U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Amendment No. 2
Annual Report Under
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended
June 30, 2006
Commission file number
000-03718
PARK CITY GROUP, INC.
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(Exact name of registrant as specified in its charter)
Nevada 37-1454128
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
3160 Pinebrook Road, Park City, Utah 84098
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(Address of principal executive offices)
(435) 645-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock ($0.01
par value per share
Title of each Class Name of each exchange on which registered
---------------------------- -----------------------------------------
Common Stock, $.01 Par Value Over-the-Counter Bulletin Board
Outstanding as of September 28, 2006
8,930,766 Shares (662 shareholders)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. (1) [X] Yes [ ] No; (2) [X] Yes [ ] No.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form , and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The issuer's revenues for the year ended June 30, 2006 were $7,085,125.
The aggregate market value of the stock held by non-affiliates of the registrant
is approximately $11,483,000, calculated using a price of $2.60 per share on
September 27, 2006.
TABLE OF CONTENTS TO ANNUAL REPORT
ON FORM 10-KSB
YEAR ENDED JUNE 30, 2006
PART I
Item 1 Description of Business 3
Item 2 Description of Properties 6
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 7
Item 6 Management's Discussion and Analysis or Plan of Operation 9
Item 7 Financial Statements 18
Item 8 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 18
Item 8A Controls and Procedures 18
Item 8B Other Information 18
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons 19
Item 10 Executive Compensation 21
Item 11 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 24
Item 12 Certain Relationships and Related Transactions 25
Item 13 Exhibits 26
Item 14 Principal Accountant Fees and Services 27
Signatures 28
Report of Independent Registered Public Accounting Firm 29
Consolidated Balance Sheets as of June 30, 2006 and
June 30, 2005 30
Consolidated Statements of Operations 31
Consolidated Statements of Stockholders' Equity (Deficit) 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statement June 30, 2006
and June 30, 2005 34
Exhibit 31 Certifications of the Principal Executive Officer and
Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32 Certifications pursuant to 18 U.S.C. Sec. 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
2
Forward-Looking Statements
--------------------------
This annual report on Form 10-KSB contains forward looking statements. The words
or phrases "would be," "will allow," "intends to," "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements."
Actual results could differ materially from those projected in the forward
looking statements as a result of a number of risks and uncertainties, including
the risk factors set forth below and elsewhere in this report. See "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Statements made herein are as of the date of the filing
of this Form 10-KSB with the Securities and Exchange Commission and should not
be relied upon as of any subsequent date. Unless otherwise required by
applicable law, we do not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences, developments,
unanticipated events or circumstances after the date of such statement.
PART I
Item 1. Description of Business
-------------------------------
General
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Park City Group develops and markets patented computer software and profit
optimization consulting services that are intended to help its retail customers
to reduce their inventory and labor costs; the two largest controllable expenses
in the retail industry. The technology has its genesis in the operations of
Mrs. Fields Cookies co-founded by Randall K. Fields, CEO of Park City Group,
Inc. Industry leading customers such as The Home Depot, Anheuser Busch
Entertainment, Perdue, Monterey Mushrooms, Pacific Sunwear, Wawa and Tesco Lotus
benefit from the Company's software. Because the product concepts originated in
the environment of actual multi-unit retail chain ownership, the products are
strongly oriented to an operations' bottom line results.
The Company was incorporated in the State of Delaware on December 8, 1964 as
Infotec, Inc. From June 20, 1999 to approximately June 12, 2001, it was known as
Amerinet Group.com, Inc. In 2001, the name was changed from Amerinet Group.com
to Fields Technologies, Inc. On June 13, 2001, the Company entered into a
"Reorganization Agreement" with Randall K. Fields and Riverview Financial
Corporation whereby it acquired substantially all of the outstanding stock of
Park City Group, Inc., a Delaware corporation, which became a 98.67% owned
subsidiary. Operations are conducted through this subsidiary which was
incorporated in the State of Delaware in May 1990. The Company develops and
licenses its software applications identified as "Fresh Market Manager", "Supply
Chain Profit Link", and "ActionManager(TM)". The Company also provides
implementation and profit optimization consulting services for its application
products.
On August 7, 2002, Fields Technologies, Inc., (OTCBB:FLDT) changed its name from
Fields Technologies, Inc., to Park City Group, Inc., and reincorporated in
Nevada. Therefore, both the parent-holding company (Nevada) and its operating
subsidiary (Delaware) are named Park City Group, Inc. Park City Group, Inc.
(Nevada) has no other business operations other than in connection with its
subsidiary. In this Registration Statement when the terms "we", "Company" or
"Park City Group" are used, it is referring to the Park City Group, Inc., a
Delaware corporation, as well as to Fields Technologies, Inc., the Delaware
corporation, which was reincorporated in Nevada under the name of the Park City
Group, Inc. The stock trades under the symbol PKCY.
On the 11th day of August 2006, the company effected a 1 for 50 reverse stock
split. All trading price information set forth gives effect to such reverse
stock split.
The principal executive offices are located at 3160 Pinebrook Road, Park City,
Utah 84098. The telephone number is (435) 645-2000. The website address is
http://www.parkcitygroup.com.
Supermarket
-----------
The Supermarket industry is under increased competitive pressure from Value
Retailers such as Wal-Mart, Costco, Target, and others. One of the strategies
that traditional supermarkets are implementing is to increase the quantity and
quality of their perishable offerings. Perishable departments, such as bakery,
meat and seafood, dairy, and deli have historically been loosely managed but now
have been forced to become a focus for profitability improvement. The Company's
software and consulting are designed to address this specific business problem;
increasing the profitability of perishable products.
Convenience Store
-----------------
For Convenience Stores, recent trends of contracting gasoline margins and
declining tobacco sales increases the need for improved cost controls and better
decision support. To magnify their issues, other industry segments such as value
retailers and grocery stores are now cutting into the convenience store
stronghold by offering gasoline. To offset declining gasoline profits, the
C-Store industry is pushing into Fresh Food as an avenue of increased sales and
profitability. Only the most progressive convenience store operations have
automated systems to help store managers, leaving the majority of the operators
without any technology to ease their administrative and operations burdens.
3
Supplier
--------
As stated above, Supermarkets and Convenience Stores are increasingly dependent
upon perishable departments for increased profitability. Suppliers are
increasingly being pressured by retailers to provide economic incentives or
assistance. Park City Group has developed Supply Chain Profit link to enable
suppliers to provide that assistance.
