UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(Mark
One)
|
[X]
|
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the
fiscal year ended December 31, 2004.
|
[_] |
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the
transition period from ________ to _________.
Commission
File Number: 0-29963
FINDEX.COM,
INC.
(Name of
Small Business Issuer in its Charter)
|
Nevada |
88-0379462 |
|
(State
or other Jurisdiction of |
(I.R.S.
Employer |
|
Incorporation
or Organization) |
Identification
No.) |
|
11204
Davenport Street, Suite 100, Omaha, Nebraska |
68154 |
|
(Address
of Principal Executive Offices) |
(Zip
Code) |
(402)
333-1900
(Issuer’s
Telephone Number, Including Area Code)
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $.001 par value
(Title of
Class)
Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
[X] No [_]
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[_]
Revenues
for the fiscal year ended December 31, 2004 totaled $5,218,784.
As of
April 14, 2005, the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the average of the
closing bid and asked prices on such date was approximately
$5,348,000.
At April
14, 2005, the registrant had outstanding 48,619,855 shares of common stock, of
which there is only a single class.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
Transitional
Small Business Disclosure Format (check one):
Yes __ No
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form
10-KSB, press releases and certain information provided periodically in writing
or orally by our officers or our agents contain statements which constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act, as amended; Section 21E of the Securities Exchange Act of 1934; and the
Private Securities Litigation Reform Act of 1995. The words “may”, “would”,
“could”, “will”, “expect”, “estimate”, “anticipate”, “believe”, “intend”,
“plan”, “goal”, and similar expressions and variations thereof are intended to
specifically identify forward-looking statements. These statements appear in a
number of places in this Form 10-KSB and include all statements that are not
statements of historical fact regarding the intent, belief or current
expectations of us, our directors or our officers, with respect to, among other
things: (i) our liquidity and capital resources; (ii) our financing
opportunities and plans; (iii) our ability to attract customers to generate
revenues; (iv) market and other trends affecting our future financial condition
or results of operations; (v) our growth strategy and operating strategy; and
(vi) the declaration and/or payment of dividends.
Investors
and prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. The factors that
might cause such differences include, among others, those set forth in Part II,
Item 6 of this annual report on Form 10-KSB, entitled Management's Discussion
and Analysis or Plan of Operation, including without limitation the risk factors
contained therein. Except as required by law, we undertake no obligation to
update any of the forward-looking statements in this Form 10-KSB after the date
of this report.
OVERVIEW
We are a
developer, publisher, and distributor/seller of off-the-shelf consumer and
organizational software products. The common thread among our products is a
customer constituency that shares a devotion to or interest in Christianity and
faith-based “inspirational” values. We are focused on becoming the premier
provider of Bible study and related faith-based software products and content to
the domestic and international markets through ongoing internal development of
new products, expansion and upgrade of existing products, and strategic product
line and/or corporate acquisitions and licensing.
CORPORATE
FORMATION, LEGACY & SUBSIDIARIES
We were
incorporated in the State of Nevada on November 7, 1997 as EJH Entertainment,
Inc. On December 4, 1997, a predecessor corporation with the same name as our
own but domiciled in Idaho was merged with and into our company. Although the
predecessor Idaho corporation was without material assets or operations as of
the time of the merger, it had historically been involved in mining and
entertainment businesses unrelated to our current business since it was
organized in 1968.
Beginning
in 1997, and although we were not then a reporting company under the Securities
Exchange Act, our common stock was quoted on the OTC Bulletin Board (originally
under the symbol “TIXX”, which was later changed to “TIXXD”). On May 13, 1999,
we changed our name to FINdex.com, Inc. On March 7, 2000, in an effort to be
able to satisfy a newly imposed NASD Rule eligibility requirement that companies
quoted on the OTC Bulletin Board be fully reporting under the Securities
Exchange Act (thereby requiring recently audited financial statements) and
current in their filing obligations, we acquired, as part of a share exchange in
which we issued 150,000 shares of our common stock, all of the outstanding
capital
stock of Reagan Holdings, Inc., a Delaware corporation. At the time of this
transaction, Reagan Holdings was subject to the requirements of having to file
reports pursuant to Section 13 of the Securities Exchange Act, had recently
audited financial statements and was current in its reporting obligations.
Having no operations, employees, revenues or other business plan at the time,
however, it was a public shell company. As a result of this transaction, Reagan
Holdings, Inc. became our wholly-owned subsidiary and we became the successor
issuer to Reagan Holdings for reporting purposes pursuant to Rule 12g-3 of the
Securities Exchange Act. Shortly thereafter, we changed our stock symbol to
“FIND”. Though it does not currently have any operations, employees, or
revenues, Reagan Holdings remains our wholly-owned subsidiary.
In
addition to Reagan Holdings, we also have one other wholly-owned subsidiary,
Findex.com, Inc. (i.e. the same name as our own), a Delaware corporation. Like
Reagan Holdings, this entity, too, does not currently have any operations,
employees, or revenues. This subsidiary resulted from an acquisition on April
30, 1999 pursuant to which we acquired all of the issued and outstanding capital
stock of FINdex Acquisition Corp., a Delaware corporation, from its then
shareholders in exchange for 4,700,000 shares of our common stock, which,
immediately following the transaction, represented 55% of our total outstanding
common stock. Our purpose for this acquisition was to broaden our then-existing
shareholder base, an important factor in our effort to develop a strong market
for our common stock. On May 12, 1999, in exchange for the issuance of 457,625
shares of FINdex Acquisition Corp. common stock, FINdex.com, Inc., another
Delaware corporation (originally incorporated in December 1995 as FinSource,
Ltd.), was merged with and into FINdex Acquisition Corp., with FINdex
Acquisition Corp. remaining as the surviving entity. Our purpose for this merger
was to acquire a proprietary financial information search engine for the
Internet which was to serve as the cornerstone for a Web-based development-stage
business, but which has since been abandoned. As part of the certificate of
merger relating to this transaction, FINdex Acquisition Corp. changed it’s name
to FINdex.com, Inc. We currently own 4,700,000 shares of FINdex.com, Inc. (the
Delaware corporation), representing 100% of its total outstanding common stock.
OUR
PRODUCTS
We are
focused on becoming the premier provider of Bible study and related faith-based
software products and content to the domestic and international markets through
ongoing internal development of new products, expansion and upgrade of existing
products, and strategic product line and/or corporate acquisitions and
licensing. Our religious software titles are currently divided among the
following six categories:
|
· |
Bible
Study |
|
· |
Financial/Office
Management Products for Churches and other Faith-Based
Ministries |
|
· |
Print
& Graphic Products |
|
· |
Pastoral
Products |
|
· |
Children’s
Products |
|
· |
Language
Tutorial Products. |
In 1999,
and for the purchase price of $5 million, we obtained an exclusive licensing
agreement with Parsons Technology, Inc., a subsidiary of The Learning Company
(“TLC”), formerly the Mattel Corporation, for their Parsons Church Division, a
collection of top-selling Christian-related titles, a copy of which agreement is
incorporated by reference as Exhibit 10.3 (the “Parsons License Agreement”). The
Parsons License Agreement originally had a term of ten years. As a result of a
settlement agreement reached on October 20, 2003 (see Note 18 - Notes to
Consolidated Financial Statements), the term of that license has now been
extended indefinitely, and provides us with the exclusive worldwide right to
market, sell, and continue to develop those titles it covers. For the fiscal
year ended December 31, 2004, over 97% of our revenues were derived from sales
of product the rights to which we maintain pursuant to the Parsons License
Agreement.
Bible
Study
For the
fiscal year ended December 31, 2004, approximately 63% of our revenues were
derived from sales of our flagship QuickVerse®
software, the industry-leading Bible-study software now in its 16th year and
9th version,
which is available in an array of content package variations ranging in retail
price from $4.50 to $299.95. QuickVerse® has sold
over one million copies since its introduction and is currently a market leader
in its category.
QuickVerse®
simplifies biblical research, allowing users to view multiple reference
materials, including Bibles, dictionaries, commentaries and encyclopedias,
side-by-side on the computer screen. A built-in QuickSearch feature enables the
user to highlight a word or Bible verse and find all of its occurrences in a
particular text. Advanced search options also enable users to search by word,
phrase or verse across multiple books. QuickVerse® 2005,
our latest version, is currently available in four CD-Rom editions: the
QuickVerse®
Essentials Edition (which includes 9 Bibles and 40 reference titles), the
QuickVerse® Standard
Edition (which includes 12 Bibles and 56 reference titles), the
QuickVerse® Expanded
Edition (which includes 14 Bibles and 95 reference titles), and the
QuickVerse® Deluxe
Edition (which includes 18 Bibles and 144 reference titles). Each
QuickVerse® purchase
includes access to additional books and content, which can be unlocked or
downloaded and made accessible for an additional fee.
QuickVerse® PDA, an
industry-leading PDA Bible-study software, is compatible on both Pocket
PC® and
Palm® OS
operating systems, and is currently in its 3rd year and
2nd version.
This program provides the same simplified access and many of the personal Bible
study features found in the desktop QuickVerse®
versions. QuickVerse® PDA is
currently available in four editions as a download and in CD-Rom: the Standard
Edition (which includes 3 Bibles and 4 reference titles), the Deluxe Edition
(which includes 5 Bibles and 6 reference titles), the Life Application Study
Bible (which includes 1 Bible and 11 reference titles) and a secular version
(which includes 2 Bibles and 4 reference titles). Each edition contains 25
scripture reading plans and provides the user with the ability to create their
own.
QuickVerse Left
Behind® Series,
a New York Times® Best
Selling book series and the newest addition to the QuickVerse® Bible
software family, is compatible on both Pocket PC® and
Palm® OS
operating systems and was released in 2004. This program provides a new way to
read, reference, recall, retrieve, note, search, and study fiction and
non-fiction. QuickVerse Left
Behind® Series
is currently available in four editions as a download and in CD-Rom. Each
edition contains three volumes from the Left Behind® Series,
1 Bible, 4 reference titles and 36 scripture reading plans.
QuickVerse®
customers
include (i) individuals devoted to or otherwise interested in studying
Christianity and (ii) religious and other spiritual organizations including
schools, churches and other faith-based ministries.
We hold our exclusive rights to QuickVerse® indefinitely pursuant to the Parsons Licensing Agreement.
In
addition to QuickVerse®, we also
develop and market certain other Bible study software packages. These include
the Complete Bible Resource Library®, the
Book®, The
Life Application Bible®, A Walk
in the Footsteps of Jesus®, Adam
Clark’s
Commentary on the Bible®, and
Dictionaries of the New Testament®.
Although our prices are subject to change from time to time, these titles
currently range in retail price from $19.99 to $79.99 per unit.
Financial/Office
Management Products for Churches and other Christian Faith-Based
Ministries
For the
fiscal year ended December 31, 2004, approximately 28% of Findex revenues were
derived from sales of its Membership Plus®
software, an industry-leading church management software now in its
9th version.
Membership Plus® is
available in each of a standard and a deluxe package at retail prices of $149.95
and $349.95 respectively. Each of these product packages provides church
database, financial management and church productivity tools, including those
designed to streamline church office accounting, tasks and scheduling, track
membership and contributions, organize membership databases, and provide
efficiency in producing targeted mailings, attendance reports and IRS-compliant
contribution receipts. The deluxe package is equipped with a broader
functionality and range of features, including, for example, a number of
templates for legal agreements frequently used by these types of organizations
and a true fund accounting function.
Membership
Plus® is designed to serve the unique needs of the churches,
“para-church” organizations and ministries, and non-profit entities. The term
“para-church” has been developed by the religious community to refer to
religious organizations which have some of the characteristics of a church, but
which are not what most people would generally consider to constitute a church,
including a defined congregation. Some “para-church” organizations are treated
as churches for some reasons, and as religious organizations which are not
churches for others.
Over
80,000 churches and faith-based organizations have purchased Membership
Plus® since
its introduction in the early 1990’s.
Membership Plus® 2005,
our latest version, is currently available in two CD-Rom editions: Membership
Plus® Standard
and Membership Plus® Deluxe.
We have approximately 50,000 current registered users for this
product.
We hold
our exclusive rights to Membership Plus®
indefinitely pursuant to the Parsons Licensing Agreement.
Print
& Graphic Products
We
currently sell/distribute ClickArt Christian Publishing® Suite
III, which is a full desktop publishing package containing over 13,000 Christian
images, icons, maps, Catholic and Jewish imagery and ethnically diverse,
family-oriented illustrations to be used in the creation of a wide range of
printed materials including newsletters, bulletins, posters, fliers, mailings,
calendars, and reports. We also publish/distribute Religious ClipArt® and
Christian Images®. Both of
these products are CD-Rom Clipart products that contain religious and Christian
graphical images that can be used in the production of other content related
projects. In addition, we also distribute several titles produced and
distributed by International Microcomputer Software, Inc. (“IMSI”) a leading
developer of software for both professional and home users.
Although
our prices are subject to change from time to time, our print and graphic
products range in price from $9.99 to $39.99 per unit. In the aggregate, and for
the fiscal year ended December 31, 2004, 3% of our revenues were derived from
sales of these products.
Pastoral
Products
We
currently produce and distribute/sell a line of pastoral products designed to
assist faith-based ministries in streamlining sermon development and research
tasks and in organizing responsibilities. These titles include the following:
|
|
· |
Bible
Illustrator®
3.0 Deluxe, which is a database compilation of illustrations, anecdotes,
quotations, proverbs and bits of humor from general topics like children
and angels to specific Bible passages, which users can use to bring
messages to a congregation or classroom. |
|
· |
Ministry
Notebook®
2.0, which is an organizational tool for users to keep better track of
ministry-related paperwork including sermons, prayer requests, personal
libraries, telephone contacts, and expense reports.
|
|
· |
Daily
Journal®,
which is a tool for entry and recordation of personal thoughts, important
family and business events. |
Although
our prices are subject to change from time to time, our pastoral products range
in price from $9.95 to $49.95 per unit. In the aggregate, and for the fiscal
year ended December 31, 2004, 2% of our revenues were derived from sales of
these products.
Children’s
Products
We
currently produce and distribute/sell a line of children’s
CD-Rom products designed to appeal to faith-conscious families interested in
spiritually-enriched entertainment and play-along educational content.
Collectively, these titles include Jonah and the Whale®, Noah
and the Ark®, Daniel
in the Lion’s
Den®, and The
Story of Creation®. In
addition, we also distribute the Veggie Tales®, a
popular line of children’s
software programs involving interactive adventures with biblical
themes.
Although
our prices are subject to change from time to time, our children’s
CD-Rom products range in price from $5.95 to $22.98 per unit. In the aggregate,
and for the fiscal year ended December 31, 2004, less than 1% of our revenues
were derived from sales of these products.
Language
Tutorial Products
We
currently produce tutorial software programs for learning Greek and Hebrew,
languages frequently studied in conjunction with a Bible-study curriculum or by
biblical scholars. Each of these two programs covers all of the essential
language development skills, including letters, vocabulary and grammar. Although
our prices are subject to change from time to time, our language tutorial
products range in price from approximately $10 to approximately $69.95 per unit.
In the aggregate, and for the fiscal year ended December 31, 2004, 3% of our
revenues were derived from sales of these products.
PRODUCT
DEVELOPMENT
We are
committed to the ongoing development of our existing software products as well
as development of new software products. Our product development team consists
of a combination of full-time employees as well as full and part-time
independent contractors, a team of which is located in Russia and several
others which are located in the United States. Our use of outside contractors
enables us to scale up and down as necessary, and maximize the productivity of
our development budget. Our development office is currently located in
Naperville, Illinois.
OUR
MARKET
According
to a Gallup poll released in March 2004, 49.4% of Americans identified
themselves as Protestant, while 23.7% identified themselves as Catholic, and
9.1% identified themselves as “Other Christian”. More than 60% of Americans say
that religion is very important to them in their own lives, and another 24% say
that religion is fairly important in their lives, according to the same survey.
A survey
released in July 2003 by the Christian Bookseller’s
Association (“CBA”) indicated that Christian-product sales for the year 2002
were $4.2 billion. The survey also revealed that $2.4 billion of the $4.2
billion total was sold through Christian retail, with $1.1 billion sold through
general retail, and $725 million sold direct-to-consumer, and through ministry
sales channels. The 3,500-store CBA segment includes several different chains,
Family Christian Stores being the largest with 325 stores. As
religious retailing increases, secular stores are offering more religious
products as evidenced by the $1.1 billion sales figure in 2002 as reported by
the CBA.
ACQUISITION
STRATEGY
Our
development strategy includes the pursuit of acquisition and related strategic
growth opportunities involving other companies that sell Christian-related
merchandise and services. Although we have no current intentions or plans to do
so, we have not ruled out the pursuit of transactional opportunities in areas
outside of these as well.
As part
of our acquisition strategy, we may acquire businesses that (i) only recently
commenced operations, (ii) are development-stage enterprises in need of
additional funds to expand into new products or markets, or (iii) are
established businesses that may be experiencing financial or operating
difficulties and need additional capital. We may also pursue opportunities to
acquire assets of other companies and establish wholly owned subsidiaries in
various businesses or purchase existing businesses as subsidiaries.
Because
acquisition and related opportunities may occur in relation to businesses at
various stages of development, the task of comparative investigation and
analysis of such business opportunities is likely to be extremely difficult and
complex. We are also likely to incur significant legal and accounting costs in
connection with our pursuit of such opportunities, including the legal fees for
preparing acquisition documentation, due diligence investigation costs, and the
costs of preparing reports and filings with the SEC.
LICENSING
STRATEGY
Our
development strategy includes the pursuit of intellectual property licensing
opportunities with respect to individual software titles that are strategically
aligned with our existing product line and focus. In addition, we may acquire
intellectual property licenses in the future for products outside of our current
area of focus.
MARKETING
AND SALES
Direct
Marketing / Online Sales
Direct
sales accounted for approximately 65% of our 2004 fiscal year revenue. Over
the past two years, we have devoted significant and increasing resources to the
development of our direct-marketing program. Through this program, we market our
products directly to consumers and Church and
“para-church” organizations through a combination of direct-mailings and
opt-in e-mailings of our product title catalogs and brochures. An important
aspect of this initiative is our online sales. In May of 2004, we launched a
full-service online store with many of the kinds of features and capabilities
that online shoppers have come to expect from cutting-edge Internet retailers.
We are currently marketing our products online through multiple sources
including our own www.quickverse.com Internet website, other Internet websites
such as www.amazon.com, as well as several widely used search engines such as
Google® and
Yahoo®. We
anticipate online orders will continue to increase as we expand our software
product base and enhance our marketing efforts in this area.
Retail
Sales
Retail
sales accounted for approximately 35% of our 2004 fiscal year revenue. Our
domestic retail sales involve thousands of retail stores across the United
States through which our products are sold, many of which are members of the
CBA. These stores vary from small, family-owned Christian bookstores to large
chain bookstores such as LifeWay Christian Stores, Family Christian Stores and
Berean Christian Stores. We face the continuing challenge of reaching these
stores on a consistent basis to keep them informed of new releases, promotional
offers, etc. In addition to advertising in trade publications and maintaining
visibility at CBA trade shows and events, we believe that it is critical to be
in direct personal contact with each customer routinely in order to maintain or
increase our market position. Towards that end, our sales representatives are
expected to contact each of our customers as well as each of the independent
stores that are not yet our customers regularly and present them with the latest
in our products and promotions. We believe our personalized approach to
marketing provides us with an edge over our competition, which we believe rely
predominantly on advertising to maintain and develop their relations with CBA
customers.
In the
secular retail market, which includes chains such as Best Buy, CompUSA, and
OfficeMax, we continue to be a top seller of Bible study software and we are
developing additional product offerings and promotions to grow our market
share.
International
Sales
International
sales accounted for approximately 2% of our 2004 fiscal year revenue. We
currently sell to distributors and retailers in Canada, New Zealand, Australia,
Philippines, Hong Kong, the United Kingdom, and Singapore. These distributors
and retailers, in turn, sell our products into both Christian and large, secular
retail outlets that sell off-the-shelf consumer software packages.
Fulfillment
We
currently fulfill all of our direct-to-consumer sales out of our warehouse
located in Omaha, Nebraska and a third-party fulfillment company, also located
in Omaha, Nebraska, fulfills our boxed retail sales.
SIGNIFICANT
CUSTOMERS AND SUPPLIERS
During
the years ended December 31, 2004 and 2003, we had no major customers that
individually accounted for 10% or more of annual sales. As we introduce new
and enhanced software titles into the market, we anticipate our sales to a
single customer, as a percentage of gross consolidated revenue, will continue to
remain below 10%.
