U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A No. 2
Annual Report Under
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended
June 30, 2005
Commission file number
000-03718
PARK CITY GROUP, INC.
(Exact name of registrant as specified in its charter)
Nevada 37-1454128
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
333 Main Street, Park City, Utah 84060
(Address of principal executive offices)
(435) 649-2221
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock ($0.01
par value per share
Title of each Class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 Par Value Over-the-Counter Bulletin Board
Outstanding as of October 13, 2005
5,657,079 (2,369 shareholders)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. (1) [XX] Yes [ ] No; (2) [XX] yes [ ] No.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the year ended June 30, 2005 were $3,631,812.
The aggregate market value of the stock held by non-affiliates of the registrant
is approximately $2,994,106, calculated using a price of $2.75 per share on
October 12, 2005.
Explanatory Note
----------------
This Form 10-KSB/A is being filed to amend and restate the Park City Group, Inc.
(the "Company") Annual Report on Form 10-KSB/A for the Fiscal Year Ended June
30, 2005. The restatement arose out of, and in conjunction with, a letter of
comment dated September 1, 2006 received from the staff of the Securities and
Exchange Commission as a result of the Company's submission and filing of Form
SB-2 Registration Statement. The financial statements and references thereto
have been amended and updated to reflect the effect of the 1:50 reverse stock
split effective August 11, 2006 pursuant to SAB Topic 4:C. At the time of the
reverse split, the Articles of Incorporation were amended to reflect authorized
common shares from 500,000,000 to 50,000,000.
Generally, no attempt has been made in this Form 10-KSB/A to modify or update
other disclosures presented in the original report on Form 10-KSB/A except as
required to meet the staff's comments. This Form 10-KSB/A does not reflect
events occurring after the filing of the original Form 10-KSB/A or modify or
update those disclosures. Information not affected by the amendment is unchanged
and reflects the disclosures made at the time of the original filing of the Form
10-KSB/A with the Securities and Exchange Commission on September 30, 2005. The
following items have been amended as of result of the restatement:
Annual Report on Form 10-KSB/A
June 30, 2005
Table of Contents - (Amendments)
Part II - Part III Reverse Stock Split 1:50 Effects
to Financials Page 9-34
Introduction Forward Looking Statements Page 3
Signature Pages Principal Executive and Principal
Financial Officer Exhibit 31 & 32
Item 8A Controls and Procedures Page 17
TABLE OF CONTENTS TO ANNUAL REPORT
ON FORM 10-KSB
YEAR ENDED JUNE 30, 2005
PART I
Item 1 Description of Business 3
Item 2 Description of Properties 8
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 9
Item 6 Management's Discussion and Analysis or Plan of Operation 10
Item 7 Financial Statements 17
Item 8 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 17
Item 8A Controls and Procedures 17
Item 8B Other Information 17
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons 18
Item 10 Executive Compensation 21
Item 11 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 24
Item 12 Certain Relationships and Related Transactions 25
Item 13 Exhibits 26
Item 14 Principal Accountant Fees and Services 26
Signatures 27
Reports of Independent Registered Public Accounting Firms 28
Consolidated Balance Sheet as of June 30, 2005 30
Consolidated Statement of Operations 31
Consolidated Statement of Stockholders' Deficit 32
Consolidated Statement of Cash Flows 33
Notes to Consolidated Financial Statement June 30, 2005
and June 30, 2004 34
Exhibit 31 Certifications of the Principal Executive Officer and Principal
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32 Certifications pursuant to 18 U.S.C. Sec. 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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2
Forward-Looking Statements
--------------------------
This annual report on Form 10-KSB contains forward looking statements. The words
or phrases "would be," "will allow," "intends to," "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements."
Actual results could differ materially from those projected in the forward
looking statements as a result of a number of risks and uncertainties, including
the risk factors set forth below and elsewhere in this report. See "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Statements made herein are as of the date of the filing
of this Form 10-KSB with the Securities and Exchange Commission and should not
be relied upon as of any subsequent date. Unless otherwise required by
applicable law, we do not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences, developments,
unanticipated events or circumstances after the date of such statement.
PART I
Item 1. Description of Business
-------------------------------
General
-------
The Company was incorporated in the State of Delaware on December 8, 1964 as
Infotec, Inc. From June 20, 1999 to approximately June 12, 2001, it was known as
Amerinet Group.com, Inc.
On June 13, 2001, the Company entered into a "Reorganization Agreement" with
Randall K. Fields and Riverview Financial Corporation (hereafter referred to as
"Reorganization Agreement,") whereby it acquired substantially all of the
outstanding stock of Park City Group, Inc., a Delaware corporation ("PCG"),
which became a 98.67% owned subsidiary. This business combination was treated as
a reverse acquisition or a recapitalization of PCG, with PCG being treated as
the acquirer. In connection with the Reorganization, the then Board of Directors
resigned and was replaced by the Board of Directors of PCG. The stockholders of
PCG gained voting control of the common stock of the Company and the name was
changed from Amerinet Group.com, Inc. to Fields Technologies, Inc.
Operations are conducted through the subsidiary, PCG, which was incorporated in
the State of Delaware in May 1990. PCG on April 5, 2001, acquired its wholly
owned subsidiary, Fresh Market Manager, LLC ("FMM"), which is a Limited
Liability Company formed in the State of Utah. PCG has conducted its operations
since 1990. PCG develops and licenses its software applications identified as
"Fresh Market Manager" and "ActionManager". PCG also provides implementation and
profit optimization consulting services for its application products.
On August 7, 2002, Fields Technologies, Inc., changed its name from Fields
Technologies, Inc., to Park City Group, Inc., and reincorporated in Nevada.
Therefore, both the parent-holding company (Nevada) and its operating subsidiary
(Delaware) are named Park City Group, Inc. Park City Group, Inc. (Nevada) has no
other business operations other than in connection with its subsidiary, PCG. In
this Annual Report Form 10-KSB when the terms "we", "Company" or "Park City
Group" are used, it is referring to the Park City Group, Inc., a Deleware
corporation, as well as to Fields Technologies, Inc., the Delaware corporation,
which was reincorporated in Nevada under the name of the Park City Group, Inc.
The stock trades under the symbol PKCY.
The principal executive offices are located at 333 Main Street, P.O. Box 5000,
Park City, Utah 84060. The telephone number is (435) 649-2221. The website
address is http://www.parkcitygroup.com.
The Company has not been involved in any bankruptcy, receivership, or similar
proceeding.
Business
--------
Park City Group develops and markets patented computer software and profit
optimization consulting services that help its retail customers to reduce their
inventory and labor costs; the two largest controllable expenses in the retail
industry, while increasing the customer's sales and gross margin. The technology
has its genesis in the operations of Mrs. Fields Cookies co-founded by Randy
Fields, CEO of Park City Group, Inc. Industry leading customers such as The Home
Depot, Victoria's Secret, Limited Brands, Anheuser Busch Entertainment, Del
Monte, WaWa and Tesco Lotus benefit from the Company's software. Park City Group
products, Supply Chain Profit Link, C-Store Manager, Fresh Market Manager and
ActionManager are proven, patented technologies that address the needs of
retailers in store operations management, manufacturing and both durable goods
and perishable product management. Because the product concepts originated in
the environment of actual multi-unit-retail chain ownership, the products are
strongly oriented to an operation's bottom line results. The products are highly
pragmatic in their approach to standardizing and improving managerial actions.
The products use a fully developed, contemporary patented technology platform
that is not only capable of supporting existing offerings, but can also be
expanded to support related products.
3
The critical strength of the products is its artificial intelligence-like rules
based technology that allows customers to tailor the operating rules to
replicate the expert knowledge and practices of their most successful managers.
Rules based systems are applications in which the action to be taken is
determined by the rules defined by the user. As such, customers who use rules
based system determine what action the system will perform when an identified
condition occurs, usually based on the policies and procedures or "rules" of the
customer's business operations. In this way, the customer decomposes its
business operation into different rules or the way in which it wants certain
conditions or actions to be addressed. In comparison, in non-rules based
systems, the applications perform action as they have been designed and coded by
the vendor, regardless of the action the customer might wish to take.
The success achieved by our customers in both their economic as well as
operational performance improvement is the best measure of our performance and
success.
The Company now offers a monthly subscription method for licensing of the
software to its customer companies. A monthly subscription deployment option was
introduced in Q3FY2004. With its lower initial implementation cost and monthly
charge for the software by department by location, the Company can now offer its
products to a larger potential market and estimates increasing its recurring
revenue stream, although no assurances can be given.
During Q3FY2005 the Company introduced both Supply Chain Profit link and C-Store
Manager products in both a subscription and traditional purchase offering. These
products are targeted to meet the needs of manufactures serving the retail
market place and the convenience store market respectively. In Q4FY2004, the
company also expanded their business operations consulting practice to the
Financial Services Industry.
Fresh Market Manager
--------------------
Fresh Market Manager is a fully integrated system for managing perishable
grocery departments such as deli, bakery, food service, meat, seafood and
produce. The product has also been deployed in supermarkets, convenience stores,
commissaries and offers a center store inventory management option. This
software enables item level management and category analysis by exception, with
particular emphasis on managing the production processes taking place within the
store. In addition, this application provides accurate cost of goods
identification and sales profitability analysis to determine gross profit and
net profit by item.
Fresh Market Manager provides corporate, store and department managers with
total item information, allowing extensive category analysis of perishable
products. Category and store department managers can leverage this information
to increase sales, decrease shrinkage, and improve overall gross profit.
Combined with demand forecasting and automated production, Fresh Market Manager
is designed to ensure that variety and item freshness increase, while overall
waste decreases.
Focusing initially on perishable inventory needs, the applications gather point
of sale and production data, which is especially helpful in areas where better
product delivery based on real demand, can help eliminate unnecessary waste, and
can improve "right product" availability. The application assists customers in
the timely ordering of materials and provides real time demand management (based
on patented forecasting algorithms) by using alerting functions.
Store management may use this software application for:
o Assortment planning to respond to customer preferences for
variety and selection within the store
o Forecasting, to attempt to improve sales by anticipating the
expected demand
o Production planning, to build produced items efficiently, when
they are needed
o Item management, to quickly and accurately enter transactions
into the system
o Reporting, to see what the business is doing now and make
decisions based on current information
Corporate management may use the Fresh Market Manager software to control
detailed data through well-defined information groupings to:
o Determine the product mix for the enterprise at any level of
detail
o Create rules that drive production scheduling to meet the
company's specific needs
o Apply labor standards for production and for category
management
The Fresh Market Manager applications are Cost Control and Category Management,
Demand Forecast and Production Planner, Inventory and Computer Assisted
Ordering, and Alert Advisor.
Cost Control & Category Management
----------------------------------
This application assists managers in reporting the amount of product
produced, production waste as well as losses from throwaways and
markdowns. The software decomposes the Point-of-Sale data to determine
the timing of products sold and by using all the information, delivers
4
cost and category management information down to the item level. The
visibility gained through the use of the software assists all levels of
a company's management to focus on profitability and product
contribution.
Demand Forecast and Production Planner
--------------------------------------
Demand Forecast and Production Planner: (a) delivers assortment plans
and production schedules; (b) delivers corporate standards for core
items; (c) assists managers in selecting customer/market driven items;
and (d) develops a daily production plan based on forecasted needs.
This application is intended to assist an organization in making the
right product in the right quantity to improve the profitability of the
perishable business by effective production planning and accurate
assortment planning.
Inventory & Computer Assisted Ordering
--------------------------------------
This aspect of the application provides cost control and inventory
management of perishable product ingredients (i.e. raw materials). It
includes computer-assisted ordering and item receiving modules. The
inventory capability is intended to address the needs of businesses to
control the cost of inventory while minimizing lost sales from items
not produced due to out of stock ingredients.
Alert Advisor and Task Manager
------------------------------
Alert Advisor delivers demand monitoring, exception analysis and
production schedule revisions to relevant managers on a real-time
basis. A task management component is also available to direct task
activities whether from the corporate office or at the specific
locations and the system provides visibility to the status of those
tasks.
ActionManager
-------------
ActionManager applications are designed to replace costly paper-based and manual
processes with systems that substantially reduce time spent on administrative
tasks, non-productive (non-selling) labor costs, and excess headcount in the
corporate office while insuring that each geographically distributed location
adheres to the Company's defined operational standards. ActionManager
applications provide an automated method for managers to plan, schedule, and
administer virtually every administrative task at store-level. In addition to
automating the bulk of all administrative processes, ActionManager also provides
the local manager with a real-time "dashboard" view of the business, as well as
a "cockpit management" type alert system to notify the manager when something is
or is not to be planned, and suggests best practice advice as to what course of
action to be taken. By automating a great deal of the "process" and
administrative burden of management, ActionManager allows management, at all
levels, to devote more time to customer-related and employee related activities
and to improve their over-all planning and decision making. The use of the
ActionManager applications are intended to result in cost savings and improved
staff and customer focus in the store. ActionManager applications have been
marketed to large, as well as small to mid-size retailers with 50 or more
locations.
ActionManager is a suite of software applications grouped into three distinct
solutions areas. Each ActionManager solution incorporates the core ActionBase
and ActionBoard technologies that allow a multi-unit organization to embed a
company's "best practice" solutions into the system.
ActionBase
----------
ActionBase provides a set of utilities for menu creation, maintenance
and security. ActionBase is designed to efficiently and effectively
manage and control the software deployed to remote locations and insure
that all locations have the same consistent interfaces.
ActionBoard
-----------
ActionBoard is a user defined, rules based, and real-time display of
events requiring immediate managerial attention. ActionBoard provides
best practices advice to location managers through the critical alerts
process and the recommended action to be taken. This is accomplished by
embedding corporate rules and practices in an application that
cross-references and consolidates operating data.
ActionBoard is intended to be used by employees, managers, and the
company as a whole. It displays operational information and guides
employee and manager action. ActionBoard has been designed to provide
the following potential advantages to employees:
o Alerts managers to issues that require immediate attention
o Gives advice on actions to be taken
o Maintaining employees focus on essential activities and tasks
to ensure that a critical task is not overlooked or delayed
o Improving performance quality and consistency
o Improving employee response time and level of contribution
o Spotlighting achievements and successes for management
5
The following describes the ActionManager software solutions and the individual
applications within them:
Workflow and Information Management
-----------------------------------
The Workflow and Information Management solution consists of the
applications: ActionForm, ActionMail, CashSheet, ScoreTracker, Internet
Mail Gateway, Action Gatekeeper, ReadyReference, and ReportBuilder
which automate data collection and distribution, insuring consistent
data flow both to and from the locations and the corporate office.