Specialty Retail
----------------
Specialty Retailers are faced with a shrinking labor force and strong
competition for qualified managers and staff. Managers are time-constrained due
to increased labor and inventory demands, margins are increasingly tight, due to
higher labor and lease expenses, and customer satisfaction demands are higher
than ever before. Park City Group has developed a range of applications that
enable managers in specialty retail to improve their labor scheduling efficiency
and reduce their total paperwork and administrative workload.
Fresh Market Manager
--------------------
Addressing the inventory issues that plague today's retailers, Fresh Market
Manager is a suite of software product applications designed to help manage
perishable food departments including bakery, deli, seafood, produce, meat, home
meal replacement, dairy, frozen food, and floral. Although the supermarket and
convenience store industries have invested substantial sums on Point-of-Sale,
scanning systems, etc., those systems are, almost without exception, limited to
proving price look-up functions rather than decision support functions. These
industries are a classic representation of "data rich" and "information poor".
Park City Group is capitalizing on that environment to bring together
information from disparate legacy applications and databases to provide an
end-to-end integrated merchandising, production planning, demand forecasting and
perpetual inventory system to address the industry's perishable department
needs.
Fresh Market Manager helps identify true cost of goods and provides accurate and
actionable profitability data on a corporate, regional, store-by-store, and/or
item-by-item basis. Fresh Market Manager also can produce hour-by-hour
forecasts, production plans, perpetual inventory, and places/receives orders.
Fresh Market Manager automates the majority of the planning, forecasting,
ordering, and administrative functions associated with fresh merchandise or
products.
ActionManager(TM)
-----------------
The second most important cost element typically facing today's retailers is
labor. ActionManager(TM) addresses labor needs by providing a suite of solutions
that forecast labor demand, schedules staff resources, and provides store
managers with the necessary tools to keep labor costs under control while
improving customer service, satisfaction and sales. Daily availability of this
information can help a retailer to address issues more quickly.
ActionManager applications provide an automated method for managers to plan,
schedule, and administer many of the administrative tasks including new hire
paperwork and time and attendance. In addition to automating most administrative
processes, ActionManager provides the local manager with a "dashboard" view of
the business. ActionManager also has extensive reporting capabilities for
corporate, field, and store-level management to enable improved decision
support.
Supply Chain Profit Link
------------------------
Supply Chain Profit Link (SCPL) allows suppliers an opportunity to work with
their retail partners on optimizing profits, while reducing stock outs and
minimizing shrink (or waste). SCPL is capable of providing daily or weekly
store-by-store item level information to a supplier to facilitate decision
support. SCPL allows suppliers opportunities to customize assortment plans,
promotions, and pricing strategies on a store-by-store level.
Professional Services
---------------------
Park City Group's Professional Services offering include project management,
technical implementation, and end-user training. In addition, Park City Group
offers a variety of traditional consulting services configured to meet specific
customer needs. Beyond these traditional services, Park City Group provides
consulting, including merchandising and store operations, that is focused on the
primary objective of helping customers to improve their profitability through
the full use of the Company's products.
4
Sales and Marketing
-------------------
Through a focused and dedicated sales effort designed to address the
requirements of each of its business, Park City Group believes its sales force
is positioned to understand its customers' businesses, trends in the
marketplace, competitive products and opportunities for new product development.
The Company's deep industry knowledge enables it to take a consultative approach
in working with its prospects and customers. Park City Group's sales personnel
focus on selling its technology solutions to major customers, both domestically
and internationally.
To date, Park City Group's primary marketing objectives have been to increase
awareness of Park City Group's technology solutions and generate sales leads. To
this end, Park City Group attends industry trade shows, conducts direct
marketing programs, publishes industry trade articles and white papers,
participates in interviews, and selectively advertises in industry publications.
Customers
---------
Our customers include some of the most notable names in retailing, including:
Schnuck's, Tesco-Lotus, Circle K Midwest, Home Depot, Wawa, Sheetz,
Williams-Sonoma, and others.
Competition
-----------
The market for Park City Group's products and services is very competitive. Park
City Group believes the principal competitive factors include product quality,
reliability, performance, price, vendor and product reputation, financial
stability, features and functions, ease of use, quality of support and degree of
integration effort required with other systems. While our competitors are often
larger companies with larger sales forces and marketing budgets, we believe that
our deep industry knowledge and the breadth and depth of our offerings give us a
competitive advantage. Park City Group's ability to continually improve its
products, processes and services, as well as its ability to develop new
products, enables the Company to meet evolving customer requirements. Park City
Group competes with companies such as Workbrain, Radient Systems, Kronos, Tomax,
Capgemini, Electronic Data Systems, and others.
Product Development
-------------------
The products sold by the Company are subject to rapid and continual
technological change. Products available from the Company, as well as from its
competitors, have increasingly offered a wider range of features and
capabilities. The Company believes that in order to compete effectively in its
selected markets, it must provide compatible systems incorporating new
technologies at competitive prices. In order to achieve this, the Company has
made a substantial ongoing commitment to research and development. .
Park City Group's product development strategy is focused on creating common
technology elements that can be leveraged in applications across its core
markets. The Company's software architecture is based on open platforms and is
modular, thereby allowing it to be phased into a customer's operations. In order
to remain competitive, Park City Group is currently designing, coding and
testing a number of new products and developing expanded functionality of its
current products.
Patents and Proprietary Rights
------------------------------
The Company owns and controls 9 U.S.patents, 8 U.S. trademarks and 37 U.S.
copyrights relating to its software technology that are approved and issued. In
addition, the Company has 3 patents currently pending. The Company has 14
international patents and patent applications pending. The patents referred to
above are continuously reviewed and renewed as their expiration dates come due.
Company policy is to seek patent protection for all developments, inventions and
improvements that are patentable and have potential value to the Company and to
protect its trade secrets other confidential and proprietary information. The
Company intends to vigorously defend its intellectual property rights to the
extent its resources permit.
Future success may depend upon the strength of the Company's intellectual
property. Although management believes that the scope of patents/patent
applications are sufficiently broad to prevent competitors from introducing
devices of similar novelty and design to compete with the Company's current
products and that such patents and patent applications are or will be valid and
enforceable, there are no assurances that if such patents are challenged, this
belief will prove correct. The Company has, however, successfully defended one
of these patents in two separate instances and as such, has some level of
confidence in the Company's ability to maintain its patents. In addition, patent
applications filed in foreign countries and patents granted in such countries
are subject to laws, rules and procedures, which differ from those in the U.S.