Also for
the years ended December 31, 2004 and 2003, product and material purchases from
IsoDisc accounted for 29% and 3%, respectively, Midlands Packaging Corporation
accounted for 18% and 14%, respectively, Frogs Copy and Graphics accounted for
17% and 10%, respectively, MicroBytes, Inc. accounted for 12% and 39%,
respectively, and Cedar Graphics accounted for 7% and 17%, respectively, of the
total product and material purchases made by us.
REGULATION
We are
not currently subject to direct regulation by any government agency, other than
regulations applicable to businesses generally.
COMPETITION
The
market for our products is rapidly evolving and highly competitive. We face
competition from other software publishers, all of which generally sell through
the same combination of channels that we do, including chain store, secular,
CBA, direct and online sales.
Specifically,
and in relation to our QuickVerse®
products, we are the market leader in our category. We currently compete with
the following companies and products, among others:
| · |
Logos
Research Systems, Inc. - Logos Series X® |
| · |
Biblesoft,
Inc. - BibleSoft PC Bible Study®
Version 4 |
| · |
Thomas
Nelson, Inc. - Nelson eBible® |
| · |
WordSearch
Bible Publishers - WordSearch®
7 |
| · |
Zondervan
- Zondervan Bible Study Library® |
Although
each of these companies publishes software packages in several different
variations, generally in a range that includes a standard package, an expanded
package, and a deluxe package (the same way that we do), in each of these
respective categories we tend to be the least expensive but the most
comprehensive in terms of the number of Bibles and reference titles included.
QuickVerse’s®
reputation, moreover, is among the most well-respected in its category.
In
relation to our Membership Plus®
products, we currently compete with the following companies and comparable
products, among others:
| · |
ACS
Technologies® |
| · |
CCIS
Church Software® |
| · |
Church
Data Master Plus® |
| · |
Church
Windows/Computer Helper® |
| · |
Church
Office® |
| · |
Logos
Management Software® |
| · |
Power
Church Software® |
| · |
Servant
PC® |
| · |
Shelby
Systems® |
| · |
Shepherd’s
Staff®
(Concordia Publishing House) |
| · |
Specialty
Software® |
In
addition to being the market leader by a margin of over 100% in the church
management software publishing category in terms of registered users, our
Membership Plus® packages
are among the least expensive products in the category.
Although
we are among the market leaders in each of our two primary product categories,
some of our competitors have longer operating histories, larger customer bases
and greater financial, marketing, service, support, technical and other
resources than us. Moreover, we believe that competition from new entrants will
increase as the market for religious products and services expands.
INTELLECTUAL
PROPERTY
Our proprietary software content and related intellectual property is the single most important component of our products and ability to generate revenues and we rely to a very large extent on our proprietary technology and intellectual property in being able to effectively compete with other Bible and inspirational content software companies. We rely on a combination of copyright, trademark, and trade secret laws to protect our proprietary content, and our copyright license agreements with our content providers are a key component in our intellectual property assets.
In 1999,
and for the purchase price of $5 million, we obtained an exclusive licensing
agreement with Parsons Technology, Inc., a subsidiary of TLC, formerly the
Mattel Corporation, for their Parsons Church Division, a collection of
top-selling Christian-related titles, a copy of which agreement is incorporated
by reference into this prospectus as Exhibit 10.3. The Parsons License Agreement
originally had a term of ten years. As a result of a settlement agreement
reached on October 20, 2003, the term of that license has now been extended
indefinitely, and provides us with the exclusive worldwide right to market,
sell, and continue to develop those titles it covers. For the fiscal year ended
December 31, 2004, over 97% of our revenues were derived from sales of product
the rights to which we maintain pursuant to the Parsons License Agreement.
In total,
we currently have content licensing agreements with 45 different publishers for
approximately 765 individual Bible translations and other biblical or related
scholarly works which are incorporated in various editions of our
QuickVerse®
products,
or in some cases sold as stand-alone or add-on content.
We cannot
be certain that the precautions we have taken will provide meaningful protection
from unauthorized use by others. If we must pursue litigation in the future to
enforce or otherwise protect our intellectual property rights, or to determine
the validity and scope of the proprietary rights of others, we may not prevail
and will likely have to make substantial expenditures and divert valuable
resources. In addition, many foreign countries’ laws may not protect us from
improper use of our proprietary technologies outside of the United States.
Finally, we may not have adequate remedies if our proprietary content is
appropriated, our proprietary rights are violated, or our trade secrets are
disclosed.
EMPLOYEES
As of
April 15, 2005, we had thirty full-time employees. Of those 30, four were part
of the senior-level executive and financial management team, six were in the
product development team, nine were on the sales team, and eleven were in
fulfillment, administration, and related support positions. For the fiscal year
ended December 31, 2004, our annual payroll was $1,260,381, equivalent to 22% of
gross revenues. In addition, we have engaged the services of several consulting
firms who are working full or part-time for us in the area of product
development and marketing.
We rely
heavily on our current officers and directors in operating the business. We are
not subject to any collective bargaining agreements and believe that our
relationships with our employees are good.
Our
principal executive offices are located at 11204 Davenport Street, Suite 100,
Omaha, Nebraska. We lease this 6,500 square foot premises under a five year
lease agreement with 11204, LLC. Our monthly rent is $7,094.79 and, as of April
15, 2005, there were approximately twenty-five months remaining under the
lease.
We
maintain additional leased office space in Naperville, Illinois for certain
product development activity. We lease this 880 square foot premises under an
eighteen month lease agreement with Transwestern Commercial Services. Our
monthly rent is $1,320.00 and there are five months remaining under the
lease.
Three of
the company’s full-time employees work in home offices located in Cedar Rapids,
Iowa. We do not pay for any space associated with these operations.
In March
2004, the company finalized a joint settlement with The Zondervan Corporation
and The Learning Company in connection with pending litigation surrounding
royalties owed by Findex. Pursuant to the settlement, Findex was required to
make certain payments to the Zondervan Corporation, which obligations, as of
July 2004, were satisfied in full. A stipulation of such settlement has been
duly entered and the matter has been discontinued.
As of the
date of this report, there were no pending material legal proceedings to which
we were a party and we were not aware that any were contemplated. There can be
no assurance, however, that we will not be made a party to litigation in the
future. Moreover, there can be no assurance that our insurance coverage will
prove adequate to cover all liabilities arising out of any claims that may be
initiated against us in the future. Any finding of liability imposed against us
coupled with a lack of corresponding insurance coverage is likely to have an
adverse effect on our business, financial condition, and operating
results.
On
October 15, 2004, we filed a definitive Information Statement on Schedule 14C
with the Securities and Exchange Commission. The Information Statement was
mailed to our stockholders on or about October 18, 2004 solely for the purpose
of informing the stockholders of the approval and unanimous consent by our board
of directors, and the affirmative vote on September 9, 2004 of the holders of a
majority of the voting power to take the following action:
| (i) |
amend
our
Articles of Incorporation to increase our authorized shares of common
stock from 50,000,000 to 120,000,000 shares; and
|
| (ii) |
ratify
the designation of our
incumbent directors among the three classes of directors.
|
Of
our
46,153,189 common shares issued and outstanding at the time, the affirmative
vote of the holders of a majority of our voting power was required to approve
the amendment and to ratify the designation. Both the amendment and the
ratification of designation received the approval of holders owning 32,307,090
shares of our common stock, representing 70% of our then total issued and
outstanding common stock (51.97% after adjustment for certain voting
restrictions set forth in our Articles of Incorporation), each by written
consent as permitted by the Nevada Revised Statutes and our Bylaws. The action
approved by the consenting stockholders became effective on November 8, 2004,
which was 20 days after we mailed the Information Statement to our stockholders.
The amendment to our Articles of Incorporation was filed and effective with the
Secretary of State of Nevada on November 10, 2004. We did not solicit proxies to
vote at a stockholders’ meeting in connection with either the amendment or the
ratification.
No other
matters were submitted to a vote of our stockholders during the fourth quarter
of the fiscal year ended December 31, 2004.
RECENT
SALES OF UNREGISTERED SECURITIES
On
September 30, 2004, we issued two promissory notes to two different individuals.
Each of these promissory notes was in the principal amount of $120,000 and,
pursuant to a separate side letter agreement in each case, was convertible at
the option of the holder into 1,000,000 restricted shares of common stock. The
issuance of these securities was effected through private transactions in each
case not involving a public offering and were exempt from the registration
provisions of the Securities Act pursuant to Section 4(2) thereof and Rule 506
of Regulation D promulgated thereunder.
On
November 10, 2004, we issued two warrants to purchase shares of common stock to
a private investment partnership. The first warrant entitles the investor to
purchase up to 10,937,500 shares of common stock at a price of $0.18 per share,
and the second warrant entitles the investor to purchase up to 10,937,500
additional shares of common stock at a price of $0.60 per share. The issuance of
these securities was effected through private transactions in each case not
involving a public offering and were exempt from the registration provisions of
the Securities Act pursuant to Section 4(2) thereof and Rule 506 of Regulation D
promulgated thereunder.
On
November 16, 2004, the holders of the promissory notes issued on September 30,
2004 converted those notes into a total of 2,000,000 shares of our common stock.
The conversion of such securities was effected without registration under the
Securities Act based on their being exempted securities under Section 3(a)(9)
thereof.
Subsequent
to December 31, 2004, the company restored a stale check that was issued to a
corporation as payment in full of a note payable. This resulted in the
conversion of the note payable into 466,666 shares of common stock. The
conversion of such securities was effected without registration under the
Securities Act based on their being exempted securities under Section 3(a)(9)
thereof.
There
were no underwriters or placement agents involved in any of the issuances set
forth above and no commissions were paid.
MARKET
INFORMATION
Our
common stock is traded on the OTC Bulletin Board, a service provided by the
Nasdaq Stock Market Inc., under the symbol, “FIND”.
The
following table sets forth for the periods indicated the high and low bid prices
for our common stock as reported each quarterly period within the last two
fiscal years on the OTC Bulletin Board, and as obtained from BigCharts.com. The
prices are inter-dealer prices, do not include retail mark-up, markdown or
commission and may not necessarily represent actual transactions.
|
Common
Stock | ||||
|
2003 |
High |
Low | ||
|
First
Quarter |
$0.024 |
$0.022 | ||
|
Second
Quarter |
$0.080 |
$0.022 | ||
|
Third
Quarter |
$0.070 |
$0.010 | ||
|
Fourth
Quarter |
$0.040 |
$0.025 | ||
|
2004 |
High |
Low | ||
|
First
Quarter |
$0.055 |
$0.020 | ||
|
Second
Quarter |
$0.400 |
$0.018 | ||
|
Third
Quarter |
$0.250 |
$0.090 | ||
|
Fourth
Quarter |
$0.190 |
$0.060 | ||
STOCKHOLDERS
As of
April 15, 2005, there were approximately 800 holders of record of our common
stock, with any shares held by persons or companies in street or nominee name
counted only under such street or nominee name.
DIVIDENDS
During
the last two years, no dividends have been paid on our common stock and we do
not anticipate paying any dividends in the foreseeable future. Although it is
our intention to utilize all available funds for the development of our
business, no restrictions are in place that would limit or restrict our ability
to pay dividends.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY
COMPENSATION PLAN INFORMATION
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a) |
Weighted-average
exercise price of outstanding options, warrants and
rights
(b) |
Number
of Securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c) | |
|
Equity
compensation plans approved by security holders |
910,000 |
$0.11 |
590,000 |
|
Equity
compensation plans not approved by security holders |
2,800,000 |
$0.0879 |
--- |
|
Total |
3,710,000 |
$0.0933 |
590,000 |
The
Findex.com, Inc. Stock Incentive Plan (the “Plan”) authorizes the issuance of
various forms of stock-based awards including incentive and nonqualified stock
options, stock appreciation rights attached to stock options, and restricted
stock awards to directors, officers and other key employees of the company. The
Plan has been approved by the shareholders and as such, provides certain income
tax advantages to employees as provided under Sections 421, 422, and 424 of the
Internal Revenue Code. Stock options are granted at an exercise price as
determined by the Board at the time the option is granted and shall not be less
than the par value of such shares of common stock. Stock options vest quarterly
over three years and have a term of up to ten years. The Plan authorizes an
aggregate of 1,500,000 shares of common stock that may be issued.
In
addition, the company issues various forms of stock-based awards including
nonqualified stock options and restricted stock awards to directors, officers,
other key employees and third party consultants, outside of the Stock Incentive
Plan. Awards granted outside of the Plan have been granted pursuant to equity
compensation arrangements that have not been approved by the shareholders. These
awards are granted at an exercise price as determined by the Board at the time
of grant and are not less than the par value of such shares of common stock.
Stock options granted outside of the Plan vest as determined by the Board at the
time of grant and have a term of up to ten years. Nonemployee directors, though
treated as employees for financial reporting purposes under FASB Interpretation
No. 44, are excluded from the income tax advantages afforded employees by the
Internal Revenue Code.
All
issued options, whether under the Plan or not, create the obligation for stock
issuance at the established exercise price.
The
following discussion should be read together with the consolidated financial
statements of Findex.com, Inc. for the period ended December 31, 2004 and the
notes to the consolidated financial statements.
Certain
information included herein contains statements that constitute “forward-looking
statements” containing certain risks and uncertainties. Readers are referred to
the cautionary statement at the beginning of this report, which addresses
forward-looking statements made by us.
CRITICAL
ACCOUNTING POLICIES
Our
critical accounting policies, including the assumptions and judgments underlying
them, are disclosed in the Notes to the Financial Statements. We have
consistently applied these policies in all material respects. These policies
primarily address matters of expense recognition and revenue recognition,
including amortization of software development cost and the calculation for
reserve of returns. Investors are cautioned that these policies are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially. Management does not believe that our
operations to date have involved uncertainty of accounting treatment, subjective
judgment, or estimates, to any significant degree.
RESULTS OF
OPERATIONS
Our
software products are highly seasonal. More than 50% of our annual sales are
expected to occur in the five months of September through January; the five
months of April through August are generally our weakest, generating only about
33% of our annual sales.
During
the years of 2003 and 2004, the company had several non-recurring items take
place. For the twelve months ended December 31, 2003, the company had a
one-time, non-recurring write down to accrued royalties of approximately
$584,000, wrote down a distinct category of obsolete inventory of approximately
$61,000, and wrote off a note payable of approximately $650,000 and the interest
associated with the note of approximately $217,000. For the twelve months ended
December 31, 2004, the company wrote down the reserve for rebates payable from a
change in accounting estimate of approximately $266,000, wrote down a distinct
category of obsolete inventory of approximately $32,000, and incurred a
non-recurring expense of approximately $155,000 related to a settlement with an
institutional private equity investor. Furthermore, for the twelve months ended
December 31, 2004, the company recognized approximately a $1,000,000 gain from
extinguishment of debt which is classified as an extraordinary item. The
extinguishment of debt is a direct result from settling with various vendors and
content providers for lump-sum payments at a reduced amount of balances owed.
The non-recurring expense is a direct result of the company coming to terms with
such institutional private equity investor for early termination of a certain
investment agreement, originally entered into in June 2001. These non-recurring
items had no effect on the cash flow statement.
Our
income before taxes and the extraordinary item decreased approximately
$1,674,000 from an income of approximately $1,808,000 for the twelve months
ended December 31, 2003 to a loss of approximately $134,000 for the twelve
months ended December 31, 2004. However, our net income increased approximately
$376,000 from a net income of approximately $1,842,000 for the twelve months
ended December 31, 2003 to a net income of approximately $2,218,000 for the
twelve months ended December 31, 2004. By excluding our interest, taxes,
depreciation, and amortization from net income, our EBITDA decreased
approximately $1,194,000 from EBITDA earnings of approximately $2,339,000 for
the twelve months ended December 31, 2003 to EBITDA earnings of approximately
$1,145,000 for the twelve months ended December 31, 2004. These net income and
EBITDA results include the non-recurring items noted above. Net of the
non-recurring items, our EBITDA decreased approximately $484,000 from an EBITDA
earnings of approximately $949,000 for the twelve months ended December 31, 2003
to EBITDA earnings of approximately $465,000 for the twelve months ended
December 31, 2004.
Non-cash
expenses related to shares of common stock issued for services increased by
approximately $126,000. For the year ended December 31, 2004, we recognized
approximately $149,000 in non-cash expenses related to shares of common stock
and warrants issued for services and approximately $30,000 in non-cash expenses
related to shares of common stock issued in a settlement agreement.
Comparatively for the year ended December 31, 2003, we recognized expenses of
approximately $53,000 relating to shares of common stock issued for services.
Overall, interest expense for the twelve months ended December 31, 2004
decreased by approximately $45,000 compared to 2003. This is due to the company
reducing its trade payables and meeting the scheduled terms. Furthermore, the
note liabilities interest was reduced due to the reclassification of the note
payable in the fourth quarter of 2003. Amortization expense related to the
software license decreased for the twelve months ended December 31, 2004
compared to 2003 as a result of the final settlement with The Learning Company,
which extended the life of the license indefinitely. Amortization expense
related to software development costs increased approximately $220,000 for the
twelve months ended December 31, 2004 compared to 2003. This is a direct result
from QuickVerse® 8.0 shipping in late December 2003, Membership Plus® 8.0
shipping in January 2004, QuickVerse® PDA 2005 shipping in September 2004, and
QuickVerse® 2005 shipping in early December 2004.
Revenues
We
recognize software revenue net of estimated returns and allowances for returns,
price discounts and rebates, upon shipment of product, which is when title
passes, provided that collection of the resulting receivable is probable and we
have no significant obligations. Revenue from inventory out on consignment is
recognized when the consignee sells the product. Revenue associated with advance
payments from customers is deferred until products are shipped. Revenue for
software distributed electronically via the Internet is recognized upon
delivery.
Product
return reserves are based upon a percentage of total retail and direct sales for
the period and may increase or decrease as actual returns are processed. Product
returns or price protection concessions that exceed our reserves could
materially adversely affect our business and operating results and could
increase the magnitude of quarterly fluctuations in our operating and financial
results. See Risk Factors - “Product returns or price protections that exceed
our anticipated reserves could result in worse than expected operating results”.
Product returns from distributors and Christian bookstores are allowed primarily
in exchange for new products or for credit towards purchases as part of a
stock-balancing program. These returns are subject to certain limitations that
may exist in the contract that we have with them. Under certain circumstances,
such as termination or when a product is defective, distributors and bookstores
could receive a cash refund if returns exceed amounts owed. Returns from sales
made directly to the consumer are accepted within 45 days of purchase and are
issued a cash refund.
Software
products are sold separately, without future performance such as upgrades or
maintenance, and are sold with post contract customer support (“PCS”)
services, customer service and technical support assistance. In
connection with the sale of certain products, we provide a limited amount of
free technical support assistance to our customers. We do not defer the
recognition of revenue associated with sales of these products, since the cost
of providing this free technical support is insignificant. We accrue the
estimated associated costs of providing this free support upon product shipment.
We also offer several plans under which customers are charged for technical
support assistance. For plans where we collect fees in advance, we recognize
revenue over the period of service, which is generally one year.
Shipping
and handling costs in connection with our software products are expensed as
incurred and included in cost of goods sold.
Gross
revenues increased approximately $999,000 from approximately $4,788,000 for the
year ended December 31, 2003 to approximately $5,787,000 for the year ended
December 31, 2004. Such increase is due to the company’s
release of an enhanced version of our top financial and data management product,
Membership Plus®, during
the first quarter of 2004 and an enhanced version of our flagship product,
QuickVerse®, during
the fourth quarter of 2004. In addition to the QuickVerse® and
Membership Plus®
releases,
there were several other new product releases in the year of 2004 such as an
enhanced version of our QuickVerse® PDA. However, the retail value of
the products ranged from $9.95 to $59.95 compared to $99.95 to $349.95 for the
QuickVerse® and
Membership Plus® titles.
During the year of 2003, we only had one major product release,
QuickVerse® version
8.0, which shipped in late December 2003. During the years of 2003 and 2004, our
sales efforts were focused on targeting the end user through telemarketing and
Internet sales. These efforts resulted in more consistent sales during the two
years. Sales into the retail market (both CBA and secular) continue to increase;
however, they are not back to the levels of pre-recession periods of 1999 and
2000.