Labor Management
----------------
The Labor Management solution consists of the applications: Scheduler,
Forecaster and TimeMeter. These applications are designed to address
the problems of managing staff and insuring that staff is performing
the right tasks at the right time and in the right place. Labor
requirements are determined by analyzing the results created by the
Forecaster and compliance to schedules and monitoring time punches are
provided by the TimeMeter application.
HR Management
-------------
The HR Management solution consists of the applications: SmartHire,
Interactive Tutor, Checkup, and HRAction, which provide an automated
process for personnel selection, training, and retention. These
applications are intended to assist managers by automating many of the
time consuming tasks that are associated with the hiring and training
process.
Supply Chain Profit Link
------------------------
Supply Chain Profit Link utilizes a mix of both Fresh Market Manager
and Action Manager products to produce a daily view of item movement of
a manufactures product by location within any given retailer. Supply
Chain Profit link products include Category Management, Forecasting,
and Automated Ordering.
Category Management
-------------------
The Category Management solution includes ScoreTracker Category
Management tool, Central Server, Alerts Manager, and our universal
integration solution. These applications provide the retail category
manager, the manufacture category management and sales/operations team
with a current view of the profitability of each product being carried
by the retailer by store location.
Forecasting
-----------
The forecasting system determines the demand by item by store location
and aggregates the demand to user configured totals. This product
provides both the retailer and manufacturer with a total demand that is
driven by the individual store performance, and takes into
consideration the marketing and merchandising plan as determined by the
corporate merchandising team.
Automated Ordering
------------------
The Automated ordering system supplies an estimated order to the
retailer for review and once approved can generate an electronic
purchase order to a manufacture or can feed the order to the retailers
existing purchase order legacy system.
C-Store Manager
---------------
C-Store Manager integrates the Action Manager Products with the Fresh
Market Manager Products in a package geared to solve the problems
currently facing the C-Store Industry. This product is configured for
rapid deployment and is a complete management system to fill the gaps
between the Accounting Systems at the Headquarters to the Point of Sale
System at the store. The product is sold and implemented in modules
depending on the specific chain's needs.
Profit Optimization and Business Operations Consulting (consulting
services)
------------------------------------------------------------------
The consulting group's staff has extensive knowledge of the business
operations aspects of retail businesses. The consulting group provides
consulting services ranging from accelerated implementations
(consultation support in conjunction with the customer's staff), to
project level advisory consulting. Focused primarily on the
implementation of the ActionManager and Fresh Market Manager
applications, the professional services consultants assist customers in
decision-making and implementing the software.
Accelerated Implementation Strategy
-----------------------------------
Using experience and industry expertise, the team focuses on
identifying the Company's mission, crucial business elements within the
client company, developing a rapid implementation program, and
providing the customer with continued assistance. The elements of this
strategy include:
o On-site support for pre-implementation analysis of
requirements
o Consultants to augment the customer's project team
o Defined project plans with time lines created to meet customer
requirements
o On-site support for installation and verification
o Completion and delivery of post-implementation and return on
investment analysis
6
Implementation Assistance Services
----------------------------------
Additional services provided to the customers include:
o Project management and consulting support for customer project
teams
o Business rule recommendations and tailoring
o Technical systems analysis, assessment and configuration
o On-site training and educational services
Financial Services and Call Center Operations Consulting
--------------------------------------------------------
The company has developed a services product that centers around Labor
Management, Organizational Design, Forecasting, and Best Practice development
and training.
Patents and Proprietary Rights
------------------------------
The Company owns or controls 8 U.S. patents, 4 patents pending, 8 U.S.
trademarks and 37 U.S. copyrights relating to its software technology. The
Company has 14 international patents and patent applications pending. The
patents referred to above are continuously reviewed and renewed as their
expiration dates as they come due.
Company policy is to seek patent protection for all developments, inventions and
improvements that are patentable and have potential value to the Company and to
protect as trade secrets other confidential and proprietary information. The
Company intends to vigorously defend its intellectual property rights to the
extent its resources permit.
Future success may depend upon the strength of the Company's intellectual
property. Although management believes that the scope of patents/patent
applications are sufficiently broad to prevent competitors from introducing
devices of similar novelty and design to compete with the Company's current
products and that such patents and patent applications are or will be valid and
enforceable, there are no assurances that if such patents are challenged, this
belief will prove correct. The Company has, however, successfully defended one
of these patents in two separate instances and as such, has some level of
confidence in the Company's ability to maintain its patents. In addition, patent
applications filed in foreign countries and patents granted in such countries
are subject to laws, rules and procedures, which differ from those in the U.S.
Patent protection in such countries may be different from patent protection
provided by U.S. Laws and may not be as favorable. The Company plans to timely
file international patents in all countries in which we seek market share.
The Company is not aware of any patent infringement claims against it; however,
there are no assurances that litigation to enforce patents issued to the
Company, to protect proprietary information, or to defend against the Company's
alleged infringement of the rights of others will not occur. Should any such
litigation occur, the Company may incur significant litigation costs, the
Company's resources may be diverted from other planned activities, and result in
a materially adverse effect on the results of operations and financial
condition.
The Company relies on a combination of patent, copyright, trademark, and other
laws to protect its proprietary rights. There are no assurances that the
Company's attempted compliance with patent, copyrights, trademark or other laws
will adequately protect its proprietary rights or that there will be adequate
remedies for any breach of our trade secrets. In addition, should the Company
fail to adequately comply with laws pertaining to its proprietary protection,
the Company may incur additional regulatory compliance costs.
Government Regulation and Approval
----------------------------------
Like all businesses, the Company is subject to numerous federal, state and local
laws and regulations, including regulations relating to patent, copyright, and
trademark law matters.
Cost of Compliance with Environmental Laws
------------------------------------------
The Company currently has no costs associated with compliance with environmental
regulations, and does not anticipate any future costs associated with
environmental compliance; however, there can be no assurance that it will not
incur such costs in the future.
Research and Development
------------------------
Total research and development expenditures were $1,019,411 and $1,176,222 for
the years ended June 30, 2005 and 2004, respectively; a 13% decrease. We
estimate that this resource will require limited growth as the Company continues
to improve their New C-Store and Supply Chain Profit Link in the next fiscal
year.
Reports to Security Holders
---------------------------
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934. Accordingly, it files annual, quarterly and other reports
and information with the Securities and Exchange Commission. You may read and
7
copy these reports and other information at the Securities and Exchange
Commission's public reference rooms in Washington, D.C. and Chicago, Illinois.
The Company's filings are also available to the public from commercial document
retrieval services and the Internet world wide website maintained by the
Securities and Exchange Commission at www.sec.gov.
Employees
---------
As of June 30, 2005, the Company had 32 employees, including 8 software
developers and programmers, 9 sales, marketing and account management employees,
7 software service and support employees and 8 accounting and administrative
employees. All of these employees work for the Company on a full time basis. The
employees are not represented by any labor union.
Item 2. Description of Properties
---------------------------------
The principal place of business operations is 333 Main Street, Park City, Utah.
The Company leases approximately 9,500 square feet at this location, consisting
primarily of office and storage areas. The Company is currently investigating
other locations.
Item 3. Legal Proceedings
-------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
None
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8
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
----------------------------------------------------------------
Dividend Policy
---------------
To date, the Company has not paid dividends on common stock. The payment of
dividends, if any, is within the discretion of the Board of Directors and will
depend upon earnings, capital requirements and financial condition, and other
relevant factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation." The Board does not intend to declare any
dividends in the foreseeable future, but instead intends to retain all earnings,
if any, for use in operations.
Share Price History
-------------------
Common stock (the "Common Stock") is traded in the over-the-counter market in
what is commonly referred to as the "Electronic" or "OTC Bulletin Board" or the
"OTCBB" under the trading symbol "PKCY." The following table sets forth the high
and low bid information of the Common Stock's closing price for the periods
indicated. The price information contained in the table was obtained from
internet sources considered reliable. Note that such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and the quotations may not necessarily represent actual transactions
in the Common Stock. NOTE: On the 11th day of August 2006, the company effected
a 1 for 50 reverse stock split. All trading price information set forth below
gives effect to such reverse stock split.
Fiscal Year 2004 Low High
---------------- --- ----
September 30, 2003 $1.50 $3.50
December 31, 2003 $1.00 $2.50
March 31, 2004 $2.00 $8.50
June 30, 2004 $3.50 $7.00
Fiscal Year 2005
----------------
September 30, 2004 $2.50 $4.00
December 31, 2004 $2.00 $4.50
March 31, 2005 $2.00 $4.00
June 30, 2005 $1.00 $2.50
Holders of Record
-----------------
At October 12, 2005 there were 2,369 holders of record of Common Stock and
shares issued and outstanding of 5,657,079. The number of holders of record
and shares issued and outstanding was calculated by reference to the stock
transfer agent's books.
Purchases of Equity Securities by the Small Business Issuer and Affiliated
Purchasers
None
Equity Compensation Plan Information
Equity Compensation Plan Information
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Plan category (a) (b) (c)
Equity compensation plans
approved by security
holders 0 0 0
Equity compensation plans
not approved by security
holders 180,930 $2.865 51,070
------- ------ ------
Total 180,930 $2.865 51,070
======= ====== ======
9
The Company has several different Equity Compensation Plans in effect at this
time. These include the following
o In August 2003 the Company authorized 40,000 options for
distribution to the employees. These options had a strike
price of $2.50
o In August 2003 the Company authorized 40,000 options for
distribution to the senior management. These options had a
strike price of $1.50
o In September of 2005 the Company authorized to pay Senior
Management 3 options for every share purchased at $3.50 for
one year. Starting October of 2006 Senior Management will get
2 options for every share purchased from the Company at market
price or $3.50 which ever is higher.
Issuance of Securities
We issued shares of our common stock in unregistered transactions during 2005.
All of the shares of common stock issued were issued in non registered
transactions in reliance on Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"). We report share issued on a quarterly bases. The
shares of common stock issued subsequent to March 31, 2005 shares of common
stock were issued as follows:
o In June 2005 47,722 shares were issued to employees in lieu
of cash compensation.
o In June 2005 35,276 shares were issued to management in
lieu of cash compensation.
o In July 2005 1,320 shares were issued for consulting
services.
o In July 2005 3,115 shares were issued per anti-dilution
agreement with the CEO.
o In August 2005 2,688 shares were issued to an employee in
lieu of cash compensation.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation
-----------------------------------------------------------------------
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition. The terms "Company", "we", "our"
or "us" are used in this discussion to refer to Park City Group, Inc. (formerly
Fields Technologies, Inc.) along with Park City Group, Inc.'s wholly owned
subsidiary, Fresh Market Manager, LLC, on a consolidated basis, except where the
context clearly indicates otherwise.
Overview
--------
The principal business is the design, development, marketing and support of
proprietary software products along with ongoing operational consulting
practice. These software products are designed to be used in retail and grocery
businesses having multiple locations by assisting individual store locations and
corporate management with managing daily business operations and communicating
results of those operations in a timely manner.
Through June 30, 2005 the Company has accumulated aggregate consolidated losses
totaling $20,566,203 which includes net losses of $3,408,037 and $675,243 for
the years ended June 30, 2005, and 2004, respectively.
Management's Discussion and Analysis
------------------------------------
Years Ended June 30, 2005 and 2004
----------------------------------
During the year ended June 30, 2005, the Company had total revenues of
$3,631,812 compared to $6,029,823 in 2004, a 40% decrease. Software license
sales were $479,615 and $3,245,557 for 2005 and 2004, respectively, an 85%
decrease. This decrease was primarily attributable to the postponement of large
sales for Fresh Market Manager at fiscal year end. One customer did sign their
agreement in July 2005 for $3,000,000 in licenses as well as $500,000 in
consulting services and $75,000 for one year exclusivity rights for the Point of
Purchase Display manufacturing industry, and $100,000 for the first right of
refusal on stock offers through December 2005, and then six months of First
Right of Offer for company offered stock sales. Maintenance and ASP revenues
increased by 6% over 2004, primarily from the increase in ASP sales agreements.
Consulting revenue increased by 44% to $735,522 for 2005, compared to $509,928
for 2004. This increase is primarily attributable to ongoing operational
consulting services for Fresh Market Manager customers and the successful launch
of our new financial services operational consulting services products. The
Company expects maintenance and support revenue for the year ending June 30,
10
2006 to be increase over 2005. Some customers may discontinue maintenance
agreements, but maintenance agreements with new customers should replace
discontinuing customers, and may result in a similar growth in maintenance
revenue.
Deferred revenue was $883,425 and $1,111,915 at June 30, 2005 and 2004,
respectively, a decrease of 20%.
Research and development expenses were $1,019,411 and $1,176,222 for 2005 and
2004, respectively, a 13% decrease. This decrease is primarily because both the
Fresh Market Manager and Action Manager products have reached a mature
development state. Research and development costs continue for both products for
enhancements and upgrades as well as the development of Supply Chain Profit
Link, C-Store Manager and two other products the Company plans to launch in
FY2006.
Sales and marketing expenses were $1,337,318 and $1,158,411 for 2005 and 2004,
respectively, a increase of 16%. This increase is primarily attributable to
employment of Jim Horton as President and COO to develop the sales organization.
During the current fiscal year the Company developed several strategic sales
channels that are headed up by commissioned alliance partners. The company
recognized approximately $456,000 in sales during the current fiscal year
included in license and professional services revenue.
General and administrative expenses were $2,055,940 and $1,672,650 for 2005 and
2004, respectively, a 23% increase. This increase was driven primarily from the
increase of reserves for bad debt including the write off of $307,500 for one
customer for non payment.
Interest expense was $1,178,454 and $1,540,417 for 2005 and 2004, respectively,
a 24% decrease. This decrease was primarily attributed to the conversion of a
bridge loan from directors.
The gain on forgiveness of debt in 2004 is attributable to certain bridge note
holders, including an officer and directors, agreeing to cancel certain amounts
payable to them pursuant to the terms of the Bridge Note C agreements.
Financial Position, Liquidity and Capital Resources
---------------------------------------------------
The Company had $209,670 in cash at June 30, 2005 compared with $312,817 at June
30, 2004, a decrease of $103,147. Working capital deficit at June 30, 2005
increased to $4,994,269, compared to $587,977 at June 30, 2004. The increase in
the working capital deficit is principally attributable to the upcoming maturity
dates on the notes payable to Whale Investments, as well as an increase in the
related party line of credit with Riverview. Subsequent to year end, the Company
was able to pay off the entire Whale Investment note of $2,000,000, and $350,000
of the Riverview operating line of credit.
During the year ended June 30, 2005 the operations of the Company used $794,318
of cash, compared to operations providing $62,264 of cash in 2004.
The company focused on developing several strategic sales channels in FY2005.