Patent protection in such countries may be different from patent protection
provided by U.S. Laws and may not be as favorable.
The Company is not aware of any patent infringement claims against it; however,
there are no assurances that litigation to enforce patents issued to the
Company, to protect proprietary information, or to defend against the Company's
5
alleged infringement of the rights of others will not occur. Should any such
litigation occur, the Company may incur significant litigation costs, the
Company's resources may be diverted from other planned activities, and result in
a materially adverse effect on the Company's operations and financial condition.
The Company relies on a combination of patent, copyright, trademark, and other
laws to protect its proprietary rights. There are no assurances that the
Company's attempted compliance with patent, copyrights, trademark or other laws
will adequately protect its proprietary rights or that there will be adequate
remedies for any breach of our trade secrets. In addition, should the Company
fail to adequately comply with laws pertaining to its proprietary protection,
the Company may incur additional regulatory compliance costs.
Government Regulation and Approval
----------------------------------
Like all businesses, the Company is subject to numerous federal, state and local
laws and regulations, including regulations relating to patent, copyright, and
trademark law matters.
Cost of Compliance with Environmental Laws
------------------------------------------
The Company currently has no costs associated with compliance with environmental
regulations, and does not anticipate any future costs associated with
environmental compliance; however, there can be no assurance that it will not
incur such costs in the future.
Research and Development
------------------------
Total research and development expenditures were $292,191 and $1,019,411 for the
years ended June 30, 2006 and 2005, respectively; a 71% decrease. This
comparative decrease is attributable to the capitalization of software costs in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86. The
Company capitalized $613,717 in labor and overhead costs for the Fiscal Year
Ended, June 30, 2006 as a result of 1 new product development and two
significant enhancements that reached feasibility during 2006. The Company
anticipates this new product and 2 significant enhancements will be available
for sale in the later part of FYE 2007.
Reports to Security Holders
---------------------------
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934. Accordingly, it files annual, quarterly and other reports
and information with the Securities and Exchange Commission. You may read and
copy these reports and other information at the Securities and Exchange
Commission's public reference rooms in Washington, D.C. and Chicago, Illinois.
The Company's filings are also available to the public from commercial document
retrieval services and the Internet world wide website maintained by the
Securities and Exchange Commission at www.sec.gov.
Employees
---------
As of June 30, 2006, the Company had 31 employees, including 10 software
developers and programmers, 6 sales, marketing and account management employees,
10 software service and support employees and 5 accounting and administrative
employees. During 2006 the Company hired 3 programmers and one Business Analyst
in India. The Company is planning to expand their Indian workforce to support
their sales in Asia and to provide additional programming resources. All of
these employees work for the Company on a full time basis. The employees are not
represented by any labor union.
Item 2. Description of Properties
---------------------------------
The principal place of business operations is 333 Main Street, Park City, Utah.
The Company leases approximately 9,500 square feet at this location, consisting
primarily of office and storage areas. The Company has currently given notice to
landlord its anticipation to vacate on or about November 1, 2006.
The company has entered into a lease at 3160 Pinebrook Drive, Park City, UT,
84098 and anticipates relocating to the new facility on or about November 1,
2006, possession to be determined by timing of build-out of the leasehold and
land improvements. The Company will lease approximately 10,000 square feet for a
period of 3 years, with an option to renew for additional 3 year increments.
The payment terms are based on a step-rate lease and are as follows:
Period Annualized Monthly
------ ---------- -------
Year 1 $ 137,250.00 $ 11,437.50
Year 2 $ 141,367.50 $ 11,780.63
Year 3 $ 145,608.53 $ 12,134.04
6
Item 3. Legal Proceedings
-------------------------
The Company has filed a lawsuit against Workbrain Corporation titled Park City
Group, Inc. vs. Workbrain Corporation Case No. 2:06 cv 289, which is pending in
the Federal District Court for the District of Utah. The Company claims that
Workbrain Corporation is infringing upon its patent # 5,111,391. The Company
will vigorously pursue this matter.
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
On July 7, 2006 notice was provided by Park City Group, Inc. describing it plans
to take certain corporate action pursuant to the written consent of our Board of
Directors and the holders of a majority of our outstanding voting securities
("Majority Stockholders"). The action was to (i) amend our Articles of
Incorporation to decrease the number of shares of common stock which we are
authorized to issue from 500,000,000 to 50,000,000 (the "Decreased Capital
Proposal"), and (ii) amend our Articles of Incorporation to effect a
one-for-fifty reverse split of our issued and outstanding shares of common stock
("Reverse Split Proposal").
On June 26, 2006, our Board of Directors unanimously approved the Decreased
Capital Proposal and the Reverse Split Proposal and the Majority Stockholders
have consented in writing to each of such proposals. The Majority Stockholders
beneficially own 4,538,862 shares of our common stock representing approximately
50.8% of the votes that could be cast by the holders of our outstanding voting
shares as of the Record Date.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
----------------------------------------------------------------
Dividend Policy
---------------
To date, the Company has not paid dividends on common stock. The payment of
dividends, if any, is within the discretion of the Board of Directors and will
depend upon earnings, capital requirements and financial condition, and other
relevant factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation." The Board does not intend to declare any
dividends in the foreseeable future, but instead intends to retain all earnings,
if any, for use in operations.
Share Price History
-------------------
Common stock (the "Common Stock") is traded in the over-the-counter market in
what is commonly referred to as the "Electronic" or "OTC Bulletin Board" or the
"OTCBB" under the trading symbol "PCYG." The following table sets forth the high
and low bid information of the Common Stock's closing price for the periods
indicated. The price information contained in the table was obtained from
internet sources considered reliable. Note that such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and the quotations may not necessarily represent actual transactions
in the Common Stock. NOTE: On the 11th day of August 2006, the company effected
a 1 for 50 reverse stock split. All trading price information set forth below
gives effect to such reverse stock split.
Fiscal Year 2005 Low High
---------------- --- ----
September 30, 2004 $2.50 $4.00
December 31, 2004 $2.00 $4.50
March 31, 2005 $2.00 $4.00
June 30, 2005 $1.00 $2.50
Fiscal Year 2006
----------------
September 30, 2005 $1.50 $3.00
December 31, 2005 $2.00 $5.50
March 31, 2006 $2.00 $4.00
June 30, 2006 $2.00 $5.50
Holders of Record
-----------------
At September 28, 2006 there were 662 holders of record of Common Stock and
shares issued and outstanding of 8,930,766. The number of holders of record and
shares issued and outstanding was calculated by reference to the stock transfer
agent's books.
