securities Exchange Act, will apply to its sales in the
market, and we will have informed the other selling stockholders that these
anti-manipulation rules may apply to their sales in the market. Also prior to
any sales of the shares being registered hereunder, we will have provided all of
the selling stockholders with a copy of such rules and regulations.
Regulation
M may limit the timing of purchases and sales of any of the shares of our common
stock by the selling stockholders and any other person distributing our common
stock. The anti-manipulation rules under the Securities Exchange Act may apply
to sales of shares of our common stock in the market and to the activities of
the selling stockholders and their affiliates. Furthermore, Regulation M of the
Securities Exchange Act may restrict the ability of any person engaged in the
distribution of shares of our common stock to engage in market-making activities
with respect to the particular shares of common stock being distributed for a
period of up to five business days prior to the commencement of such
distribution. All of the foregoing may affect the marketability of our common
stock and the ability of any person or entity to engage in market-making
activities with respect to our common stock.
Rules 101
and 102 of Regulation M under the Securities Exchange Act, among other things,
generally prohibit certain participants in a distribution from bidding for or
purchasing for an account in which the participant has a beneficial interest,
any of the securities that are the subject of the distribution. Rule 104 of
Regulation M governs bids and purchases made to stabilize the price of a
security in connection with a distribution of the security.
Barron
Partners, LP and the other selling stockholders will pay all commissions,
transfer taxes and other expenses associated with their sales. The shares
offered hereby are being registered pursuant to our contractual obligations, and
we have agreed to pay the expenses of the preparation of this prospectus.
The
following summary description of our capital stock is a summary and is qualified
in its entirety by reference to our articles of incorporation, as amended to
date, and our bylaws. All material terms of these referenced documents are
disclosed in this document.
We have
an authorized capitalization of 120,000,000 shares of common stock, $.001 par
value per share and 5,000,000 authorized shares of preferred stock, $.001 par
value per share. Our articles of incorporation authorize our board of directors
to direct the issuance of shares of preferred stock in one or more series from
time to time and to fix the designations, powers, preferences, rights,
qualifications, limitations and restrictions of each series of preferred stock.
These may include voting rights, dividend rates and whether dividends are
cumulative, terms and conditions of redemption or conversion, and rights upon
liquidation.
We have
an authorized capitalization of 120,000,000 shares of common stock, $.001 par
value per share. As of June 7, 2005, there were 48,619,855 shares of our
common stock issued and outstanding. The holders of our common stock are
entitled to one non-cumulative vote for each share held of record on all matters
submitted to a vote of stockholders. Subject to preferences that may be
applicable to outstanding shares of preferred stock, if any, the holders of
common stock are entitled to receive ratably any dividends that are declared by
our board of directors out of funds legally available therefore and are entitled
to share ratably in all of our assets available for distribution to
holders of our common stock upon liquidation, dissolution or winding up of our
affairs. Holders of our common stock have no preemptive, subscription or
conversion rights and there are no redemption or sinking fund provisions or
rights applicable thereto.
We
have an authorized capitalization of 5,000,000 authorized shares of
preferred stock, $.001 par value per share. Our board of directors, without
stockholder approval, may designate and issue from time to time various series
of preferred stock with rights, preferences and privileges as they deem
appropriate, including without limitation liquidation preferences, redemption
rights, consent rights, voting rights and conversion rights (including those
containing anti-dilution protections) that could materially and adversely impact
of the interests of holders of our common stock. The issuance of preferred stock
could also decrease the amount of earnings and assets available for distribution
to holders of our common stock. In addition, the issuance of preferred stock may
have the effect of delaying or preventing a change of our control.
Although
we have previously designated and had issued and outstanding two series of
convertible preferred stock, all shares of such serial preferred stocks have
since been converted to common stock and, as of June 7, 2005, there were no
outstanding shares of our preferred stock. We have no present intention or plans
to designate any series, or to issue any additional shares, of preferred stock.
There can be no assurance, however, that we will not designate and issue
additional series of preferred stock in the future.
Payment
of dividends is solely at the discretion of our board of directors. We have
never declared cash dividends on our capital stock. We currently intend to
retain all available funds and any future earnings for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
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 |
|||
On June 6,
2005, the closing bid price of our common stock was $0.11 and there were
approximately 800 stockholders of record, excluding stock held in street name.
The SEC
has adopted Rule 15g-9 under the Securities Exchange Act of 1934 which
establishes the definition of a “penny stock” for the purposes relevant to us,
as any equity security having a market price of less than $5.00 per share or
carrying an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
|
•
|
that
a broker or dealer approve a person’s
account for transactions in penny stocks; and
|
|
•
|
the
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased. |
In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
|
•
|
obtain
financial information and investment experience objectives of the person;
and |
|
• |
make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks. |
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
|
•
|
sets
forth the basis on which the broker or dealer made the suitability
determination; and |
|
• |
that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
|
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
For these
reasons, and generally, brokers may be less willing to execute transactions in
securities subject to the penny stock rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
The
transfer agent for our common stock is Continental Stock Transfer and Trust
Company, 2 Broadway, New York, New York 10004.
M.M.
Membrado, PLLC, 115 East 57th Street,
Suite 1006, New York, New York, 10022 has passed on the validity of the shares
of common stock and underlying the shares of common stock previously unexercised
warrants offered hereby.
The
audited consolidated financial statements included in this prospectus have been
audited by Chisholm, Bierwolf & Nilson, LLC, independent certified public
accountants, and are included herein in reliance upon the report of said firm
given upon their authority as experts in accounting and auditing.
We have
filed with the SEC a registration statement on Form SB-2 under the Securities
Act with respect to the common stock offered hereby. This prospectus does not
contain all of the information set forth in the rules and regulations of the
SEC. For further information with respect to our company and this offering, we
refer you to the registration statement and exhibits filed as part of it. You
may inspect the registration statement, including the exhibits thereto, without
charge at the Public Reference Room of the SEC at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may also obtain copies of all or any portion of the
registration statement from the Public Reference Room, upon payment of the
prescribed fees. You may obtain information on the operation of the Public
Reference Room by calling the SEC at (202) 942-8090. You may also access such
material electronically by means of the SEC’s home page on the Internet located
at www.sec.gov.