The primary focuses are, Large Grocery Chains, Medium Grocery Chains, Large
C-Store Chains, Medium C-Store Chain, Specialty Retailers through Alliance
Partners, Financial Services and Call Center operations, and Perishable and Non
Perishable Product Manufacturers. Each of these channels has a Senior Executive
responsible for the development of the channel. In addition the Company has
entered into agreements with the Alliance Partners and independent commissioned
sales personnel as needed to facilitate introductions and relationships within
the channel.
In addition to our channel focus, the Company subsequent to June 30, 2005,
entered into a license agreement with IMI as disclosed in our 8-K filing on
August 15, 2005. Although there is no certainty, the Company believes that this
working relationship with the operating companies has significant potential for
revenue generation. Joint management operating meetings will be conducted later
to discuss future business opportunities
We expect that these channels will take 12 to 18 months to initiate and expect
to start seeing results in Q1FY2006, although no assurance of positive results
from these strategic sales channels can be given. Our working capital and other
capital requirements for the foreseeable future will vary based upon a number of
factors, including: (i) changes in the software industry and environment which
may require additional modifications to our software and platforms; (ii) the
pace at which our products are accepted by and sold into the market and the
related sales and marketing effort and support requirements, and (iii) changes
in existing financing arrangements. The Company is pursuing opportunities to
sell its ActionManager and Fresh Market Manager products through alliances with
other software vendors (CRS Retail Systems) and companies (Kurt Salmon
Associates) selling to the retail industry. This selling strategy is dependent
on successfully establishing these alliances and the efforts of the other
companies.
To date, the Company has financed its operations through operating revenues,
loans from directors, officers and stockholders, loans from the CEO, and
majority shareholder, and private placements of equity securities. The Company
has been constrained by not having a desirable level of working capital.
Although the Company anticipates that it will meet its working capital
requirements primarily through increased revenue, while controlling and
controlling costs and expenses, no assurances can be given that the Company will
be able to meet its working capital requirements. Should the Company desire to
raise additional equity or debt financing, there are no assurances that the
Company could do so on acceptable terms.
11
Inflation
---------
The impact of inflation may cause retailers to slow spending in the technology
area, which could have an impact on company sales.
Risk Factors
------------
The Company is subject to certain other risk factors due to the organization and
structure of the business, the industry in which it competes and the nature of
its operations. These risk factors include the following:
Risk Factors Related to the Company's Operations
Continued net losses could impair the ability to raise capital.
---------------------------------------------------------------
The Company cannot accurately predict future revenues. The future marketing
strategy emphasizes sales activities for the Fresh Market Manager and
ActionManager applications, in the sales channels of Grocery, C-Store, Specialty
Retail, Financial Service and Food Manufactures. If this marketing strategy
fails, revenues and operations will be negatively affected. All Park City Group
applications are designed to be highly flexible so that they can work in diverse
business environments There is no assurance that the markets will accept the
Park City Group applications in proportion to the increased marketing of these
product lines, although current business activity might suggest that the market
opportunity and acceptance of the Park City Group applications are positive. The
Company may face significant competition that may negatively affect demand for
the Park City Group applications. This includes the public's preference for
competitor's new product releases or updates over the Company's releases or
updates. The company is focusing our marketing effort on the development of the
new expanded sales channels, this will be increasing our marketing and
operational costs.
There can be no assurance that the Company will be able to generate significant
revenues or that it will achieve or maintain profitability, or generate revenues
from operations in the future. Management believes that success will depend upon
the ability to generate and retain new customers, which cannot be assured, and
in many circumstances, may be beyond the Company's control. The ability to
generate sales will depend on a variety of factors, including:
o Sales and marketing efforts as well as the co-marketing
efforts of strategic partners,
o The success of the new strategic sales channels
o The length of the sales cycle for our products
o The reliability and cost-effectiveness of services, and
o Customer service and support.
The Company faces competition from existing and emerging technologies that may
affect our profitability. The markets for our type of software products and that
of our competitors are characterized by: (i) Development of new software,
software solutions, or enhancements that are subject to constant change, (ii)
Rapidly evolving technological change, (iii) Unanticipated changes in customer
needs.
Because these markets are subject to such rapid change, the life cycle of the
products is difficult to predict; accordingly, the Company is subject to
following risks:
o Whether or how the Company will respond to technological
changes in a timely or cost-effective manner,
o Whether the products or technologies developed by competitors
will render the products and services less attractive to
potential buyers or shorten the life cycle of the Company's
products and services, and
o Whether products and services will achieve and sustain market
acceptance.
If the Company is unable to adapt to the constantly changing markets and to
continue to develop new products and technologies to meet customers' needs,
revenues and profitability will be negatively affected. Future revenues are
dependent on the successful development and licensing of new and enhanced
versions of the products and potential product offerings. If the Company fails
to successfully upgrade existing products and develop new products or the
product upgrades and new products do not achieve market acceptance, revenues
will be negatively impacted.
Operating results may fluctuate, which makes it difficult to predict future
performance.
--------------------------------------------------------------------------------
Management expects a portion of the revenue stream to come from license sales,
maintenance and services charged to new customers, which will fluctuate in
amounts because software sales to retailers tend to be cyclical in nature. In
addition, the Company may potentially experience significant fluctuations in
future operating results caused by a variety of factors, many of which are
outside of its control, including:
o Demand for and market acceptance of new products,
o Introduction or enhancement of products and services by the
Company or its competitors,
o Capacity utilization,
o Technical difficulties, system downtime,
12
o Fluctuations in data communications and telecommunications
costs,
o Maintenance subscriber retention,
o The timing and magnitude of capital expenditures and
requirements,
o Costs relating to the expansion or upgrading of operations,
facilities, and infrastructure,
o Changes in pricing policies and those of competitors,
o Changes in regulatory laws and policies, and
o General economic conditions, particularly those related to the
information technology industry.
Because of the foregoing factors, Management expects future operating results to
fluctuate. As a result of such fluctuations, it will be difficult to predict
operating results. Period-to-period comparisons of operating results are not
necessarily meaningful and should not be relied upon as an indicator of future
performance. In addition, a relatively large portion of the Company's expenses
will be relatively fixed in the short-term, particularly with respect to
facilities and personnel. Therefore, future operating results will be
particularly sensitive to fluctuations in revenues because of these and other
short-term fixed costs.
Some competitors are larger and have greater financial and operational resources
that may give them an advantage in the market. Many of the Company's competitors
are larger and have greater financial and operational resources. This may allow
them to offer better pricing terms to customers in the industry, which could
result in a loss of potential or current customers or could force the Company to
lower prices. Any of these actions could have a significant effect on revenues.
In addition, the competitors may have the ability to devote more financial and
operational resources to the development of new technologies that provide
improved operating functionality and features to their product and service
offerings. If successful, their development efforts could render the Company's
product and service offerings less desirable to customers, again resulting in
the loss of customers or a reduction in the price the Company can demand for our
offerings.
The Company needs to hire and retain qualified personnel to sustain its
business. The Company is currently managed by a small number of key management
and operating personnel. There are no employment agreements with most of the
employees. Future success depends, in part, on the continued service of key
executive, management, and technical personnel, some of whom have only recently
been hired, and the ability to attract highly skilled employees. If key officers
or employees are unable or unwilling to continue in their present positions,
business could be harmed. From time to time, the Company has experienced, and
expects to continue to experience, difficulty in hiring and retaining highly
skilled employees. Competition for employees in the industry is intense. If the
Company is unable to retain key employees or attract, assimilate or retain other
highly qualified employees in the future, it may have a material adverse effect
on the business and results of operations.
The Company is dependent on the continued participation of certain key
executives and personnel to effectively execute its business plan and strategies
and must effectively integrate its management team. The business is dependent on
the continued services of its founder and Chief Executive Officer, Randall K.
Fields. Should the services of Mr. Fields be lost, operations will be negatively
impacted. The Company currently maintains three key man insurance policies on
Mr. Fields life in the amount of $10,000,000 each. The beneficiary of each
policy is (1) to the Fields Trust, (2) to Park City Group, Inc. and (3) to the
Fields Trust. The third policy is a new policy which will replace the first
policy as soon as all contingencies and waiting periods have been removed from
the new policy. The loss of the services of Mr. Fields would have a materially
adverse effect on the business.
The Company depends on the ability of its management team to effectively execute
its business plan and strategies. During the last year, key executives have had
to forgo a portion of their salary, and as such are at risk for their continued
commitment. If the management group is unable to effectively integrate its
activities, or if the Company is unable to integrate new employees into its
operations, its business plan and strategies will not be effectively executed
and operations could suffer.
The business is currently dependent on a limited customer base; should any of
these customer accounts be lost, revenues will be negatively impacted. The
Company expects that existing customers will continue to account for a
substantial portion of total revenues in future reporting periods. The ability
to retain existing customers and to attract new customers will depend on a
variety of factors, including the relative success of marketing strategies and
the performance, quality, features, and price of current and future products.
Accordingly, if customer accounts are lost or customer orders decrease, revenues
and operating results will be negatively impacted. The company has experienced
the loss of long term maintenance customers due to the high reliability of the
product, and in some cases, the customer deciding to replace Park City Group
13
applications. The company continues to focus on these long term clients to
provide new functionality and applications to meet their business needs. The
company also expects to lose some maintenance revenue due to consolidation of
industries or customer operational difficulties that lead to their reduction of
size. In addition, future revenues will be negatively impacted if the Company
fails to add new customers that will make purchases of its products and
services.
The Company may be unable to raise necessary funds for operations.
The Company anticipates that we need to raise additional funds to meet cash flow
and capital requirements. In the past, the Company has frequently experienced
cash flow shortages because not enough cash has been generated from operations
to cover expenses. Raising additional funds will be necessary to meet capital
needs. There can be no assurance that such financing will be available in
amounts or on acceptable terms, if at all. Further, the lack of tangible assets
to pledge could prevent the Company from establishing debt-based sources of
financing. The inability to raise necessary funding would adversely affect the
ability to successfully implement the business plan. There can be no assurance
that the Company will be able to obtain additional financing to meet the current
or future requirements on satisfactory terms, if at all. Failure to obtain
sufficient capital could materially adversely affect the business and results of
operations.
The Company faces risks associated with proprietary protection of its software.
The Company's success depends on its ability to develop and protect existing and
new proprietary technology and intellectual property rights. It seeks to protect
its software, documentation and other written materials primarily through a
combination of patents, trademark, and copyright laws, confidentiality
procedures and contractual provisions. While the Company has attempted to
safeguard and maintain its proprietary rights, there are no assurances there it
will be successful in doing so. Competitors may independently develop or patent
technologies that are substantially equivalent or superior.
Despite efforts to protect proprietary rights, unauthorized parties may attempt
to copy aspects of the Company's products or obtain and use information regarded
as proprietary. Policing unauthorized use of the Company's products is
difficult. While the Company is unable to determine the extent to which piracy
of its software exists, software piracy can be expected to be a persistent
problem, particularly in foreign countries where the laws may not protect
proprietary rights as fully as the United States. The Company can offer no
assurance that its means of protecting its proprietary rights will be adequate
or that its competitors will not reverse engineer or independently develop
similar technology.
The Company incorporates third party software providers' licensed technologies
into its products; the loss of these technologies may prevent sales of its
products or lead to increased costs. The Company now licenses, and in the future
will license, technologies from third party software providers that are
incorporated into its products. The loss of third-party technologies could
prevent sales of products and increase costs until substitute technologies, if
available, are developed or identified, licensed and successfully integrated
into the products. Even if substitute technologies are available, there can be
no guarantee that the Company will be able to license these technologies on
commercially reasonable terms, if at all.
The Company may discover software errors in its products that may result in a
loss of revenues or injury to its reputation. Non-conformities or bugs
("errors") may be found from time to time in the existing, new or enhanced
products after commencement of commercial shipments, resulting in loss of
revenues or injury to the Company's reputation. In the past, the Company has
discovered errors in its products and, as a result, has experienced delays in
the shipment of products. Errors in its products may be caused by defects in
third-party software incorporated into the products. If so, these defects may
not be able to be fixed without the cooperation of these software providers.
Since these defects may not be as significant to the software provider as they
are to the Company, it may not receive the rapid cooperation that may be
required. The Company may not have the contractual right to access the source
code of third-party software and, even if it does have access to the source
code, it may not be able to fix the defect. Since its customers use its products
for critical business applications, any errors, defects or other performance
problems could result in damage to the customers' business. These customers
could seek significant compensation from the Company for their losses. Even if
unsuccessful, a product liability claim brought against the Company would likely
be time consuming and costly.
The Company's officers and directors serve as officers and directors of other
corporations and have ownership interests in other corporations; conflicts of
interest may arise which are not resolved in the Company's favor and which may
negatively impact its operations and financial condition.
The officers and directors are in a position to control their own compensation
and to approve dealings by the Company with other entities with which these
principals are also involved. For example, if a company affiliated with one of
the directors were to be considered as a possible strategic alliance, the
director would have a conflict of interest in negotiating the most favorable
terms for the director's affiliated company or Park City Group. As a result
there will be conflicts of interest. There is no assurance that these conflicts
will be resolved in the Company's favor.
The Chief Executive Officer, Randall K. Fields, has a 100% ownership interest in
Riverview Financial Corp. that has entered into financial transactions with the
Company; these transactions present conflicts of interest that may not be
resolved in the Company's favor.
14
Park City Group has an unpaid promissory note due to Riverview Financial Corp.
("Riverview") in the amount of $3,296,406 with interest payable at 12% per
annum.
The Company may continue to have other transactions with Riverview that may
create conflicts of interest between its interests and Mr. Fields' sole
ownership of Riverview. There is no assurance that these conflicts will be
resolved in the Company's favor.
The Company's officers and directors have limited liability and indemnification
rights under its organizational documents, which may impact its results. The
officers and directors are required to exercise good faith and high integrity in
the management of the Company's affairs. The certificate of incorporation and
bylaws, however, provide, that the officers and directors shall have no
liability to the stockholders for losses sustained or liabilities incurred which
arise from any transaction in their respective managerial capacities unless they
violated their duty of loyalty, did not act in good faith, engaged in
intentional misconduct or knowingly violated the law, approved an improper
dividend or stock repurchase, or derived an improper benefit from the
transaction. The certificate of incorporation and bylaws also provide for the
Company to indemnify the officers and directors against any losses or
liabilities they may incur as a result of the manner in which they operate the
business or conduct the internal affairs, provided that the officers and
directors reasonably believe such actions to be in, or not opposed to, the
Company's best interests, and their conduct does not constitute gross
negligence, misconduct or breach of fiduciary obligations.