Sales
returns and allowances increased approximately $171,000 from approximately
$391,000 for the year ended December 31, 2003 to approximately $562,000 for the
year ended December 31, 2004 and increased as a percentage of gross sales from
approximately 8% for the year ended December 31, 2003 to approximately 10% for
the year ended December 31, 2004. The increase in sales returns and allowances
as a percentage is attributable to our release of enhanced versions of
QuickVerse® and
Membership Plus® in late
December of 2003 and January of 2004, respectively. The release of these two
enhanced products resulted in an increased quantity of sales returns and
allowances of prior versions as distributors and stores made shelf space during
the first quarter of 2004. Furthermore, the release of QuickVerse® in late
December of 2003 was the only enhancement to the product within a three year
timeframe. We released QuickVerse® 2005
earlier in the fourth quarter of 2004 with only an eleven month difference from
the last enhancement. Due to the earlier release, we anticipated stores would
have more time to return the previous version of QuickVerse® than
compared to a year ago. Product returns during the other quarters were
consistent. We anticipate the sales return and allowances as a percentage to
decrease due to our focused sales efforts to the end user and our decreased
presence in the retail market. Incidents of return are lower for sales direct to
the end user than sales into the retail stores.
Cost
of Sales
Cost of
sales consists primarily of royalties to third party providers of intellectual
property and the direct costs and manufacturing overhead required to reproduce,
package and ship the software products, and the amortized software development
costs. The direct costs and manufacturing overhead increased from 15.1% of gross
revenues in 2003 to 16.7% of gross revenues in 2004. The increase resulted
directly from amortization of software development costs. The amortization
recognized during the twelve months ended December 31, 2003 resulted from
several new software releases in 2003 including the then newly released
QuickVerse® 8.0.
However, the shorter timeframe between our product upgrades during the year of
2004 led to an increased amount of amortization recognized. During the twelve
months ended December 31, 2004 we continued to amortize the costs associated
with QuickVerse® 8.0
along with the newly released Membership Plus® 8.0, the
updated release of QuickVerse® PDA 2005
and the release of QuickVerse® 2005.
The direct costs and manufacturing overhead percentage is expected to continue
at the 2004 levels as working capital remains more consistent and as more
development projects are implemented in a shortened timeframe.
Royalties
to third party providers of intellectual property also increased from 5.5% of
gross revenues in 2003 to 7.2% of gross revenues in 2004. The increase of
royalties reflects the release of the QuickVerse® 8.0
editions in late December 2003 and the release of QuickVerse® 2005
editions in early December 2004. Furthermore, we sold some of the
older
QuickVerse® versions
to liquidators at a reduced price throughout the year compared to no sales to
liquidators during the year ended 2003. During the year ended 2004, we also
renegotiated several royalty contracts which resulted in some cases in a higher
royalty rate along with access to more content. Overall, our royalties have
decreased compared to prior years due to the focus on selling product upgrades
and non-royalty titles. Upgrade sales, for example, from
QuickVerse® version
8.0 to QuickVerse® version
2005, are subject to royalties only on the content additions of the upgraded
version. The royalty rate as a percentage of gross sales is expected to increase
in the future as the new QuickVerse® 2005 is
released into the retail market. Upgrade sales will continue to be subject to
royalties only on content additions and sales to new users are expected to
increase significantly.
Software
development costs are expensed as incurred until technological feasibility has
been established, at which time development costs are capitalized until the
software title is available for general release to customers. Software
development is segregated by title and technology platform. Once a product has
been successfully released, subsequent revisions and upgrades are considered
development and the costs of the revision and upgrade are capitalized.
Capitalized costs are amortized on a product-by-product basis using the
greater of straight-line amortization over the estimated life of the product or
on the ratio of current revenues from the product to the total projected revenue
over the life of the product. Generally, we consider technological feasibility
to have been established with the release of a beta version for testing.
Software development costs are summarized in the table below. The software
development costs, consisting primarily of direct and indirect labor and related
overhead charges, capitalized during the twelve months ended December 31, 2003
and 2004 were approximately $659,000 and approximately $692,000, respectively.
Accumulated amortization of these development costs included in cost of sales
totaled approximately $355,000 and approximately $575,000 for the twelve months
ended December 31, 2003 and 2004, respectively. The increase in both the
capitalization and amortization is a direct result of the increase in the number
of development projects.
|
Twelve
Months Ended | |||||||
|
December
31, | |||||||
|
2003 |
2004 |
||||||
Beginning
balance |
$ |
280,502 |
$ |
584,706 |
|||
Capitalized |
659,487 |
692,063 |
|||||
|
Amortized
(cost of sales) |
355,283 |
575,480 |
|||||
|
Ending
balance |
$ |
584,706 |
$ |
701,289 |
|||
|
Research
and development expense (General and administrative) |
$ |
128,159 |
$ |
64,653 |
|||
Sales,
General and Administrative
Operating
expenses for 2004 include approximately $149,000 in non-cash expenses related to
shares of common stock and warrants issued for services and approximately
$30,000 in non-cash expenses related to shares of common stock issued in a
settlement agreement compared with approximately $53,000 for 2003. With gross
revenues increasing approximately $999,000 from 2003 to 2004, sales expenses
also increased approximately $481,000 from approximately $813,000 for 2003 to
approximately $1,294,000 for 2004. Included in sales expenses, commissions to a
third-party telemarketing firm increased approximately $244,000 as our sales
focus to the direct consumer increased along with the number of new and enhanced
product releases during 2004 compared with that of 2003; fulfillment costs from
a third-party warehouse increased approximately $32,000 as we released three
major product upgrades beginning late December 2003 through December 2004;
advertising, rebates, and direct marketing increased approximately $200,000 as
we launched a full-service online store, began marketing our products online
through multiple sources, attended more retail conferences, and increased the
number of new product upgrades throughout the year; and marketing and customer
service costs increased approximately $5,000 as our sales efforts continue to be
more focused towards the consumer instead of the retail store.
Research
and development costs include salaries and benefits of personnel and third
parties conducting research and development of software products. Software
development costs expensed as research and development (see table above)
amounted to approximately $65,000 for the twelve months ended December 31, 2004
compared to approximately $128,000 incurred for the twelve months ended December
31, 2003. The decrease in 2004 reflects further development of existing products
whereas in 2003 we had more research and development costs associated with new
titles such as QuickVerse® PDA for
both Pocket PC® and Palm
OS®
operating systems. Research and development expenses are expected to increase in
future periods as we add new products and versions to our product mix.
Personnel
costs increased approximately $371,000 from approximately $1,096,000 for the
twelve months ended December 31, 2003 to approximately $1,467,000 for the twelve
months ended December 31, 2004. This increase is primarily from the increase in
our sales and marketing team and technical support staff and the associated
health care costs. The company also recognized approximately $14,000 of expense
related to 635,000 restricted shares of common stock issued to employees and
approximately $67,000 in expense for upper management year-end bonus accrual.
Furthermore, the capitalization of direct and indirect labor and related
overhead charges as software development costs (see “Cost of Sales” above)
decreased by approximately $76,000 from approximately $190,000 for the twelve
months ended December 31, 2003 to approximately $114,000 for the twelve months
ended December 31, 2004. This decrease is due to the shortened development time
period for the new development projects that began during the year 2004. It is
anticipated that personnel costs will continue to increase in future periods as
operating capital is available to fund full staffing of our product development
team and expansion of the direct marketing staff. In addition, interest and
penalty fees related to back payroll taxes increased approximately $95,000 for
the twelve months ended December 31, 2004.
Direct
legal costs increased approximately $38,000 for the twelve months ended December
31, 2004 as the disputes with TLC and Zondervan were finalized in March 2004.
However, approximately $44,000 of legal costs were related to the stock offering
costs incurred in July 2004 and the
related preparation of a 14C information statement and SB-2 registration
statement; and therefore was recorded as a reduction to additional
paid-in capital. It is anticipated that legal costs will increase as we pursue
our business plan for growth by acquiring companies that are synergistic with
our current product line and customer base. Rent expense increased approximately
$25,000 as we opened a new product development facility located in Naperville,
IL. The increase is also attributed to the capitalization of related overhead
charges as software development costs. See “Cost of Sales” above.
Telecommunications costs increased approximately $70,000 as the call volume
increased in technical support and customer service due to the release of the
three major product upgrades beginning late December 2003 through December 2004.
Corporate service fees increased approximately $94,000 for the twelve months
ended December 31, 2004. These fees are related to the recent hire of an outside
consultant, the expense for an issuance of a warrant to purchase 600,000 shares
of common stock allocated over the term of the consulting contract, and the
expense for a previous issuance of a warrant to purchase 250,000 shares of
common stock.
Nonrecurring
Items
The
company wrote-off distinctly different categories of obsolete inventory with a
carried cost totaling approximately $61,000 during the twelve months ended
December 31, 2003 and approximately $32,000 during the twelve months ended
December 31, 2004. The 2004 inventory write-off was a direct result of the March
2004 settlement with The Zondervan Corporation. These have been recognized as an
expense.
During
the year ended December 31, 2003, the company recorded an adjustment to the
balance of accrued royalties as of December 31, 2002 in the amount of
approximately $584,000. This adjustment resulted from an internal audit of the
royalty calculations as affected by the June 30, 2001 bad debt provision
totaling $2,391,000 related to net balances owed the company by TLC. The royalty
liabilities had been accrued based on Findex sales to TLC as originally
reported. This has been recognized as an expense recovery and included in
operating expenses.
During
the year ended December 31, 2004, the company incurred approximately $155,000 in
expenses related to a settlement agreement with an institutional private equity
investor for early termination of the agreement. As part of a settlement
agreement, the company issued 295,692 shares of common stock and paid a cash
lump sum of $125,000. The shares were valued at $0.10 per share. This has been
treated as expenses incurred in a withdrawn public offering.
During
the year ended December 31, 2003, the company reclassified as other income -
nonrecurring items proceeds totaling $650,000, and the corresponding accrued
interest payable totaling approximately $217,000, that were previously recorded
as an unsecured note payable. The determination to reclassify the obligation was
made on the basis of the combined facts that (i) the obligation exists, if at
all, solely pursuant to an oral loan agreement made over three years ago in the
State of North Carolina with a representative of the party to whom the
obligation was believed to have been owed, (ii) no party has ever made any
demand for repayment thereof despite the fact that no payments have ever been
made on the obligation, (iii) the party believed to be owed the obligation, upon
inquiry, claims no record of any such obligation, and (iv) the State of North
Carolina Statute of Limitations applicable to oral agreements, believed to
govern the continued enforceability of the obligation, has expired.
Rebate
Reserve Adjustment
During
the year ended December 31, 2004 the company adjusted the reserve for rebates by
approximately $266,000 in order to more properly reflect open rebate programs
and the estimated balance of each that management expects to pay. The remaining
reserve balance was estimated based on historical response rates.
Amortization
Amortization
of the software license decreased approximately $29,000 from approximately
$45,000 for the twelve months ended December 31, 2003 to approximately $16,000
for the twelve months ended December 31, 2004. Upon final settlement with TLC in
October of 2003, the term of the software license agreement was extended
indefinitely and provided the company with the exclusive worldwide right to
market, sell, and continue to develop those titles it covers. This effectively
changed the substance from an amortizable intangible asset with a finite useful
life to an unamortizable intangible asset with an indefinite useful life.
Amortization expense, determined using the straight-line method, was calculated
through the settlement date of October 20, 2003. Amortization expense for 2004
reflects the launch of our new website during the second quarter.
Income
Tax Benefits
Our
effective tax rate differs from the statutory federal rate due to differences
between income and expense recognition prescribed by the Internal Revenue Code
and Generally Accepted Accounting Principles. We utilize different methods and
useful lives for depreciating property and equipment. Changes in estimates
(reserves) are recognized as expense for financial reporting but are not
deductible for income tax purposes.
We have
recognized a net deferred tax asset whose realization depends on generating
future taxable income. At December 31, 2003, management established the
valuation allowance equal to the total deferred tax assets due to the
uncertainty about the company’s ability to continue as a going concern. At
December 31, 2004, management adjusted the amount of valuation allowance based
on the assessment that the company will continue as a going concern and will
produce sufficient income in the future to realize its net deferred tax asset.
The resulting deferred tax liability reflects income taxes payable in future
periods on the net deductible differences related to the software license
agreement. We currently have net operating loss carryforwards, for income tax
purposes, of approximately $7,648,000. The carryforwards are the result of
income tax losses generated in 2000 ($2,480,000 expiring in 2020) and 2001
($5,168,000 expiring in 2021). We will need to achieve a minimum annual taxable
income, before deduction of operating loss carryforwards, of approximately
$450,000 to fully utilize the current loss carryforwards. We believe this is
achievable through careful expense management and continued introduction of new
products and enhanced versions of our existing products.
Although
there can be no assurance, management expects the deductible temporary
differences (reserves) to reverse sometime beyond the next fiscal year.
Extraordinary
Item
During
the year ended December 31, 2004, the company recognized approximately a
$1,000,000 gain from extinguishment of debt which is classified as an
extraordinary item. The extinguishment of debt is a direct result from settling
with various vendors and content providers for lump-sum payments ranging from
approximately 17% to approximately 60% of balances owed. Income taxes allocated
and subtracted from the total gain were approximately $401,000, or approximately
40%.
LIQUIDITY
AND CAPITAL RESOURCES
As of
December 31, 2004, Findex had $1,601,801 in current assets, $1,383,146 in
current liabilities and a retained deficit of $5,684,015. We had a net loss
before income taxes of $134,455 for the year ended December 31, 2004. However,
operating expenses for 2004 included approximately $149,000 in non-cash expenses
related to shares of common stock and warrants issued for services and
approximately $30,000 in non-cash expenses related to shares of common stock
issued in a settlement agreement. See “Results Of Operations” above.
Net cash
provided by operating activities was approximately $822,000 for the year ended
December 31, 2003 and net cash used by operating activities was approximately
$644,000 for the year ended December 31, 2004. The increase in cash used was
primarily due to an increase in the amounts paid to suppliers and employees
which would include all royalty payments to our content providers.
Net cash
used in investing activities was approximately $714,000 and $797,000 for the
years ended December 31, 2003 and 2004, respectively. The increase in cash used
for investing activities results from capitalizing costs associated with
software development and upgrading our internal computer equipment and software
in order to increase our operating efficiency capabilities.
Net cash
used by financing activities was approximately $65,000 for the year ended
December 31, 2003 and net cash provided by financing activities was
approximately $1,690,000 for the year ended December 31, 2004. Cash used by
financing activities reflects final settlement on our accounts receivable line
of credit, payments made on debt obligations, and stock offering costs
associated with the Barron Partners, LP (“Barron”)
equity financing discussed below. Cash provided by financing activities reflects
proceeds from issuance of stock to Barron and convertible debentures.
On March
19, 2001, we entered into an Accounts Receivable Financing Agreement with
Alliance Financial Capital, Inc. (“AFC”). Pursuant to this agreement, AFC agrees
to purchase selected accounts receivable on a discounted basis, including,
without limitation, full power to collect, compromise, sue for, assign, or in
any manner enforce collection thereof. The agreement provides for advances of
60% toward the purchase of the invoices with a credit line of $250,000. The
terms call for 40% to be held in a reserve account from the collection of each
invoice. Invoices not paid by the customer within 90 days of shipment are
required to be repurchased by us out of the reserve account. The agreement
carries a 12-month term with a minimum monthly fee equal to one half of one
percent (.5%). The term renews automatically in 12-month increments unless a
written request for termination is received by AFC at least 30 days before the
renewal date. During the twelve months ended December 31, 2004, we transferred
accounts receivable totaling $300,966 to a lender for cash advances of $180,580.
As accounts are paid, the collected funds (less the amount advanced and
appropriate fees) are disbursed to the company. The transfer agreement includes
a repurchase requirement and, accordingly, the proceeds were accounted for as a
secured borrowing. At December 31, 2004, the balance of receivables transferred
and included in trade receivables was $0. The remaining secured borrowing
balance included in accrued expenses was $0. On July 20, 2004, we terminated the
Accounts Receivable Financing Agreement with AFC.
On July
19, 2004, we completed an equity financing in the amount of $1,750,000 through a
private placement with Barron. Under the terms of the agreement, Barron
purchased 21,875,000 restricted shares of common stock at a price of $0.08 per
share. In addition, according to the terms of the agreement, Barron received two
warrants to purchase common stock. The first warrant entitles Barron to purchase
up to 10,937,500 shares of common stock at a price of $0.18 per share and the
second warrant entitles Barron to purchase up to 10,937,500 additional shares of
common stock at a price of $0.60 per share. The original terms of the agreement
called for the exercise price associated with each of the warrants to be subject
to downward adjustment based on the occurrence or non-occurrence of certain
events. An amendment to the Barron Partners, LP Stock Purchase Agreement was
entered into on September 30, 2004 which removed these provisions. See Exhibits
10.10 and 10.11.
On
September 30, 2004, we issued promissory notes to each of two different
individuals. Each of these promissory notes was in the principal amount of
$120,000 and, pursuant to a separate side letter agreement in each case, was
convertible at the option of the holder into 1,000,000 restricted shares of
common stock. On November 16, 2004, the holders of the promissory notes
converted those notes into a total of 2,000,000 shares of our common
stock.
The
company was in arrears with the Internal Revenue Service for back payroll taxes
and had been paying the payroll taxes in monthly installments previously
approved by the Internal Revenue Service. Subsequent to the financing received
in July of 2004, the company paid all back payroll taxes that were due to the
Internal Revenue Service.
In July
2004, the company made the final payment to The Zondervan Corporation for
$100,000 plus 5% simple interest. This payment completed all of the company’s
obligations that were previously outlined in the settlement with The Zondervan
Corporation and TLC dated October 2003. See Note 18 - Commitments and
Contingencies. In addition, according to the settlement agreement, the term of
the software license agreement with Parsons Technology, Inc., a subsidiary of
TLC, has been extended indefinitely, and provides the company with the exclusive
worldwide right to market, sell, and continue to develop those titles it covers.
RISK
FACTORS
Several
of the matters discussed in this document contain forward-looking statements
that involve risks and uncertainties. Factors associated with the
forward-looking statements that could cause actual results to differ from those
projected or forecast are included in the statements below. In addition to other
information contained in this report, readers should carefully consider the
following cautionary statements and risk factors.
GENERAL
BUSINESS RISK
Our
liquidity and capital resources are very limited.
Our
ability to fund working capital and anticipated capital expenditures will depend
on our future performance, which is subject to general economic conditions,
financial conditions, our customers, actions of our domestic and international
competitors, and other factors that are beyond our control. Our ability to fund
operating activities is also dependent upon (a) the extent and availability of
bank and other credit facilities, (b) our ability to access external sources of
financing, and (c) our ability to effectively manage our expenses in relation to
revenues. Based upon the current level of operations and planned growth, we
believe that the net proceeds received from our 2004 sales of common stock,
warrants, together with future cash flow from operations, and funds from
external sources of credit-based debt financing, will be adequate to meet our
anticipated liquidity requirements over the next 12 months and will provide
additional capital for potential acquisitions. Given our initiative towards
rapid revenue growth, there can be no assurance, however, that our operations
and access to external sources of financing will continue to provide resources
sufficient to satisfy our liabilities arising in the ordinary course of
business.
RISKS
ASSOCIATED WITH OUR BUSINESS AND INDUSTRY
We
face serious competition in our business segment.
The
market for our products is rapidly evolving and highly competitive. We face
competition from other software publishers, all of which generally sell through
the same combination of channels that we do, including chain store,
secular, CBA, direct and online sales. Specifically, we currently compete
with Logos Research Systems, Inc., Biblesoft, Inc., Thomas Nelson, Inc.,
Zondervan and WordSearch Bible Publishers, among others. Although we are among
the market leaders in our primary product categories, some of our competitors
have longer operating histories, larger customer bases and greater financial,
marketing, service, support, technical and other resources than us. Moreover, we
believe that competition from new entrants will increase as the market for
religious products and services continues to expand.
We
have experienced, and may continue to experience, reduced revenues due to delays
in the introduction and distribution of our products.
We cannot
be certain that we will be able to meet our planned release dates for our new
software releases. If we cannot release an important new product during the
scheduled quarter, our revenues would likely be reduced in that quarter. In the
past, we have experienced significant delays in our introduction of some new
products. For instance, delays in duplication, packaging and distribution caused
our QuickVerse® version
2005 to begin shipping in early-December 2004, long after the holiday season had
been underway. As a result, we experienced fewer sales of this product than we
would have if the product had been available before the holiday selling season
began, which had a materially adverse effect on our operating results for the
2004 fourth quarter. It is likely in the future that delays will continue to
occur and that some new products will not be released in accordance with our
internal development schedule or the expectations of public market analysts and
investors.