Descriptions contained in this prospectus as to the contents of any contract or
other document filed as an exhibit to the registration statement are not
necessarily complete and each such description is qualified by reference to such
contract or document.
|
CONDENSED
CONSOLIDATED BALANCE SHEETS | |||||||
|
| |||||||
|
|
(Unaudited) | ||||||
|
|
March 31, 2005 |
December
31, 2004 |
|||||
|
Assets | |||||||
|
Current
assets: | |||||||
|
Cash
and cash equivalents |
$ |
283,141 |
$ |
341,359 |
|||
|
Accounts
receivable, trade |
517,242
|
566,819
|
|||||
|
Inventory |
248,047
|
234,000
|
|||||
|
Other
current assets |
355,099
|
409,269
|
|||||
|
Total
current assets |
1,403,529
|
1,551,447
|
|||||
|
Property
and equipment, net |
140,800
|
131,019
|
|||||
|
Software
license |
2,513,158
|
2,513,158
|
|||||
|
Capitalized
software development costs, net |
783,250
|
701,289
|
|||||
|
Restricted
cash |
50,354
|
50,354
|
|||||
|
Other
assets |
417,854
|
348,069
|
|||||
|
Total
assets |
$ |
5,308,945 |
$ |
5,295,336 |
|||
|
| |||||||
|
Liabilities
and stockholders’ equity | |||||||
|
Current
liabilities: | |||||||
|
Accounts
payable, trade |
$ |
506,852 |
$ |
621,804 |
|||
|
Accrued
royalties |
253,744
|
287,514
|
|||||
|
Other
current liabilities |
474,602
|
473,828
|
|||||
|
Total
current liabilities |
1,235,198
|
1,383,146
|
|||||
|
Long-term
obligations |
296,894
|
296,940
|
|||||
|
Commitments
and contingencies | |||||||
|
Stockholders’
equity: | |||||||
|
Preferred
stock |
-
|
-
|
|||||
|
Common
stock |
48,620
|
48,620
|
|||||
|
Paid-in
capital |
9,198,417
|
9,198,417
|
|||||
|
Retained
(deficit) |
(5,470,184 |
) |
(5,631,787 |
) | |||
|
Total
stockholders’ equity |
3,776,853
|
3,615,250
|
|||||
|
Total
liabilities and stockholders’ equity |
$ |
5,308,945 |
$ |
5,295,336 |
|||
|
| |||||||
|
See
accompanying notes. | |||||||
|
Findex.com,
Inc. | |||||||
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||
|
(Unaudited) | |||||||
|
| |||||||
|
Three
Months Ended March 31 |
2005 |
2004 |
|||||
|
Revenues,
net of reserves and allowances |
$ |
1,672,504 |
$ |
1,537,264 |
|||
|
Cost
of sales |
493,506
|
465,110
|
|||||
|
Gross
profit |
1,178,998
|
1,072,154
|
|||||
|
Operating
expenses: | |||||||
|
Sales
and marketing |
437,816
|
217,016
|
|||||
|
General
and administrative |
636,711
|
555,678
|
|||||
|
Other
operating expenses |
20,544
|
12,075
|
|||||
|
Total
operating expenses |
1,095,071
|
784,769
|
|||||
|
Earnings
from operations |
83,927
|
287,385
|
|||||
|
Other
expenses, net |
(3,856 |
) |
(14,330 |
) | |||
|
Income
before income taxes |
80,071
|
273,055
|
|||||
|
Provision
for income taxes |
81,532
|
(800 |
) | ||||
|
Net
income |
161,603
|
272,255
|
|||||
|
Retained
deficit at beginning of year |
(5,631,787 |
) |
(7,845,331 |
) | |||
|
Retained
deficit at end of period |
$ |
(5,470,184 |
) |
$ |
(7,573,076 |
) | |
|
| |||||||
|
Net
earnings per share: | |||||||
|
Basic |
$ |
- |
$ |
0.01 |
|||
|
Diluted |
$ |
- |
$ |
0.01 |
|||
|
| |||||||
|
Weighted
average shares outstanding: | |||||||
|
Basic |
48,619,855
|
21,011,438
|
|||||
|
Diluted |
49,350,801
|
22,965,438
|
|||||
|
| |||||||
|
See
accompanying notes. | |||||||
|
Findex.com,
Inc. | |||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS | |||||||
|
(Unaudited) | |||||||
|
| |||||||
|
Three
Months Ended March 31 |
2005 |
2004 |
|||||
|
Cash
flows from operating activities: | |||||||
|
Cash
received from customers |
$ |
1,707,292 |
$ |
1,481,382 |
|||
|
Cash
paid to suppliers and employees |
(1,456,683 |
) |
(1,385,164 |
) | |||
|
Other
operating activities, net |
(3,076 |
) |
(13,921 |
) | |||
|
Net
cash provided by operating activities |
247,533
|
82,297
|
|||||
|
Cash
flows from investing activities: | |||||||
|
Software
development costs |
(264,649 |
) |
(73,628 |
) | |||
|
Other
investing activities, net |
(14,581 |
) |
(18,674 |
) | |||
|
Net
cash (used) by investing activities |
(279,230 |
) |
(92,302 |
) | |||
|
Cash
flows from financing activities: | |||||||
|
Proceeds
from line of credit, net |
-
|
16,605
|
|||||
|
Payments
made on long-term notes payable |
(26,521 |
) |
(17,684 |
) | |||
|
Net
cash (used) by financing activities |
(26,521 |
) |
(1,079 |
) | |||
|
Net
(decrease) in cash and cash equivalents |
(58,218 |
) |
(11,084 |
) | |||
|
Cash
and cash equivalents, beginning of year |
341,359
|
142,022
|
|||||
|
Cash
and cash equivalents, end of period |
$ |
283,141 |
$ |
130,938 |
|||
|
| |||||||
|
Reconciliation
of net income to cash flows from operating activities: | |||||||
|
Net
income |
$ |
161,603 |
$ |
272,255 |
|||
|
Adjustments
to reconcile net income to net cash provided by operating
activities: |
|||||||
|
Software
development costs amortized |
182,688
|
152,213
|
|||||
|
Provision
for bad debts |
653
|
2,500
|
|||||
|
Depreciation
& amortization |
19,891
|
9,575
|
|||||
|
Loss
on disposal of property, plant and equipment |
1,715
|
-
|
|||||
|
Change
in assets and liabilities: |
|||||||
|
(Increase)
decrease in accounts receivable |
48,924
|
(80,478 |
) | ||||
|
(Increase)
decrease in inventories |
(14,047 |
) |
99,600
|
||||
|
(Increase)
decrease in prepaid expenses |
51,841
|
(1,750 |
) | ||||
|
(Decrease)
in accrued royalties |
(33,770 |
) |
(100,436 |
) | |||
|
(Decrease)
in accounts payable |
(114,952 |
) |
(251,996 |
) | |||
|
Increase
in income taxes payable |
180
|
-
|
|||||
|
Increase
(decrease) in deferred taxes |
(81,712 |
) |
800
|
||||
|
Increase
(decrease) in other liabilities |
24,519
|
(19,986 |
) | ||||
|
Net
cash provided by operating activities |
$ |
247,533 |
$ |
82,297 |
|||
|
| |||||||
|
See
accompanying notes. | |||||||
Findex.com,
Inc.
Notes
to Condensed Consolidated Financial Statements
March
31, 2005
(Unaudited)
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Generally Accepted Accounting Principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by Generally Accepted Accounting Principles for complete
financial statements. The accompanying unaudited condensed consolidated
financial statements reflect all adjustments that, in the opinion of management,
are considered necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The accompanying
financial statements should be read in conjunction with the audited consolidated
financial statements of Findex.com, Inc. included in our Form 10-KSB/A for the
fiscal year ended December 31, 2004.
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.
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.
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.
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.
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 (a) the
straight-line basis over the estimated product life (generally from 12 to 18
months), or (b) the ratio of current revenues to total projected product
revenues. Total cumulative capitalized software development costs were
$2,013,383, less accumulated amortization of $1,230,133 at March 31, 2005.