Market and Capital Risks
Future issuances of the Company's shares may lead to future dilution in the
value of its common stock, a reduction in shareholder voting power, and prevent
a change in Company control. The shares may be substantially diluted due to the
following:
o Issuance of common stock in connection with funding agreements with
third parties and future issuances of common and preferred stock by the
Board of Directors, and
o The Board of Directors has the power to issue additional shares of
common stock and preferred stock and the right to determine the voting,
dividend, conversion, liquidation, preferences and other conditions of
the shares without shareholder approval.
Stock issuances may result in reduction of the book value or market price of
outstanding shares of common stock. If the Company issues any additional shares
of common or preferred stock, proportionate ownership of common stock and voting
power will be reduced. Further, any new issuance of common or preferred shares
may prevent a change in control or management.
Issuance of preferred stock could depress the market value of current
shareholders and could have a potential anti-takeover effect. The Company has
30,000,000 authorized shares of preferred stock that may be issued by action of
the Board of Directors. The Board of Directors may designate voting control,
liquidation, dividend and other preferred rights to preferred stock holders. The
Board of Directors' authority to issue preferred stock without shareholder
consent may have a depressive effect on the market value of the common stock.
The issuance of preferred stock, under various circumstances, could have the
effect of delaying or preventing a change in control or other take-over attempt
and could adversely affect the rights of holders of the shares of common stock.
Preferred stock holders would receive dividends, if any, at a rate twenty times
that paid per share of the common stock holders; accordingly, if dividends are
declared, preferred stock holders will have preferential rights in the payment
of dividends.
The holders of shares of preferred stock are entitled to receive, out of Company
assets, legally available, and as when declared by the Board of Directors,
dividends of every kind declared and paid to holders of commons stockholders, at
a rate of twenty times that paid for shares of common stock. Because the Board
of Directors has the authority to issue preferred stock to such preferred stock
holders will have preferential rights in the payment of dividends.
Because the common stock is considered a penny stock, any investment in the
common stock is considered to be a high-risk investment and is subject to
restrictions on marketability. The common stock has traded on the
Over-the-Counter Bulletin Board since June 2001. The bid price of the common
stock has been less than $5.00 during this period. The Company is subject to the
penny stock rules adopted by the Securities and Exchange Commission that require
brokers to provide extensive disclosure to its customers prior to executing
trades in penny stocks. These disclosure requirements may cause a reduction in
the trading activity of the common stock.
Broker-dealer practices in connection with transactions in penny stocks are
regulated by certain penny stock rules adopted by the Securities and Exchange
Commission. Penny stocks generally are equity securities with a price of less
than $5.00. Penny stock rules require a broker dealer, prior to a transaction in
a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document that provides information about penny stocks and the
15
risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules generally require
that prior to a transaction in a penny stock, the broker-dealer make a special
written determination that the penny stock is a suitable investment for the
purchaser and receives the purchaser's written agreement to the transaction.
Because the Company is subject to the penny stock rules its shareholders may
find it difficult to sell their shares.
Critical Accounting Policies
This Management's Discussion and Analysis of Financial Condition and
Results of Operations discuss the Company's Financial Statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States.
We commenced operations in the software development and professional
services business during 1990. The preparation of our financial statements
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an ongoing basis,
management evaluates its estimates and assumptions, including those related to
inventory, income taxes, revenue recognition and restructuring initiatives. We
anticipate that management will base its estimates and judgments on historical
experience of the operations we may acquire and on various other factors that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among
others, will affect its more significant judgments and estimates used in the
preparation of our Consolidated Financial Statements.
Income Taxes. In determining the carrying value of the Company's net
deferred tax assets, the Company must assess the likelihood of sufficient future
taxable income in certain tax jurisdictions, based on estimates and assumptions,
to realize the benefit of these assets. If these estimates and assumptions
change in the future, the Company may record a reduction in the valuation
allowance, resulting in an income tax benefit in the Company's Statements of
Operations. Management evaluates the realizability of the deferred tax assets
and assesses the valuation allowance quarterly.
Goodwill and Other Long-Lived Asset Valuations. In June 2001, the FASB
issued SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other
Intangible Assets", effective for fiscal years beginning after December 15, 2001
with early adoption permitted for companies with fiscal years beginning after
March 15, 2001. We adopted the new rules on accounting for goodwill and other
intangible assets during the first quarter of fiscal 2004. Under the new rules,
goodwill and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with the
statements. Other intangible assets will continue to be amortized over their
useful lives.
Revenue Recognition. The Company's revenues are derived from the sale
of software, maintenance of software, professional consulting services and
software hosting services. Revenue from the sale of software is recognized at
the time the software is shipped to the customer. The company also defers a
portion of the software license fee equal to the cost of maintenance for the
warranty period on all license sales that are either to a new customer or are a
new product being sold to and existing customer. Customers who purchases
additions licenses for software they already have and are paying maintenance on
waive the warranty period. Revenue from maintenance of software, professional
consulting services and software hosting services is recognized during the month
the services are preformed.
Stock-Based Compensation. The Company accounts for its employee
stock-based compensation plans using the intrinsic value method, as prescribed
by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, the Company records deferred compensation costs
related to its employee stock options when the current market price of the
underlying stock exceeds the exercise price of each stock option on the
measurement date (usually the date of grant). The Company records and measures
deferred compensation for stock options granted to non-employees, other than
members of the Company's Board of Directors, using the fair value based method.
Deferred compensation is expensed on a straight-line basis over the vesting
period of the related stock option. During 2005 and 2004, the Company did not
grant any stock options to employees or members of the Company's Board of
Directors with exercise prices below the market price on the measurement date.
16
An alternative method to the intrinsic value method of accounting for
stock-based compensation is the fair value based method prescribed by Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." If the Company used the fair value
based method, the Company would be required to record deferred compensation
based on the fair value of the stock option at the date of grant as computed
using an option-pricing model, such as the Black-Scholes option pricing model.
The deferred compensation calculated under the fair value based method would
then be amortized over the vesting period of the stock option
Item 7. Financial Statements
----------------------------
See the index to consolidated financial statements and consolidated financial
statement schedules included herein as Item 13.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
------------------------------------------------------------------------
On August 12, 2005, the Company dismissed Tanner LC as its principal accountant
to audit its financial statements. There have been no disagreements between
Tanner and the Company on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to the satisfaction of Tanner, would have caused it to make a reference
to the subject matter of any such disagreement within its report. We filed a
Form 8-K to report on the above described change of accountants. Attached as an
exhibit to each of such filings was a letter from Tanner LC stating that it
agreed with the statements we made in such filings relating to our change of
auditor. Also on August 12, 2005 the Company hired HJ & Associates, LLC as its
principal accountant.
Item 8A. Controls and Procedures
--------------------------------
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our Management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of the design
and operations of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as of June 30, 2005. Based on this evaluation, our chief
executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports submitted under the
Securities and Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in Securities and
Exchange Commission ("SEC") rules and forms, including to ensure that
information required to be disclosed by the Company is accumulated and
communicated to management, including the principal executive officer
and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
While the Company believes that the disclosure controls currently in
place are adequate to prevent material misstatements, the Company has
found significant internal control deficiencies in its accounting for
property, plant and equipment. In conducting a self-assessment and in
preparation for compliance for Section 404 of the Sarbanes-Oxley Act of
2002, the Company has identified deficiencies in the correlation of
serial numbers presented on Pre-1999, fully depreciated computer and
other related equipment and its relationship to internal tracking of
long-standing, and aged Property, Plant and Equipment. Due to the fact
that these specific assets have been fully depreciated, the Company has
concluded that no material misstatement or material weakness exists;
however, the Company has concluded that it is necessary to invest in a
more formal fixed asset tracking platform to ensure consistencies going
forward in tracking aged Property, Plant & Equipment that are still
available for use and PPE that has been disposed of.
(b) Changes in internal controls over financial reporting.
The Company's Chief Executive Officer and Chief Financial Officer have
determined that there have been no changes in the Company's internal
control over financial reporting during the period covered by this
report identified in connection with the evaluation described in the
above paragraph that have materially affected, or reasonably likely
to materially affect, Company's internal control over financial
reporting.
Item 8B. Other Information
--------------------------
Not applicable
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
---------------------------------------------------------------------
The Board of Directors and executive officers consist of the persons named in
the table below. Vacancies in the Board of Directors may only be filled by the
Board of Directors by majority vote at a Board of Director's meeting of which
stockholders holding a majority of the issued and outstanding shares of capital
stock are present. The directors are elected annually by the stockholders at the
annual meeting. Each director shall be elected for the term of one year, and
until his or her successor is elected and qualified, or until earlier
resignation or removal. The bylaws provide for at least one director. The
directors and executive officers are as follows:
17
Name Age Position - Committee
---- --- --------------------
Randall K. Fields 58 Chief Executive Officer
Chairman of the Board and Director
*Peter Jensen Deceased Chief Financial Officer and Secretary
**William Dunlavy 50 Chief Financial Officer and Secretary
***James Horton 51 President
Thomas W Wilson 73 Director and Compensation Committee Chairman
****William R. Jones 70 Director and Audit Committee Chairman
Bernard F. Brennan 67 Director
*****Edward C. Dmytryk 59 Director and Audit Committee Chairman
******Anthony E. Meyer 44 Director
*Appointed CFO on 6/3/03 - Deceased 8/21/04
**Appointed CFO on 8/23/04
***Appointed President 9/1/04
****Resigned 1/4/05
*****Appointed Audit Committee Chairman 10/1/2004
****** Resigned 11/14/04
Randall K. Fields has been the Chief Executive Officer, and Chairman of the
Board of Directors since June, 2001. Mr. Fields founded Park City Group, Inc., a
software development company based in Park City, Utah, in 1990 and has been its
President, Chief Executive Officer, and Chairman of the Board since its
inception in 1990. Mr. Fields has been responsible for the strategic direction
of Park City Group, Inc. since its inception. Mr. Fields co-founded Mrs. Fields
Cookies with his then wife, Debbi Fields. He served as Chairman of the Board of
Mrs. Fields Cookies from 1978 to 1990. In the early 1970's Mr. Fields
established a financial and economic consulting firm called Fields Investment
Group. Mr. Fields received a Bachelor of Arts degree in 1968 and a Masters of
Arts degree in 1970 from Stanford University, where he was Phi Beta Kappa,
Danforth Fellow and National Science Foundation Fellow.
Peter Jensen served as Chief Financial Officer from June 3, 2003 to August 21,
2004. Mr. Jensen unexpectedly passed away on August 21, 2004.
William Dunlavy has been appointed CFO and Secretary as of August, 2004. Mr.
Dunlavy joined Fresh Market Manager LLC in 1999 as its Chief Operating Officer
and continued in the same capacity with the acquisition of Fresh Market Manager
LLC in 2001. He has been responsible for the design of the business
functionality in the Fresh Market Manager product in addition to his business
operations activities for Park City Group. He was formerly the Chief Operating
Officer at Mrs. Fields Cookies, Director of Operations at Golden Corral Family
Restaurants, head of Fresh Foods at Harris Teeter, Inc. and head of Fresh Foods
at Raley's and Bel Air Supermarkets. He has also served as a board member of the
International Deli, Dairy, Bakery Association.
James Horton has been appointed President and Chief Operating Officer as of
September 2004. Mr. Horton joined Park City Group in 2004. He was most recently
a Vice President and senior officer at Kurt Salmon Associates. Jim has extensive
experience in the retail industry. He began his career with Ernst and Young
consultants, was the National Director of Retail consulting for KPMG. Mr.
Horton's resume includes being the President of World Wide Chain Store Systems,
a retail/wholesale distribution application software company that had been
installed in many of the largest retail and wholesale companies. His more than
25 years of retail operation experience coupled with both a BS in Accounting and
an MBA from West Virginia University has assisted him in becoming a featured
presenter in worldwide industry conferences at the Food Marketing Institute, the
National Retail Federation and the International Business Leaders Advisory
Council.
Thomas W. Wilson, Jr. has been a director since August, 2001. From 1995 to 1999,
Mr. Wilson was the Chairman of the Board Information Resources, Inc., a Chicago,
Illinois-based provider of point-of-sale information based business solutions to
the consumer packaged goods industry. From 1998 to 1999, Mr. Wilson was the
Interim Chief Executive Officer of Information Resources, Inc. From 1966 to
1990, Mr. Wilson was employed in various capacities with McKinsey & Co., a
18
management consulting company. In 1968, Mr. Wilson was elected a Partner of
McKinsey and Co., and in 1972 he was elected a Senior Partner. Mr. Wilson
received a Bachelor of Arts Degree from Dartmouth College and a Masters of
Business Administration Degree from the Wharton School of the University of
Pennsylvania.
William R. Jones was a director since August, 2001. Mr. Jones resigned from the
Board of Directors on January 4, 2005
Bernard F. Brennan has been a director since August, 2001. Mr. Brennan has been
a senior executive (CEO and President) with such organizations as Sears Roebuck
& Company, Montgomery Ward Corporation, Von's Supermarkets as well as an
additional broad spectrum of retail operations. He became President & CEO of
Household Merchandising, Inc., a $5 billion division of Household International,
Inc. where he also served on Household International's board of directors. There
he oversaw a diversity of retail operations, including Von's Supermarkets, Ben
Franklin Stores, Coast-To-Coast Stores, TG & Y Discount Stores, Barker Brothers,
Colby's and American Furniture Stores. In 1985, Brennan rejoined Montgomery Ward
Corporation as Chairman & CEO of the holding company, including the Retail Group
and Signature Direct Marketing Group, where he served until 1997. Mr. Brennan
has also served as chairman of the National Retail Federation.
Edward C. Dmytryk has been a director since June, 2000. In October 2002, Mr.
Dmytryk took on additional responsibilities as acting Chief Financial Officer
and as such resigned from the Audit Committee. He served in this capacity until
June 2003. Later in 2003, Mr. Dmytryk became the Chief Executive Officer of
Safescript Pharmacies, Inc ( SAFS) due to a request by the Safescript
Pharmacies, Inc. Board of Directors to restructure the Company during a
liquidity crisis and a SEC investigation. He restructured the Company and helped
arranged the sale of assets to a group of interested investors. He remains the
CEO due to the complications of the sale and the damage caused by hurricane
Katrina in New Orleans where 3 operating pharmacies were located. Currently, Mr.
Dmytryk is the CEO of RxPert, Inc., a Pharmacy company located in Ponte Vedra,
Florida. Mr. Dmytryk graduated Summa Cum Laude from the Citadel, the Military
College of South Carolina in 1968 with a Bachelor of Science Degree and was an
Instructor Pilot in the United States Air Force..
Anthony E. Meyer was a director since October, 2002. Mr. Meyers resigned from
the Board of Directors November 14, 2004.