Product
returns or price protections that exceed our anticipated reserves could result
in worse than expected operating results.
At the
time we ship our products we establish reserves, including reserves that
estimate the potential for future product returns. Product returns or price
protection concessions that exceed our reserves could increase the magnitude of
quarterly fluctuations in our operating and financial results. Furthermore, if
we incorrectly assess the creditworthiness of our wholesale customers who take
delivery of our products on credit, we could be required to significantly
increase the reserves previously established. Although, historically, actual
returns have been within management’s prior estimates, we cannot be certain that
any future write-offs exceeding reserves will not occur or that amounts written
off will not have a material adverse effect on our results of operations.
Errors
or defects in our software products may cause a loss of market acceptance and
result in fewer sales of our products.
Our
products are complex and may contain undetected errors or defects when first
introduced or as new versions are released. In the past, we have discovered
software errors in some of our new products and enhancements after their
introduction into the market. Because our products are complex, we anticipate
that software errors and defects will be present in new products or releases in
the future. While to date these errors have not been material, future errors and
defects could result in adverse product reviews and a loss of, or delay in,
market acceptance of our products.
We
may not have available funds to develop products that consumers
want.
The
Bible-study, inspirational content, and organizational management software
markets are subject to rapid technological developments. To develop products
that consumers and church and other faith-based organizations desire, we must
continually improve and enhance our existing products and technologies and
develop new products and technologies that incorporate these technological
developments. We cannot be certain that we will have the financial and technical
resources available to make these improvements. We must make these improvements
while remaining competitive in terms of performance and price. This will require
us to make substantial investments in research and development, often times well
in advance of the widespread release of the products in the market and any
revenues these products may generate.
The
loss of any of our key executives or our failure to attract, integrate, motivate
and retain additional key employees could have a material adverse effect on our
business.
Our
success depends to a large degree upon the skills of our senior management team
and key employees and upon our ability to identify, hire, and retain additional
sales, marketing, technical, and financial personnel. The loss of any of our key
executives or the failure to attract, integrate, motivate, and retain additional
key employees could have a material adverse effect on our business. We presently
do not maintain key person life insurance on any of our executives. Although we
have employment agreements with each of our three key executives, there can be
no assurance that we will be able to retain our existing key personnel or
attract and retain additional key personnel. Competition for these personnel in
the software and technology industry is intense and identifying personnel with
experience in this industry is even more difficult. Any loss of one of our key
executives would likely have a material adverse effect on our business and
prospects.
Our
proprietary technology may not be adequately protected from unauthorized use by
others, which could increase our litigation costs and adversely affect our
sales.
Our
proprietary software content and related intellectual property is the single
most important component of our products and ability to generate revenues and we
rely to a very large extent on our proprietary technology and intellectual
property in being able to effectively compete with other Bible and inspirational
content software companies. Unauthorized use by others of our proprietary
content could result in an increase in competing products and a reduction in our
own sales. We rely on a combination of copyright, trademark, and trade secret
laws to protect our proprietary content, and our copyright license agreements
with our content providers are a key component in our intellectual property
assets. We cannot be certain; however, that the precautions we have taken will
provide meaningful protection from unauthorized use by others. If we must pursue
litigation in the future to enforce or otherwise protect our intellectual
property rights, or to determine the validity and scope of the proprietary
rights of others, we may not prevail and will likely have to make substantial
expenditures and divert valuable resources. In addition, many foreign countries’
laws may not protect us from improper use of our proprietary technologies
outside of the United States. We may not have adequate remedies if our
proprietary content is appropriated, our proprietary rights are violated, or our
trade secrets are disclosed.
If
our products infringe any proprietary rights of others, a lawsuit may be brought
against us that could require us to pay large legal expenses and judgments and
redesign or discontinue selling one or more of our
products.
We
believe that our products do not infringe any valid existing proprietary rights
of third parties. Any infringement claims, however, whether or not meritorious,
could result in costly litigation or require us to enter into royalty or
licensing agreements. If we are found to have infringed the proprietary rights
of others, we could be required to pay damages, redesign the products or
discontinue their sale. Any of these outcomes, individually or collectively,
could have a material adverse effect on our financial condition and results of
operations.
New
internet access devices may change the way information is displayed requiring us
to change our products.
Recent
increases in the use of internet devices to access inspirational content and the
continued development of internet devices as a medium for the delivery of
network-based information, content, and services may require us to change our
products. Our success depends on our ability to understand the method upon which
our search engines operate and our ability to service new and emerging devices
to access the internet, such as browser phones, personal digital assistants, and
other wireless devices. To the extent these new Internet access devices change
the way that information is displayed to the end user or causes a change in the
medium that is searched, we may be required to revise the methodology of our
products. Although our PDA version products have performed well for us since
their introduction in 2004, we cannot predict the impact that new devices will
have on our services across the entire spectrum of developing technologies, and
any required product adaptations may result in loss of revenue and goodwill,
increased expenses, and reduced operating margins.
RISKS
ASSOCIATED WITH AN INVESTMENT IN OUR COMMON STOCK
Up
to 47,025,000 shares of our common stock are likely to become eligible for
public sale as a result of a resale registration statement filing which is
likely to depress our stock price.
As of the
date of filing of this annual report with the SEC on Form 10-KSB, we also have a
registration statement filed with the SEC on Form SB-2 which, once declared
effective by the SEC, will cause to be
eligible for immediate resale on the public market 23,875,000
shares of our common stock and an additional 23,150,000
shares of our common stock underlying warrants (the
resale offering of which shall only be made by means of a separate
prospectus). As a
percentage of our total outstanding common stock, this represents 65.5%. If a
significant number of shares are offered for sale simultaneously, which is not
unlikely to occur, it would have a depressive effect on the trading price of our
common stock on the public market. Any such depressive effect may encourage
short positions and short sales, which could place further downward pressure on
the price of our common stock. Further, all of the shares sold in the offering
will be freely transferable thereafter without restriction or further
registration under the Securities Act (except for any shares purchased by our
“affiliates”, as defined in Rule 144 of the Securities Act), which could place
even further downward pressure on the price of our common stock.
Unless
an active trading market develops for our common stock, you may not be able to
sell your shares.
Although
we are a reporting company and our common stock is listed on the OTC Bulletin
Board (owned and operated by the Nasdaq Stock Market, Inc.), there is no active
trading market for our common stock. There can be no assurance that an active
trading market will ever develop for our common stock or, if it does develop,
that it will be maintained. Failure to develop or maintain an active trading
market will have a generally negative effect on the price of our common stock,
and you may be unable to sell your shares or any attempted sale of such shares
may have the effect of lowering the market price, and therefore your investment
could be a complete or partial loss.
Since
our common stock is thinly traded, it is more susceptible to extreme rises or
declines in price, and you may not be able to sell your shares at or above the
price you paid.
You may
have difficulty reselling shares of our common stock, either at or above the
price you paid, or even at a fair market value. The stock markets often
experience significant price and volume changes that are not related to the
operating performance of individual companies, and because our common stock is
thinly traded, it is particularly susceptible to such changes. These broad
market changes may cause the market price of our common stock to decline
regardless of how well we perform as a company, and, depending on when you
determine to sell, you may not be able to obtain a price at or above the price
you paid.
Trading
in our common stock on the OTC Bulletin Board may be limited thereby making it
more difficult for you to resell any shares you may
own.
Our
common stock trades on the OTC Bulletin Board owned and operated by the Nasdaq
Stock Market, Inc. The OTC Bulletin Board is not an exchange and, because
trading of securities on the OTC Bulletin Board is often more sporadic than the
trading of securities listed on a national exchange or on the Nasdaq National
Market, you may have difficulty reselling any of the shares of our common stock
that you purchase from the selling stockholders.
Our
common stock is subject to the “penny stock” regulations, which is likely to
make it more difficult to sell.
Our
common stock is considered a “penny stock”, which generally is a stock trading
under $5.00 and not registered on national securities exchanges or quoted on the
Nasdaq National Market. The Securities and Exchange Commission has adopted rules
that regulate broker-dealer practices in connection with transactions in penny
stocks. This regulation generally has the result of reducing trading in such
stocks, restricting the pool of potential investors for such stocks, and making
it more difficult for investors to sell their shares. Prior to a transaction in
a penny stock, a broker-dealer is required to:
| · |
deliver
a standardized risk disclosure document that provides information about
penny stocks and the nature and level of risks in the penny stock
market; |
| · |
provide
the customer with current bid and offer quotations for the penny
stock; |
| · |
explain
the compensation of the broker-dealer and its salesperson in the
transaction; |
| · |
provide
monthly account statements showing the market value of each penny stock
held in the customer’s
account; and |
| · |
make
a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser’s written agreement
to the transaction. |
These
requirements may have the effect of reducing the level of trading activity in
the secondary market for a stock that is subject to the penny stock rules. Since
our common stock is subject to the penny stock rules, investors in our common
stock may find it more difficult to sell their shares.
Our
stock price could be volatile, and your investment could suffer a decline in
value.
The
trading price of our common stock is likely to be highly volatile and could be
subject to extreme fluctuations in price in response to various factors, many of
which are beyond our control, including:
| · |
the
trading volume of our shares; |
| · |
the
number of securities analysts, market-makers and brokers following our
common stock; |
| · |
changes
in, or failure to achieve, financial estimates by securities
analysts; |
| · |
new
products introduced or announced by us or our
competitors; |
| · |
announcements
of technological innovations by us or our
competitors; |
| · |
our
ability to produce and distribute retail packaged versions of our software
in advance of peak retail selling seasons; |
| · |
actual
or anticipated variations in quarterly operating
results; |
| · |
conditions
or trends in the consumer software and/or Christian products
industries; |
| · |
announcements
by us of significant acquisitions, strategic partnerships, joint ventures,
or capital commitments; |
| · |
additions
or departures of key personnel; |
| · |
sales
of our common stock; and |
| · |
stock
market price and volume fluctuations of publicly-traded, particularly
microcap, companies generally. |
In
addition, the stock market has recently experienced significant price and volume
fluctuations. Volatility in the market price for particular companies has often
been unrelated or disproportionate to the operating performance of those
companies. These broad market and industry factors may seriously harm the market
price of our common stock, regardless of our operating performance. In addition,
securities class action litigation has often been initiated following periods of
volatility in the market price of a company’s securities. A securities class
action suit against us could result in substantial costs, potential liabilities
and the diversion of management’s attention and resources from our business.
Further, and as noted above, our shares are currently traded on the OTC Bulletin
Board and, further, are subject to the penny stock regulation. Price
fluctuations in such shares are particularly volatile and subject to
manipulation by market-makers, short-sellers and option traders.
Future
sales of our common stock by our officers or directors may depress our stock
price.
Although
our officers and directors are contractually obligated to refrain from selling
any of their shares until July 20, 2005, following that date, any shares owned
by our officers or directors which are registered in another registration
statement, or which otherwise may be sold in the future without registration
under the Securities Act to the extent permitted by Rule 144 or other exemptions
under the Securities Act, may be sold. Because of the perception by the
investing public that a sale by such insiders may be reflective of their own
lack of confidence in our prospects, the market price of our common stock could
decline as a result of a sell-off following sales of substantial amounts of
common stock by our officers and directors into the public market, or the mere
perception that these sales could occur.
Future
issuances of our common or preferred stock may depress our stock price and
dilute your interest.
We may
want to issue additional shares of our common stock in future financings and may
grant stock options to our employees, officers, directors and consultants under
our stock incentive plan. Any such issuances could have the effect of depressing
the market price of our common stock and, in any case, would dilute the
interests of our common stockholders. In addition, we could issue serial
preferred stock having rights, preferences and privileges senior to those of our
common stock, including the right to receive dividends and/or preferences upon
liquidation, dissolution or winding-up in excess of, or prior to, the rights of
the holders of our common stock. This could depress the value of our common
stock and could reduce or eliminate the amounts that would otherwise have been
available to pay dividends on our common stock (which
are unlikely in any case) or to make distributions on
liquidation.
If
you require dividend income, you should not rely on an investment in our common
stock.
We do not
anticipate paying dividends on our common stock in the foreseeable future.
Rather, we intend to retain earnings, if any, for the continued operation and
expansion of our business. It is unlikely, therefore, that holders of our common
stock will have an opportunity to profit from anything other than potential
appreciation in the value of our common stock held by them. If you require
dividend income, you should not rely on an investment in our common
stock.
The
lack of a majority of independent directors on our board of directors may affect
our ability to be listed on a national securities exchange or quotation system.
We are
not currently subject to the listing requirements of any national securities
exchange or quotation system. The listing standards of the national securities
exchanges and automated quotation systems require that a company’s board of
directors consist of a majority of directors who are independent as defined by
the Sarbanes-Oxley Act of 2002 and as defined by applicable listing standards,
and that the audit committee of the board of directors must consist of at least
three members, all of whom are independent. Similarly, the compensation
and nominating committees of company boards of directors must also consist of
independent directors. Currently, only two of our directors, who are the
only members of our Audit Committee, meet the definition of an “independent”
director as defined by the Sarbanes-Oxley Act of 2002 and as defined by listing
standards. Further, two of our four directors are currently executive
officers and thereby do not satisfy these independence standards. There is
no guarantee that we will be able to appoint an additional director who will
satisfy these independence requirements. If we are unable to appoint an
additional independent director to our board, we will be precluded from listing
any of our capital stock on a national securities exchange or quotation
system.
We
have relied on the private placement exemption to raise substantial amounts of
capital and could suffer substantial losses if that exemption is determined not
to have been properly relied upon.
We have
raised substantial amounts of capital in private placements from time to time.
The securities offered in such private placements were not registered with the
SEC or any state agency in reliance upon exemptions from such registration
requirements. Such exemptions are highly technical in nature and if we
inadvertently failed to comply with the requirements of any of such exemptive
provisions, investors would have the right to rescind their purchase of our
securities or otherwise sue for damages. If one or more investors were to
successfully seek such rescission or institute any such suit, we could face
severe financial demands that could materially and adversely affect our
financial position.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of Findex.com, Inc.:
We have
audited the accompanying consolidated balance sheets of Findex.com, Inc. as of
December 31, 2004 and 2003 and the related consolidated statements of
operations, stockholders’ equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
has determined that it is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Findex.com,
Inc. as of December 31, 2004 and 2003 and the results of its operations and cash
flows for the years then ended in conformity with U.S. generally accepted
accounting principles.
Chisholm,
Bierwolf & Nilson, LLC
Bountiful,
UT
February
18, 2005
|
Findex.com,
Inc. |
|||||||
|
CONSOLIDATED
BALANCE SHEETS |
|||||||
|
December
31, 2004 and 2003 | |||||||
|
| |||||||
|
|
2004 |
2003 |
|||||
|
Assets | |||||||
|
Current
assets: | |||||||
|
Cash
and cash equivalents: |
|||||||
|
Unrestricted
cash |
$ |
341,359 |
$ |
36,339 |
|||
|
Restricted
cash |
50,354
|
105,683
|
|||||
|
Total
cash and cash equivalents |
391,713
|
142,022
|
|||||
|
Accounts
receivable, trade (Note 2) |
566,819
|
365,803
|
|||||
|
Inventories
(Note 3) |
234,000
|
272,600
|
|||||
|
Deferred
income taxes, net (Note 8) |
300,191
|
-
|
|||||
|
Other
current assets |
109,078
|
21,920
|
|||||
|
Total
current assets |
1,601,801
|
802,345
|
|||||
|
Property
and equipment, net (Note 4) |
131,019
|
65,603
|
|||||
|
Software
license (Note 5) |
2,513,158
|
2,513,158
|
|||||
|
Capitalized
software development costs, net (Note 1) |
701,289
|
584,706
|
|||||
|
Deferred
income taxes, net (Note 8) |
253,968
|
-
|
|||||
|
Other
assets |
94,101
|
63,818
|
|||||
|
Total
assets |
$ |
5,295,336
|
$ |
4,029,630 |
|||
|
| |||||||
|
Liabilities
and stockholders' equity | |||||||
|
Current
liabilities: | |||||||
|
Notes
payable (Note 6) |
$ |
- |
$ |
89,999 |
|||
|
Current
maturities of long-term debt (Note 7) |
35,495
|
126,876
|
|||||
|
Accrued
royalties |
287,514
|
1,499,006
|
|||||
|
Accounts
payable, trade |
621,804
|
989,354
|
|||||
|
Accrued
payroll |
209,984
|
216,767
|
|||||
|
Reserve
for sales returns |
100,180
|
57,572
|
|||||
|
Rebates
payable |
29,561
|
357,451
|
|||||
|
Payroll
taxes payable |
8,235
|
221,600
|
|||||
|
Other
current liabilities |
90,373
|
89,554
|
|||||
|
Total
current liabilities |
1,383,146
|
3,648,179
|
|||||
|
Long-term
debt (Note 7) |
42,972
|
73,764
|
|||||
|
Deferred
income taxes, net (Note 8) |
253,968
|
1,051,327
|
|||||
|
Commitments
and contingencies (Note 18) | |||||||
|
Stockholders'
equity (Note 9): | |||||||
|
Preferred
stock, $.001 par value |
|||||||
|
5,000,000
shares authorized |
|||||||
|
Series
A: -0- and 11,400 shares issued and outstanding,
respectively |
-
|
11
|
|||||
|
Series
B: -0- and 40,000 shares issued and outstanding,
respectively |
-
|
40
|
|||||
|
Common
stock, $.001 par value |
|||||||
|
120,000,000 and
50,000,000 shares authorized, respectively |
|||||||
|
48,619,855 and
21,011,438 shares issued and outstanding, respectively |
48,620
|
21,011
|
|||||
|
Paid-in
capital |
9,250,645
|
7,080,629
|
|||||
|
Retained
(deficit) |
(5,684,015 |
) |
(7,845,331 |
) | |||
|
Total
stockholders' equity |
3,615,250
|
(743,640 |
) | ||||
|
Total
liabilities and stockholders' equity |
$ |
5,295,336 |
$ |
4,029,630 |
|||
|
| |||||||
|
See
accompanying notes.