Purchases of Equity Securities by the Small Business Issuer and Affiliated
Purchasers
--------------------------------------------------------------------------
None
7
Equity Compensation Plan Information
------------------------------------
Equity Compensation Plan Information
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
Plan category (a) (b) (c)
---------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 0 0 0
---------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders 93,288 $2.93 66,712
---------------------------------------------------------------------------------------------------------
Total 93,288 $2.93 66,712
=========================================================================================================
The Company has several different Equity Compensation Plans in effect at this
time. These include the following
o In August 2003 the Company authorized 40,000 options for
distribution to the employees. These options had a strike price of
$2.50
o In August 2003 the Company authorized 40,000 options for
distribution to the senior management. These options had a strike
price of $1.50
o In September of 2005 the Company authorized to pay Senior Management
3 options for every share purchased at $3.50 for one year. Starting
October of 2006 Senior Management will get 2 options for every share
purchased from the Company at market price or $3.50 which ever is
higher.
Issuance of Securities
----------------------
We issued shares of our common stock in unregistered transactions during 2006.
All of the shares of common stock issued were issued in non registered
transactions in reliance on Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"). We report shares issued on an annual basis. The
shares of common stock issued subsequent to June 30, 2005 were issued as
follows:
o In July 2005 3,115 shares were issued per anti-dilution agreement
with the CEO. This dilution reduces the effective price per share of
the CEO's cash investments to $3.05.
o In August 2005 2,688 shares were issued to an employee in lieu of
cash compensation of $5,376.
o In November 2005, 14,667 shares of common stock were issued to
management in lieu of cash compensation of $30,017.
o In November 2005, 10,500 shares of common stock were issued to board
member is lieu of cash compensation of $22,500.
o In January 2006, 4,500 shares of common stock ($3.50 per share) were
issued as a fee for extension of a note payable.
o In February 2006, 58,571 shares of common stock ($2.00 per share)
were issued due to exercise of warrants.
o In March 2006, 2,500 shares of common stock were issued to board
members in lieu of cash compensation of $7,500.
o In March 2006, 18,097 shares of common stock were issued to
management in lieu of cash compensation of $58,333.
o In March 2006, 1,324,693 shares of common stock ($2.71 per share)
were issued for conversion of a note payable and accrued interest of
$3,473,606.
o In April 2006, 1,667 shares of common stock were issued to board
members in lieu of cash compensation of $5,000.
o In April 2006, 3,889 shares of common stock were issued to
management in lieu of cash compensation.
o In April 2006, 10,000 shares of common stock ($2.50 per share) were
issued to a member of management for the vested portion of a signing
bonus.
o In June 2006, 1,818,182 shares of common stock ($2.75) were issued
in connection with a Placement Agreement.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operation for the Years Ended June 30, 2006 and June 30, 2005
-------------------------------------------------------------------------------
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition. The terms "Company", "we", "our"
8
or "us" are used in this discussion to refer to Park City Group, Inc. (formerly
Fields Technologies, Inc.) along with Park City Group, Inc.'s wholly owned
subsidiary, Fresh Market Manager, LLC, on a consolidated basis, except where the
context clearly indicates otherwise.
Overview
--------
The principal business is the design, development, marketing and support of
proprietary software products along with ongoing operational consulting
practice. These software products are designed to be used in retail and grocery
businesses having multiple locations by assisting individual store locations and
corporate management with managing daily business operations and communicating
results of those operations in a timely manner.
Through June 30, 2006 the Company has accumulated aggregate consolidated losses
totaling $19,207,606 which includes net income of $1,358,597 and a net loss of
$3,408,037 for the years ended June 30, 2006, and 2005, respectively.
Management's Discussion and Analysis
------------------------------------
Years Ended June 30, 2006 and 2005
----------------------------------
During the year ended June 30, 2006, the Company had total revenues of
$7,085,125 compared to $3,631,812 in 2005, a 95% increase. Software license
sales were $3,626,821 and $479,615 for 2006 and 2005, respectively, a 656%
increase. This $3,147,206 increase was attributable to the license sale of a new
customer for $3,000,000 in a non-recurring blanket license sale in the first
quarter of 2006. As previously stated, the Company historically realizes the
majority of its annual revenues through blanket or non-recurring license
agreements for use of its patented software. For the year ended, June 30, 2006
and 2005, 49% and 12% of total revenue were based on one-time non-recurring
license revenue, respectively. Maintenance and support revenues decreased by 2%.
ASP revenues increased by 74% over 2005, primarily from the increase in ASP
sales agreements to the manufacturing industry. Consulting revenue increased by
37% to $1,004,224 for 2006, compared to $735,522 for 2005. This $268,702
increase is driven specifically by consulting services associated with the large
license sale in Q1.
Total research and development expenditures were $292,191 and $1,019,411 for the
years ended June 30, 2006 and 2005, respectively; a 71% decrease. This
comparative decrease of $727,220 is attributable to an overall reduction of
research and development and the capitalization of $613,717 in labor and
overhead costs for the Fiscal Year Ended, June 30, 2006 as a result of 1 new
product development and two significant enhancements that reached technological
feasibility during 2006. The Company anticipates this new product and 2
significant enhancements will be available for sale in the later part of FYE
2007
Sales and marketing expenses were $1,375,794 and $1,337,318 for 2006 and 2005,
respectively, an increase of 3%. During the current fiscal year the Company
continued to develop several strategic sales channels that are headed up by
commissioned alliance partners.
General and administrative expenses were $1,518,092 and $2,055,940 for 2006 and
2005, respectively, a 26% decrease. This $537,848 decrease was from one time
charges in the 2005. These charges include a bad debt write off of $307,500 and
settlement of a legal issue that arose from the reverse acquisition with
Amerinet.com and has been pending since 2002.
Interest expense was $884,404 and $1,178,454 for 2006 and 2005, respectively, a
25% decrease. This $294,050 decrease attributed to the retirement of a note
payable with proceeds from operations and the conversion of the note payable
with Riverview Financial into common stock. See Notes 12 and 16 to the financial
statements.
In accordance with generally accepted accounting principles (GAAP), earnings per
share basic and diluted for the year ended, June 30, 2006 was $ .23 and $ .22
per share, respectively. NOTE: The Company believes providing some additional
information on a non GAAP basis for earnings per share (EPS) that has
significant benefit to the reader of this Form 10KSB. These GAAP results reflect
a weighted average of 6 million shares for the fiscal year. As previously
reported, Park City Group raised $5 million in a private placement of shares
during the fourth quarter, and this placement had a significant impact on the
9
weighted average share count for the year. At year end, Park City Group had 8.9
million shares outstanding. Excluding the effects a weighted average share
count, Park City Group's earnings per share for the fiscal year 2006 was $0.16.