Our Executive Officers are elected by the Board on an annual basis and serve at
the discretion of the Board.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who
beneficially own more than 10% of a registered class of the Company's equity
securities, to file reports of beneficial ownership and changes in beneficial
ownership of the Company's securities with the SEC on Forms 3 (Initial Statement
of Beneficial Ownership), 4 (Statement of Changes of Beneficial Ownership of
Securities) and 5 (Annual Statement of Beneficial Ownership of Securities).
Directors, executive officers and beneficial owners of more than 10% of the
Company's Common Stock are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms that they file. The Company believes
that, during the year ended December 31, 2004, the Reporting Persons met all
applicable Section 16(a) filing requirements
Code of Ethics
The company has not yet adopted a code of ethics that applies to all
officers, directors, and employees of the Company. The company is addressing
this issue in its October 2005 Board Meeting.
Committees of the Board of Directors
Our board of directors has an audit committee, a compensation committee
and a nominating and corporate governance committee, each of which has the
composition and responsibilities described below:
Audit Committee. The audit committee provides assistance to the board
of directors in fulfilling its legal and fiduciary obligations in matters
involving our accounting, auditing, financial reporting, internal control and
legal compliance functions by approving the services performed by our
independent accountants and reviewing their reports regarding our accounting
practices and systems of internal accounting controls. The audit committee also
oversees the audit efforts of our independent accountants and takes those
actions as it deems necessary to satisfy itself that the accountants are
independent of management. The audit committee currently consists of Edward C.
Dmytryk (Chairman), Thomas W. Wilson Jr., and Bernard F. Brennan, each of whom
is a non-management member of our board of directors. Edward C. Dmytryk is also
our audit committee financial expert as currently defined under Securities and
Exchange Commission rules. We believe that the composition of our audit
committee meets the criteria for independence under, and the functioning of our
audit committee complies with the applicable requirements of, the Sarbanes-Oxley
Act of 2002, the current rules of the Over-the-Counter Bulletin Board Stock
Market and Securities and Exchange Commission rules and regulations. We intend
to comply with future audit committee requirements as they become applicable to
us.
19
Compensation Committee. The compensation committee determines our
general compensation policies and the compensation provided to our directors and
officers. The compensation committee also reviews and determines bonuses for our
officers and other employees. In addition, the compensation committee reviews
and determines equity-based compensation for our directors, officers, employees
and consultants and administers our stock option plans and employee stock
purchase plan. The current members of the compensation committee are Thomas W.
Wilson Jr. (Chairman), and Bernard F. Brennan, each of whom is a non-management
member of our board of directors. We believe that the composition of our
compensation committee meets the criteria for independence under, and the
functioning of our compensation committee complies with the applicable
requirements of, the Sarbanes-Oxley Act of 2002, the current rules of the
Over-the-Counter Bulletin Board Stock Market and Securities and Exchange
Commission rules and regulations. We intend to comply with future compensation
committee requirements as they become applicable to us.
Nominating and Corporate Governance Committee. The nominating and
corporate governance committee is responsible for making recommendations to the
board of directors regarding candidates for directorships and the size and
composition of the board. In addition, the nominating and corporate governance
committee is responsible for overseeing our corporate governance guidelines and
reporting and making recommendations to the board concerning corporate
governance matters. The current members of the nominating and governance
committee are Randall K Fields (Chairman), and Edward C. Dmytryk. We believe
that the composition of our nominating and governance committee meets the
criteria for independence under, and the functioning of our nominating and
corporate governance committee complies with the applicable requirements of, the
Sarbanes-Oxley Act of 2002, the current rules of the Over-the-Counter Bulletin
Board Stock Market and Securities and Exchange Commission rules and regulations.
We intend to comply with future nominating and corporate governance committee
requirements as they become applicable to us.
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20
Item 10. Executive Compensation
-------------------------------
The following table sets forth information concerning the compensation paid to
the Company's Chief Executive Officer, and all persons serving as the Company's
most highly compensated executive officers other than its chief executive
officer, who were serving as executive officers as of June 30, 2005 and whose
annual compensation exceeded $100,000 during such year (collectively the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation Awards
----------------------------------------- ----------------------------------------
Securities
Other Annual Restricted Underlying LTIP
Name and Principal Year/ Salary Compensation Stock Options/SARs Payouts
Position Period ($) Bonus ($) ($) Awards($) (#)+ ($)
Randall K. Fields 2005 317,500* - 61,037 (1) 50,000 - -
Chairman and CEO 2004 317,500* 4,377 46,760 (1) 50,000 - -
2003 330,000 6,477 41,185 (1) 24,167 - -
James Horton 2005 270,833** - - - 8,336(2) -
President and COO
William Dunlavy 2005 198,958 - - - 6,772 -
CFO 2004 100,000 4,377 - 50,000 - -
2003 103,750 31,477 575 (2) 24,167 - -
Shaun Broadhead 2005 100,000 - - 50,000 - -
Director of 2004 100,000 4,377 - 50,000 - -
Research & Development 2003 108,750 6,477 675 (3) 24,167 - -
Carolyn Doll 2005 100,000 - - 50,000 - -
Vice President of 2004 100,000 4,377 - 50,000
Marketing 2003 105,000 6,477 600 (4) 24,167 - -
Aaron Prevo 2005 29,583*** - - - 1,312 -
Vice-President of
Professional Services
---------------
+ On the 11th day of August 2006, the company effected a 1 for 50 reverse
stock split. All information set forth gives effect to such reverse stock
split.
* A significant part of Mr. Fields salary is paid to a management company
wholly owned by Mr. Fields.
** Mr. Horton joined the Company in September 2004
*** Mr. Prevo joined the Company in April 2005
(1) These amounts include Employer contributions to the Company's 401(k) Plan
for the benefit of Mr. Fields in the amounts of $1,608 for 2003, as well as
payments for unused accrued vacation and sick leave of $39,577 for 2003;
Premiums paid on Life Insurance policy of $46,622 and $27,614 for 2005 and
2004, respectively, Company car related expenses of $13,003 and $14,880 for
2005 and 2004, respectively; and medical premiums of $1,412
(2) These amounts represent the employer contribution to the Company's 401(k)
Plan for the benefit of Mr. Dunlavy;
(3) These amounts represent employer contributions to the Company's 401(k) Plan
for the benefit of Mr. Broadhead;
(4) These amounts include employer contributions to the Company's 401(k) Plan
for the benefit of Ms. Doll.
21
Stock Options Granted in the Last Fiscal Year
The following table sets forth information on grants of options to
purchase shares of our common stock in fiscal year 2004 to our officers and
directors.
Individual Grants
% of Total
Number of Options
Securities Granted to Exercise
Underlying Employees in Price Expiration
Name Options Granted Fiscal Year ($/Sh)(1) Date
--------------------------------------------------------------------------------
James Horton 8,336 9.7% $3.50 06/30/2015
William Dunlavy 6,772 7.9% $3.50 06/30/2015
Aaron Prevo 1,312 1.5% $3.50 06/30/2015
-------------
(1) The exercise price was equal to 100% of the fair market value on the date
of grant.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option Values
Securities Underlying Value of Unexercised In-the-
Unexercised Options at Money Options at
Shares December 31, 2004 December 31, 2004 ($)(1)
Acquired on Value ------------------ ------------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
----------------------------------------------------------------------------------------------------------------------
None
Employment Agreement
--------------------
Park City Group has an employment agreement with its chief executive officer,
Randall K. Fields, dated effective January 1, 2001, and revised effective July
1, 2003. The compensation for Mr. Fields, under the terms of the revision,
provides for a portion of the compensation to be provided pursuant to an
employment agreement and the balance to be provided pursuant to the terms of a
services agreement between the Company and Fields Management, Inc., an executive
management services provider, a company wholly owned by Mr. Fields. The term of
the two agreements is five years ending June 30, 2008, with automatic one-year
renewals. The combined agreements provide for:
o An annual base compensation of $350,000,
o Use of a company vehicle,
o Employee benefits that are generally provided to Park City
Group, Inc. employees, and
o A bonus to be determined annually by the Compensation
Committee of the Board of Directors.
Effective October 1, 2002, Mr. Fields agreed to a temporary, but indefinite,
reduction of his base compensation to $317,500.
Park City Group has an employment agreement with its President and chief
operating officer, James Horton, dated effective September 1, 2004. This
agreement provides Mr. Horton with the following compensation:
o An annual base compensation of $325,000,
o An annual bonus based on the percent of his base pay that is
equal to the revenue growth of the Company provided that the
company's revenue grows at least 25% and that the pretax
profits grow at an equal or greater percent, 1/2 of this bonus
will be paid in cash and 1/2 will be paid in stock,
o Employee benefits that are generally provided to Park City
Group, Inc. employees, and
o Stock options equal to 3 to 1 for each share of stock
purchased at a cost of $3.50 or the current market price,
which ever is higher, through September 30, 2005 with an
exercise price of $3.50 or the current market price, which
ever is higher,
o Stock options equal to 2 to 1 for each share of stock
purchased at a cost of $3.50 or the current market price,
which ever is higher, $3.50 or the current market price, which
ever is higher, there after.
Park City Group has an employment agreement with its Executive Vice President
and chief financial officer, William Dunlavy, dated effective September 1, 2004.
This agreement provides Mr. Dunlavy with the following compensation:
o An annual base compensation of $225,000,
o An annual bonus based on the percent of his base pay that is
equal to the revenue growth of the Company provided that the
company's revenue grows at least 25% and that the pretax
profits grow at an equal or greater percent, 1/2 of this bonus
will be paid in cash and 1/2 will be paid in stock,
o Employee benefits that are generally provided to Park City
Group, Inc. employees, and
o Stock options equal to 3 to 1 for each share of stock
purchased at a cost of $3.50 or the current market price,
which ever is higher, through September 30, 2005 with an
exercise price of $3.50 or the current market price, which
ever is higher,
22
o Stock options equal to 2 to 1 for each share of stock
purchased at a cost of $3.50 or the current market price,
which ever is higher, $3.50 or the current market price, which
ever is higher, there after.
Park City Group has an employment agreement with its Vice President of
Professional Services, Aaron Prevo, dated effective April 11, 2005. This
agreement provides Mr. Prevo with the following compensation:
o An annual base compensation of $130,000,
o Will participate in the senior management bonus program,
o Employee benefits that are generally provided to Park City
Group, Inc. employees, and
o Stock options equal to 2 to 1 for each share of stock
purchased at a cost of $3.50 or the current market price,
which ever is higher, $3.50 or the current market price, which
ever is higher.
Director Compensation
---------------------
The continuing outside directors, Edward C. Dmytryk, Thomas W. Wilson, Jr., and
Bernard F. Brennan receive the following compensation:
Annual cash compensation of $10,000 payable at the rate of $2,500 per
quarter. The Company has the right to pay this amount in the form of
shares of Company Stock.
Annual options to purchase $20,000 of the Company restricted common
stock at the market value of the shares on the date of the grant, which
is to be the first day the stock market is open in January of each
year.
401(k) Retirement Plan. The Company offers an employee benefit plan under
Benefit Plan Section 401(k) of the Internal Revenue Code. Employees who have
attained the age of 21 are immediately eligible to participate. The Company, at
its discretion, matches 50% of the first 4% of each employee's contributions. No
matching contribution has been made after September 30, 2002.
Indemnification for Securities Act Liabilities
----------------------------------------------
Nevada law authorizes, and the Company's Bylaws and Indemnity Agreements provide
for, indemnification of the Company's directors and officers against claims,
liabilities, amounts paid in settlement and expenses in a variety of
circumstances. Indemnification for liabilities arising under the Act may be
permitted for directors, officers and controlling persons of the Company
pursuant to the foregoing or otherwise. However, the Company has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
Stock Options and Warrants
--------------------------
The Company has stock option plans that enable it to issue to officers,
directors, consultants and employees nonqualified and incentive options to
purchase common stock. At June 30, 2005, a total of 108,930 of such options
were outstanding with exercise prices ranging from $1.50 to $7.00 per share.
At June 30, 2005 a total of 943,829 warrants to purchase shares of common
stock were outstanding. Of those warrants, 649,306 were issued in connection
with certain debt financings; 128,571 were issued in connection with an equity
investment by an officer; and 165,952 were issued based on antidilution
provisions associated with shares and warrants issued with certain transactions.
These warrants have exercise prices ranging from $2.00 to $5.00 per share and
expire between December 31, 2005 and August 26, 2009.
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
No executive officers of the Company serve on the Compensation Committee (or in
a like capacity) for the Company or any other entity.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
23
Item 11. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of October 13, 2005, for
each person or entity that is known to beneficially own more than 5 percent of
the Common Stock. As of October 13, 2005, there were 5,657,079 shares of Common
Stock outstanding. NOTE: On the 11th day of August 2006, the company effected a
1 for 50 reverse stock split. All information set forth below gives effect to
such reverse stock split.
Amount of
Title of Beneficial Nature of
Class Name and Address of Beneficial Owner Ownership Ownership Percent of Class
----- ------------------------------------ ----------- --------- ----------------
Common Randall K. Fields, Park City, Utah 707,225 (2) Direct 12.51%
Common Riverview Financial Corp., Park City, Utah (1)
Park City, Utah 2,283,955 Direct 40.38%
Common Thomas W. Wilson, Westport, Connecticut 337,194 (3) Direct 5.96%
Common Bernard F. Brennan, Ponte Vedra Beach, Florida 339,321 (4) Direct 6.00%
Common AW Fields Acquisition, LLC, New York, New York 341,667 Direct 6.04%
---------- -----
Total 4,009,362 70.89%
=========== ======
-------------------
(1) Randall K. Fields is the president and 100% shareholder of Riverview
Financial Corp.
Security Ownership of Management
--------------------------------
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of October 13, 2005, for each of the
directors, each of the Named Executive Officers, and all directors and executive
officers as a group. As of October 13, 2005, there were 5,657,079 shares of
Common Stock outstanding. NOTE: On the 11th day of August 2006, the company
effected a 1 for 50 reverse stock split. All information set forth below gives
effect to such reverse stock split.
Amount of
Beneficial Nature of
Title of Class Name, Position and Address of Beneficial Owner Ownership (1) Ownership Percent of Class
-------------- ---------------------------------------------- ------------- ---------- ----------------
Common Randall K. Fields, CEO, Chairman and Director 2,991,180 (5) Direct and 52.88%
Park City, Utah Indirect
Common Edward C. Dmytryk, Director 38,033 (6) Direct *
Ocala, Florida
Common Thomas W. Wilson Jr., Director 337,194 Direct 5.96%
Westport, Connecticut
Common Bernard F. Brennan, Director 339,321 Direct 6.00%
Ponte Vedra Beach, Florida
Common William Dunlavy, CFO 48,842 (7) Direct *
Park City, Utah
Common James Horton, President and COO 182,544 (8) Direct 3.23%
Acworth, Georgia
Common Shaun Broadhead, Director of Research and 55,444 (9) Direct *
Development
Heber, Utah
Common Carolyn Doll, VP of Marketing 52,444 (10) Direct *
Heber, Utah
Common Aaron Prevo, VP of Professional Services 1,968 (11) Direct *
Layton, Utah
Common Executive Officers & Directors as a Group 4,046,970 71.54%
---------------- ======
* Less than 1%.