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 2,
Accounting for Research and Development Costs, established accounting
and reporting standards for research and development. In accordance with SFAS 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 $37,080 and $16,174 for the
three months ended March 31, 2005 and 2004, 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 (“AICPA”) 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 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. Total cumulative Website development
costs, included in other assets on our condensed consolidated balance sheets,
were $89,140, less accumulated amortization of $25,799 at March 31,
2005.
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 the three months ended March 31, 2005 and 2004
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: (1) the
above revenue recognition criteria are met; (2) any undelivered products or
services are not essential to the functionality of the delivered products and
services; (3) payment for the delivered products or services is not contingent
upon delivery of the remaining products or service; and (4) 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 condensed 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 Web
sites, 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 include it in cost of sales.
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 shareholders 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 earnings per share, in accordance with SFAS No. 128.
RECLASSIFICATIONS
Certain
accounts in the 2004
financial statements have been reclassified for comparative purposes to conform
with the presentation in the 2005
financial statements.
NOTE
2 - INVENTORIES
At
March 31,
2005,
inventories consisted of the following:
Raw
materials |
$ |
134,070 |
||
|
Finished
goods |
113,977 |
|||
|
Inventories |
$ |
248,047 |
During
the three months ended March 31,
2004, we
wrote-off obsolete inventory with a carried cost totaling $32,396. This
has been included in cost of sales.
NOTE
3 - INCOME TAXES
The
provision (benefit) for taxes on net income for the three months ended
March 31,
2005 and
2004
consisted of the following:
|
2005 |
2004 |
||||||
|
Current: | |||||||
|
Federal |
$ |
--- |
$ |
--- |
|||
|
State |
180 |
--- |
|||||
|
180 |
--- |
||||||
|
Deferred: | |||||||
|
Federal |
(83,038 |
) |
650 |
||||
|
State |
1,326 |
150 |
|||||
|
(81,712 |
) |
800 |
|||||
|
Total
tax provision (benefit) |
$ |
(81,532 |
) |
$ |
800 |
||
NOTE
4 - EARNINGS PER COMMON SHARE
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 and
warrants, assuming that we reinvested the proceeds to purchase additional shares
at market value.
The
following table shows the amounts used in computing earnings per share and the
effect on income and the average number of shares of dilutive potential common
stock:
|
For
the Three Months Ended March 31 |
2005 |
2004 |
|||||
|
Net
Income |
$ |
161,603 |
$ |
272,255 |
|||
|
Preferred
stock dividends |
--- |
--- |
|||||
|
Net
income available to common shareholders |
$ |
161,603 |
$ |
272,255 |
|||
|
Basic
weighted average shares outstanding |
48,619,855 |
21,011,438 |
|||||
|
Dilutive
effect of: | |||||||
|
Stock
options |
480,790 |
--- |
|||||
|
Convertible
notes payable |
--- |
1,800,000 |
|||||
|
Convertible
Preferred Series A |
--- |
114,000 |
|||||
|
Convertible
Preferred Series B |
--- |
40,000 |
|||||
|
Warrants |
250,156 |
--- |
|||||
|
Diluted
weighted average shares outstanding |
49,350,801 |
22,965,438 |
|||||
A total
of 24,285,000 and 4,075,283 dilutive potential securities for the three months
ended March 31,
2005 and
2004,
respectively, have been excluded from the computation of diluted earnings per
share, as their inclusion would be anti-dilutive.
NOTE
5 - COMMITMENTS AND CONTINGENCIES
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 position.
As part
of the July 2004 financing transaction, we entered into a certain Registration
Rights Agreement with a New York based private investment partnership pursuant
to which we committed to registering all of the shares issued as part of such
transaction, including those issuable under each of the two warrants. Under the
terms of the Registration Rights Agreement, as amended, we had until November
12, 2004 to file a registration statement covering the shares already issued in
the transaction, and we have another 150 days thereafter to have caused such
registration statement to become effective. Upon receipt of the requisite
stockholder approval to increase the number of authorized common shares so as to
be able to deliver the warrants, which was effectively obtained as of November
10, 2004 (and which increase was effectuated on November 10, 2004), we had 30
days in which to file a registration statement covering such shares (which was
filed November 22, 2004), and another 150 days thereafter to cause such
registration statement to become effective. Any delays in meeting these
obligations will result in our being liable to the New York based private
investment partnership in an amount equal to $630,000 per year, pro-rated as
appropriate for the duration of any such delay.
NOTE
6 - RISKS AND UNCERTAINTIES
Our
future operating results may be affected by a number of factors. We depend 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
7 - SUBSEQUENT EVENTS
As of
April 22, 2005, this registration statement 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, with no additional penalty obligations accruing for at
least 60 days from April 22, 2005. Although there can be no assurance,
management is hopefully that we will be able to cause the registration statement
to be declared effective by June 21, 2005. 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, financial condition and results of operations.
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.
Chisholm,
Bierwolf & Nilson, LLC
Bountiful,
UT
February
18, 2005
| Findex.com, Inc. | |||||||
| CONSOLIDATED BALANCE SHEETS | |||||||
| December 31, 2004 and 2003 | |||||||
|
2004
|
2003
|
||||||
|
Assets | |||||||
|
Current
assets: |
|||||||
|
Cash
and cash equivalents: |
$ |
341,359 |
$ |
36,339 |
|||
|
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 |
696,662 |
|||||
|
Property
and equipment, net (Note 4) |
131,019 |
65,603 |
|||||
|
Software
license (Note 5) |
2,513,158 |
2,513,158 |
|||||
|
Capitalized
software development costs, net (Note 1) |
701,289 |
584,706 |
|||||
|
Deferred
income taxes, net (Note 8) |
253,968 |
-- |
|||||
|
Restricted
cash |
50,354 |
105,683 |
|||||
|
Other
assets |
94,101 |
63,818 |
|||||
|
Total
assets |
$ |
5,295,336 |
$ |
4,029,630 |
|||
|
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 |
357,451 |
|||||
|
Payroll
taxes payable |
8,235 |
221,600 |
|||||
|
Other
current liabilities |
90,373 |
89,554 |
|||||
|
Total
current liabilities |
1,383,146 |
3,648,179 |
|||||
|
Long-term
debt (Note 7) |
42,972 |
73,764 |
|||||
|
Deferred
income taxes, net (Note 8) |
253,968 |
1,051,327 |
|||||
|
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 |
9,198,417 |
7,080,629 |
|||||
|
Retained
(deficit) |
(5,631,787 |
) |
(7,845,331 |
) | |||
|
Total
stockholders’ equity |
3,615,250 |
(743,640 |
) | ||||
|
Total
liabilities and stockholders’ equity |
$ |
5,295,336 |
$ |
4,029,630 |
|||
See
accompanying notes.