Park City Group believes utilizing the full year share count provides a more
meaningful view into the company's profitability at the per share level. This
non-GAAP EPS amount is less than the GAAP basis EPS by $.07 and $.06 on a
weighted average of shares, basic and dilutive, respectively.
Financial Position, Liquidity and Capital Resources
---------------------------------------------------
Net cash provided by operations for the year ended June 30, 2006, was $725,134
compared to an operating cash-flow deficit of $794,318 for the year ended June
30, 2005. The increase is attributable to the non-recurring $3.0 million license
fee received in 2006 and a 37% increase in consulting revenue for new and
existing clients. Furthermore, in refinancing its debt, the company also
utilized operating cash flow to reduce its accrued interest liability by
$848,258. The company believes that as a result of refinancing and debt
conversion, it will reduce interest expense by approximately $800,000 annualized
in 2007. Interest expense was $884,404 and $1,178,454 for 2006 and 2005,
respectively, a 25% decrease. This $294,050 decrease attributed to the
retirement of a note payable with proceeds from operations and the conversion of
the note payable with Riverview Financial into common stock. Management believes
this will allow the Company to direct non-interest cost resources toward the
development and implementation of its new products and enhancements expected for
release in 2007.
Cash on hand was $3,517,060 at June 30, 2006, an increase of $3,307,390 over the
$209,670 on hand in the same fiscal period in 2005. As stated herein, the annual
increase is attributable to the issuance of stock, restructuring of the
companies equity and debt structure, and a substantial one-time non-recurring
license fee in 2006. In fiscal 2006, the company utilized $2,373,268 in order to
retire notes payable and capital lease obligations. Net cash provided by
financing activities totaled $3,169,053 in 2006 compared to $723,116 for the
year ended June 30, 2005. In 2006, the company made payments to reduce its
outstanding line of credit in the amount of $716,743 as opposed to utilizing its
credit facility to fund $619,743 towards operations in the same period 2005.
Current assets at June 30, 2006 totaled $4,031,578, an increase of $3,428,509
over June 30, 2005. The Company had $3,517,060 in cash and cash equivalents at
June 30, 2006 compared with $209,670 at June 30, 2005, an increase of
$3,307,390. Through debt refinancing and stock issuance the company believes
that its increased cash position will allow it to continue to focus on
developing strategic sales channels and aligning itself with partners who
provide high margin, low operating costs, and developing symbiotic relationships
that enhance the core focus of Park City Group. Management believes the increase
in its reduced-leverage cash position will continue to allow the company to
target its software products toward Grocery Chains, Convenience-Store Chains,
and Specialty Retailers through Alliance Partners, Financial Services, Call
Center operations, and Perishable and Non Perishable Product Manufacturers.
Working capital at June 30, 2006 was $2,534,296, compared to a working capital
deficit of $4,994,269 at June 30, 2005. The increase in the working capital is
principally attributable to sale of equity in the fourth quarter of 2006, the
retirement of a current note payable in Q1, as well as the pay-off of the
Company's lines of credit in the second half of the year. Management believes
the increase in working capital will allow the Company to target its resources
toward additional license sales and reduce monthly cash operating costs as a
result of decreased reliance on debt financing.
In prior years, the Company has financed its operations through operating
revenues, loans from directors, officers and stockholders, loans from the CEO
and majority shareholder, and private placements of equity securities. The
Company, through a private placement of equity reduced liabilities from
$8,772,879 to $3,344,826, 2005 to 2006, respectively. In addition, the loans
between the Company and its directors and CEO have been converted to stock. The
Company has secured a $1.9 million revolving line of credit that in combination
with a strict focus on cost control and increased revenue anticipation will
provide a level of working capital necessary to satisfy its operating needs for
fiscal 2007.
Inflation
---------
The impact of inflation may cause retailers to slow spending in the technology
area, which could have an impact on company sales.
Risk Factors
------------
The Company is subject to certain other risk factors due to the organization and
structure of the business, the industry in which it competes and the nature of
its operations. These risk factors include the following:
Risks Related To the Company
----------------------------
We have incurred losses in the past and there can be no assurance that
we will operate continually or consistently at a profit in the future.
Resulting losses could cause a reduction in operations and could have a
detrimental effect on the long-term capital appreciation of our stock.
Our marketing strategy emphasizes sales activities for the
Fresh Market Manager, ActionManager(TM), and Supply Chain Profit Link
applications to Supermarkets, Convenience Stores, Specialty Retail,
Financial Services, and Food Manufacturers. If this marketing strategy
fails, revenues and operations will be negatively affected. A reduction
in revenues will result in increases in operational losses.
For the years ended June 30, 2006 and June 30, 2005, we had
net income of $1,393,596 and net loss of $3,408,037 respectively. There
can be no assurance that we will reliably or consistently operate
profitably during future fiscal years. If we do not operate profitably
in the future our current cash resources will be used to fund our
operating losses. If this were to continue, in order to continue with
our operations, we would need to raise additional capital. Continued
losses would have an adverse effect on the long term value of our
common stock and your investment in the Company. We cannot give any
assurance that we will ever generate significant revenue or have
sustainable profits.
Our liquidity and capital requirements will be difficult to predict,
which may adversely affect our cash position in the future.
In June of 2006, we completed the sale of shares of our common
stock from which we received gross offering proceeds of $5,000,000. We
anticipate that we will have adequate cash resources to fund our
operations for at least the next 12 months. Thereafter, our liquidity
and capital requirements will depend upon numerous other factors,
including the following:
o The extent to which our products and services gain market
acceptance;
o The progress and scope of product evaluations;
o The timing and costs of acquisitions and product and services
introductions;
o The extent of our ongoing research and development programs; and
o The costs of developing marketing and distribution capabilities.
If in the future, we are required to seek additional financing
in order to fund our operations and carry out our business plan, there
can be no assurance that such financing will be available on acceptable
terms, or at all, and there can be no assurance that any such
arrangement, if required or otherwise sought, would be available on
terms deemed to be commercially acceptable and in our best interests.
Operating results may fluctuate, which makes it difficult to predict
future performance.