| |||||||
|
Findex.com,
Inc. |
|||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS |
|||||||
|
|
|||||||
Year
Ended December 31 |
2004 |
2003 |
|||||
Revenues,
net of reserves and allowances |
$ |
5,218,784 |
$ |
4,390,757 |
|||
|
Cost
of sales |
1,556,626
|
1,113,866
|
|||||
Gross
profit |
3,662,158
|
3,276,891
|
|||||
|
Operating
expenses: | |||||||
Sales
and marketing |
1,294,377
|
813,438
|
|||||
General
and administrative |
2,466,479
|
1,861,185
|
|||||
Nonrecurring
items (Note 10 ) |
32,396
|
(522,836 |
) | ||||
Rebate
reserve adjustment (Note 11) |
(266,301 |
) |
-
|
||||
Bad
debt expense |
22,778
|
23,208
|
|||||
Amortization
expense |
16,343
|
45,157
|
|||||
|
Depreciation
expense |
44,478
|
43,224
|
|||||
|
Total
operating expenses |
3,610,550
|
2,263,376
|
|||||
Earnings
from operations |
51,608
|
1,013,515
|
|||||
Interest
income |
1,378
|
9,727
|
|||||
Other
income |
9,276
|
7,977
|
|||||
Nonrecurring
items (Note 10 ) |
(154,569 |
) |
866,516
|
||||
Gain
(loss) on disposition of assets |
(141 |
) |
(2,659 |
) | |||
|
Interest
expense |
(42,007 |
) |
(87,144 |
) | |||
Income
(Loss) before income taxes |
(134,455 |
) |
1,807,932
|
||||
|
Provision
for income taxes (Note 8) |
1,750,908
|
33,567
|
|||||
Income
(Loss) before extraordinary item |
1,616,453
|
1,841,499
|
|||||
|
Extraordinary
item (Note 12) (less applicable income taxes of $400,874) |
601,216
|
-
|
|||||
|
Net
income |
$ |
2,217,669 |
$ |
1,841,499 |
|||
|
| |||||||
|
Basic
earnings per share (Note 14): | |||||||
|
Before
extraordinary item |
$ |
- |
$ |
0.09 |
|||
|
Extraordinary
item |
$ |
0.02 |
$ |
- |
|||
|
Net
income |
$ |
0.06 |
$ |
0.09 |
|||
|
| |||||||
|
Diluted
earnings per share (Note 14): | |||||||
|
Before
extraordinary item |
$ |
- |
$ |
0.09 |
|||
|
Extraordinary
item |
$ |
0.02 |
$ |
- |
|||
|
Net
income |
$ |
0.06 |
$ |
0.08 |
|||
|
| |||||||
|
Weighted
average shares outstanding (Note 14): | |||||||
|
Basic |
34,520,754
|
20,411,438
|
|||||
|
Diluted |
34,520,754
|
22,365,438
|
|||||
|
| |||||||
|
See
accompanying notes. | |||||||
|
Findex.com,
Inc. |
||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY | ||||||||||||||||||||||
|
| ||||||||||||||||||||||
|
|
Retained |
|||||||||||||||||||||
|
|
Preferred
Stock |
Common
Stock |
Paid-In |
Earnings |
||||||||||||||||||
|
|
Series
A |
Series
B |
Shares |
Amount |
Capital |
(Deficit) |
Total | |||||||||||||||
|
| ||||||||||||||||||||||
Balance
as previously reported, December 31, 2002 |
$ |
11 |
$ |
40 |
19,811,438
|
$ |
19,811 |
$ |
7,029,079 |
$ |
(9,785,777 |
) |
$ |
(2,736,836 |
) | |||||||
|
Prior
period adjustment (Note 13) |
-
|
-
|
-
|
-
|
-
|
98,947
|
98,947
|
|||||||||||||||
Balance,
restated, December 31, 2002 |
$ |
11 |
$ |
40 |
19,811,438
|
$ |
19,811 |
$ |
7,029,079 |
$ |
(9,686,830 |
) |
$ |
(2,637,889 |
) | |||||||
Common
stock issued for services |
-
|
-
|
1,200,000
|
1,200
|
51,550
|
-
|
52,750
|
|||||||||||||||
|
Net
income, December 31, 2003 |
-
|
-
|
-
|
-
|
-
|
1,841,499
|
1,841,499
|
|||||||||||||||
Balance,
December 31, 2003 |
$ |
11 |
$ |
40 |
21,011,438
|
$ |
21,011 |
$ |
7,080,629 |
$ |
(7,845,331 |
) |
$ |
(743,640 |
) | |||||||
Common
stock issued for services |
-
|
-
|
2,774,105
|
2,774
|
100,445
|
-
|
103,219
|
|||||||||||||||
Common
stock warrants issued for services |
-
|
-
|
-
|
-
|
75,715
|
-
|
75,715
|
|||||||||||||||
Common
stock cancelled |
-
|
-
|
(48,387 |
) |
(48 |
) |
48
|
-
|
-
|
|||||||||||||
Preferred
Series A common stock dividend |
-
|
-
|
71,356
|
71
|
56,282
|
(56,353 |
) |
-
|
||||||||||||||
Conversion
of preferred stock |
(11 |
) |
(40 |
) |
469,677
|
470
|
(419 |
) |
-
|
-
|
||||||||||||
Common
stock issued in connection with |
||||||||||||||||||||||
private
placement, net of $51,047 of issuance costs |
-
|
-
|
21,875,000
|
21,875
|
1,677,078
|
-
|
1,698,953
|
|||||||||||||||
Conversion
of notes payable |
-
|
-
|
2,466,666
|
2,467
|
260,867
|
-
|
263,334
|
|||||||||||||||
|
Net
income, December 31, 2004 |
-
|
-
|
-
|
-
|
-
|
2,217,669
|
2,217,669
|
|||||||||||||||
|
Balance,
December 31, 2004 |
$ |
- |
$ |
- |
48,619,855
|
$ |
48,620 |
$ |
9,250,645 |
$ |
(5,684,015 |
) |
$ |
3,615,250 |
||||||||
|
| ||||||||||||||||||||||
|
See
accompanying notes. | ||||||||||||||||||||||
|
Findex.com,
Inc. |
|||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS | |||||||
|
| |||||||
Year
Ended December 31 |
2004 |
2003 |
|||||
|
Cash
flows from operating activities: | |||||||
|
Cash
received from customers |
$ |
5,062,396 |
$ |
4,228,649 |
|||
|
Cash
paid to suppliers and employees |
(5,673,088 |
) |
(3,364,838 |
) | |||
|
Other
operating receipts |
9,276
|
7,977
|
|||||
|
Interest
paid |
(37,928 |
) |
(43,203 |
) | |||
|
Interest
received |
1,378
|
9,727
|
|||||
|
Income
taxes (paid) refunded |
(5,702 |
) |
43,909
|
||||
|
Net
cash provided (used) by operating activities |
(643,668 |
) |
882,221
|
||||
|
Cash
flows from investing activities: | |||||||
|
Acquisition
of property, plant and equipment |
(58,247 |
) |
(18,433 |
) | |||
|
Proceeds
from sale of property, plant and equipment |
-
|
-
|
|||||
|
Software
development costs |
(692,063 |
) |
(659,486 |
) | |||
|
Website
development costs |
(31,838 |
) |
(35,684 |
) | |||
|
Deposits
made |
(14,788 |
) |
(500 |
) | |||
|
Net
cash (used) by investing activities |
(796,936 |
) |
(714,103 |
) | |||
|
Cash
flows from financing activities: | |||||||
Proceeds
from (payments on) line of credit, net |
(20,931 |
) |
14,657
|
||||
Payments
made on long-term notes payable |
(227,727 |
) |
(79,404 |
) | |||
Proceeds
from convertible notes payable |
240,000
|
-
|
|||||
Proceeds
from issuance of stock |
1,750,000
|
-
|
|||||
|
Stock
offering costs paid |
(51,047 |
) |
-
|
||||
|
Net
cash provided (used) by financing activities |
1,690,295
|
(64,747 |
) | ||||
Net
increase in cash and cash equivalents |
249,691
|
103,371
|
|||||
|
Cash
and cash equivalents, beginning of year |
142,022
|
38,651
|
|||||
|
Cash
and cash equivalents, end of year |
$ |
391,713 |
$ |
142,022 |
|||
|
| |||||||
|
Reconciliation
of net income to cash flows from operating activities: | |||||||
|
Net
income |
$ |
2,217,669 |
$ |
1,841,499 |
|||
|
Adjustments
to reconcile net income to net cash |
|||||||
|
provided (used)
by operating activities: |
|||||||
|
Software
development costs amortized |
575,481
|
355,282
|
|||||
|
Stock
and warrants issued for services |
178,929
|
52,750
|
|||||
|
Rebate
reserve adjustment |
266,301
|
-
|
|||||
|
Provision for
bad debts |
22,778
|
23,208
|
|||||
|
Depreciation
& amortization |
60,821
|
88,381
|
|||||
|
Non-cash
non-recurring revenue |
-
|
(650,000 |
) | ||||
|
Loss on
disposal of property, plant and equipment |
141
|
2,659
|
|||||
|
Extraordinary
item |
(1,002,090 |
) |
-
|
||||
|
Change
in assets and liabilities: |
|||||||
|
Decrease in
accounts receivable |
(223,794 |
) |
(160,770 |
) | |||
|
Decrease in
inventories |
38,600
|
144,100
|
|||||
|
(Increase)
decrease in refundable income taxes |
(2,948 |
) |
43,909
|
||||
|
(Increase)
decrease in prepaid expenses |
(84,211 |
) |
20,869
|
||||
|
(Decrease) in
accrued royalties |
(324,360 |
) |
(631,607 |
) | |||
|
(Decrease)
increase in accounts payable |
(271,198 |
) |
81,793
|
||||
|
(Decrease) in
income taxes payable |
(1,270 |
) |
-
|
||||
|
Increase
(decrease) in deferred taxes |
(1,351,518 |
) |
(33,567 |
) | |||
|
(Decrease) in
other liabilities |
(742,999 |
) |
(296,285 |
) | |||
|
Net
cash provided (used) by operating activities |
$ |
(643,668 |
) |
$ |
882,221 |
||
|
| |||||||
|
See
accompanying notes. | |||||||
Notes to
Consolidated Financial Statements
December
31, 2004 and
2003
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Findex.com,
Inc. (“Findex” or the “company”) was incorporated under the laws of the State of
Nevada on November 7, 1997, as EJH Entertainment, Inc. On December 4, 1997, the
company acquired EJH Entertainment, Inc. (EJH Idaho), an Idaho corporation, in a
stock for stock transaction. EJH Idaho was incorporated on June 21, 1968, as
Alpine Silver, Inc. (Alpine). Alpine changed its name to The Linked Companies,
Inc. (Linked) on December 4, 1992. On September 9, 1996, Linked acquired
Worldwide Entertainment, Inc. (Worldwide), a Delaware corporation, in a stock
for stock transaction and changed its name to Worldwide Entertainment, Inc. On
June 27, 1997, Worldwide changed its name to EJH Entertainment,
Inc.
On April
30, 1999, the company acquired Findex Acquisition Corporation (FAC), a Delaware
corporation in a stock for stock transaction and the name of the company was
changed to Findex.com, Inc. FAC is a wholly-owned subsidiary without current
business operations. FAC was incorporated on February 19, 1999 and acquired
FinSource Ltd. (FinSource), a Delaware corporation in April 1999, in a stock for
stock transaction. The mergers with FAC and FinSource were treated as
reorganization mergers with the accounting survivor (business history) being
FinSource.
On March
7, 2000, the company acquired Reagan Holdings, Inc. (Reagan), a Delaware
corporation in a stock for stock transaction. Reagan was incorporated on July
27, 1999 and is a wholly-owned subsidiary without current business
operations.
Findex is
a retail, wholesale and Internet supplier of personal computer software products
to business and religious organizations and individuals around the world. In
July 1999, the company completed an exclusive license agreement with Parsons
Technology, Inc., a subsidiary of The Learning Company (“TLC”),
formerly Mattel (“MAT”)
Corporation, for the Parsons Church Division of Mattel. In so doing, Findex
obtained the exclusive right to market, sell and continue to develop several
Bible study software products. The company develops and publishes church and
Bible study software products designed to simplify biblical research and
streamline church office tasks.
ACCOUNTING
METHOD
The
company recognizes income and expenses on the accrual basis of
accounting.
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the accounts of the company and its
wholly owned subsidiaries after eliminations.
USE
OF ESTIMATES
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Significant estimates used in the consolidated financial
statements include the estimates of (i) doubtful accounts, sales returns, price
protection and rebates, (ii) provision for income taxes and realizability of the
deferred tax assets, (iii) the life and realization of identifiable intangible
assets, and (iv) provisions for obsolete inventory. The amounts Findex will
ultimately incur or recover could differ materially from current
estimates.
CONCENTRATIONS
Financial
instruments that potentially subject Findex to concentrations of credit risk
consist of cash and cash equivalents and accounts receivable. Findex places its
cash and cash equivalents at well-known, quality financial institutions. The
company currently maintains its cash balances in one financial institution
located in Omaha, Nebraska. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. At December
31, 2004, the
company’s uninsured cash balance totaled $268,380.
Findex
sells a majority of its products to end-users through distributors, Christian
bookstores, Internet and direct marketing efforts. Although Findex attempts to
prudently manage and control accounts receivable and performs ongoing credit
evaluations in the normal course of business, the company generally requires no
collateral on its product sales. During the years ended December
31, 2004 and
2003, the
company had no major customers that individually accounted for 10% or more of
the annual sales.
During
the year ended December
31, 2004, we
derived 63% of our total revenue from sales of QuickVerse®, 28%
from sales of Membership Plus®, and 9%
from sales of other software titles.
During
the years ended December
31, 2004 and
2003, five
vendors provided purchases individually of 10% or more of the total product and
material purchases as follows: Vendor A accounted for 29% and 3%, respectively,
Vendor B accounted for 18% and 14%, respectively, Vendor C accounted for 17% and
10%, respectively, Vendor D accounted for 12% and 39%, respectively, and Vendor
E accounted for 7% and 17%, respectively. Accounts payable relating to Vendors
A, B, C, D, and E were $40,234 and $20, $18,426 and $14,379, $34,931 and
$26,194, $-0- and $39,431, and $2,020 and $-0-, as of December 31, 2004 and 2003
respectively.
ROYALTY
AGREEMENTS
Findex
has entered into certain agreements whereby it is obligated to pay royalties for
content of software published. Findex generally pays royalties based on a
percentage of sales on respective products or on a fee per unit sold basis. The
company expenses software royalties as product costs during the period in which
the related revenues are recorded.
CASH
AND CASH EQUIVALENTS
Findex
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
RESTRICTED
CASH
Restricted
cash represents cash held in reserve by our merchant banker to allow for a
potential increase in credit card chargebacks from increased consumer purchases.
The cash held in reserve by our merchant banker will be unrestricted when
consumer sales and chargeback volumes stabilize.
ACCOUNTS
RECEIVABLE
Accounts
receivable arise in the normal course of business. It is the policy of
management to review the outstanding accounts receivable quarterly, as well as
the bad debt write-offs experienced in the past, and establish an allowance for
doubtful accounts for uncollectible amounts. Individual accounts are charged
against the allowance when they are deemed uncollectible.
INVENTORY
Inventory,
including out on consignment, consists primarily of software media, manuals and
related packaging materials and is recorded at the lower of cost or market
value, determined on a first-in, first-out and adjusted on a per-item basis.
PROPERTY
AND EQUIPMENT
Property
and equipment are recorded at cost. Furniture, fixtures and computer equipment
are depreciated over five years using the straight-line method. Software is
depreciated over three years using the straight-line method. Expenditures for
maintenance, repairs and other renewals of items are charged to expense when
incurred.
ACCOUNTING
FOR LONG-LIVED ASSETS
The
company reviews property and equipment and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability is measured by comparison of its
carrying amount to future net cash flows the assets are expected to generate. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds its
fair market value. Property and equipment to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
INTANGIBLE
ASSETS
In
accordance with SFAS No. 142, Goodwill and Other Intangible Assets, intangible
assets with an indefinite useful life are not amortized. Intangible assets with
a finite useful life are amortized on the straight-line method over the
estimated useful lives.
SOFTWARE
DEVELOPMENT COSTS
In
accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed, software development costs are expensed as
incurred until technological feasibility has been established, at which time
such costs are capitalized until the product is available for general release to
customers. Capitalized costs are then amortized on a straight-line basis over
the estimated product life, or on the ratio of current revenues to total
projected product revenues, whichever is greater. Total cumulative capitalized
software development costs were $1,748,735 and $1,056,672, less accumulated
amortization of $1,047,446 and $471,966 at December
31, 2004 and
2003,
respectively. Research and development costs incurred and charged to expense
were $64,653 and $128,159 for the years ended December
31, 2004 and
2003,
respectively.
REVENUE
RECOGNITION
The
company recognizes software revenue net of estimated returns and allowances for
returns, price discounts and rebates, upon shipment of product, which is when
title passes, provided that collection of the resulting receivable is probable
and we have no significant obligations. Revenue from inventory out on
consignment is recognized when the consignee sells the product. Revenue
associated with advance payments from customers is deferred until products are
shipped. Revenue for software distributed electronically via the Internet is
recognized upon delivery.
Product
returns from distributors and Christian bookstores are allowed primarily in
exchange for new products or for credit towards purchases as part of a
stock-balancing program. These returns are subject to certain limitations that
may exist in the contract. Under certain circumstances, such as termination or
when a product is defective, distributors and bookstores could receive a cash
refund if returns exceed amounts owed. Returns from sales made directly to the
consumer are accepted within 45 days of purchase and are issued a cash
refund.
Software
products are sold separately, without future performance such as upgrades or
maintenance, and are sold with postcontract customer support (“PCS”)
services, customer service and technical support assistance. In
connection with the sale of certain products, we provide a limited amount of
free technical support assistance to our customers. We do not defer the
recognition of revenue associated with sales of these products, since the cost
of providing this free technical support is insignificant. We accrue the
estimated associated costs of providing this free support upon product shipment.
We also offer several plans under which customers are charged for technical
support assistance. For plans where we collect fees in advance, we recognize
revenue over the period of service, generally one year.
The
company maintains an allowance for potential credit losses and an allowance for
anticipated returns on products sold to distributors, Christian bookstores, and
direct customers. The allowance for sales returns is estimated based on a
calculation of forecast sales to the end-user in relation to estimated current
channel inventory levels.
Shipping
and handling costs in connection with our software products are expensed as
incurred and included in cost of goods sold.
ADVERTISING
Advertising
costs, including direct response advertising costs, are charged to operations as
incurred. The company has determined that direct response advertising costs are
insignificant. Total advertising costs for the years ended December
31, 2004 and
2003 were
approximately, $448,000 and
$240,000,
respectively.
STOCK-BASED
COMPENSATION
As
permitted under SFAS No. 123, Accounting for Stock-based Compensation, and
amended under SFAS No. 148, Accounting for Stock-based Compensation-Transition
and Disclosure, the company has elected to follow the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees, in accounting for stock-based
awards to employees (see Note 15) and, accordingly, does not recognize
compensation cost when employee stock-option grants are made at fair-market
value.
LEGAL
COSTS RELATED TO LOSS CONTINGENCIES
The
company accrues legal costs expected to be incurred in connection with a loss
contingency as they occur.
INCOME
TAXES
The
company utilizes SFAS No. 109, Accounting for Income Taxes. SFAS No. 109
requires the use of the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
company’s assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.
EARNINGS
PER SHARE
The
company follows SFAS No. 128, Earnings Per Share, to calculate and report basic
and diluted earnings per share (EPS). Basic EPS is computed by dividing income
available to common shareholders by the weighted average number of shares of
common stock outstanding for the period. Diluted EPS is computed by giving
effect to all dilutive potential shares of common stock that were outstanding
during the period. For the company, dilutive potential shares of common stock
consist of the incremental shares of common stock issuable upon the exercise of
stock options and warrants for all periods, convertible notes payable and the
incremental shares of common stock issuable upon the conversion of convertible
preferred stock.
When
discontinued operations, extraordinary items, and/or the cumulative effect of an
accounting change are present, income before any of such items on a per share
basis represents the “control number” in determining whether potential shares of
common stock are dilutive or anti-dilutive. Thus, the same number of potential
shares of common stock used in computing diluted EPS for income from continuing
operations is used in calculating all other reported diluted EPS amounts. In the
case of a net loss, it is assumed that no incremental shares would be issued
because they would be anti-dilutive. In addition, certain options and warrants
are considered anti-dilutive because the exercise prices were above the average
market price during the period. Anti-dilutive shares are not included in the
computation of diluted earnings per share, in accordance with SFAS No. 128.
COMPREHENSIVE
INCOME (LOSS)
The
company has adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards of reporting and displaying comprehensive income and its
components of net income and “other comprehensive income” in a full set of
general-purpose financial statements. “Other comprehensive income” refers to
revenues, expenses, gains and losses that are not included in net income, but
rather are recorded directly in stockholders’ equity. The adoption of this
Statement had no impact on the company’s net income or loss or stockholders’
equity.
TRANSFER
OF FINANCIAL ASSETS
The
company has adopted SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS No. 140 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities and provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. The adoption of this standard did not have a material
effect on the company’s results of operations or financial
position.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Unless
otherwise indicated, the fair values of all reported assets and liabilities that
represent financial instruments (none of which are held for trading purposes)
approximate the carrying values of such instruments because of the short
maturity of those instruments.
RECLASSIFICATIONS
Certain
accounts in the 2003
financial statements have been reclassified for comparative purposes to conform
with the presentation in the 2004
financial statements.
NOTE
2 - ACCOUNTS RECEIVABLE
At
December
31, 2004 and
2003,
accounts receivable consisted of the following (see Note 1 -
Concentrations):
|
2004 |
2003 |
||||||
Trade
receivables |
$ |
584,819 |
$ |
384,803 |
|||
|
Less:
Allowance for doubtful accounts |
18,000 |
19,000 |
|||||
|
Accounts
receivable, trade |
$ |
566,819 |
$ |
365,803 |
|||
During
the years ended December
31, 2004 and
2003, we
transferred accounts receivable totaling $300,966 and $320,533 to a lender for
cash advances of $180,580 and $192,320, respectively. As accounts are paid, the
collected funds (less the amount advanced and appropriate fees) are disbursed to
the company. The transfer agreement includes a repurchase requirement and,
accordingly, the proceeds were accounted for as a secured borrowing. The
agreement was terminated in July 2004. At December
31, 2004 and
2003, the
balance of receivables transferred and included in trade receivables was $-0-
and $34,893, respectively. The remaining secured borrowing balances of
$-0- and
$20,936 are
included in accrued expenses at December
31, 2004 and
2003,
respectively.