|
Findex.com,
Inc. | |||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS | |||||||
|
Year
Ended December 31 |
2004
|
2003
|
|||||
|
Revenues,
net of reserves and allowances |
$ |
5,218,784 |
$ |
4,390,757 |
|||
|
Cost
of sales (Note 10) |
1,745,664 |
1,284,608 |
|||||
|
Gross
profit |
3,473,120 |
3,106,149 |
|||||
|
Operating
expenses: |
|||||||
|
Sales
and marketing |
1,294,377 |
813,438 |
|||||
|
General
and administrative |
2,309,837 |
1,751,235 |
|||||
|
Nonrecurring
items (Note 10 ) |
-- |
(583,628 |
) | ||||
|
Rebate
reserve adjustment (Note 11) |
(266,301 |
) |
-- |
||||
|
Bad
debt expense |
22,778 |
23,208 |
|||||
|
Amortization
expense |
16,343 |
45,157 |
|||||
|
Depreciation
expense |
44,478 |
43,224 |
|||||
|
Total
operating expenses |
3,421,512 |
2,092,634 |
|||||
|
Earnings
from operations |
51,608 |
1,013,515 |
|||||
|
Interest
income |
1,378 |
9,727 |
|||||
|
Other
income |
9,276 |
7,977 |
|||||
|
Nonrecurring
items (Note 10 ) |
(154,569 |
) |
866,516 |
||||
|
Gain
(loss) on disposition of assets |
(141 |
) |
(2,659 |
) | |||
|
Interest
expense |
(42,007 |
) |
(87,144 |
) | |||
|
Income
(Loss) before income taxes |
(134,455 |
) |
1,807,932 |
||||
|
Provision
for income taxes (Note 8) |
1,750,908 |
33,567 |
|||||
|
Income
before extraordinary item |
1,616,453 |
1,841,499 |
|||||
|
Extraordinary
item (Note 12) (less applicable income taxes of $400,874) |
601,216 |
-- |
|||||
|
Net
income |
$ |
2,217,669 |
$ |
1,841,499 |
|||
|
Basic
earnings per share (Note 14): |
|||||||
|
Before
extraordinary item |
$ |
0.05 |
$ |
0.09 |
|||
|
Extraordinary
item |
$ |
0.02 |
$ |
-- |
|||
|
Net
income |
$ |
0.06 |
$ |
0.09 |
|||
|
Diluted
earnings per share (Note 14): |
|||||||
|
Before
extraordinary item |
$ |
0.05 |
$ |
0.08 |
|||
|
Extraordinary
item |
$ |
0.02 |
$ |
-- |
|||
|
Net
income |
$ |
0.06 |
$ |
0.08 |
|||
|
Weighted
average shares outstanding (Note 14): |
|||||||
|
Basic |
34,520,754 |
20,411,438 |
|||||
|
Diluted |
35,195,840 |
22,365,438 |
|||||
See
accompanying notes.
| Findex.com, Inc. | ||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||
|
Retained |
||||||||||||||||||||||
|
Preferred
Stock |
Common
Stock |
Paid-In |
Earnings |
|||||||||||||||||||
|
Series
A |
Series B |
Shares |
Amount |
Capital |
(Deficit) |
Total |
||||||||||||||||
|
Balance
as previously reported, December 31, 2002 |
$ |
11 |
$ |
40 |
19,811,438 |
$ |
19,811 |
$ |
7,029,079 |
$ |
(9,785,777 |
) |
$ |
(2,736,836 |
) | |||||||
|
Prior
period adjustment (Note 13) |
-- |
-- |
-- |
-- |
-- |
98,947 |
98,947 |
|||||||||||||||
|
Balance,
restated, December 31, 2002 |
$ |
11 |
$ |
40 |
19,811,438 |
$ |
19,811 |
$ |
7,029,079 |
$ |
(9,686,830 |
) |
$ |
(2,637,889 |
) | |||||||
|
Common
stock issued for services |
-- |
-- |
1,200,000 |
1,200 |
51,550 |
-- |
52,750 |
|||||||||||||||
|
Net
income, December 31, 2003 |
-- |
-- |
-- |
-- |
-- |
1,841,499 |
1,841,499 |
|||||||||||||||
|
Balance,
December 31, 2003 |
$ |
11 |
$ |
40 |
21,011,438 |
$ |
21,011 |
$ |
7,080,629 |
$ |
(7,845,331 |
) |
$ |
(743,640 |
) | |||||||
|
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 |
1,677,078 |
-- |
1,698,953 |
|||||||||||||||
|
Conversion
of notes payable |
-- |
-- |
2,466,666 |
2,467 |
260,867 |
-- |
263,334 |
|||||||||||||||
|
Net
income, December 31, 2004 |
-- |
-- |
-- |
-- |
-- |
2,217,669 |
2,217,669 |
|||||||||||||||
|
Balance,
December 31, 2004 |
$ |
-- |
$ |
-- |
48,619,855 |
$ |
48,620 |
$ |
9,198,417 |
$ |
(5,631,787 |
) |
$ |
3,615,250 |
||||||||
See
accompanying notes.
|
Findex.com,
Inc. | |||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS | |||||||
|
Year
Ended December 31 |
2004
|
2003
|
|||||
|
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
made (paid) |
40,545 |
) |
(500 |
) | |||
|
Net
cash (used) by investing activities |
(741,603 |
) |
(714,103 |
) | |||
|
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 |
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 |
305,020 |
103,371 |
|||||
|
Cash
and cash equivalents, beginning of year |
36,339 |
(67,032 |
) | ||||
|
Cash
and cash equivalents, end of year |
$ |
341,359 |
$ |
36,339 |
|||
|
Reconciliation
of net income to cash flows from operating activities: |
|||||||
|
Net
income |
$ |
2,217,669 |
$ |
1,841,499 |
|||
|
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 |
266,301 |
-- |
|||||
|
Provision
for bad debts |
22,778 |
23,208 |
|||||
|
Depreciation
& amortization |
60,821 |
88,381 |
|||||
|
Non-cash
non-recurring item |
-- |
(650,000 |
) | ||||
|
Loss
on disposal of property, plant and equipment |
141 |
2,659 |
|||||
|
Extraordinary
item |
(1,002,090 |
) |
-- |
||||
|
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 |
) | |||
|
(Decrease)
increase in accounts payable |
(271,198 |
) |
81,793 |
||||
|
(Decrease)
in income taxes payable |
(1,270 |
) |
-- |
||||
|
Increase
(decrease) in deferred taxes |
(1,351,518 |
) |
(33,567 |
) | |||
|
(Decrease)
in other liabilities |
(742,999 |
) |
(296,285 |
) | |||
|
Net
cash provided (used) by operating activities |
$ |
(643,668 |
) |
$ |
882,221 |
||
See
accompanying notes.
Findex.com,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 our 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.
CONCENTRATIONS
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 performs 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.
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 (a) the
straight-line basis over the estimated product life (generally from 12 to 18
months), or (b) 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 2,
Accounting for Research and Development Costs, established accounting
and reporting standards for research and development. In accordance with SFAS 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 (“AICPA”) 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 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. 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: (1) the
above revenue recognition criteria are met; (2) any undelivered products or
services are not essential to the functionality of the delivered products and
services; (3) payment for the delivered products or services is not contingent
upon delivery of the remaining products or service; and (4) 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 Web
sites, 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 15) and,
accordingly, does not recognize compensation cost when employee stock-option
grants are made at fair-market value.