Management expects a portion of the Company's revenue stream
to come from license sales, maintenance and services charged to new
customers, which will fluctuate in amounts because software sales to
10
retailers are difficult to predict. In addition, the Company may
potentially experience significant fluctuations in future operating
results caused by a variety of factors, many of which are outside of
its control, including:
o Demand for and market acceptance of new products;
o Introduction or enhancement of products and services by the Company
or its competitors;
o Capacity utilization;
o Technical difficulties, system downtime;
o Fluctuations in data communications and telecommunications costs;
o Maintenance subscriber retention;
o The timing and magnitude of capital expenditures and requirements;
o Costs relating to the expansion or upgrading of operations,
facilities, and infrastructure;
o Changes in pricing policies and those of competitors;
o Composition and duration of product mix including license sales,
consulting fees, and the timing of software rollouts;
o Changes in regulatory laws and policies, and;
o General economic conditions, particularly those related to the
information technology industry.
Because of the foregoing factors, future operating results may
fluctuate. As a result of such fluctuations, it will be difficult to
predict operating results. Period-to-period comparisons of operating
results are not necessarily meaningful and should not be relied upon as
an indicator of future performance. In addition, a relatively large
portion of our expenses will be fixed in the short-term, particularly
with respect to facilities and personnel. Therefore, future operating
results will be particularly sensitive to fluctuations in revenues
because of these and other short-term fixed costs.
We will need to effectively manage our growth in order to achieve and
sustain profitability. Our failure to manage growth effectively could
reduce our sales growth and result in continued net losses.
To achieve continual and consistent profitable operations on a
fiscal year on-going basis, we must have significant growth in our
revenues from the sale of our products and services. If we are able to
achieve significant growth in our future sales and to expand the scope
of our operations, and our management, financial, and other
capabilities, our existing procedures and controls could be strained.
We cannot be certain that our existing or any additional capabilities,
procedures, systems, or controls will be adequate to support our
operations. We may not be able to design, implement, or improve our
capabilities, procedures, systems, or controls in a timely and
cost-effective manner. Failure to implement, improve and expand our
capabilities, procedures, systems, and controls in an efficient and
timely manner could reduce our sales growth and result in a reduction
of profitability or increase of net losses.
Our officers and directors have significant control over us that may
lead to conflicts with other stockholders over corporate governance.
Our officers and directors, other than our Chief Executive
Officer, control approximately 6.88% of our common stock. Our Chief
Executive Officer, Randall K. Fields, individually, controls 48.51% of
our common stock. Consequently, Mr. Fields, individually, and our
officers and directors, as stockholders acting together, will be able
to significantly influence all matters requiring approval by our
stockholders, including the election of directors and significant
corporate transactions, such as mergers or other business combination
transactions.
Our corporate charter contains authorized, unissued "blank check"
preferred stock that can be issued without stockholder approval with
the effect of diluting then current stockholder interests.
Our certificate of incorporation currently authorizes the
issuance of up to 30,000,000 shares of "blank check" preferred stock
with designations, rights, and preferences as may be determined from
time to time by our board of directors. Our board of directors is
empowered, without stockholder approval, to issue one or more
additional series of preferred stock with dividend, liquidation,
conversion, voting, or other rights that could dilute the interest of,
or impair the voting power of, our common stockholders. The issuance of
a series of preferred stock could be used as a method of discouraging,
delaying, or preventing a change in control.
11
Because we have never paid dividends, you should exercise caution
before making an investment in our common stock.
We have never paid dividends nor do we anticipate the
declaration or payments of any dividends in the foreseeable future. We
intend to retain earnings, if any, to finance the development and
expansion of our business. Our Board of Directors will determine future
dividend policy at their sole discretion and future dividends will be
contingent upon future earnings, if any, our financial condition,
capital requirements, general business conditions and other factors.
Future dividends may also be affected by covenants contained in loan or
other financing documents, which may be executed by us in the future.
Therefore, there can be no assurance that dividends of any kind will
ever be paid.
Our business is dependent upon the continued services of our founder
and Chief Executive Officer, Randall K. Fields; should we lose the
services of Mr. Fields, our operations will be negatively impacted.
Our business is dependent upon the expertise of our founder
and Chief Executive Officer, Randall K. Fields. Mr. Fields is essential
to our operations. Accordingly, you must rely on Mr. Fields' management
decisions that will continue to control our business affairs after the
offering. We currently maintain key man insurance on Mr. Fields' life
in the amount of $10,000,000; however, that coverage would be
inadequate to compensate for the loss of his services. The loss of the
services of Mr. Fields would have a materially adverse effect upon our
business.
If we are unable to attract and retain qualified personnel, we may be
unable to develop, retain or expand the staff necessary to support our
operational business needs.
Our current and future success depends on our ability to
identify, attract, hire, train, retain and motivate various employees,
including skilled software development, technical, managerial, sales,
marketing and customer service personnel. Competition for such
employees is intense and we may be unable to attract or retain such
professionals. If we fail to attract and retain these professionals,
our revenues and expansion plans will be negatively impacted.
Our officers and directors have limited liability and indemnification
rights under our organizational documents, which may impact our
results.
Our officers and directors are required to exercise good faith
and high integrity in the management of our affairs. Our certificate of
incorporation and bylaws, however, provide, that the officers and
directors shall have no liability to the stockholders for losses
sustained or liabilities incurred which arise from any transaction in
their respective managerial capacities unless they violated their duty
of loyalty, did not act in good faith, engaged in intentional
misconduct or knowingly violated the law, approved an improper dividend
or stock repurchase, or derived an improper benefit from the
transaction. As a result, you may have a more limited right to action
than you would have had if such a provision were not present. Our
certificate of incorporation and bylaws also require us to indemnify
our officers and directors against any losses or liabilities they may
incur as a result of the manner in which they operate our business or
conduct our internal affairs, provided that the officers and directors
reasonably believe such actions to be in, or not opposed to, our best
interests, and their conduct does not constitute gross negligence,
misconduct or breach of fiduciary obligations.
Business Operations Risks
-------------------------
If our marketing strategy fails, our revenues and operations will be
negatively affected.
We plan to concentrate our future sales efforts towards
marketing our applications and services. These applications and
services are designed to be highly flexible so that they can work in
multiple retail and supplier environments such as grocery stores,
convenience stores, quick service restaurants, and route-based delivery
environments. There is no assurance that the public will accept our
applications and services in proportion to our increased marketing of
this product line. We may face significant competition that may
negatively affect demand for our applications and services, including
the public's preference for our competitors' new product releases or
updates over our releases or updates. If our applications and services
marketing strategy fails, we will need to refocus our marketing
strategy to our other product offerings, which could lead to increased
marketing costs, delayed revenue streams, and otherwise negatively
affect our operations.