24
(1) Beneficial ownership is determined in accordance with SEC rules and
generally includes holding voting and investment power with respect to the
securities. Shares of common stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for
computing the percentage of the total number of shares beneficially owned
by the designated person, but are not deemed outstanding for computing the
percentage for any other person.
(2) Includes warrants to purchase 233,804 shares of common stock.
(3) Includes warrants and options to purchase 142,157 shares of common stock.
(4) Includes warrants and options to purchase 132,042 shares of common stock.
(5) Includes 2,283,955 shares of common stock owned by Riverview Financial
Corp., which is 100% owned by Randall K. Fields.
(6) Includes options to purchase 17,500 shares of common stock.
(7) Includes options to purchase 16,772 shares of common stock.
(8) Includes warrants and options to purchase 136,908 shares of common stock.
(9) Includes options to purchase 7,000 shares of common stock.
(10) Includes options to purchase 4,000 shares of common stock.
(11) Includes options to purchase 1,312 shares of common stock.
Change in Control
-----------------
The Company is not currently engaged in any activities or arrangements that it
anticipates will result in a change in control of the Company.
Pursuant to the terms of the note payable with Whale Investments, Ltd., the
Company stock partially securing the note payable equates to a controlling
interest in the Company. In the event of the Company's default on the Whale
Investments, Ltd. note payable, the note holder may choose to foreclose on the
Company stock partially securing the note, which would result in Whale
Investment, Ltd. becoming the majority shareholder of the Company. See note 8
and note 17 to the audited financial statements.
Item 12. Certain Relationships and Related Transactions
-------------------------------------------------------
The Company has a note payable to Riverview Financial Corporation (Riverview),
in the principal amount of $3,296,406 at June 30, 2005 with accrued interest of
$841,995. The chief executive of Riverview is also the chief executive of the
Company. In June 2004, the Company issued 49,600 shares of common stock to
Riverview to subordinate to the extended Whale Investments note. See note 8 to
the audited financial statements.
Riverview has loaned the Company $345,000 under a note payable bearing interest
at 18%. Payments are made monthly for interest only, with the principal due in
December 2005. Riverview was issued 17,143 shares of common stock as an
inducement to make the loan. The note was extended in June 2004 to December
2005. See note 8 to the audited financial statements.
The Company's CEO has made loans to the Company to cover short term cash needs
pursuant to a line of credit promissory note payable. Repayments are made as
funds are available, with a due date of June 15, 2005 and interest is at 12%.
There was no balance due under the line of credit at June 30, 2004. See note 7
to the audited financial statements.
In December 2002 the Company obtained a $2,000,000 note payable funding from
Whale Investment, Ltd. The note bore interest at 18%, payable monthly, and was
due in December 2005, as extended. Whale Investment, Ltd. is controlled by an
individual who was already a shareholder of the Company at the time of the loan.
The extended note was due December 2005 and the Company paid to Whale
Investments $40,000 in cash and 20,000 in common stock valued at $80,000 as
consideration for the extension. In August 2005 the loan and accrued interest
was paid off. See note 16 to the audited financial statements.
The Company has payables to employees of $182,146 at June 30, 2005 for
un-reimbursed business expenses, including $118,407 due to officers of the
company.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
25
Item 13. Exhibits
-----------------
Exhibits, Financial Statements and Schedules
The Consolidated Financial Statements of the Company and its subsidiaries are
filed as part of this Report:
o Report of Independent Registered Public Accounting Firm
o Consolidated Balance Sheet as of June 30, 2005
o Consolidated Statement of Operations for the years ended June
30, 2005 and 2004
o Consolidated Statement of Stockholders' Deficit for the years
ended June 30, 2005 and 2004
o Consolidated Statement of Cash Flows for the years ended June
30, 2005 and 2004
o Notes to Consolidated Financial Statements
Exhibit 31.1 Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Principal Executive Officer pursuant to 18
U.S.C Section 1350
Exhibit 32.2 Certification of Principal Financial Officer pursuant to 18
U.S.C Section 1350
(1) Incorporated herein by reference from Registrant's Form 8-K dated April
21, 2005
(2) Incorporated herein by reference from Registrant's Form 8-K dated
August 11, 2005
(3) Incorporated herein by reference from Registrant's Form 8-K dated
August 12, 2005
(4) Incorporated herein by reference from Registrant's Form 10-KSB filed on
October 13, 2005
Balance of Registrant's Form 8-K's incorporated in Forms 10QSB previously filed.
Item 14. Principal Accounting Fees and Services
-----------------------------------------------
The aggregate fees billed for professional services by HJ & Associates, LLC and
Tanner LC in fiscal year 2005 and 2004 for these various services were:
Type of Fees 2005 2004
---------------- ------- -------
Audit Fees $56,450 $55,700
Audit-Related Fees - -
Tax Fees 8,400 8,400
All Other Fees - 900
------- -------
Total $64,850 $65,000
======= =======
In the above table, in accordance with the SEC's definitions and rules, "audit
fees" are fees the Company has paid or expects to pay HJ & Associates, LLC and
Tanner LC for professional services for the audit of the Company's consolidated
financial statements included in Form 10-KSB and review of financial statements
included in Form 10-QSBs, and for services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements;
"audit-related fees" are fees for assurance and related services that are
reasonably related to the performance of the audit or review of the Company's
financial statements; "tax fees" are fees for tax compliance, tax advice and tax
planning; and "all other fees" are fees for any services not included in the
first three categories.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PARK CITY GROUP, INC.
(Registrant)
Date: September 13, 2006 By /s/ Randall K. Fields
----------------------------------
Principal Executive Officer & CEO
Chairman of the Board and Director
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Randall K. Fields Chief Executive Officer, September 13, 2006
-------------------------- Chairman of the Board and
Randall K. Fields Director (Principal Executive
Officer)
/s/ William Dunlavy Chief Financial Officer and September 13, 2006
-------------------------- Secretary (Principal
William Dunlavy Financial Officer)
/s/ Edward C. Dmytryk Director September 13, 2006
--------------------------
Edward C. Dmytryk
/s/ Thomas W. Wilson, Jr. Director September 13, 2006
--------------------------
Thomas W. Wilson, Jr.
/s/ Bernard F. Brennan Director September 13, 2006
--------------------------
Bernard F. Brennan
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of
Park City Group, Inc and Subsidiaries
Park City, Utah
We have audited the accompanying consolidated balance sheet of Park City Group,
Inc. and Subsidiaries as of June 30, 2005, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the year then
ended. These consolidated 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 audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. 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 audit provides 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 Park
City Group, Inc. and Subsidiaries as of June 30, 2005, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ HJ & Associates, LLC
HJ & Associates, LLC
Salt Lake City, Utah
October 12, 2005, except for Note 18, for which the date
is September 13, 2006
28
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Park City Group, Inc.
We have audited the accompanying consolidated statement of operations,
stockholders' deficit and cash flows of Park City Group, Inc. and Subsidiaries
for the year ended June 30, 2004. These consolidated 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of their operations and their cash
flows of Park City Group, Inc. and subsidiaries for the year ended June 30,
2004, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Tanner LC
Tanner LC
Salt Lake City, Utah
August 12, 2004
29
Park City Group, Inc. & Subsidiaries
Consolidated Balance Sheet
June 30, 2005
(Restated)
Assets
Current assets:
Cash $ 209,670
Receivables, net of allowance for doubtful
accounts of $56,000 356,339
Prepaid expenses and other current assets 37,060
--------------
Total current assets 603,069
--------------
Property and equipment, net of accumulated
depreciation and amortization 109,512
--------------
Other assets:
Deposits and other assets 25,000
Capitalized software costs, net of accumulated
amortization of $731,167 332,349
--------------
Total other assets 357,349
--------------
Total assets $ 1,069,930
==============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 628,398
Accrued liabilities 1,164,964
Deferred revenue 883,425
Current portion of capital lease obligations 23,159
Notes payable, net of discount of $54,976 1,945,024
Related party notes payable, net of
discount of $12,375 332,625
Related party lines of credit 619,743
--------------
Total current liabilities 5,597,338
--------------
Long-term debt:
Long-term debt to related party, net of
discounts of $122,992 3,173,414
Capital lease obligations, less current portion 2,127
--------------
Total long-term debt 3,175,541
--------------
Total liabilities 8,772,879
--------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $.01 par value, 30,000,000 shares
authorized no shares issued, -
Common stock, $.01 par value, 50,000,000 shares
authorized, 5,651,118 issued and outstanding 56,511
Additional paid-in-capital 12,806,743
Accumulated deficit (20,566,203)
--------------
Total stockholders' deficit (7,702,949)
--------------
Total liabilities and stockholders' deficit $ 1,069,930
==============
See accompanying notes to consolidated financial statements.
30
Park City Group, Inc. & Subsidiaries
Consolidated Statement of Operations
For the Years Ended June 30, 2005 and 2004
2005 2004
------------- -------------
(Restated) (Restated)
Revenues:
Software licenses $ 479,615 $ 3,245,557
Maintenance and support 2,416,675 2,274,338
Consulting and other 735,522 509,928
------------- -------------
Total revenues 3,631,812 6,029,823
Cost of revenues 1,448,726 1,366,501
------------- -------------
Gross margin 2,183,086 4,663,322
------------- -------------
Operating expenses:
Research and development 1,019,411 1,176,222
Sales and marketing 1,337,318 1,158,411
General and administrative expenses 2,055,940 1,672,650
------------- -------------
Total operating expenses 4,412,669 4,007,283
------------- -------------
Income (loss) from operations (2,229,583) 656,039
------------- -------------
Other income (expense):
Gain on forgiveness of debt - 119,201
Gain on settlement of payable - 89,934
Interest expense (1,178,454) (1,540,417)
------------- -------------
Total other income (expense) (1,178,454) (1,331,282)
------------- -------------
Loss before income taxes (3,408,037) (675,243)
------------- -------------
Income tax (expense) benefit - -
------------- -------------
Net loss $ (3,408,037) $ (675,243)
============= =============
Weighted average shares 5,489,000 4,711,000
============= =============
Basic loss per share $ (0.62) $ (0.14)
============= =============
See accompanying notes to consolidated financial statements.
31
Park City Group, Inc. & Subsidiaries
Consolidated Statement of Stockholders' Deficit
For the Years Ended June 30, 2005 and 2004 (Restated)
Additional
Common Stock Paid-In Treasury Accumulated
Shares Amount Capital Stock Deficit Total
----------- ---------- ----------- ---------- ------------ -----------
Balance, July 1, 2003 4,274,812 $ 42,748 $8,540,855 $(30,000) $(16,482,923) $(7,929,320)
Common stock issued for:
Compensation 111,073 1,111 295,834 - - 296,945
Services 65,567 656 222,381 - - 223,037
Settlement 60,422 604 157,739 - - 158,343
Debt refinancing 168,205 1,682 513,004 - - 514,686
Debt Conversions 534,912 5,349 1,949,659 - - 1,955,008
Exercise of Options 159,333 1,593 317,074 - - 318,667
Cancel of treasury stock - - (30,000) 30,000 - -
Net loss - - - - (675,243) (675,243)
----------- ---------- ----------- ---------- ------------ -----------
Balance, June 30, 2004 5,374,323 53,743 11,966,546 - (17,158,166) (5,137,877)
Common stock issued for:
Compensation 173,817 1,738 470,517 - - 472,255
Services 14,320 143 39,617 - - 39,760
Settlement 41,300 413 164,787 - - 165,200
Debt refinancing 4,500 45 15,705 - - 15,750
Equity investment 42,857 429 149,571 - - 150,000
Net loss - - - - (3,408,037) (3,408,037)
----------- ---------- ----------- ---------- ------------ -----------
Balance, June 30, 2005 5,651,118 $ 70,904 $12,806,743 $ - $(20,566,203) $(7,702,949)
=========== ========== =========== ========== ============ ===========
See accompanying notes to consolidated financial statements.
32
Park City Group, Inc. & Subsidiaries
Consolidated Statement of Cash Flows
For the Years Ended June 30, 2005 and 2004
Year Ended Year Ended
June 30, 2005 June 30, 2004
------------- -------------
Cash flows from Operating Activities:
Net loss $ (3,408,037) $ (675,243)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 337,851 326,103
Bad debt expense 358,158 -
Stock issued for services and compensation 677,215 678,326
Amortization of discounts on debt 177,506 389,870
Gain on settlement of payable - (89,934)
Gain on forgiveness of debt - (119,201)
Decrease (increase) in:
Trade receivables 428,661 (197,756)
Prepaid and other assets 169,109 (64,852)
Increase (decrease) In:
Accounts payable 301,227 (41,184)
Accrued liabilities (108,377) 104,777
Deferred revenue (228,490) (106,155)
Advances payable - (175,000)
Accrued interest, related party 500,859 32,513
------------- -------------
Net cash (used in) provided by operating activities (794,318) 62,264
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment (35,345) (56,742)
Proceeds from disposal of property 3,400 -
------------- -------------
Net cash used in investing activities (31,945) (56,742)
------------- -------------
Cash flows from financing activities:
Net increase (decrease) in line of credit - related party 619,743 69,467
Proceeds from exercise of options 150,000 238,667
Payment to extend note payable (9,000) (40,000)
Proceeds from debt - -
Payments on notes payable and capital leases (37,627) (30,144)
------------- -------------
Net cash provided by financing activities 723,116 237,990
------------- -------------
Net increase (decrease) in cash (103,147) 243,512
Cash at beginning of year 312,817 69,305
------------- -------------
Cash at end of year $ 209,670 $ 312,817
============= =============
See accompanying notes to consolidated financial statements.
33
Park City Group, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2005 and June 30, 2004
1. Summary of Significant Accounting Policies, Organization and Principles of
Consolidation
The Company was incorporated in Delaware on May 11, 1990 as Riverview Software,
Inc. In 1990, the Company changed its name to Fields Software Group, Inc. and in
1993, the Company's name was changed again to Park City Group, Inc. (PCG).