NOTE
3 - INVENTORIES
At
December
31, 2004 and
2003,
inventories consisted of the following:
|
2004 |
2003 |
||||||
Raw
materials |
$ |
111,300 |
$ |
75,000 |
|||
|
Finished
goods |
122,700 |
197,600 |
|||||
|
Inventories |
$ |
234,000 |
$ |
272,600 |
|||
During
the years ended December
31, 2004 and
2003, the
company wrote-off distinctly different categories of obsolete inventory with a
carried cost totaling $32,396
and$60,792,
respectively. These have been recognized as an operating expense. See Note
10.
NOTE
4 - PROPERTY AND EQUIPMENT, net
At
December
31, 2004 and
2003,
property and equipment consisted of the following:
|
2004 |
2003 |
||||||
Computer
equipment |
$ |
84,009 |
$ |
61,905 |
|||
Computer
software |
62,861 |
41,297 |
|||||
Office
equipment |
77,947 |
24,099 |
|||||
Office
furniture and fixtures |
62,594 |
51,119 |
|||||
|
Warehouse
equipment |
23,150 |
23,150 |
|||||
310,561 |
201,570 |
||||||
|
Less:
Accumulated depreciation |
179,542 |
135,967 |
|||||
|
Property
and equipment, net |
$ |
131,019 |
$ |
65,603 |
|||
At
December
31, 2004, Office
equipment contained telephone equipment under a capital lease obligation with a
cost basis of $51,788. See Notes 7 and 16.
NOTE
5 - SOFTWARE LICENSE AGREEMENT
During
the year ended December
31, 2003, the
company offset the remaining unpaid installment ($1,051,785) against the
carrying value of the software license in accordance with the terms of a
tentative settlement agreement with TLC. In addition, the agreement called for
the extension of the estimated life of the license from 10 years to 50 years.
On
October 20, 2003, the company reached settlement in a dispute with The Zondervan
Corporation and TLC. The settlement extended indefinitely the term of the
software license agreement. This effectively changed the substance from an
amortizable intangible asset with a finite useful life to an unamortizable
intangible asset with an indefinite useful life. Amortization expense for 2003,
determined using the straight-line method, was calculated through the settlement
date.
NOTE
6 - NOTES PAYABLE
At
December
31, 2004 and
2003, notes
payable consisted of the following:
|
2004 |
2003 |
||||||
Note
payable to a corporation, due May 31, 2003, with interest compounded
monthly at 1.5%. Unsecured. Convertible at the option of the holder into
666,667 restricted shares of common stock. |
$ |
--- |
$ |
33,333 |
|||
Note
payable to a corporation, due May 31, 2003, with interest compounded
monthly at 1.5%. Unsecured. Convertible at the option of the holder into
666,667 restricted shares of common stock. |
--- |
33,333 |
|||||
|
Note
payable to a corporation, due May 31, 2003, with interest compounded
monthly at 1.5%. Unsecured. Convertible at the option of the holder into
466,666 restricted shares of common stock. See Notes 17 and
20. |
--- |
23,333 |
|||||
|
Notes
payable |
$ |
--- |
$ |
89,999 |
|||
In
September 2004, the company borrowed a total of $240,000 from two individuals.
Both notes were unsecured, carried an annual interest rate of 7.5%, were due
August 2005, and were convertible at the option of the holder into a total of
2,000,000 restricted shares of common stock. Both notes were converted in
November 2004 at the election of the respective holder. See Notes 9 and
17.
During
the year ended December
31, 2003, the
company reclassified as other income - nonrecurring items (see Note 10) proceeds
totaling $650,000, and the corresponding accrued interest payable, received in
late 1999 and early 2000 that were previously recorded as an unsecured note
payable.
NOTE
7 - LONG-TERM DEBT
At
December
31, 2004 and
2003,
long-term debt consisted of the following:
|
2004 |
2003 |
||||||
Unsecured
term note payable to a corporation due October 2004 in monthly
installments of $5,285, including interest at 8%. |
$ |
26,679 |
$ |
53,975 |
|||
Term
note payable to a corporation due December 2005 in monthly installments of
$6,833, including interest at 8%. Secured by inventory. See Notes 3 and
12. |
--- |
146,665 |
|||||
|
Capital
lease obligation payable to a corporation due November 2009 in monthly
installments of $1,144, including interest at 11.7%. Secured by telephone
equipment. See Notes 4 and 16. |
51,788 |
--- |
|||||
78,467 |
200,640 |
||||||
|
Less:
Current maturities |
35,495 |
126,876 |
|||||
|
Long-term
debt |
$ |
42,972 |
$ |
73,764 |
|||
Principal
maturities at December
31, 2004 are as
follows:
2005 |
$ |
35,495 |
||
2006 |
9,186 |
|||
2007 |
10,318 |
|||
2008 |
11,591 |
|||
|
2009 |
11,877 |
|||
|
Total |
$ |
78,467 |
NOTE
8 - INCOME TAXES
The
provision (benefit) for taxes on income from continuing operations for the years
ended December
31, 2004 and
2003
consisted of the following:
|
2004 |
2003 |
||||||
|
Current: | |||||||
Federal |
$ |
--- |
$ |
--- |
|||
|
State |
1,484 |
--- |
|||||
|
1,484 |
--- |
||||||
|
Deferred: | |||||||
Federal |
(1,785,267 |
) |
(29,061 |
) | |||
|
State |
32,875 |
(4,506 |
) | ||||
|
(1,752,392 |
) |
(33,567 |
) | ||||
|
Total
tax provision (benefit) |
$ |
(1,750,908 |
) |
$ |
(33,567 |
) | |
The
reconciliation of income tax computed at statutory rates of income tax benefits
is as follows:
|
2004 |
2003 |
||||||
Expense
at Federal statutory rate - 34% |
$ |
284,813 |
$ |
614,697 |
|||
State
tax effects, net of Federal tax benefits |
25,668 |
178,721 |
|||||
Nondeductible
expenses |
33,636 |
1,764 |
|||||
Taxable
temporary differences |
(269,916 |
) |
(3,213 |
) | |||
Deductible
temporary differences |
84,176 |
(99,761 |
) | ||||
|
Deferred
tax asset valuation allowance |
(1,909,285 |
) |
(725,775 |
) | |||
|
Income
tax benefit |
$ |
(1,750,908 |
) |
$ |
(33,567 |
) | |
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The company’s total and net deferred
tax assets, deferred tax asset valuation allowances and deferred tax liabilities
at December
31, 2004 and
2003 are as
follows:
|
For
the year ended December
31, 2004 |
Federal |
State |
Total | |||||||
|
Current
Deferred Income Taxes | ||||||||||
Reserve
for sales returns |
$ |
34,061 |
$ |
8,014 |
$ |
42,075 |
||||
Reserve
for technical support costs |
13,362 |
3,144 |
16,506 |
|||||||
Accrued
compensation costs |
34,720 |
8,170 |
42,890 |
|||||||
Deferred
revenue |
14,807 |
3,484 |
18,291 |
|||||||
Reserve
for bad debts |
6,120 |
1,440 |
7,560 |
|||||||
|
Operating
loss carryforwards |
204,000 |
1,053 |
205,053 |
|||||||
307,070 |
25,305 |
332,375 |
||||||||
|
Less:
Valuation allowance |
27,719 |
4,465 |
32,184 |
|||||||
|
Deferred income
tax asset, net |
$ |
279,351 |
$ |
20,840 |
$ |
300,191 |
||||
|
Non-current
Deferred Income Taxes | ||||||||||
Property
and equipment, net |
$ |
2,312 |
$ |
544 |
$ |
2,856 |
||||
Reorganization
costs |
1,700 |
400 |
2,100 |
|||||||
State
deferred tax liabilities |
89,002 |
--- |
89,002 |
|||||||
|
Operating
loss carryforwards |
2,552,812 |
7,725 |
2,560,537 |
|||||||
2,645,826 |
8,669 |
2,654,495 |
||||||||
|
Less:
Valuation allowance |
1,269,587 |
865 |
1,270,452 |
|||||||
|
Deferred income
tax asset, net |
1,376,239 |
7,804 |
$ |
1,384,043 |
||||||
Software
development costs |
(238,438 |
) |
(56,103 |
) |
$ |
(294,541 |
) | |||
Website
costs |
(23,020 |
) |
(5,416 |
) |
(28,436 |
) | ||||
Software
license fees |
(851,074 |
) |
(200,253 |
) |
(1,051,327 |
) | ||||
|
State
deferred tax assets |
(9,739 |
) |
--- |
(9,739 |
) | |||||
|
Deferred income
tax liability |
(1,122,271
|
) |
(261,772 |
) |
$ |
(1,384,043 |
) | |||
|
Deferred income
tax asset, net |
$ |
253,968 |
||||||||
|
Deferred income
tax liability, net |
$ |
(253,968 |
) |
| ||||||
|
For
the year ended December
31, 2003 |
Federal |
State |
Total | |||||||
|
Current
Deferred Income Taxes | ||||||||||
Reserve
for sales returns |
$ |
19,574 |
$ |
4,606 |
$ |
24,180 |
||||
Reserve
for technical support costs |
12,580 |
2,960 |
15,540 |
|||||||
Accrued
compensation costs |
60,781 |
14,301 |
75,082 |
|||||||
Reserve
for bad debts |
6,460 |
1,520 |
7,980 |
|||||||
|
Operating
loss carryforwards |
102,000 |
24,000 |
126,000 |
|||||||
201,395 |
47,387 |
248,782 |
||||||||
|
Less:
Valuation allowance |
201,395 |
47,387 |
248,782 |
|||||||
|
Deferred income
tax asset, net |
$ |
--- |
$ |
--- |
$ |
--- |
||||
|
Non-current
Deferred Income Taxes | ||||||||||
Property
and equipment, net |
$ |
614 |
$ |
144 |
$ |
758 |
||||
Reorganization
costs |
11,900 |
2,800 |
14,700 |
|||||||
State
deferred tax liabilities |
68,086 |
--- |
68,086 |
|||||||
|
Operating
loss carryforwards |
2,417,615 |
721,673 |
3,139,288 |
|||||||
2,498,215 |
724,617 |
3,222,832 |
||||||||
|
Less:
Valuation allowance |
2,498,215 |
724,617 |
3,222,832 |
|||||||
|
Deferred income
tax asset, net |
$ |
--- |
$ |
--- |
--- |
|||||
|
Software
license fees |
$ |
(851,074 |
) |
$ |
(200,253 |
) |
(1,051,327 |
) | ||
|
Deferred income
tax liability |
$ |
(851,074 |
) |
$ |
(200,253 |
) |
(1,051,327 |
) | ||
|
Deferred income
tax liability, net |
$ |
(1,051,327 |
) | |||||||
A
valuation allowance has been recorded primarily related to tax benefits
associated with income tax operating loss carryforwards. Adjustments to the
valuation allowance will be made if there is a change in management’s assessment
of the amount of the deferred tax asset that is realizable. At December 31,
2001, in accordance with SFAS No. 109, Accounting for Income Taxes, management
established the valuation allowance equal to the total deferred tax assets due
to the uncertainty about the company’s ability to continue as a going concern.
At December
31, 2004,
management adjusted the amount of valuation allowance based on the assessment
that the company will continue as a going concern and will produce sufficient
income in the future to realize its net deferred tax asset. The valuation
allowance for deferred tax assets was decreased by $2,168,978 during the year
ended December
31, 2004 and
decreased by $725,775 during the year ended December
31, 2003.
At
December
31, 2004, the
company has available net operating loss carryforwards of approximately
$7,648,000 for federal income tax purposes that expire in 2021. The federal
carryforwards resulted from losses generated in 1996 through 2002. The company
also has net operating loss carryforwards available from various state
jurisdictions ranging from approximately $39,000 to approximately $841,000 that
expire in 2021.
NOTE
9 - STOCKHOLDERS’ EQUITY
COMMON
STOCK
In July
2003, the company issued 250,000 shares of common stock to an employee as
settlement of a 2002 signing bonus. These shares were valued at $0.04 per share,
the value on the date the settlement was accepted by the employee.
In July
2003, the company issued a total of 600,000 shares of common stock to the
external Board of Directors in lieu of cash and meeting fees for the period
April 2002 through June 2003. These shares were valued at $0.045 per
share.
In July
2003, the company issued a total of 150,000 shares of common stock to three
independent contractors as a bonus for their performance on our software
development projects. These shares were valued at $0.045 per share.
In July
2003, the company issued a total of 200,000 shares of common stock to an
independent contractor for past and future performance on preparing written
corporate materials. These shares were valued at $0.045 per share.
In April
2004, the company issued a total of 1,519,349 restricted shares of common stock
to the executive management team as payment of the 2003 accrued performance
bonus. These shares were valued at $0.022 per share.
In April
2004, the company resolved to issue 637,500 restricted shares of common stock to
the non-executive employees as additional compensation pursuant to an incentive
and retention bonus program. In July, 2004, the company removed 2,500 restricted
shares of common stock from the resolution due to voluntary separation from
service by a part-time employee. These shares were valued at $0.022 per
share.
In June
2004, the company issued 324,074 restricted shares of common stock to the
outside Board of Directors in lieu of cash and meeting fees for the period from
July 2003 through August 2004. These shares were valued at $0.081 per
share.
In July
2004, the holders of 11,400 shares of Preferred Series A and the holders of
40,000 shares of Preferred Series B elected to convert such shares into 218,000
shares of common stock and 266,667 shares of common stock, respectively. In
addition, the holders converted $4,125 unpaid accumulated Preferred Series A
dividends into 56,353 shares of common stock.
In July
2004, the company issued 295,692 non-restricted shares of common stock in
settlement of an agreement with an institutional private equity investor. These
shares were valued at $0.10 per share. A warrant dated March 26, 2001 to
purchase 510,000 shares of common stock exercisable at $0.23 per share was
cancelled in the settlement. See Note 10.
In July
2004, the company issued 21,875,000 restricted shares of common stock for
proceeds of $1,750,000 through a private placement with a New York based private
investment partnership. In connection with this issuance, the company incurred
$51,047 in legal and other direct costs. These costs have been recorded as a
reduction to additional paid-in capital. In addition, according to the terms of
the agreement, the investor received two warrants to purchase shares of common
stock. The first warrant entitles the investor to purchase up to 10,937,500
shares of common stock at a price of $0.18 per share, and the second warrant
entitles the investor to purchase up to 10,937,500 additional shares of common
stock at a price of $0.60 per share. These warrants are accounted for as rights
and were issued on November 10, 2004.
In July
2004, the company removed 48,387 previously resolved but un-issued shares of
common stock associated with an unexecuted 2001 stock subscription
agreement.
In
October 2004, the company increased the number of our authorized shares of
common stock from 50,000,000 to 120,000,000.
In
November 2004, the company issued 2,000,000 restricted shares of common stock to
holders of convertible promissory notes who exercised their options to convert.
See Note 6.
COMMON
STOCK OPTIONS
In June
2003, the company granted an employee 500,000, fully vested stock options with
an exercise price of $0.05 per share. These options expire in June 2013. In
addition, 667 unvested stock options with an exercise price of $1.00 and 6,250
unvested stock options with an exercise price of $0.11 were forfeited upon
termination and 16,250 vested stock options with an exercise price of $1.00 and
30,000 vested stock options with an exercise price of $0.11 expired after
termination. There was no effect on the financial statements resulting from
these transactions. See Note 15.
In July
2004, the company cancelled 190,200 vested stock options with an exercise price
of $1.00 per share and 525,000 vested stock options with an exercise price of
$1.03 per share. In addition, 100,000 vested stock options with an exercise
price of $0.11 were voluntarily forfeited by management and 1,333 vested stock
options with an exercise price of $1.00 and 38,750 vested stock options with an
exercise price of $0.11 expired after termination. There was no effect on the
financial statements resulting from these transactions.
COMMON
STOCK WARRANTS
In April
2004, the company issued a warrant for 150,000 shares of common stock with an
exercise price of $0.022 per share to our corporate counsel as payment for
$3,300 of accrued legal services.
In May
2004, the company issued a warrant for 600,000 shares of common stock with an
exercise price of $0.15 per share to a consultant for corporate business
planning, financing, and merger and acquisition assistance. This warrant was
valued at $63,215 using the Black-Scholes method and recorded as an
expense.
In July
2004, the company cancelled a warrant for 510,000 shares of common stock with an
exercise price of $0.23 per share with an institutional private equity investor
in connection with a settlement in which 295,692 non-restricted shares of common
stock were issued. See Note 10.
In
November 2004, the company issued two warrants to purchase shares of common
stock in connection with a private placement with a New York based private
investment partnership. The first warrant entitles the investor to purchase up
to 10,937,500 shares of common stock at a price of $0.18 per share, and the
second warrant entitles the investor to purchase up to 10,937,500 additional
shares of common stock at a price of $0.60 per share. These warrants are
accounted for as stock rights.
CONVERTIBLE
PREFERRED STOCK (SERIES A)
The
rights, preferences and privileges of the preferred shareholders are as
follows:
Dividends
Holders
of Series A Preferred Stock (the Preferred Stock) are entitled to receive common
stock dividends of $0.50 per share per annum, in preference to any payment of
cash dividends declared or paid on shares of common stock. Dividends on
Preferred Stock are fully cumulative and are payable as determined by the Board
of Directors. As of December 31, 2004, no dividends have been declared. Common
stock dividends were paid to a shareholder as a conversion
incentive.
Liquidation
Holders
of Preferred Stock are entitled to liquidation preferences over common
shareholders to the extent of $10.00 per share of Preferred Stock, plus all
declared but unpaid dividends. If funds are sufficient to make a complete
distribution to the preferred shareholders, such shareholders will share in the
distribution of the company assets on a pro rata basis in proportion to the
aggregate preferential amounts owed each shareholder. After payment has been
made to the preferred shareholders, any remaining assets and funds are to be
distributed equally among the holders of the common stock based upon the number
of shares of the common stock held by each.
Conversion
Each
share of Convertible Preferred Stock shall be convertible at the option of the
holder thereof, at any time prior to the close of business on the date fixed by
the corporation for redemption or conversion of such shares as herein provided,
into fully paid and nonassessable shares of common stock and such other
securities and property as hereinafter provided, initially at the rate of 10
shares of common stock for each full share of convertible Preferred Stock.
Redemption
At the
election of the Board of Directors, the company may redeem all or part of the
shares of the Preferred Stock (pro rata based upon the total number of shares of
the Preferred Stock held by each holder) by paying in cash a sum per share equal
to $10.00 plus accrued and unpaid dividends per annum.
Voting
Rights
The
holder of each share of Preferred Stock is not entitled to vote except as
required by law.
During
the year ended December 31, 2004, all Series A convertible Preferred
Stockholders elected to convert into shares of common stock.
CONVERTIBLE
PREFERRED STOCK (SERIES B)
The
rights, preferences and privileges of the preferred shareholders are as
follows:
Dividends
The
holders are entitled to receive cash dividends at the rate of $1.60 per annum
per share, and not more, which shall be fully cumulative, shall accrue without
interest from the date of first issuance and shall be payable quarterly in
arrears on March 15, June 15, September 15, and December 15 of each year
commencing September 15, 1999, to holders of record as they appear on the stock
books of the corporation on such record dates, not more than 60 nor less than 10
days preceding the payment dates for such dividends, as are fixed by the Board
of Directors. As of December 31, 2004, no dividends have been declared.
Liquidation
The
holders are entitled to a liquidation preference of an amount equal to the
dividends accrued and unpaid, whether or not declared, without interest, and a
sum equal to $20.00 per share, and not more, before any payment shall be made or
any assets distributed to the holders of common stock or any other class or
series of the corporation’s capital stock ranking junior as to liquidation
rights to the Convertible Preferred Stock.
Conversion
Each
share of convertible Preferred Stock shall be convertible at the option of the
holder thereof, at any time prior to the close of business on the date fixed by
the corporation for redemption of such share as herein provided, into fully paid
and nonassessable shares of common stock and such other securities and property
as hereinafter provided, initially at the rate of one (1) share of common stock
for each full share of Convertible Preferred Stock.
Redemption
Subject
to restrictions, shares of the Series shall be redeemable at the option of the
corporation at any time at the redemption price of $20.00 per share plus, in
each case, an amount equal to the dividends accrued and unpaid thereon to the
redemption date. The corporation may not redeem any shares of Preferred Stock
unless the current market value of the corporation’s common stock, as defined,
immediately prior to the redemption date is not less than $18.00 per
share.