Because we are changing the emphasis of our sales activities from an
annual license fee structure to a monthly fee structure, our revenues
may be negatively affected.
12
Historically, we offered our applications and related
maintenance contracts to new customers on a one-time up front license
strategy and provided an option for annually renewing their maintenance
agreements. Because our one-time licensing fee approach was subject to
inconsistent and unpredictable revenues, we now offer prospective
customers an option for monthly licensing of these products. Our
customers may now choose to acquire the software in an Application
Solution Provider basis, or ASP resulting in monthly charges for use of
our software products and maintenance fees. Our conversion from a
one-time licensing strategy to monthly-based fees is subject to the
following risks:
o Our customers may prefer one-time fees rather than monthly fees;
o Because public awareness pertaining to our Application Solution
Provider services will be delayed until we begin our marketing
campaign to promote those services, our revenues may decrease over
the short term; and
o There maybe a threshold level (number of locations) at which the
monthly based fee structure may not be economical to the customer,
and a request to convert from monthly fees to annual fee could
occur.
We face competition from competing and emerging technologies that may
affect our profitability. The markets for our type of software products
and that of our competitors are characterized by:
o Development of new software, software solutions, or enhancements
that are subject to constant change;
o Rapidly evolving technological change; and
o Unanticipated changes in customer needs.
Because these markets are subject to such rapid change, the
life cycle of our products is difficult to predict; accordingly, we are
subject to the following risks:
o Whether or how we will respond to technological changes in a timely
or cost-effective manner;
o Whether the products or technologies developed by our competitors
will render our products and services obsolete or shorten the life
cycle of our products and services; and
o Whether our products and services will achieve market acceptance.
If we are unable to adapt to our constantly changing markets and to
continue to develop new products and technologies to meet our
customers' needs, our revenues and profitability will be negatively
affected.
Our future revenues are dependent upon the successful and
timely development and licensing of new and enhanced versions of our
products and potential product offerings suitable to our customer's
needs. If we fail to successfully upgrade existing products and develop
new products, and those new products do not achieve market acceptance,
our revenues will be negatively impacted.
We face risks with attracting new first-time clients from a limited
global prospect pool.
Our software licensing is currently reliant upon a limited number of
national and internatonal prospect companies who require our unique
product and services as a result of consolidation in the global number
of big-box retailers specifically in the grocery and retail industries.
As a consequence, future revenue may be significantly impacted if we
are unable to attract new license customers from this limited prospect
pool.
We expect that as further industry consolidation provides for
both a limited customer pool to attract new software license prospects,
a small number of our new customers will account for a substantial
portion of current, non-recurring license revenues in future reporting
periods. In 2006, our top 5 new license customers accounted for 92% of
total non-recurring license revenue and 70% of total annual revenue.
The remaining 30% of total revenue included on-going recurring revenue
attributable to product upgrades, consulting revenues, maintenance and
support revenue.
A substantial portion of our annual revenue is derived from a one-time,
non-recurring licensing fee for utilization of our patented software
A large portion of our customers rely on our patented software
for utilization during the normal course and scope of their business
operations. New customers are charged a license fee based on a
"blanket" license agreement fee for a particular software product or an
initial license fee that is based on a store by store opening basis.
Although results vary from period to period, in 2006, non-recurring
initial license fee revenue equaled $3,000,000 or 42% of total revenue.
Historically, over 94% of new, first-time customers will not purchase
products, license agreements, or services at the same financial level
in future periods as they do in the first year of installation. While
the company is not substantially dependent on any one particular
customer for providing a continued revenue stream, we are dependent on
attracting new first-time license clients in order to meet our
operating and capital cash flow needs since the fee represents, in most
cases a substantial portion of revenue. If we cannot attract new
first-time license customers, our remaining recurring revenue streams
may not provide sufficient financial resources to support capital and
operating needs.
The ability to attract new software license customers will
depend on a variety of factors, including the relative success of
marketing strategies and the performance, quality, features, and price
of current and future products. Accordingly, if we cannot attract new
customer licensing accounts or customer needs for our product and
services decrease, revenues and operating results will be negatively
impacted.
We face risks associated with the loss of maintenance and other revenue
We have experienced the loss of long term maintenance
customers because the product is so reliable they do not want to
continue to pay for maintenance that they do not need or use, and in
some cases, the customer has decided to replace Park City Group
applications or maintain the system on their own. We continue to focus
on these clients by providing new functionality and applications to
meet their business needs. We also may lose some maintenance revenue
due to consolidation of industries or customer operational difficulties
that lead to their reduction of size. In addition, future revenues will
be negatively impacted if we fail to add new maintenance customers that
will make additional purchases of our products and services.
13
We face risks associated with proprietary protection of our software.
Our success depends on our ability to develop and protect
existing and new proprietary technology and intellectual property
rights. We seek to protect our software, documentation and other
written materials primarily through a combination of patents,
trademarks, and copyright laws, trade secret laws, confidentiality
procedures and contractual provisions. While we have attempted to
safeguard and maintain our proprietary rights, there are no assurances
there we will be successful in doing so. Our competitors may
independently develop or patent technologies that are substantially
equivalent or superior to ours.
Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products or
obtain and use information that we regard as proprietary. In some types
of situations, we may rely in part on "shrink wrap" or "point and
click" licenses that are not signed by the end user and, therefore, may
be unenforceable under the laws of certain jurisdictions. Policing
unauthorized use of our products is difficult. While we are unable to
determine the extent to which piracy of our software exists, software
piracy can be expected to be a persistent problem, particularly in
foreign countries where the laws may not protect proprietary rights as
fully as the United States. We can offer no assurance that our means of
protecting our proprietary rights will be adequate or that our
competitors will not reverse engineer or independently develop similar
technology.
We incorporate a number of third party software providers' licensed
technologies into our products, the loss of which could prevent sales
of our products or increase our costs due to more costly substitute
products.
We license technologies from third party software providers
and such technologies are incorporated into our products. We anticipate
that we will continue to license technologies from third parties in the
future. The loss of these technologies or other third-party
technologies could prevent sales of our products and increase our costs
until substitute technologies, if available, are developed or
identified, licensed and successfully integrated into our products.
Even if substitute technologies are available, there can be no
guarantee that we will be able to license these technologies on
commercially reasonable terms, if at all.
We may discover software errors in our products that may result in a
loss of revenues or injury to our reputation.