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 earnings per share, 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.
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. See Note 10.
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 16.
NOTE
5 - SOFTWARE LICENSE AGREEMENT
During
the year ended December 31, 2003, we offset the remaining unpaid installment
($1,051,785) against the carrying value of the software license in accordance
with the terms of a tentative settlement agreement with TLC. In addition, the
agreement called for the extension of the estimated life 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. The settlement extended indefinitely the term of the
software license agreement. This effectively changed the substance from an
amortizable intangible asset with a finite useful life to an unamortizable
intangible asset with an indefinite useful life. Amortization expense for 2003,
determined using the straight-line method, was calculated through the settlement
date.
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 17 and
20 |
-- |
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 17.
During
the year ended December 31, 2003, we reclassified as other income - nonrecurring
items (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
12 |
-- |
146,665 |
|||||
|
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 16 |
51,788 |
-- |
|||||
|
|
78,467 |
200,640 |
|||||
|
Less:
Current maturities |
35,495 |
126,876 |
|||||
|
Long-term
debt |
$ |
42,972 |
$ |
73,764 |
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
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 |
-- |
|||||
|
Federal |
(1,785,267 |
) |
(29,061 |
) | |||
|
State |
32,875 |
(4,506 |
) | ||||
|
|
(1,752,392 |
) |
(33,567 |
) | |||
|
Total
tax provision (benefit) |
$ |
(1,750,908 |
) |
$ |
(
33,567 |
) |
The
reconciliation of income tax computed at statutory rates of income tax benefits
is as follows:
|
2004
|
2003
|
||||||
|
Expense
at Federal statutory rate - 34% |
$ |
284,813 |
$ |
614,697 |
|||
|
State
tax effects, net of Federal tax benefits |
25,668 |
178,721 |
|||||
|
Nondeductible
expenses |
33,636 |
1,764 |
|||||
|
Taxable
temporary differences |
(269,916 |
) |
(3,213 |
) | |||
|
Deductible
temporary differences |
84,176 |
(99,761 |
) | ||||
|
Deferred
tax asset valuation allowance |
(1,909,285 |
) |
(725,775 |
) | |||
|
Income
tax benefit |
$ |
(1,750,908 |
) |
$ |
(
33,567 |
) |
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 |
34,720 |
8,170 |
42,890 |
|||||||
|
Deferred
revenue |
14,807 |
3,484 |
18,291 |
|||||||
|
Reserve
for bad debts |
6,120 |
1,440 |
7,560 |
|||||||
|
Operating
loss carryforwards |
204,000 |
1,053 |
205,053 |
|||||||
|
|
307,070 |
25,305 |
332,375 |
|||||||
|
Less:
Valuation allowance |
27,719 |
4,465 |
32,184 |
|||||||
|
Deferred
income tax asset, net |
$ |
279,351 |
$ |
20,840 |
$ |
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 |
89,002 |
-- |
89,002 |
|||||||
|
Operating
loss carryforwards |
2,552,812 |
7,725 |
2,560,537 |
|||||||
|
|
2,645,826 |
8,669 |
2,654,495 |
|||||||
|
Less:
Valuation allowance |
1,269,587 |
865 |
1,270,452 |
|||||||
|
Deferred
income tax asset, net |
1,376,239 |
7,804 |
$ |
1,384,043 |
||||||
|
Software
development costs |
(238,438 |
) |
(56,103 |
) |
$ |
(
294,541 |
) | |||
|
Website
costs |
(23,020 |
) |
(5,416 |
) |
(28,436 |
) | ||||
|
Software
license fees |
(851,074 |
) |
(200,253 |
) |
(1,051,327 |
) | ||||
|
State
deferred tax assets |
(9,739 |
) |
-- |
(9,739 |
) | |||||
|
Deferred
income tax liability |
(1,122,271 |
) |
(261,772 |
) |
$ |
(1,384,043 |
) | |||
|
Deferred
income tax asset, net |
$ |
253,968 |
||||||||
|
Deferred
income tax liability, net |
$ |
(253,968 |
) |
|
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 |
68,086 |
-- |
68,086 |
|||||||
|
Operating
loss carryforwards |
2,417,615 |
721,673 |
3,139,288 |
|||||||
|
|
2,498,215 |
724,617 |
3,222,832 |
|||||||
|
Less:
Valuation allowance |
2,498,215 |
724,617 |
3,222,832 |
|||||||
|
Deferred
income tax asset, net |
$ |
-- |
$ |
-- |
$ |
-- |
||||
|
Software
license fees |
$ |
(
851,074 |
) |
$ |
(
200,253 |
) |
(1,051,327 |
) | ||
|
Deferred
income tax liability |
$ |
(
851,074 |
) |
$ |
(
200,253 |
) |
(1,051,327 |
) | ||
|
Deferred
income tax liability, net |
|
|
$ |
(1,051,327 |
) |
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 $2,168,978 during the year
ended December 31, 2004 and decreased by $725,775 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.
NOTE
9 - STOCKHOLDERS’ EQUITY
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. These warrants are accounted for as rights and were issued on
November 10, 2004.
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 15.
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 15. 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 shares of common stock in
connection with a private placement with a New York based private investment
partnership. 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. These warrants are accounted for
as stock rights and have been valued at $576,042 each ($1,152,084 total) using
the Black-Scholes method.
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 remain 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 - NONRECURRING ITEMS
APB
Opinion No. 30 requires material events or transactions that are either unusual
or infrequent, but not both, to be presented in the income statement as separate
elements of income from continuing operations.
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. The 2004 obsolete inventory was a direct result of the
March 2004 settlement with The Zondervan Corporation. See Notes 3 and 18. These
have been included in cost of sales.
During
the year ended December 31, 2003, we recorded an adjustment to the balance of
accrued royalties in the amount of $583,628. This adjustment resulted from an
internal audit of the royalty calculations as affected by the product sales
provided by TLC during the second quarter of 2001. These reduced sales numbers
also resulted in the June 30, 2001 bad debt provision totaling $2,391,000 from
net balances owed us by TLC. The royalty liabilities had been accrued based on
our sales to TLC as originally reported. This has been recognized as an expense
recovery and included in operating expenses.
During
the year ended December 31, 2004, we settled an agreement with 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.
During
the year ended December 31, 2003, we reclassified as other income - nonrecurring
items 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 “Non-cash non-recurring item” and
“(Decrease) in other current liabilities”.
NOTE
11 - REBATE RESERVE ADJUSTMENT
During
the year ended December 31, 2004, we recorded an adjustment to the rebates
reserve in the amount of $266,301. The reserve balance properly reflects open
rebate programs and the estimated balance of each that management expects to
pay. This adjustment resulted from an internal review of the amount owed and our
ability to reach the intended rebate recipients and properly reflects historical
response rates. This has been recognized as an expense recovery and included in
operating expenses.
NOTE
12 - EXTRAORDINARY ITEM
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 in accordance with SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, and classified as an
extraordinary item in accordance with SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Income taxes allocated and subtracted from the total gain were
$400,874, or approximately 40%.