On June 13, 2001, Park City Group, Inc. (formerly known as Fields Technologies,
Inc.(FTI) and prior to that AmeriNet Group.com, Inc.) issued 2,192,472 shares
of common stock in exchange for 98.76% of the issued and outstanding shares of
PCG. For accounting purposes the business combination is treated as a reverse
acquisition or a recapitalization of PCG, with PCG being treated as the
accounting acquirer. On August 7, 2002 Fields Technologies, Inc., changed its
name to Park City Group, Inc., and reincorporated in Nevada. Throughout these
financial statements when the terms "Company" or "Park City Group" are used it
is referring to the current Nevada successor Park City Group, Inc.
Operations are conducted through the subsidiary, PCG, which was incorporated in
the State of Delaware in May 1990. PCG on April 5, 2001, acquired its wholly
owned subsidiary, Fresh Market Manager, LLC ("FMM"), which is a Limited
Liability Company formed in the State of Utah. PCG has conducted its operations
since 1990.
The financial statements presented herein reflect the consolidated financial
position of PCG and FTI as of June 30, 2005, and operations of PCG and FTI for
the years ended June 30, 2005 and 2004. All inter-company transactions and
balances have been eliminated in consolidation.
Riverview Financial Corp. (Riverview) is a stockholder and creditor of the
Company. Riverview is wholly owned by the Company's CEO.
Business Activity
-----------------
The Company designs, develops, markets and supports proprietary software
products. These products are designed to be used in retail businesses having
multiple locations to assist in the management of business operations on a daily
basis and communicate results of operations in a timely manner. In addition the
company has built a consulting practice for business improvement that centers
around the companies proprietary software products. The principal markets for
the Company's products are retail companies, financial services, Branded food
manufacturers and display manufacturing companies which have operations in North
America and, to a lesser extent, in Europe and Asia.
Use of Estimates and Reclassifications
--------------------------------------
The preparation of consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that materially affect the amounts reported in the consolidated
financial statements. Actual results could differ from these estimates. The
methods, estimates and judgments the Company uses in applying its most critical
accounting policies have a significant impact on the results it reports in its
financial statements. The U.S. Securities and Exchange Commission has defined
the most critical accounting policies as the ones that are most important to the
portrayal of the Company's financial condition and results, and require the
Company to make its most difficult and subjective judgments, often as a result
of the need to make estimates of matters that are inherently uncertain. Based on
this definition, the Company's most critical accounting policies include:
revenue recognition, allowance for doubtful accounts, capitalization of software
development costs and impairment of long-lived assets.
Cash and Cash Equivalents
-------------------------
The Company considers all short-term instruments with an original maturity of
three months or less to be cash equivalents.
Concentration of Credit Risk and Significant Customers
------------------------------------------------------
The Company maintains cash in bank deposit accounts, which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on cash
and cash equivalents.
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which when realized have been within the range of
management's expectations. The Company does not require collateral from its
customers.
The Company's accounts receivable are derived from sales of products and
services primarily to customers operating multi-location retail and grocery
stores. At June 30, 2005, net accounts receivable includes amounts due from
customers totaling $356,339.
During the year ended June 30, 2005, the Company received approximately $486
thousand of its revenue from new customers and approximately $3.1 million in
revenue from existing customers for continued support and additional license
sales.
During 2005, the Company had sales to major customers that exceeded 10 percent
of revenues are as follows:
Customer A $489,045
Customer B $374,249
The Company did not have any major customers that exceeded 10 percent of
revenues during 2004.
The Company also has an account receivable from a major customer as of June 30,
2005 as follows:
Customer C $122,753
Allowance for Doubtful Accounts Receivable
------------------------------------------
The Company offers credit terms on the sale of the Company's products to a
significant majority of the Company's customers and require no collateral from
these customers. The Company performs ongoing credit evaluations of the
Company's customers' financial condition and maintains an allowance for doubtful
accounts receivable based upon the Company's historical experience and a
specific review of accounts receivable at the end of each period. As of June 30,
2005, the allowance for doubtful accounts was $56,000.
34
Depreciation and Amortization
-----------------------------
Depreciation and amortization of property and equipment is computed using the
straight line method based on the following estimated useful lives:
Years
-----
Furniture and fixtures 7
Computer equipment 3
Equipment under capital leases 3
Leasehold improvements see below
Leasehold improvements are amortized over the shorter of the remaining lease
term or the estimated useful life of the improvements.
Warranties
----------
The Company offers a limited warranty against software defects for a general
period of ninety days. Customers who are not completely satisfied with their
software purchase may attempt to be reimbursed for their purchases outside the
warranty period. The Company accrues amounts for such warranty settlements that
are probable and can be reasonably estimated.
Revenue Recognition
-------------------
Revenue from the sale of software licenses is recognized upon delivery of the
software unless specific delivery terms provide otherwise. If not recognized
upon delivery, revenue is recognized upon meeting specified conditions, such as,
meeting customer acceptance criteria. In no event is revenue recognized if
significant Company obligations remain. Customer payments are typically received
in part upon signing of license agreements, with the remaining payments received
in installments pursuant to the agreements. Until revenue recognition
requirements are met, the cash payments received are treated as deferred
revenue.
Maintenance and support services that are sold with the initial license fee are
recorded as deferred revenue and recognized ratably over the initial service
period. Revenues from maintenance and other support services provided after the
initial period are generally paid in advance and are recorded as deferred
revenue and recognized on a straight-line basis over the term of the agreements.
Consulting service revenues are recognized in the period that the service is
provided or in the period such services are accepted by the customer if
acceptance is required by agreement.
ASP Services are sold, on a contractual bases, for one or more years. These fees
are collected in advance of the services being performed and the revenue is
recognized ratably over the respective months, as services are provided.
Software Development Costs
--------------------------
The Company accounts for software development costs in accordance with Statement
of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed. Research and development
costs have been charged to operations as incurred. From inception through
January 2001, the Company viewed the software as an evolving product. Therefore,
all costs incurred for research and development of the Company's software
products through January 2001 were expensed as incurred. During January 2001,
technological feasibility of a major revision to the Company's Fresh Market
35
Manager and the Company's ActionManager 4x development platform was established.
Development costs for Fresh Market Manager software incurred from January 2001
through September 2002, totaling $1,063,515, were capitalized. These costs are
being amortized on a straight-line basis over four years, beginning in September
2002 when the product was available for general release to customers. During
2005 and 2004, $265,876 of the capitalized development costs were amortized into
expense each year.
Research and Development Costs
------------------------------
Research and development costs include personnel costs, engineering, consulting,
and contract labor and are expensed as incurred for software that has not
achieved technological feasibility.
Income Taxes
------------
The Company accounts for income taxes under the provision of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. This method
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between tax bases and financial
reporting bases of other assets and liabilities.
Earnings Per Share
------------------
The computation of basic (loss) earnings per common share is based on the
weighted average number of shares outstanding during each year. The computation
of diluted earnings per common share is based on the weighted average number of
shares outstanding during the year, plus the common stock equivalents that would
arise from the exercise of stock options and warrants outstanding, using the
treasury stock method and the average market price per share during the year.
Options and warrants to purchase 52,638,012 shares of common stock at prices
ranging from $1.50 to $7.00 per share were outstanding at June 30, 2005, but
were not included in the diluted loss per share calculation because the effect
would have been anti-dilutive.
The shares used in the computation of the Company's basic and diluted earnings
per common share are reconciled as follows:
June 30, 2005 June 30, 2004
------------- -------------
Weighted average 5,489,000 4,711,000
Dilutive effect of options and warrants - -
----------- -----------
Weighted average shares outstanding
assuming dilution 5,489,000 4,711,000
=========== ===========
Stock Based Compensation
------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123) which established financial accounting and reporting standards for
stock-based compensation. The new standard defines a fair value method of
accounting for an employee stock option or similar equity instrument. This
statement gives entities the choice between adopting the fair value method or
continuing to use the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 with footnote disclosures of the pro forma effects if the
fair value method had been adopted. The Company has opted for the latter
approach.
Had compensation expense for the Company's option plan been determined based on
fair value at the grant dates, as prescribed in SFAS No. 123 as amended by SFAS
No. 148, the Company's net loss would have been as follows:
Year Ended Year Ended
June 30, June 30,
2005 2004
----------- ---------
Net loss
As reported $(3,408,037) $(672,243)
Pro forma (4,038,715) (724,743)
Loss per common share-basic and diluted-as reported $ (0.62) $ (0.14)
Loss per common share-basic and diluted-pro forma $ (0.74) $ (0.15)
The weighted-average grant-date fair value of options granted during year ended
June 30, 2005 was $3.00 per share. The fair value for the options granted in
2005 were estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions:
Risk-free interest rate 1.63% - 3.73%
Expected life (in years) 2 - 10
Expected volatility 404.47%
Expected dividend yield 0.00%
36
The following table summarizes information about fixed stock options and
warrants outstanding at June 30, 2005:
Options and Warrants Outstanding Options and Warrants
at June 30, 2005 Exercisable at June 30, 2005
---------------- ----------------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of Outstanding at contractual exercise Exercisable at exercise
exercise prices June 30, 2005 life(years) price June 30, 2005 price
--------------- ------------- ----------- ----- ------------- -----
$1.50 - $2.50 739,911 2.62 $ 1.99 735,936 $ 1.98
$3.50 - $4.00 302,849 2.67 3.52 302,849 3.52
$7.00 10,000 1.36 7.00 10,000 7.00
---------- ----------
1,052,760 2.62 2.48 1,048,785 2.48
========== ==========
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist of cash, receivables, payables,
accruals and notes payable. The carrying amount of cash, receivables, payables
and accruals approximates fair value due to the short-term nature of these
items. The notes payable also approximate fair value based on evaluations of
market interest rates.
2. Liquidity
------------
As shown in the consolidated financial statements, the Company incurred losses
for the years ended June 30, 2005 and 2004 and had current liabilities in excess
of current assets at June 30, 2005. The Company generated cash from operations
for the year ending June 30, 2004, however the Company used cash in operations
for the year ending June 30, 2005.
The Company believes that cash flow from sales, as well as the ability and
commitment of its majority shareholder to contribute funds necessary to continue
to operate, will allow the Company to fund its currently anticipated working
capital, capital spending and debt service requirements during the year ended
June 30, 2006. Currently the Company has experienced a high level of sales as
mentioned in Footnote 16. The IMI sale combined with maintenance and booked
consulting contracts represents a cash flow in excess of $7,500,000. The company
has retired the senior debt from these proceeds as indicated in Footnote 16, and
believes that the remaining cash will allow the Company to meet all of their
cash needs for Fiscal Year 2006. The financial statements do not reflect any
adjustments should the Company's operations not be achieved.
3. Receivables
--------------
Trade accounts receivable consist of the following at June 30, 2005:
Trade accounts receivable $ 412,339
Allowance for doubtful accounts (56,000)
-----------
$ 356,339
===========
4. Property and Equipment
-------------------------
Property and equipment are stated at cost and consist of the following at June
30, 2005:
Computer equipment $ 1,408,546
Furniture and equipment 207,251
Leasehold improvements 85,795
-----------
1,701,592
Less accumulated depreciation
and amortization (1,592,080)
-----------
$ 109,512
===========
37
5. Intangible Asset
-------------------
Intangible assets consists of the following at June 30, 2005
Capitalized software costs $ 1,063,516
Less accumulated amortization (731,167)
-----------
$ 332,349
===========
6. Accrued Liabilities
----------------------
Accrued liabilities consist of the following at June 30, 2005:
Accrued interest $ 848,258
Other payroll liabilities 156,300
Accrued vacation 112,722
Other accrued liabilities 32,684
Accrued board compensation 15,000
-----------
$ 1,164,964
===========
7. Related party line of credit
-------------------------------
In May 2003 the Company arranged an unsecured, revolving line of credit with its
CEO. Advances bear interest at 12%, and are repaid as funds availability
permits. The line of credit originally expired June 15, 2005. In June 2005 the
expiration date on this revolving line of credit was extended to June 15, 2007,
and the balance at June 30, 2005 is $619,743.
8. Long-term and related party notes payable
--------------------------------------------
The Company had the following long-term notes payable at June 30, 2005:
Note payable to Riverview bearing interest at 12%
compounding, due July 31, 2007, unsecured, net of
discount of $122,992 3,173,414
Capital lease obligation on computer equipment,
due in monthly installments of $2,124 decreasing
through February 2007, imputed interest rates of 10.9% 25,286
----------
3,198,700
Less current portion of capital lease obligation (23,159)
----------
$3,175,541
==========
Maturities of long-term debt at June 30, 2005 are as follows:
Year Amount
---- ------
2006 $ 23,159
2007 2,127
2008 3,173,414
----------
$3,198,700
==========
Capital Leases: Amortization expense related to capitalized leases is included
in depreciation expense and was $25,926 and $23,066 for the years ended June 30,
2005 and 2004, respectively. Accumulated depreciation was $54,301 at June 30,
2005. This amortized depreciation expenses relates to $98,121 of equipment
purchased under capital lease agreements of which $47,666 is still under capital
lease at June 30, 2005.
38
9. Deferred Revenue
-------------------
Deferred revenue consisted of the following at June 30, 2005:
License Sales $ 17,817
Consulting Services 18,950
Maintenance and Support 846,658
--------
$883,425
========
10. Income Taxes
----------------
The Company provides for deferred income taxes on temporary differences that
represent tax effects of transactions reported for tax purposes in periods
different than for book purposes.
The provisions for income taxes differ from the amount computed at statutory
rates as follows:
Year Ended Year Ended
June 30, 2005 June 30, 2004
------------- -------------
Income tax benefit at statutory rates $ 1,329,000 $ 263,000
Change in valuation allowance (1,298,000) (251,000)
Other (31,000) (31,000)
----------- ----------
$ - $ -
=========== ==========
The deferred income tax benefit for the years ended June 30, 2005 and 2004 is as
follows:
June 30, 2005 June 30, 2004
------------- -------------
Short Term
----------
Allowance for bad debts $ 22,000 $ 2,000
Accrued vacation 44,000 38,000
Deferred revenue 345,000 434,000
Valuation allowance (411,000) (474,000)
----------- -----------
Deferred tax asset $ - $ -
=========== ===========
Long Term
---------
Depreciation $ 52,000 $ 46,000
Net Operating loss carry forward 4,250,000 2,895,000
Valuation allowance (4,302,000) (2,941,000)
----------- -----------
Deferred tax asset $ - $ -
=========== ===========
As of June 30, 2005, the Company had available net operating losses (NOL) for
federal and state tax purposes of approximately $10,899,000. The NOL carry
forward is limited to use against future taxable income due to changes in
ownership and control. If a substantial change in the Company's ownership should
occur, there would be an annual limitation of the amount of the NOL carry
forward which could be utilized. The following schedule summarizes the net
operating losses available to the Company with the corresponding expiration
periods:
Expiration
Period of Loss Amount Year
-------------- ------ ----
2001 1,040,000 2021
2002 2,470,000 2022
2003 3,254,000 2023
2004 660,000 2024
2005 3,475,000 2025
-----------
$10,899,000
===========
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39
11. Supplemental Disclosure of Cash Flow Information
----------------------------------------------------
Interest paid during the years ended June 30, 2005 and 2004 was $460,085 and
$481,783, respectively. No income taxes were paid during the years ended June
30, 2005 or 2004.