Voting
Rights
The
holder of each share of Preferred Stock is not entitled to vote, except as
required by law and as a class. Voting as a class, the holders are entitled to
elect one director to fill one directorship.
During
the year ended December 31, 2004, all Series B convertible Preferred
Stockholders elected to convert into shares of common stock.
NOTE
10 - NONRECURRING ITEMS
APB
Opinion No. 30 requires material events or transactions that are either unusual
or infrequent, but not both, to be presented in the income statement as separate
elements of income from continuing operations.
During
the years ended December
31, 2004 and
2003, the
company wrote-off distinctly different categories of obsolete inventory with a
carried cost totaling $32,396 and $60,792, respectively. The 2004 obsolete
inventory was a direct result of the March 2004 settlement with The Zondervan
Corporation. See Notes 3 and 18. These have been recognized as operating
expenses.
During
the year ended December 31, 2003, the company recorded an adjustment to the
balance of accrued royalties in the amount of $583,628. This adjustment resulted
from an internal audit of the royalty calculations as affected by the product
sales provided by TLC during the second quarter of 2001. These reduced sales
numbers also resulted in the June 30, 2001 bad debt provision totaling
$2,391,000 from net balances owed the company by TLC. The royalty liabilities
had been accrued based on Findex sales to TLC as originally reported. This has
been recognized as an expense recovery and included in operating
expenses.
During
the year ended December 31, 2004, the company settled an agreement with an
institutional private equity investor for early termination of the agreement.
The company issued 295,692 shares of common stock valued at $0.10 per share and
paid a cash lump sum of $125,000. A total of $154,569 has been treated as
expenses incurred in a withdrawn public offering. See Note 9.
During
the year ended December 31, 2003, the company reclassified as other income -
nonrecurring items proceeds totaling $650,000, and the corresponding accrued
interest payable totaling $216,516, that were previously recorded as an
unsecured note payable. The determination to reclassify the obligation was made
on the basis of the combined facts that (i) the obligation exists, if at all,
solely pursuant to an oral loan agreement made over three years ago in the State
of North Carolina with a representative of the party to whom the obligation was
believed to have been owed, (ii) no party has ever made any demand for repayment
thereof despite the fact that no payments have ever been made on the obligation,
(iii) the party believed to be owed the obligation, upon inquiry, claims no
record of any such obligation, and (iv) the State of North Carolina Statute of
Limitations applicable to oral agreements, believed to govern the continued
enforceability of the obligation, has expired.
NOTE
11 - REBATE RESERVE ADJUSTMENT
During
the year ended December 31, 2004, the company recorded an adjustment to the
rebates reserve in the amount of $266,301. The reserve balance properly reflects
open rebate programs and the estimated balance of each that management expects
to pay. This adjustment resulted from an internal review of the amount owed and
our ability to reach the intended rebate recipients and properly reflects
historical response rates.
NOTE
12 - EXTRAORDINARY ITEM
During
the year ended December 31, 2004, we settled with various vendors and content
providers for lump-sum payments ranging from approximately 17% to approximately
60% of balances owed. The difference between the balance owed and the settlement
amount, totaling $1,002,090, has been treated as gain from extinguishment of
debt in accordance with SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, and classified as an
extraordinary item in accordance with SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Income taxes allocated and subtracted from the total gain were
$400,874, or approximately 40%.
NOTE
13 - PRIOR PERIOD ADJUSTMENT
During
the year ended December 31, 2004, the company adjusted retained earnings to
reflect the correction of an error in recording our liability for product
rebates. During the year ended December 31, 2000, the company discontinued the
use of a third-party to process rebate claims. Rebate program details were
obtained from the third party and a liability recorded for the unpaid rebate
claims. In 2004, we discovered that the unpaid rebate claims were duplicated
between reports received from the third party processor and the liability
recorded upon the company’s assumption of the rebate claim fulfillment. The
adjustment decreased accounts payable by $98,947, decreased deferred tax assets
by $39,451, increased the deferred tax asset valuation allowance by $39,451, and
decreased the accumulated deficit by $98,947.
NOTE
14 - EARNINGS PER COMMON SHARE
Earnings
per common share are computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding during
the year. Common stock equivalents are the net additional number of shares that
would be issuable upon the exercise of the outstanding common stock options (see
Note 15), assuming that the company reinvested the proceeds to purchase
additional shares at market value.
The
following table shows the amounts used in computing earnings per share and the
effect on income and the average number of shares of dilutive potential common
stock:
|
For
the Year Ended December 31 |
2004 |
2003 |
|||||
Income
(Loss) before extraordinary item |
$ |
(134,455 |
) |
$ |
1,841,499 |
||
|
Common
stock dividend on Preferred Series A |
(56,353 |
) |
--- |
||||
|
Income
(loss) before extraordinary item available to common
shareholders |
$ |
(190,808 |
) |
$ |
1,841,499 |
||
Net
Income |
$ |
2,217,669 |
$ |
1,841,499 |
|||
|
Common
stock dividend on Preferred Series A |
(56,353 |
) |
--- |
||||
|
Net
income available to common shareholders |
$ |
2,161,316 |
$ |
1,841,499 |
|||
Basic
weighted average shares outstanding |
34,520,754 |
20,411,438 |
|||||
|
Dilutive
effect of: | |||||||
Stock
options |
--- |
--- |
|||||
Convertible
notes payable |
--- |
1,800,000 |
|||||
Convertible
Preferred Series A |
--- |
114,000 |
|||||
Convertible
Preferred Series B |
--- |
40,000 |
|||||
|
Warrants |
--- |
--- |
|||||
|
Diluted
weighted average shares outstanding |
34,520,754 |
22,365,438 |
|||||
A total
of 23,712,763 and 4,075,273 dilutive potential securities for the years ended
December
31, 2004 and
2003,
respectively, have been excluded from the computation of diluted earnings per
share, as their inclusion would be anti-dilutive.
NOTE
15 - STOCK-BASED COMPENSATION
The Stock
Incentive Plan (the “Plan”) authorizes the issuance of various forms of
stock-based awards including incentive and nonqualified stock options, stock
appreciation rights attached to stock options, and restricted stock awards to
directors, officers and other key employees of the company. The Plan has been
approved by the shareholders and as such, provides certain income tax advantages
to employees as provided under Sections 421, 422, and 424 of the Internal
Revenue Code. Stock options are granted at an exercise price as determined by
the Board at the time the option is granted and shall not be less than the par
value of such shares of common stock. Stock options vest quarterly over three
years and have a term of up to ten years. The Plan authorizes an aggregate of
1,500,000 shares of common stock may be issued.
In
addition, the company issues various forms of stock-based awards including
nonqualified stock options and restricted stock awards to directors, officers,
other key employees and third-party consultants, outside of the Plan. Awards
granted outside of the Plan have been granted pursuant to equity compensation
arrangements that have not been approved by the shareholders. These awards are
granted at an exercise price as determined by the Board at the time of grant and
are not less than the par value of such shares of common stock. Stock options
granted outside of the Plan vest as determined by the Board at the time of grant
and have a term of up to ten years. Nonemployee directors, though treated as
employees for financial reporting purposes under FASB Interpretation No. 44, are
excluded from the income tax advantages afforded employees by the Internal
Revenue Code.
The
company applies APB Opinion No. 25 and related interpretations in accounting for
its stock options. Accordingly, no compensation cost has been recognized for
outstanding stock options. Had compensation cost for the company’s outstanding
stock options been determined based on the fair value at the grant date
(calculated using the Black-Scholes Option-Pricing Model) for those options
consistent with SFAS No. 123, the company’s net income and primary and diluted
earnings per share would have differed as reflected by the pro forma amounts
indicated below:
|
2004 |
2003 |
||||||
Net
income, as reported |
$ |
2,217,669 |
$ |
1,841,499 |
|||
|
Pro
Forma compensation charge under SFAS 123 |
--- |
(59,722 |
) | ||||
|
Pro
Forma net income |
$ |
2,217,669 |
$ |
1,781,777 |
|||
|
Earnings
per share: | |||||||
|
Basic
- as reported |
$ |
0.06 |
$ |
0.09 |
|||
|
Basic
- pro forma |
$ |
0.06 |
$ |
0.09 |
|||
|
Diluted
- as reported |
$ |
0.06 |
$ |
0.08 |
|||
|
Diluted
- pro forma |
$ |
0.06 |
$ |
0.08 |
|||
The fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Expected
dividend yield |
0 |
% | ||
Expected
stock price volatility |
280 |
% | ||
Risk-free
interest rate |
6.00 |
% |
Activity
under the company’s stock option plans is summarized as follows:
|
|
Outstanding
Options | ||||||
|
|
Number
of Shares |
Weighted-Average
Exercise Price | |||||
Balance
at December
31, 2002 |
2,843,450 |
$ |
0.33 |
||||
Granted |
500,000 |
$ |
0.04 |
||||
Exercised |
--- |
--- |
|||||
Expired
or forfeited |
(53,167 |
) |
$ |
0.39 |
|||
|
Canceled |
--- |
--- |
|||||
Balance
at December
31, 2003 |
3,290,283 |
$ |
0.29 |
||||
Granted |
--- |
--- |
|||||
Exercised |
--- |
--- |
|||||
Expired
or forfeited |
(140,083 |
) |
$ |
0.12 |
|||
|
Canceled |
(715,200 |
) |
$ |
1.02 |
|||
|
Balance
at December
31, 2004 |
2,435,000 |
$ |
0.09 |
||||
The
following table summarizes information about stock options outstanding at
December
31, 2004:
|
Outstanding
Options |
Exercisable
Options | |||||||||||||||
|
Range
of Exercise Prices |
Outstanding
at December
31, 2004 |
Weighted-Average
Remaining Contractual Life (Years) |
|
Weighted-Average
Exercise Price |
Exercisable
at December
31, 2004 |
Weighted-Average
Exercise Price |
||||||||||
|
$0.00
to $0.11 |
2,435,000 |
7.1 |
$ |
0.0854 |
2,435,000 |
$ |
0.0854 |
|||||||||
The
following table summarizes other equity instruments issued during 2004 to
acquire goods and services (see Note 9):
|
|
Number
of Shares |
Weighted-Average
Exercise Price | |||||
Common
stock |
2,774,115 |
$ |
0.0372 |
||||
|
Common
stock warrants |
750,000 |
$ |
0.1244 |
||||
NOTE
16 - RENTAL AND LEASE INFORMATION
OPERATING
LEASES
The
company leases office space/warehouse facilities in Omaha, Nebraska under an
operating lease with a third-party with terms extending through 2007. The
company is responsible for all taxes, insurance and utility expenses associated
with this lease. There is no lease renewal option contained in the lease.
The
company leases office space in Naperville, Illinois under an operating lease
with a third-party with terms extending through September 2005. The company is
responsible for all insurance expenses associated with this lease.
Rental
expense for the years ended December
31, 2004 and
2003 amounted
to $75,555 and
$51,039,
respectively. Rental expenses are included in capitalized software development
costs. See Note 1 - Software Development Costs.
At
December
31, 2004, the
future minimum rental payments required under these leases are as
follows:
2005 |
$ |
77,261 |
||
2006 |
65,491 |
|||
|
2007 |
27,288 |
|||
|
Total
future minimum rental payments |
$ |
170,040 |
CAPITAL
LEASES
The
company leases telephone equipment under a capital lease expiring in November
2009. The asset and liability under the capital lease are recorded at the
present value of the minimum lease payments. The asset is depreciated over a 5
year life. Depreciation of the asset under the capital lease is included in
depreciation expense for 2004.
The
following table summarizes property held under capital leases at December
31, 2004:
Office
equipment |
$ |
51,788 |
||
|
Less:
Accumulated depreciation |
1,726 |
|||
|
Net
property and equipment under capital lease |
$ |
50,062 |
Minimum
future lease payments under capital leases as of December
31, 2004 for each
of the next five years and in the aggregate are:
2005 |
$ |
14,870 |
||
2006 |
13,726 |
|||
2007 |
13,726 |
|||
2008 |
13,726 |
|||
|
2009 |
12,582 |
|||
Total
minimum lease payments |
68,630 |
|||
|
Less:
Amount representing interest |
16,842 |
|||
Total
obligations under capital lease |
51,788 |
|||
|
Less:
Current installments of obligations under capital lease |
8,816 |
|||
|
Long-term
obligation under capital lease |
$ |
42,972 |
NOTE
17 - SUPPLEMENTAL CASH FLOW INFORMATION
The
company incurred the following non-cash investing and financing activities
during the years ended December
31, 2004 and
2003,
respectively:
|
2004 |
2003 |
||||||
Conversion
of notes payable into common stock. See Note 6. |
$ |
263,334 |
$ |
--- |
|||
Common
stock dividend on Preferred Series A |
$ |
56,353 |
$ |
--- |
|||
Preferred
stock converted into common stock |
$ |
470 |
$ |
--- |
|||
|
Common
stock and warrants issued for services |
$ |
178,929 |
$ |
52,750 |
|||
NOTE
18 - COMMITMENTS AND CONTINGENCIES
The
company is subject to legal proceedings and claims that arise in the ordinary
course of its business. In the opinion of management, the amount of ultimate
liability with respect to these actions will not materially affect the financial
position of the company.
In March
2004, the company finalized the settlement with The Zondervan Corporation and
TLC. The Settlement Agreement was effective October 20, 2003 and called for
Findex to pay Zondervan a total of $500,000, plus 5% simple interest, in
installments of $150,000, plus interest, due November 15, 2003 and January 30,
2004, and installments of $100,000, plus interest, due April 30, 2004 and July
30, 2004, all of which have been paid. This agreement was secured by all rights,
title and interest in QuickVerse® together with all proceeds produced by
QuickVerse®. In addition, according to the settlement agreement, the term of the
software license agreement with Parsons Technology, Inc., a subsidiary of TLC,
has been extended indefinitely and provides the company with the exclusive
worldwide right to market, sell, and continue to develop those titles it covers.
The
company was in arrears with the Internal Revenue Service for back payroll taxes
and had been paying the payroll taxes in monthly installments previously
approved by the Internal Revenue Service. In July of 2004, the company paid all
back payroll taxes that were due to the Internal Revenue Service and remain
current with all payroll tax deposits and filings.
NOTE
19 - RISKS AND UNCERTAINTIES
The
company’s future operating results may be affected by a number of factors. The
company is dependent upon a number of major inventory and intellectual property
suppliers. If a critical supplier had operational problems or ceased making
material available to the company, operations could be adversely affected.
NOTE
20 - SUBSEQUENT EVENTS
Subsequent
to December 31, 2004, the company restored a stale check (outstanding more than
six months) to unrestricted cash. The stale check was issued to a corporation as
payment in full of a note payable. Communication with the payee resulted in
conversion of the note into 466,666 shares of common stock. The transaction has
been reflected in unrestricted cash, common stock and paid-in capital at
December 31, 2004. The company has stopped payment on the check.
Not
Applicable.
(a) Evaluation of
Disclosure Controls and Procedures.
Based on
their most recent evaluation of our disclosure controls and procedures, which
was completed within 90 days of the filing of this Form 10-KSB, the company’s
Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c)
and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended)
are effective.
(b) Changes In
Internal Controls
Formation of
Disclosure Controls and Procedures Officer Committee
The
Disclosure Controls and Procedures Officer Committee (the “Disclosure Policy
Committee”) was formed in September of 2002 and charged with the responsibility
for considering the materiality of information and determining disclosure
obligations on a timely basis. The Disclosure Policy Committee has implemented
disclosure controls and procedures that meet the standards established by the
new rules. These controls and procedures have been reviewed and
adopted by the Audit Committee of our Board of Directors.
Control and
Procedures
The
Disclosure Policy Committee meets within one week of the last day of each
quarter. Members are to provide information that is documented within the
Quarterly Control and Procedures Report. This report contains attestations and,
where applicable, documentation, in regard to the following:
| · |
The
Fact that Internal Controls Have Been Reviewed Within the Past 90
Days |
| · |
Any
Concerns Regarding Weaknesses in Internal
Control |
| · |
Any
Concerns Relating To Events that May Require
Disclosure |
| · |
Any
Concerns Relating To Internal
Fraud/Defalcation |
| · |
Potential
Material Losses |
| · |
New
Off-Balance Sheet Arrangements |
| · |
Material
Amounts Not Reflected on the General Ledger |
The
Quarterly Control and Procedures Report is completed, signed and presented to
the CEO and CFO prior to completing the first draft of each quarterly 10-QSB and
the annual 10-KSB. Because material issues may occur between regularly scheduled
quarterly meetings, this report is to be generated by the Disclosure Policy
appropriate Officers at anytime when warranted. The CEO and CFO will consult
with our Disclosure Policy Committee to determine any action that is
necessary.
Other
than as set forth above, there were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and/or material weaknesses.
None.
Our
directors and executive officers and their ages as of April 2005 are as follows:
|
Name |
Age |
Position | ||
|
Steven
Malone |
38 |
Director,
Chairman of the Board and President | ||
|
Henry
M. Washington, Ph.D. |
61 |
Director | ||
|
John
A. Kuehne, CA |
47 |
Director | ||
|
Kirk
R. Rowland, CPA |
45 |
Director
and Chief Financial Officer | ||
|
William
Terrill |
48 |
Chief
Technology Officer | ||
|
Brittian
Edwards |
42 |
Vice
President, CBA Sales and Licensing | ||
|
Chad
Grosse-Rhode |
35 |
Vice
President, Sales and Marketing |
Steven
Malone - Chairman of the Board of Directors, President and Chief Executive
Officer
Mr.
Malone has served as President and Chief Executive Officer since March 2001 and
director and Chairman of the Board since February 2002. Between July 2000 and
March 2001, Mr. Malone was Senior Vice President and between June 1999 and July
2000 he was a Vice President. Mr. Malone possesses over seventeen years of
experience in the computer industry, with the last eleven focused on software
sales. As a National Account Manager for Grolier Interactive, he was responsible
for their largest retail and distribution accounts. As Director of Corporate
Sales for Software Publishing Corporation (SPC), he was responsible for the
on-going sales growth of premiere corporate products, such as the award winning
Harvard Graphics, as well as the introduction of several new products to the
corporate marketplace. As Director of Sales for InfoUSA, he was responsible for
sales and marketing of InfoUSA’s products to retail, distribution, OEM and
corporate accounts.
Henry
M. Washington, Ph.D. - Director
Dr.
Washington has served as director since December 2000. He is presently President
of Wren Enterprises Corporation. Wren Enterprises is a manufacturing solutions
company working with automotive, non-automotive, Agricultural markets, utilities
and government agencies providing plastic, metal and fabrication. Prior to
his current position, Dr. Washington was the interim President for Jamestown
Plastic Molders Corporation. Dr. Washington has also served as Managing Director
of Rilas & Rogers, LLC, an international consulting firm located in Detroit.
He has held short-term assignments with the U.S. Department of Commerce, where
he was Executive Director of the Department’s Minority Business Opportunity
Committee (MBOC). He currently serves on several national organizations
including the American Association of Christian Counselors, The Black Caucus
International Think Tank, and the International Trade and Development
Organization dealing with global security issues. Dr. Washington holds a
Bachelor of Management and Metaphysics degree, a Masters of Metaphysics and
Theology from the University of Metaphysics, and a Doctorate degree in
Metaphysical Counseling from the University of Metaphysics.
John
A. Kuehne, CA - Director
Mr.
Kuehne has served as director since December 2000. He is presently a management
consultant and President of SmallCap Corporate Partners Inc., www.smallcap.ca, where
his focus is on corporate finance and investor communications. Mr. Kuehne is
experienced in finance and accounting, including nine years with Deloitte &
Touche, in Edmonton and Chicago. He also has industry experience, including over
seven years with Doman Industries Limited, a large Canadian forest products
company, culminating as Chief Financial Officer. As the CFO of Doman Industries,
Mr. Kuehne gained practical experience in corporate finance and mergers and
acquisitions, completing a US $125 million senior note issue through Bear
Stearns and the $140 million acquisition of Pacific Forest Products. Mr. Kuehne
holds a Bachelor of Commerce degree from the University of Alberta and a Masters
of Management from the highly rated J.L.Kellogg Graduate School of Management at
Northwestern University. Mr. Kuehne qualified as a Canadian Chartered Accountant
in 1983 and as an American Certified Public Accountant in 1985.
Kirk
R. Rowland, CPA - Chief Financial Officer
Mr.