NOTE
13 - PRIOR PERIOD ADJUSTMENT
During
the year ended December 31, 2004, we adjusted retained earnings to reflect the
correction of an error in recording our liability for product rebates. During
the year ended December 31, 2000, we discontinued the use of a third-party to
process rebate claims. Rebate program details were obtained from the third party
and a liability recorded for the unpaid rebate claims monthly beginning July
1999 through October 2000. In 2004, we discovered that the unpaid rebate claims
were duplicated between reports received from the third party processor and the
liability recorded upon our assumption of the rebate claim fulfillment. The
adjustment decreased accounts payable by $98,947, decreased deferred tax assets
by $39,451, increased the deferred tax asset valuation allowance by $39,451, and
decreased the accumulated deficit by $98,947.
NOTE
14 - EARNINGS PER COMMON SHARE
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 15), assuming that we reinvested the proceeds to purchase additional shares
at market value.
The
following table shows the amounts used in computing earnings per 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
|
|||||
|
Income
before extraordinary item |
$ |
1,616,453 |
$ |
1,841,499 |
|||
|
Common
stock dividend on Preferred Series A |
(4,125 |
) |
-- |
||||
|
Income
(loss) before extraordinary item available to common
stockholders |
$ |
1,612,328 |
$ |
1,841,499 |
|||
|
Net
Income |
$ |
2,217,669 |
$ |
1,841,499 |
|||
|
Common
stock dividend on Preferred Series A |
(4,125 |
) |
-- |
||||
|
Net
income available to common stockholders |
$ |
2,213,544 |
$ |
1,841,499 |
|||
|
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 share, as their inclusion would be
anti-dilutive.
NOTE
15 - STOCK-BASED COMPENSATION
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 |
$ |
2,217,669 |
$ |
1,841,499 |
|||
|
Pro
Forma compensation charge under SFAS 123 |
-- |
(59,722 |
) | ||||
|
Pro
Forma net income |
$ |
2,217,669 |
$ |
1,781,777 |
|||
|
Earnings
per share: |
|||||||
|
Basic
- as reported |
$ |
0.06 |
$ |
0.09 |
|||
|
Basic
- pro forma |
$ |
0.06 |
$ |
0.09 |
|||
|
Diluted
- as reported |
$ |
0.06 |
$ |
0.08 |
|||
|
Diluted
- pro forma |
$ |
0.06 |
$ |
0.08 |
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 |
280 |
% | ||
|
Risk-free
interest rate |
6.00 |
% |
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 |
$ |
.00854 |
|||||||||
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 |
NOTE
16 - 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
17 - SUPPLEMENTAL CASH FLOW INFORMATION
We
incurred the following non-cash investing and financing activities during the
years ended December 31, 2004 and 2003, respectively:
|
2004
|
2003
|
||||||
|
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 |
|||
NOTE
18 - COMMITMENTS AND CONTINGENCIES
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 position.
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 $500,000.00 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.
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 Findex 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. 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.
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 this
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 June 7, 2005, we had accrued a total
of $100,000 in
registration rights penalties for not causing this registration statement to be
declared effective by the SEC as of April 22, 2005.
NOTE
19 - 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
20 - 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, 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,
financial condition and results of operations.
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47,491,666
Shares
FINDEX.COM,
INC.
Common
Stock
_________________
PROSPECTUS
_________________
June 7,
2005
_________________
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Indemnification
of Officers And Directors
Nevada
law authorizes a Nevada corporation to indemnify its officers and directors
against claims or liabilities arising out of such person’s conduct as officers
or directors if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the company for which
they serve. Our srticles of incorporation provide for indemnification of our
directors. In addition, our Bylaws provide for indemnification of our directors,
officers, employees or agents. In general, these provisions provide for
indemnification in instances when such persons acted in good faith and in a
manner they reasonably believed to be in or not opposed to our best interests.
Other
Expenses of Issuance and Distribution
Expenses
payable in connection with the registration and distribution of the securities
being registered hereunder, all of which will be borne by the registrant, are as
follows:
|
Registration
Fee - Securities and Exchange Commission |
$ |
1,370 |
||
|
Printing
and Engraving |
$ |
3,630 |
* | |
|
Legal
Fees and Expenses |
$ |
40,000 |
* | |
|
Accounting
Fees |
$ |
20,000 |
* | |
|
Blue
Sky Fees and Expenses |
$ |
5,000 |
* | |
|
Total |
$ |
70,000 |
* |
*
Estimated
Recent
Sales of Unregistered Securities
The
following is a comprehensive list of securities that we issued and sold within
the past three years without registration under the Securities Act:
|
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 |
||||||||||
|
07/19/04 |
Common
Stock |
Barron
Partners, LP |
21,875,000
|
$ |
1,750,000 |
1A |
||||||||||
|
07/16/04 |
Common
Stock |
Swartz
Private Equity, LLC |
295,692
|
$ |
29,569 |
3A |
||||||||||
|
07/16/04 |
Common
Stock |
Abraham
Garfinkel |
20,000
|
$ |
- |
4B |
||||||||||
|
07/16/04 |
Common
Stock |
Carlos
E. Vazquez |
10,000
|
$ |
- |
4B |
||||||||||
|
07/16/04 |
Common
Stock |
Ed
Toon |
20,000
|
$ |
- |
4B |
||||||||||
|
07/16/04 |
Common
Stock |
First
Atlantic Capital Management, Inc. |
66,667
|
$ |
- |
4B |
||||||||||
|
07/16/04 |
Common
Stock |
Ian
G. Landies |
16,000
|
$ |
- |
4B |
||||||||||
|
07/16/04 |
Common
Stock |
Ionian
International Limited |
200,000
|
$ |
- |
4B |
||||||||||
|
07/16/04 |
Common
Stock |
Ira
N. Kalfus |
25,000
|
$ |
- |
4B |
||||||||||
|
07/16/04 |
Common
Stock |
Irwin
B. Finch Pension Trust |
30,000
|
$ |
- |
4B |
||||||||||
|
07/16/04 |
Common
Stock |
Irwin
B. Finch Profit Sharing |
20,000
|
$ |
- |
4B |
||||||||||
|
07/16/04 |
Common
Stock |
Jasmina
K. Skubic |
30,000
|
$ |
- |
4B |
||||||||||
|
07/16/04 |
Common
Stock |
Kenneth
C. Jameson |
16,000
|
$ |
- |
4B |
||||||||||
|
07/16/04 |
Common
Stock |
Randall
G. Darling |
16,000
|
$ |
- |
4B |
||||||||||
|
07/16/04 |
Common
Stock |
Robert
Wohlfeld |
71,356
|
$ |
4,125 |
4B |
||||||||||
|
06/04/04 |
Common
Stock |
Independent
Board of Directors |
324,074
|
$ |
26,250 |
6A |
||||||||||
|
04/28/04 |
Common
Stock |
Non-Executive
Employees |
635,000
|
$ |
13,970 |
6C |
||||||||||
|
04/07/04 |
Common
Stock |
Executive
Officers |
1,519,349
|
$ |
33,426 |
6A |
||||||||||
|
07/25/03 |
Common
Stock |
Edward
Gerskovich |