Non-Cash Transactions Disclosure
--------------------------------
In connection with the note payable funding from Whale Investment, Ltd. issued
in December 2002, the Company incurred a finders fee which was paid with 76,190
shares of common stock and a warrant to purchase 142,857 shares of common stock.
The shares of common stock have a fair value of $152,381 which was recorded as a
prepaid expense and is being amortized into expense over the term of the note
payable, as extended. The fair value of the warrants of $179,711 was recorded as
a discount on the note payable and is being amortized into interest expense over
the term of the note payable, as extended. During June 2004, the Company issued
20,000 shares of common stock valued at $80,000 and paid $40,000 to extend this
note payable to December 2005, and the $120,000 in total extension fee was
recorded as a debt discount, none of which was amortized as of June 30, 2004. Of
this new discount of $120,000, as well as the remaining $44,928 of the warrant
discount $109,952 was amortized into interest expense during 2005. The remaining
finder's fee was also amortized into expense during 2005 in the amount of
$29,952. (see note 16).
During 2003, an additional 17,143 shares of common stock were issued in
connection with the $345,000 note payable funding from Riverview obtained as a
condition of the Whale Investment, Ltd. funding. The 17,143 shares of common
stock have a fair value of $17,143 which was recorded as a discount on the
advances and is being amortized into interest expense over the term of the
advances. For the periods ended June 30, 2005 and 2004, the Company amortized
$8,571 and $4,286 of the common shares discount into interest expense,
respectively. In December 2004, the Company paid $9,000 and issued 4,500 shares
of common stock for extension of the note payable to December 2005. The 4,500
shares have a fair value of $15,750, and the total amount of $24,750 was
recorded as a discount and will be amortized over the remaining life of the note
as extended. $12,375 of the new discount was amortized to interest expense in
2005.
The Company issued 140,000 shares of common stock to Riverview in exchange for
extending the associated related party note payable to January 2, 2004. The fair
value of the shares of common stock of $350,000 was recorded as a discount to
the related party note payable. As of June 30, 2003, $218,750 of the discount
had been amortized into interest expense, and the remaining $131,250 was
amortized into interest expense in 2004. In April 2004, $1,100,000 of accrued
interest on the Riverview note payable was converted into 314,286 shares of
common stock. In June 2004, the Company issued 49,680 shares of common stock
valued at $173,885 to extend the Riverview note payable to July 2007. The
$173,885 was recorded as a debt discount, and amortized over the remaining life
of the note. $50,893 of this discount was amortized to interest expense in 2005.
During the years ended June 30, 2005 and 2004, the Company issued 173,817 and
111,073 shares of common stock, respectively, as payment for compensation to
employees, management, and directors in lieu of cash of $296,945 and $472,255,
respectively.
During 2005, $35,345 of property and equipment was purchased through a capital
lease.
12. Commitments and Contingencies.
----------------------------------
Operating Leases. In September 1998, the Company entered into a lease agreement
for office space. Under the terms of the lease agreement, the Company was
required to pay $16,723 per month with a 4% annual increase in the base rent
through December 2000. The lease agreement was renewed in February 2001, and
under the terms of the new agreement, the Company must pay $18,482 per month
with a 4% annual increase in base rent until December 31, 2003. Total rent
expense under this agreement for each of the years ended June 30, 2005 and 2004
was $114,000 and $208,486, respectively. The Company is currently negotiating a
new office space lease agreement, and is currently paying $9,500 on a
month-to-month basis in its existing location until a new office space lease
agreement is finalized.
13. Employee Benefit Plan
-------------------------
The Company offers an employee benefit plan under Benefit Plan Section 401(k) of
the Internal Revenue Code. Employees who have attained the age of 21 are
eligible to participate. The Company, at its discretion, matches 50% of the
first 4% of each employee's contributions. The company currently does not match
employee contributions. There were no expenses for the years ended June 30, 2005
and 2004.
40
14. Stock Compensation Plans
----------------------------
Stock in Lieu of Cash Compensation. Beginning October 1, 2002, officers and
management of the Company received a portion of their compensation in common
stock of the Company. The number of shares was calculated based on the fair
value of the shares at the end of each payroll period, with a floor price of
$2.50 per share. During the year ended June 30, 2005, 64,209 shares were issued
with a fair value of $169,842.
Beginning October 1, 2003, employees received 10% of their compensation in
common stock of the Company. The 10% was deferred from employees salary and paid
quarterly in stock based on the after tax portion of the deferred compensation.
The plan was suspended in September 2004 and then reinstated for the period
March through May 2005. During the year ended June 30, 2005, 58,448 shares were
issued with a fair value of $121,581.
Officers and Directors Stock Compensation. In February 2004 to be effective
January 2004, the Board of Directors approved the following compensation for
directors who are not employed by the Company.
o Annual cash compensation of $10,000 payable at the rate of
$2,500 per quarter. The Company has the right to pay this
amount in the form of shares of common stock of the Company.
o Annual options to purchase $20,000 of the Company restricted
common stock at the market value of the shares on the date of
the grant, which is to be the first day the stock market is
open in January of each year.
o Reimbursement of all travel expenses related to performance of
Directors duties on behalf of the Company.
As of June 30, 2005 there were outstanding to directors fully vested options
outstanding to purchase 55,000 common shares at $2.00 - $7.00 per share, and
expiring at various dates through December 2007.
In December 2001, the Board of Directors approved a plan to incentivize members
of the Board of Directors, including those employed by the Company, to purchase
shares of stock of the Company. Therefore, for any common stock purchased at
fair market value by a member of the Board of Directors, the Company matches
with an option to purchase additional shares equivalent to those purchased, at
the same price of the original purchased shares and expiring two years from the
date of grant. Under this plan the Company has issued options to purchase
113,333 shares of common stock at prices of $5.50 - $12.00, all of which were
exercised or expired as of March 2004.
Officers, Key Employees, Consultants and Directors Stock Compensation In January
2000, the Company entered into a non-qualified stock option & stock incentive
plan. Officers, key employees, consultants and directors of the Company are
eligible to participate. The maximum aggregate number of shares which may be
granted under this plan was originally 20,000 and was subsequently amended to
40,000 on March 8, 2000. The plan is administered by a Committee. The exercise
price for each share of common stock purchasable under any incentive stock
option granted under this plan shall be not less than 100% of the fair market
value of the common stock, as determined by the stock exchange on which the
common stock trades on the date of grant. If the incentive stock option is
granted to a shareholder who possesses more than 10% of the Company's voting
power, then the exercise price shall be not less than 110% of the fair market
value on the date of grant. Each option shall be exercisable in whole or in
installments as determined by the Committee at the time of the grant of such
options. All incentive stock options expire after 10 years. If the incentive
stock option is held by a shareholder who possesses more than 10% of the
Company's voting power, then the incentive stock option expires after five
years. If the option holder is terminated, then the incentive stock options
granted to such holder expire no later than three months after the date of
termination. For options holders granted incentive stock options exercisable for
the first time during any fiscal year and in excess of $100,000 (determined by
the fair market value of the shares of common stock as of the grant date), the
excess shares of common stock shall not be deemed to be purchased pursuant to
incentive stock options.
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41
A schedule of the options and warrants at June 30, 2005 is as follows:
Number of Price
Options Warrants per Share
------- -------- ---------
Outstanding at July 1, 2003 369,167 1,255,891 $2.00-72.00
Granted 44,460 - $1.50-2.50
Exercised (113,333) (46,000) $2.00
Reclassify (233,333) 233,333 $3.50
Called - - -
Cancelled - - -
Expired (780) (6,000) $2.50-72.00
----------- ----------- ----------
Outstanding at June 30, 2004 66,181 1,437,224 $1.50-37.50
Granted 85,980 128,571 $1.50-3.50
Exercised - - -
Called - - -
Cancelled (21,020) (10,500) $1.50-4.00
Expired (22,210) (611,465) $2.50
----------- ----------- ----------
Outstanding at June 30, 2005 108,931 943,830 $1.50-7.00
=========== =========== ==========
15. Related Party Transactions
------------------------------
The Company has a note payable to Riverview Financial Corporation (Riverview),
in the principal amount of $3,296,403 at June 30, 2005 with accrued interest of
$841,995. The chief executive of Riverview is also the chief executive of the
Company. In August 2002 the interest rate was increased from 10% to 12% and from
simple to compounded interest. Riverview was issued 140,000 shares of common
stock in November 2002 in consideration for an extension of the due date to
January 2004. In April 2004, $1,100,000 of accrued interest on the Riverview
note payable was converted into 314,286 shares of common stock. In June 2004,
the Company issued 49,680 shares of common stock valued at $173,885 to extend
the Riverview note payable to July 2007.
Riverview has loaned the Company $345,000 under a note payable bearing interest
at 18%. Payments are made monthly for interest only, with the principal due in
December 2004. Riverview was issued 17,143 shares of common stock as an
inducement to make the loan. In December 2004 Riverview was paid $9,000 and
issued 4,500 shares to extend the note to December 2005.
The Company's CEO has made loans to the Company to cover short term cash needs
pursuant to a promissory note payable. Repayments are made as funds are
available, with a due date of June 15, 2007, as amended. Interest is at 12%. See
note 7.
In December 2002 the Company obtained a $2,000,000 note payable funding from
Whale Investment, Ltd. The note bears interest at 18%, payable monthly, and is
due in December 2005, as amended. Whale Investment, Ltd. is controlled by an
individual who was already a shareholder of the Company at the time of the loan.
See note 11 and note 16.
The Company has payables to employees of $182,146 at June 30, 2005 for
un-reimbursed business expenses, including $118,407 due to officers of the
company.
Also see note 11.
16. Subsequent Events
---------------------
In August 2005 the Company entered into a Software License Agreement with Cannon
Equipment Company. In consideration for a $3,000,000 license fee, the Company
granted Cannon a perpetual, non-exclusive, non-transferable license to the
Company's Supply Chain Profit Link Software. In addition the Company entered
into a Consulting Services Agreement with Cannon whereby the Company will
provide certain consulting services to Cannon on an hourly basis. The Consulting
Services Agreement calls for a $500,000 retainer to be paid by Cannon to the
Company to be offset against services rendered under the Consulting Agreement.
The Company and Cannon also entered into a Right of First Offer Agreement. The
Company will provide Cannon a right of first offer to purchase shares of the
Company's common stock offered by the Company prior to December 31, 2005 and a
42
thirty-day exclusive right to negotiate the purchase of shares offered after
December 31, 2005. The term of this agreement is one year.
In August 2005 the Company retired its note payable to Whale Investments in the
amount of $2,000,000 plus accrued interest of $30,000.
In September of 2005 the Company authorized to pay Senior Management 3 options
for every share purchased at $3.50 for one year. Starting October of 2006 Senior
Management will get 2 options for every share purchased from the Company at
market price or $3.50 which ever is higher.
17. Recent Accounting Pronouncements
------------------------------------
In December 2004, the FASB issued SFAS No. 123R (revised 2004) "Share-Based
Payment." SFAS No. 123R requires employee stock-based compensation to be
measured based on the grant-date fair value of the awards and the cost to be
recognized over the period during which an employee is required to provide
service in exchange for the award. The Statement eliminates the alternative use
of Accounting Principles Board (APB) No. 25's intrinsic value method of
accounting for awards, which is the company's accounting policy for stock
options. See Note 1 to the Consolidated Financial Statements for the pro forma
impact of compensation expense from stock options on net earnings and earnings
per share. SFAS No. 123R is effective for the Company's fiscal year beginning
July 1, 2006. The company will adopt the provisions of SFAS No. 123R on a
prospective basis. The financial statement impact will be dependent on future
stock-based awards and any unvested stock options outstanding at the date of
adoption.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Correction - a replacement of APB No. 20 and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements. SFAS 154 changes the requirements for
the accounting for and reporting of a change in accounting principle. It also
applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47) "Accounting
for Conditional Asset Retirement Obligations, an Interpretation of FASB
Statement No. 143." This Interpretation clarifies that a conditional retirement
obligation refers to a legal obligation to perform an asset retirement activity
in which the timing and (or) method of settlement are conditional on a future
event that may or may not be within the control of the entity. The obligation to
perform the asset retirement activity is unconditional even though uncertainty
exists about the timing and (or) method of settlement. Accordingly, an entity is
required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably
estimated. The liability should be recognized when incurred, generally upon
acquisition, construction or development of the asset. FIN 47 is effective no
later than the end of the fiscal years ending after December 15, 2005. The
company is in the process of evaluating the impact of FIN 47 but does not expect
the adoption to have a material impact on the financial statements.
43
18. Explanation of Restatement
In connection with the filing of an amendment to the Company's June 30, 2005
Form 10KSB/A and an amended SB-2 registration statement, the financial
statements and references thereto have been amended and updated to reflect the
effect of a 1:50 reverse stock split effective August 11, 2006 pursuant to SAB
Topic 4:C. At the time of the reverse split, the Articles of Incorporation were
amended to reflect authorized common shares from 500,000,000 to 50,000,000.
These changes had the following effect on the consolidated financial statements:
Effects on the Consolidated Balance Sheet
As Reported Restatements As Restated
Stockholders' deficit:
Preferred stock, $.01 par value, 30,000,000
shares authorized no shares issued, - - -
Common stock, $.01 par value, 50,000,000 shares,
authorized, 5,651,118 issued and outstanding $ 2,825,561 $ (2,769,050) $ 56,511
Additional paid-in-capital 10,037,693 2,769,050 12,806,743
Accumulated deficit
(20,566,203) - (20,566,203)
---------------- -------------------- ------------------
Total stockholders' deficit $ (7,702,949) $ - $ (7,702,949)
================ ==================== ==================
Effects on the Consolidated Statement of Operations for the Years Ended June 30, 2005 and 2004
2005 2005 2004 2004
As Reported Restatements As Restated As Reported Restatements As Restated
Net loss $(3,408,037) - $(3,408,037) $(675,243) - $(675,243)
=========== =========== =========== =========== =========== ==========
Weighted average shares 274,430,000 (268,941,000) 5,489,000 235,563,000 (230,852,000) 4,711,000
=========== =========== =========== =========== =========== ==========
Basic loss per share $(0.01) $(0.61) $(0.62) $(0.00) $(0.14) $(0.14)
=========== =========== =========== =========== =========== ==========
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44