Rowland has served as Chief Financial Officer and director since April 2002. He
served as Vice President of Finance from March 2001 to April 2002, and as
Director of Finance from December 1999 through March 2001. Mr. Rowland has over
seventeen years of experience in public accounting working in a multitude of
industries, including insurance, manufacturing, and agriculture. Most recently,
he was a partner in a local Nebraska accounting firm. Mr. Rowland was formerly
with KMG Main Hurdman (now KPMG Peat Marwick), an international accounting firm.
William
Terrill - Chief Technology Officer
Mr.
Terrill rejoined Findex.com in July 2002 as Chief Technology Officer after
having been involved with the company when it was owned and operated by another
entity. He has over 25 years experience managing software divisions and
technology efforts for Findex.com, TLC, Mindscape, and The Software Toolworks.
As Vice President of the Church Division for The Learning Company, Mr. Terrill
managed a 30% annual revenue increase and shared responsibilities spinning off
the division to Findex.com. Mr. Terrill was the Senior Vice President Reference
Products Division for Mindscape from 1989 to 1995 managing revenues exceeding
$14 million. He has extensive experience managing international software
development teams in China, Singapore, United Kingdom, India, and Russia. Mr.
Terrill has experience with joint ventures, spin-offs, mergers, IPOs, and
corporate acquisitions. In addition, Mr. Terrill has lead software product
marketing teams and content/media acquisition efforts for over ten years. As a
consultant, Mr. Terrill has extensive experience leading large-scale product
development and information technology efforts for Ford Motor Company, Navistar,
Nalco Chemical, American Express, Motorola, and IBM Global Services.
Brittian
Edwards - Vice President of CBA Sales and Licensing
Mr.
Edwards has served as Vice President of CBA Sales and Licensing since July 2004.
Mr. Edwards served as Vice President of Sales from April 2002 to July 2004 and
director of CBA Sales from July 1999 to April 2002. Mr. Edwards has been in the
CBA marketplace for more than 17 years. He got his start in 1988 with LifeWay
Christian Resources as LifeWay Christian Stores retail manager. He then worked
successfully for Genesis Marketing Group as a Sales Manager for Texas, Oklahoma,
Louisiana and New Mexico. From there he served as a Product Manager, for the
largest Christian Distributor Spring Arbor, which is now owned by Ingram Book
Group. He left Spring Arbor as National Sales Manager to become the National
Sales Manager for Parsons Technology, then owned by Broderbund.
Chad
Grosse-Rhode - Vice President of Sales and Marketing
Mr.
Grosse-Rhode joined Findex.com in August 2004 as Vice President of Sales and
Marketing. Mr. Grosse-Rhode was most recently with Summitsoft Corporation,
www.summisoftcorp.com, where he served as the Vice President of Sales and
Marketing. Summitsoft produces a full line of small business software products,
which are available in both PC and Macintosh®
platforms and are sold in most major secular retail outlets. Prior to
Summitsoft, Mr. Grosse-Rhode was General Manager of NewLeadsUSA which is a
subsidiary of InfoUSA. In this role, Mr. Grosse-Rhode managed the compilation,
production, marketing and sales of multiple direct marketing databases. Mr.
Grosse-Rhode has over 10 years of senior management experience in both sales and
marketing.
Board
of Directors Committees
There are
currently two standing committees comprised of members of our board of
directors. These include the Audit Committee and the Compensation
Committee.
Since
December 2000, Findex has had an Audit Committee. The current members of our
Audit Committee include John A. Kuehne and Dr. Henry M. Washington. We currently
have one member, John A. Kuehne, who is a “financial
expert” (as defined in Regulation 228.401(e)(1)(i)(A) of Regulation S-B)
serving on our Audit Committee. Mr. Kuehne and Dr. Washington both qualify as
“independent”
directors under Item 7(d)(3)(iv) of Schedule 14A of the Securities
Exchange Act of 1934.
Since
July 2003, there have been two members on our board of directors standing
Compensation Committee. The current members of our Compensation Committee
include Dr. Henry M. Washington and John A. Kuehne.
Disclosure
Policy Committee
Since
September 2002, Findex has had a Disclosure Policy Committee. The current
members of the Disclosure Policy Committee include Steven Malone, John A.
Kuehne, and Kirk R. Rowland. The Disclosure Policy Committee has implemented
disclosure controls and procedures that meet the standards established by the
new rules.
Code
of Ethics
The
company has adopted the Code of Ethics attached as Exhibit 14.1 to this Form
10-KSB for its senior financial officers and the principal executive
officer.
Compliance
with Section 16(a)
Section
16(a) of the Exchange Act requires the company’s
directors and executive officers, and persons who own more than ten percent of a
registered class of the company’s
equity securities, to file with the SEC initial reports of ownership and reports
of changes in ownership of the company’s
Common Stock and other equity securities of the company. Officers, directors and
greater than ten percent stockholders are required by the SEC’s
regulations to furnish the company with copies of all Section 16(a) forms they
filed.
The
following table sets for the compliance reporting under Section 16(a) during the
last fiscal year.
|
Number
of Late
Reports |
Number
of
Transactions
Not
Timely
Reported |
Failure
to
File | |||
|
Henry
M. Washington |
1 |
1 |
--- | ||
|
William
Terrill |
1 |
1 |
--- | ||
| Barron Partners, LP |
--- |
--- |
2 |
SUMMARY
COMPENSATION TABLE
The
following table sets forth the total compensation paid to each of the executive
officers of the company who earned compensation of $100,000 or more during any
such year. Steven Malone has served as the company’s
President and Chief Executive Officer since March 2001. William Terrill has
served as the company’s
Chief Technology Officer since July 2002. Kirk R. Rowland has served as the
company’s
Chief Financial Officer and director since April 2002. No other individuals
employed by the company earned a salary and bonus in excess of $100,000 during
2004.
|
Long
Term Compensation | ||||||||||
|
Annual
Compensation |
Awards |
|||||||||
|
|
Restricted |
Securities | ||||||||
|
|
Stock |
Underlying | ||||||||
|
Name
and Principal Position |
Year |
Salary |
Bonus |
Awards |
Options/SARs
(#) | |||||
|
Steven
Malone, |
2004 |
$150,000 |
$22,192 |
-0- |
-0- | |||||
|
President
and Chief Executive |
2003 |
$150,000 |
$18,079 |
-0- |
-0- | |||||
|
Officer
|
2002 |
$150,000 |
$2,203 |
$37,306 |
-0- | |||||
|
William
Terrill |
2004 |
$150,000 |
$22,192 |
-0- |
-0- | |||||
|
Chief
Technology Officer |
2003 |
$150,000 |
$18,079 |
$14,536 |
500,000 | |||||
|
2002 |
$72,115 |
$2,203 |
-0- |
500,000 | ||||||
|
Kirk
R. Rowland |
2004 |
$108,846 |
$22,192 |
-0- |
-0- | |||||
|
Chief
Financial Officer |
2003 |
$82,306 |
$18,079 |
-0- |
-0- | |||||
|
2002 |
$80,000 |
-0- |
$31,807 |
-0- | ||||||
INFORMATION
CONCERNING STOCK OPTIONS
Our Stock
Incentive Plan, adopted in 1999, authorizes the issuance of various forms of
stock-based awards including incentive and nonqualified stock options, stock
appreciation rights attached to stock options, and restricted stock awards to
directors, officers and other key employees of our company. In accordance with
the terms of the Stock Incentive Plan, stock options are granted at an exercise
price as determined by our Board of Directors at the time any such option is
granted but which shall not be less than the par value of our common shares
($0.001).
The
company did not grant stock options during the fiscal year ended December 31,
2004. No executive exercised any stock options during the fiscal year 2004.
Option/SAR
Grants in Last Fiscal Year
|
Name |
Number
of Securities
Underlying
Options/SARs
Granted
(#) |
Percent
of Total
Options/SARs
Granted to
Employees
in Fiscal Year |
Exercise
or
Base
Price
($/Sh) |
Expiration
Date | ||||
|
Steven
Malone |
-0- |
-0- |
-0- |
N/A | ||||
|
William
Terrill |
-0- |
-0- |
-0- |
N/A | ||||
|
Kirk
R. Rowland |
-0- |
-0- |
-0- |
N/A |
The
following table sets forth the number of stock options/SARs held by the
executive officers named in the Summary Compensation Table as of December 31,
2004 and the value of unexercised “in-the-money” options/SARs held which
represents the positive difference between the exercise price and the market
price at fiscal year end. No such executive exercised any options/SARs during
the fiscal year 2004.
Aggregated
Option/SAR Exercises in Last Fiscal Year and FY-End
Option/SAR
Values
|
Name |
Shares
Acquired
on
Exercise
(#) |
Value
Realized
($) |
Number
of Unexercised
Options/SARs
at
Fiscal
Year End (#) |
Value
of Unexercised
“In-the-Money”
Options/
SARs
at Fiscal Year End ($) | ||||
|
Steven
Malone |
-0- |
-0- |
250,000 |
-0- | ||||
|
William
Terrill |
-0- |
-0- |
1,000,000 |
$15,000 | ||||
|
Kirk
R. Rowland |
-0- |
-0- |
150,000 |
-0- |
DIRECTOR
COMPENSATION
Pursuant
to authority granted under our Article III, Section 13 of our bylaws,
non-officer directors are entitled to such compensation as our board of
directors shall from time to time determine. On July 25, 2003, we resolved to
issue each of our outside directors 300,000 shares of common stock valued at
$0.045 per share in lieu of cash and meeting fees, for the period April 1, 2002
through June 30, 2003. On June 4, 2004, we resolved to issue our outside
directors a total of 324,074 shares of common stock valued at $0.081 per share
in lieu of cash and meeting fees, for the period July 1, 2003 through August 31,
2004. These shares were issued on September 9, 2004. We have
accrued $7,500 for our outside directors’ fees, for the period September 1, 2004
through December 31, 2004.
EMPLOYMENT
AGREEMENTS
Mr.
Malone is employed pursuant to a three-year employment agreement, which
commenced on July 25, 2003. The agreement provides for a base annual salary
equal to $150,000 and an annual bonus equal to 1% of our net income. In the
event Mr. Malone is terminated by the company, other than for cause, the company
is required to pay him his then base salary until the later of (i) the
expiration of the employment agreement or (ii) one year. Mr. Malone has agreed
to refrain from competing with us for a period of one year following the
termination of his employment.
Mr.
Terrill is employed pursuant to a three-year employment agreement, which
commenced on June 7, 2002. The agreement provides for a base annual salary equal
to $150,000, an annual bonus equal to 1% of our net income, 500,000 stock
options upon his start date at an exercise price of $0.05 per share, and an
additional 500,000 stock options upon the one year anniversary of his start date
based on performance criteria outlined in a separate agreement. The agreement
also included a signing cash bonus of $10,000, which was converted on July 25,
2003 into 250,000 shares of common stock at the market price of $0.04 per share,
the value on the date the settlement was accepted. In the event Mr. Terrill is
terminated by the company, other than for cause, the company is required to pay
him his then base salary until the later of (i) the expiration of the employment
agreement or (ii) one year. Mr. Terrill has agreed to refrain from competing
with us for a period of one year following the termination of his
employment.
Mr.
Rowland is employed pursuant to a two-year employment agreement, which commenced
on July 25, 2003. The agreement provides for a base annual salary equal to
$110,000 and an annual bonus equal to 1% of our net income. In the event Mr.
Rowland is terminated by the company, other than for cause, the company is
required to pay him his then base salary until the later of (i) the expiration
of the employment agreement or (ii) one year. Mr. Rowland has agreed to refrain
from competing with us for a period of one year following the termination of his
employment.
The
tables below set forth information regarding the beneficial ownership of our
common stock as of April 15, 2005. The information in these tables provides the
ownership information for:
| · |
each
person known by us to be the beneficial owner of more than 5% of our
Common Stock; |
| · |
each
of our directors and executive officers;
and |
| · |
all
of our directors and executive officers as a
group. |
Beneficial
ownership has been determined in accordance with the rules and regulations of
the SEC and includes voting or investment power with respect to our common stock
and those rights to acquire additional shares within sixty days. Unless
otherwise indicated, the persons named in the table below have sole voting and
investment power with respect to the number of shares of common stock indicated
as beneficially owned by them, except to the extent such power may be shared
with a spouse. Common stock beneficially owned and percentage ownership are
based on 71,769,855 shares of common stock currently outstanding (reflects a
1-for-50 reverse stock-split of our common stock that occurred in 1997 and a
1-for-20 reverse stock-split of our common stock that occurred on March 18,
1998) and 23,150,000 additional shares potentially acquired within sixty days.
The address of each person listed is in care of Findex.com, Inc., 11204
Davenport Street, Suite 100, Omaha, Nebraska 68154.
|
Name
of Beneficial Owner |
Amount
and Nature of Beneficial Owner |
Percent
of Class | ||
|
Barron
Partners, LP (1) |
43,750,000 |
61.0% |
| (1) |
Consists
of warrants to acquire up to 21,875,000 shares of common stock and
21,875,000 shares of common stock directly
owned. |
|
Name
of Beneficial Owner |
Amount
and Nature of Beneficial Owner |
Percent
of Class | ||
|
Steven
Malone (1) |
2,143,111 |
3.0% | ||
|
Henry
M. Washington (2) |
1,583,025 |
2.2% | ||
|
John
A. Kuehne (3) |
1,691,849 |
2.4% | ||
|
Kirk
R. Rowland (4) |
1,819,111 |
2.5% | ||
|
William
Terrill (5) |
1,751,127 |
2.4% | ||
|
All
officers and directors
as
a group (5 persons) |
8,988,223 |
12.5% |
| (1) |
Consists
of stock options to acquire up to 250,000 shares of common stock, all of
which are presently exercisable, 1,719,111 shares of common stock directly
owned, and stock options to acquire up to 50,000 shares of common stock
all of which are presently exercisable and 124,000 shares of common stock
indirectly owned through spouse. |
| (2) |
Consists
of stock options to acquire up to 175,000 shares of common stock, all of
which are presently exercisable and 1,408,025 shares of common stock
directly owned. |
| (3) |
Consists
of stock options to acquire up to 175,000 shares of common stock, all of
which are presently exercisable and 1,516,849 shares of common stock
directly owned. |
| (4) |
Consists
of stock options to acquire up to 150,000 shares of common stock, all of
which are presently exercisable and 1,669,111 shares of common stock
directly owned. |
| (5) |
Consists
of stock options to acquire up to 1,000,000 shares of common stock, all of
which are presently exercisable and 751,127 shares of common stock
directly owned. |
There are
no related party transactions to be reported.
|
No. |
Description
of Exhibit |
|
2.1 |
Share
Exchange Agreement between Findex.com, Inc. and the stockholders of Reagan
Holdings, Inc. dated March 07, 2000, incorporated by reference to Exhibit
2.1 on Form 8-K filed March 15, 2000. |
|
3.1(i) |
Articles
of Incorporation of Findex.com, Inc., incorporated by reference to Exhibit
3.1 on Form 8-K filed March 15, 2000. |
|
3.1(ii) |
Amendment
to Articles of Incorporation of Findex.com, Inc. dated November 12, 2004
incorporated by reference to Exhibit 3.1(ii) on Form 10-QSB filed November
12, 2004. |
|
3.2 |
By-Laws
of Findex.com, Inc., incorporated by reference to Exhibit 3.3 on Form 8-K
filed March 15, 2000. |
|
10.1 |
Stock
Incentive Plan of Findex.com, Inc. dated May 07, 1999, incorporated by
reference to Exhibit 10.1 on Form 10-KSB/A filed May 13,
2004. |
|
10.2 |
Share
Exchange Agreement between Findex.com, Inc. and the stockholders of Reagan
Holdings Inc., dated March 07, 2000, incorporated by reference to Exhibit
2.1 on Form 8-K filed March 15, 2000. |
|
10.3 |
License
Agreement between Findex.com, Inc. and Parsons Technology, Inc. dated June
30, 1999, incorporated by reference to Exhibit 10.3 on Form 10-KSB/A filed
May 13, 2004. |
|
10.4 |
Employment
Agreement between Findex.com, Inc. and Steven Malone dated July 25, 2003,
incorporated by reference to Exhibit 10.4 on Form 10-KSB/A filed May 13,
2004. |
|
10.5 |
Employment
Agreement between Findex.com, Inc. and Kirk Rowland dated July 25, 2003,
incorporated by reference to Exhibit 10.5 on Form 10-KSB/A filed May 13,
2004. |
|
10.6 |
Employment
Agreement between Findex.com, Inc. and William Terrill dated June 7, 2002,
incorporated by reference to Exhibit 10.6 on Form 10-KSB/A filed May 13,
2004. |
|
10.7 |
Restricted
Stock Compensation Agreement between Findex.com, Inc. and John A. Kuehne
dated July 25, 2003, incorporated by reference to Exhibit 10.7 on Form
10-KSB/A filed May 13, 2004. |
|
10.8 |
Restricted
Stock Compensation Agreement between Findex.com, Inc. and Henry M.
Washington dated July 25, 2003, incorporated by reference to Exhibit 10.8
on Form 10-KSB/A filed May 13, 2004. |
|
10.9 |
Restricted
Stock Compensation Agreement between Findex.com, Inc. and William Terrill
dated July 25, 2003, incorporated by reference to Exhibit 10.9 on Form
10-KSB/A filed May 13, 2004. |
|
10.10 |
Stock
Purchase Agreement, including the form of warrant agreement, between
Findex.com, Inc. and Barron Partners, LP dated July 19, 2004, incorporated
by reference to Exhibit 10.1 on Form 8-K filed July 28,
2004. |
|
10.11 |
Amendment
No. 1 To Barron Partners, LP Stock Purchase Agreement dated September 30,
2004, incorporated by reference to Exhibit 10.3 on Form 8-K filed October
6, 2004. |
|
14.1 |
Code
of Ethics, adopted by Board of Directors April 15, 2005. FILED
HEREWITH. |
|
21.1 |
Share
Exchange Agreement between Findex.com, Inc. and the stockholders of Reagan
Holdings Inc., dated March 07, 2000, incorporated by reference to Exhibit
2.1 on Form 8-K filed March 15, 2000. |
|
31.1 |
Certification
of Findex.com, Inc. Chief Executive Officer, Steven Malone, required by
Rule 13a-14(a) or Rule 15d-14(a), and dated April 15, 2005. FILED
HEREWITH. |
|
31.2 |
Certification
of Findex.com, Inc. Chief Financial Officer, Kirk Rowland, required by
Rule 13a-14(a) or Rule 15d-14(a), and dated April 15, 2005. FILED
HEREWITH. |
|
32.1 |
Certification
of Findex.com, Inc. Chief Executive Officer, Steven Malone, required by
Rule 13a-14(a) or Rule 15d-14(a) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350), and dated April 15, 2005.
FILED HEREWITH. |
|
32.2 |
Certification
of Findex.com, Inc. Chief Financial Officer, Kirk Rowland, required by
Rule 13a-14(a) or Rule 15d-14(a) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350), and dated April 15, 2005.
FILED HEREWITH. |
Summarized
below is the aggregate amount of various professional fees billed by our
principal accountants with respect to our last two fiscal years:
|
2004
|
2003
| |||
|
Audit
fees |
$14,390 |
$14,237 | ||
|
Audit-related
fees |
$--- |
$--- | ||
|
Tax
fees |
$--- |
$--- | ||
|
All
other fees |
$--- |
$--- | ||
|
All
other fees, including tax consultation and preparation |
$--- |
$--- |
All audit
fees are approved by our audit committee and board of directors. Chisholm,
Bierwolf & Nilson, LLC does not
provide any non-audit services to the company.
Signatures
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
FINDEX.COM,
INC. |
|||
|
By:
/s/ Steven Malone |
|||
|
Steven
Malone |
|||
|
President
and Chief Executive Officer |
Date:
April 15, 2005
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
|
Signature |
Title
|
Date | ||
|
/s/
Steven Malone |
Chairman
of the Board, President and Chief |
April
15, 2005 | ||
|
Steven
Malone |
Executive
Officer (principal executive officer) |
|||
|
/s/
John A. Kuehne |
Director |
April
15, 2005 | ||
|
John
A. Kuehne |
||||
|
/s/
Henry M. Washington |
Director |
April
15, 2005 | ||
|
Henry
M. Washington |
||||
|
/s/
Kirk R. Rowland |
Director
and Chief Financial Officer |
April
15, 2005 | ||
|
Kirk
R. Rowland |
(principal
financial and accounting officer) |