75,000
|
$ |
3,375 |
6A |
||||||||||
|
07/25/03 |
Common
Stock |
Executive
Officer |
250,000
|
$ |
10,000 |
6A |
||||||||||
|
07/25/03 |
Common
Stock |
Frank
Quinby |
200,000
|
$ |
9,000 |
6A |
||||||||||
|
07/25/03 |
Common
Stock |
Independent
Board of Directors |
600,000
|
$ |
27,000 |
6A |
||||||||||
|
07/25/03 |
Common
Stock |
Rick
Cosaro |
25,000
|
$ |
1,125 |
6A |
||||||||||
|
07/25/03 |
Common
Stock |
StandAlone,
Inc. |
50,000
|
$ |
2,250 |
6A |
||||||||||
|
11/08/02 |
Common
Stock |
Ardt
Investment Management, Inc. |
296,308
|
$ |
8,889 |
3A |
||||||||||
|
09/20/02 |
Common
Stock |
Ronald
Ardt |
9,000
|
$ |
- |
5A |
||||||||||
|
09/20/02 |
Common
Stock |
Ronald
Ardt |
137,250
|
$ |
- |
5A |
||||||||||
|
07/23/02 |
Common
Stock |
Charles
Moskowitz |
205,000
|
$ |
10,250 |
3A |
||||||||||
|
04/01/02 |
Common
Stock |
Executive
Officers |
2,460,000
|
$ |
61,500 |
6A |
||||||||||
|
04/01/02 |
Common
Stock |
Independent
Board of Directors |
2,000,000
|
$ |
50,000 |
6A |
||||||||||
|
04/01/02 |
Common
Stock |
Non-Executive
Employees |
1,367,280
|
$ |
34,182 |
6C |
||||||||||
|
03/07/02 |
Common
Stock |
Ahmad
Al Khiyami |
75,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Betty
Wolfe |
36,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Billy
W. Spain |
30,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Bing
Bingham |
30,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Bob
Heusinkveld |
60,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Business
Investor Services, Inc. |
360,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Charles
M. Jager |
10,500
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Cory
J. Rueb |
75,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
D.R.
Jack Sullivan |
45,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Donald
Harrison |
75,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Hugh
B. Jacks |
45,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Jager
Companies, Inc. |
9,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
James
O. Walker |
60,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Jeff
Morgan |
36,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Jernigan
Family Partnership II |
75,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
John
B. Padgett |
15,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
John
B. Richardson |
15,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Kent
A. Upton |
45,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Lifeway
Christian Resources |
120,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Lifeway
Christian Resources |
480,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Ollie
Sandlin |
45,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Ralph
Ewing |
36,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Robert
R. Crowe |
30,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Ronald
Ardt |
213,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Roy
W. Gilbert, Jr. |
30,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Stan
Blair |
30,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Steve
Jager |
10,500
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
Thomas
Ardt |
24,000
|
$ |
- |
5A |
|
03/07/02 |
Common
Stock |
Thomas
E. Bradford, Jr. |
30,000
|
$ |
- |
5A |
||||||||||
|
03/07/02 |
Common
Stock |
W.P.
Buck |
30,000
|
$ |
- |
5A |
||||||||||
|
12/15/01 |
Common
Stock |
Charles
Moskowitz |
10,750
|
$ |
430 |
3A |
||||||||||
|
11/15/01 |
Common
Stock |
Charles
Moskowitz |
10,750
|
$ |
645 |
3A |
||||||||||
|
10/25/01 |
Common
Stock |
World
Trade Partners, Inc. |
500,000
|
$ |
65,000 |
3A |
||||||||||
|
10/15/01 |
Common
Stock |
Charles
Moskowitz |
10,750
|
$ |
1,398 |
3A |
||||||||||
|
09/15/01 |
Common
Stock |
Charles
Moskowitz |
10,750
|
$ |
1,828 |
3A |
||||||||||
|
08/15/01 |
Common
Stock |
Charles
Moskowitz |
10,750
|
$ |
957 |
3A |
||||||||||
|
07/15/01 |
Common
Stock |
Charles
Moskowitz |
10,750
|
$ |
1,398 |
3A |
||||||||||
|
07/15/01 |
Common
Stock |
Gordon
Landies |
41,103
|
$ |
4,200 |
4B |
||||||||||
|
06/15/01 |
Common
Stock |
Charles
Moskowitz |
10,750
|
$ |
2,473 |
3A |
||||||||||
|
05/15/01 |
Common
Stock |
Charles
Moskowitz |
10,750
|
$ |
2,903 |
3A |
||||||||||
|
04/15/01 |
Common
Stock |
Charles
Moskowitz |
10,750
|
$ |
3,225 |
3A |
||||||||||
|
03/15/01 |
Common
Stock |
Charles
Moskowitz |
10,750
|
$ |
7,310 |
3A |
||||||||||
|
02/15/01 |
Common
Stock |
Charles
Moskowitz |
12,500
|
$ |
5,250 |
3A |
||||||||||
|
01/15/01 |
Common
Stock |
Charles
Moskowitz |
12,500
|
$ |
5,625 |
3A |
||||||||||
|
|
||||||||||||||||
|
Common
Stock Warrant Issuances | ||||||||||||||||
|
11/10/04 |
Common
Stock |
Barron
Partners, LP |
10,937,500
|
$ |
576,042 |
1A |
||||||||||
|
11/10/04 |
Common
Stock |
Barron
Partners, LP |
10,937,500
|
$ |
576,042 |
1A |
||||||||||
|
05/21/04 |
Common
Stock |
Joseph
Abrams |
600,000
|
$ |
59,915 |
3A |
||||||||||
|
04/07/04 |
Common
Stock |
Michael
Membrado |
150,000
|
$ |
3,300 |
3A |
||||||||||
|
06/03/02 |
Common
Stock |
Ronald
Ardt |
250,000
|
$ |
12,500 |
3A |
||||||||||
|
05/11/01 |
Common
Stock |
Membrado
& Montell, LLP |
50,000
|
$ |
13,464 |
3A |
||||||||||
|
03/26/01 |
Common
Stock |
Swartz
Private Equity |
510,000
|
$ |
181,392 |
5A |
||||||||||
|
03/07/01 |
Common
Stock |
Membrado
& Montell, LLP |
100,000
|
$ |
13,464 |
3A |
||||||||||
|
02/19/01 |
Common
Stock |
Kevin
Reagan |
62,500
|
$ |
19,750 |
3A |
||||||||||
|
02/19/01 |
Common
Stock |
Robert
Chamberlain |
62,500
|
$ |
19,750 |
3A |
||||||||||
|
Common
Stock Option Issuances | ||||||||||||||||
|
07/07/03 |
Common
Stock |
Executive
Officer |
500,000
|
$ |
- |
6A |
||||||||||
|
06/07/02 |
Common
Stock |
Executive
Officer |
500,000
|
$ |
- |
6A |
||||||||||
|
08/21/01 |
Common
Stock |
Independent
Board of Directors |
525,000
|
$ |
- |
6A |
||||||||||
|
07/18/01 |
Common
Stock |
Executive
Officers |
500,000
|
$ |
- |
6A |
||||||||||
|
07/18/01 |
Common
Stock |
Non-Executive
Employees |
950,000
|
$ |
- |
6C |
||||||||||
|
06/12/01 |
Common
Stock |
Non-Executive
Employee |
2,000
|
$ |
- |
6C |
||||||||||
|
05/03/01 |
Common
Stock |
Non-Executive
Employee |
2,000
|
$ |
- |
6C |
||||||||||
|
03/05/01 |
Common
Stock |
Executive
Officer |
25,000
|
$ |
- |
6A |
||||||||||
|
03/05/01 |
Common
Stock |
Non-Executive
Employees |
31,000
|
$ |
- |
6C |
||||||||||
|
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 |
||||||||||
|
05/31/02 |
Common
Stock |
AIM
Financial Advisors, Inc. |
666,666
|
$ |
33,333 |
1A |
||||||||||
|
05/31/02 |
Common
Stock |
AIM
Securities, Inc. |
666,666
|
$ |
33,333 |
1A |
||||||||||
|
05/31/02 |
Common
Stock |
Business
Investor Services, Inc. |
666,666
|
$ |
33,333 |
1A |
||||||||||
|
Non-Convertible
Promissory Note Issuances | ||||||||||||||||
|
03/15/04 |
Note
Payable |
American
Bible Society |
-
|
$ |
90,700 |
5A |
||||||||||
|
09/25/03 |
Note
Payable |
Ivy
Hill/Warner Media |
-
|
$ |
164,000 |
5A |
||||||||||
|
*
Consideration is calculated to be the value of the security at the date of
issuance. |
|||||
|
1.
Stock issued in connection with financing activities. |
|||||
|
2.
Stock issued in connection with a convertible promissory note.
|
|||||
|
3.
Stock issued in connection with services rendered. |
|||||
|
4.
Stock issued as the result of Preferred Stock conversion and/or Preferred
Stock dividend conversion. |
|||||
|
5.
Stock issued in settlement of an outstanding liability. |
|||||
|
6.
Stock issued in connection with services rendered by employees, executive
officers, board of directors or independent
contractors. | |||||
|
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. |
|||||
|
C.
We relied in each case for these unregistered sales on the private
offering exemption of Section 4(2) of the Securities Act based on the
following factors: (i) the number of offerees, (ii) the absence of general
solicitation, (iii) representations obtained from the acquirors relative
to their sophistication (or from offeree 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. | |||||
|
As
of the date of this registration statement, none of the common stock
option issuances or the common stock warrant issuances have been
exercised. | |||||
Exhibits
The
Exhibits to this registration statement are listed in the Exhibit Index
commencing at page EX-1 hereof.
Undertakings
The
undersigned registrant hereby undertakes the following:
|
(1)
|
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
|
|
|
(i)
|
to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; |
|
|
(ii)
|
to
reflect in the prospectus any facts or events arising after the effective
date of this Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information in this registration statement; and
|
|
|
(iii)
|
to
include any material information with respect to the plan of distribution
not previously disclosed in this registration statement, or any material
change to such information in the registration statement.
|
|
(2)
|
That,
for the purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bonafide offering thereof. |
|
(3)
|
To
remove from registration by means of a post-effective amendment to this
registration statement any of the securities being registered which remain
unsold at the termination of this offering.
|
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling the registrant
pursuant to the General Corporation Law of Nevada, the articles of
incorporation, or otherwise, the registrant has been advised that, in the
opinion of the SEC, such indemnification is against public policy as expressed
in such Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or person
controlling the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or person controlling the
registrant in connection with any securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in such Act and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant certifies that
it has reasonable grounds to believe that it meets all the requirements for
filing on Form SB-2 and has duly caused this registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Omaha, State of Nebraska, on the date below.
Dated: June
7, 2005
|
FINDEX.COM,
INC.
By:
/s/
Steven Malone
Steven
Malone, President
&
Chief Executive Officer |
POWER
OF ATTORNEY
We, the
undersigned directors and officers of Findex.com, Inc., do hereby constitute and
appoint Steven Malone, acting individually, our true and lawful attorney and
agent, to do any and all acts and things in our name and behalf in our
capacities as directors and officers, and to execute any and all instruments for
us and in our names in the capacities indicated below, which said attorney and
agent may deem necessary or advisable to enable said corporation to comply with
the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the SEC, in connection with this registration statement,
including specifically, but without limitation, power and authority to sign for
us or any of us in our names and in the capacities indicated below, any and all
amendments (including post-effective amendments) hereof; and we do hereby ratify
and confirm all that the said attorney and agent shall do or cause to be done by
virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
|
Signature |
Title |
Date |
||||||
|
/s/
Steven Malone |
|
Chairman
of the Board, President |
|
|
June
7, 2005 |
|
| |
|
Steven
Malone |
|
and
Chief Executive Officer (principal |
|
|
||||
|
|
|
executive
officer) |
|
|
||||
|
|
|
|
|
|||||
|
/s/
Kirk R. Rowland |
|
Chief
Financial Officer |
|
|
June
7, 2005 |
|
| |
|
Kirk
R. Rowland |
|
(principal
financial and accounting |
|
|
||||
|
|
|
officer) |
|
|
||||
|
|
|
|
|
|||||
|
/s/
John Kuehne |
|
Director |
|
|
June
7, 2005 |
|
| |
|
John
A. Kuehne |
|
|||||||
|
|
|
|
|
|||||
|
/s/
Henry M. Washington |
|
Director |
|
|
June
7, 2005 |
|
| |
|
Henry
M. Washington |
|
|||||||
EXHIBIT
INDEX
FINDEX.COM,
INC.
The
following exhibits are included as part of this registration statement, except
those which are identified as having been previously filed with the SEC and
which are incorporated by reference to another registration statement, report or
document. References to the “company” in this Exhibit Index mean FINDEX.COM,
INC., a Nevada corporation.
|
Exhibit
No. |
Description |
|
3.1(i)
|
Articles
of Incorporation of Findex.com, Inc., incorporated by reference to Exhibit
3.1 on Form 8-K filed March 15, 2000. |
|
3.1(ii)
|
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. |
|
3.2
|
By-Laws
of Findex.com, Inc., incorporated by reference to Exhibit 3.3 on Form 8-K
filed March 15, 2000. |
|
5.1
|
Legal
opinion of M.M. Membrado, PLLC dated June 7, 2005. FILED HEREWITH.
|
|
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
on 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,
incorporated by reference to Exhibit 10.14 on
Form 10-KSB/A filed on June 7, 2005.
|
|
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. |
|
23.1
|
Consent
of Chisholm, Bierwolf & Nilson, LLC, Independent Certified Public
Accountants dated May 23, 2005. FILED HEREWITH.
|
|
23.2
|
Consent
of M.M. Membrado, PLLC (contained in Exhibit 5.1 to this registration
statement). |
|
24.1
|
Powers
of Attorney (included on the signature page to this registration
statement). |