Non-conformities or bugs ("errors") may be found from time to
time in our existing, new or enhanced products after commencement of
commercial shipments, resulting in loss of revenues or injury to our
reputation. In the past, we have discovered errors in our products and
as a result, have experienced delays in the shipment of products.
Errors in our products may be caused by defects in third-party software
incorporated into our products. If so, we may not be able to fix these
defects without the cooperation of these software providers. Since
these defects may not be as significant to the software provider as
they are to us, we may not receive the rapid cooperation that may be
required. We may not have the contractual right to access the source
code of third-party software and, even if we do have access to the
source code, we may not be able to fix the defect. Since our customers
use our products for critical business applications, any errors,
defects or other performance problems could result in damage to our
customers' business. These customers could seek significant
compensation from us for their losses. Even if unsuccessful, a product
liability claim brought against us would likely be time consuming and
costly.
Some competitors are larger and have greater financial and operational
resources that may give them an advantage in the market.
Many of our competitors are larger and have greater financial
and operational resources. This may allow them to offer better pricing
terms to customers in the industry, which could result in a loss of
potential or current customers or could force us to lower prices. Any
of these actions could have a significant effect on revenues. In
addition, the competitors may have the ability to devote more financial
and operational resources to the development of new technologies that
provide improved operating functionality and features to their product
14
and service offerings. If successful, their development efforts could
render our product and service offerings less desirable to customers,
again resulting in the loss of customers or a reduction in the price we
can demand for our offerings.
Risks Relating To Our Common Stock
----------------------------------
If we fail to remain current on our reporting requirements, we could be
removed from the OTC Bulletin Board, which would limit the ability of
broker-dealers to sell our securities and the ability of stockholders
to sell their securities in the secondary market.
Companies trading on the OTC Bulletin Board, like us, must be
reporting issuers under Section 12 of the Securities Exchange Act of
1934, as amended, and must be current in our reports under Section 13
to maintain price quotation privileges on the OTC Bulletin Board. If we
fail to remain current on our reporting requirements, we could be
removed from the OTC Bulletin Board. As a result, the market liquidity
for our securities could be severely and adversely affected by limiting
the ability of broker-dealers to sell our securities and the ability of
stockholders to sell their securities in the secondary market.
Our common stock is subject to the "penny stock" rules of the SEC and
the trading market in our securities is limited, which makes
transactions in our stock cumbersome and may reduce the value of an
investment in our stock.
The Securities and Exchange Commission has adopted Rule 15g-9,
which establishes the definition of a "penny stock," for the purposes
relevant to us, as any equity security that has a market price of less
than $5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in
penny stocks, the broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any
transaction in a penny stock, a disclosure schedule prescribed by the
Commission relating to the penny stock market, which, in highlight
form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions
in securities subject to the "penny stock" rules. This may make it more
difficult for investors to dispose of our common stock and cause a
decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in
penny stocks in both public offerings and in secondary trading and
about the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities, and
the rights and remedies available to an investor in cases of fraud in
penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
The limited public market for our securities may adversely
affect your ability to liquidate your investment
Although our common stock is currently quoted on the OTC
Bulletin Board (OTCBB), there is limited trading activity. We can give
no assurance that an active market will develop, or if developed, that
it will be sustained. If you acquire shares of our common stock, you
may not be able to liquidate your investment in such shares should you
need or desire to do so.
15
Future issuances of our shares may lead to future dilution in the value
of our common stock, and will lead to a reduction in shareholder voting
power, and preventing a change in Company control.
The shares may be substantially diluted due to the following:
o Issuance of common stock in connection with funding agreements with
third parties and future issuances of common and preferred stock by
the Board of Directors; and
o The Board of Directors has the power to issue additional shares of
common stock and preferred stock and the right to determine the
voting, dividend, conversion, liquidation, preferences and other
conditions of the shares without shareholder approval.
Stock issuances may result in reduction of the book value or
market price of outstanding shares of common stock. If we issue any
additional shares of common or preferred stock, proportionate ownership
of common stock and voting power will be reduced. Further, any new
issuance of common or preferred shares may prevent a change in control
or management.
Critical Accounting Policies
----------------------------
This Management's Discussion and Analysis of Financial Condition and Results of
Operations discuss the Company's Financial Statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States.
We commenced operations in the software development and professional services
business during 1990. The preparation of our financial statements requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, management evaluates
its estimates and assumptions, including those related to inventory, income
taxes, revenue recognition and restructuring initiatives. We anticipate that
management will base its estimates and judgments on historical experience of the
operations we may acquire and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others,
will affect its more significant judgments and estimates used in the preparation
of our Consolidated Financial Statements.
Income Taxes. In determining the carrying value of the Company's net
deferred tax assets, the Company must assess the likelihood of sufficient future
taxable income in certain tax jurisdictions, based on estimates and assumptions,
to realize the benefit of these assets. If these estimates and assumptions
change in the future, the Company may record a reduction in the valuation
allowance, resulting in an income tax benefit in the Company's Statements of
Operations. Management evaluates the realizability of the deferred tax assets
and assesses the valuation allowance quarterly.
Goodwill and Other Long-Lived Asset Valuations. In June 2001, the FASB
issued SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other
Intangible Assets", effective for fiscal years beginning after December 15, 2001
with early adoption permitted for companies with fiscal years beginning after
March 15, 2001. We adopted the new rules on accounting for goodwill and other
intangible assets during the first quarter of fiscal 2004. Under the new rules,
goodwill and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with the
statements. Other intangible assets will continue to be amortized over their
useful lives.
Revenue Recognition. The Company's revenues are derived from the sale
of software, maintenance of software, professional consulting services and
software hosting services. Revenue from the sale of software is recognized at
the time the software is shipped to the customer. The Company also defers a
portion of the software license fee equal to the cost of maintenance for the
warranty period on all license sales that are either to a new customer or are a
new product being sold to and existing customer. Customers who purchases
additions licenses for software they already have and are paying maintenance on
waive the warranty period. Revenue from maintenance of software, professional
consulting services and software hosting services is recognized during the month
the services are preformed.
Stock-Based Compensation. The Company accounts for its employee
stock-based compensation plans using the intrinsic value method, as prescribed
by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, the Company records deferred compensation costs
related to its employee stock options when the current market price of the
underlying stock exceeds the exercise price of each stock option on the
measurement date (usually the date of grant). The Company records and measures
deferred compensation for stock options granted to non-employees, other than
16
members of the Company's Board of Directors, using the fair value based method.
Deferred compensation is expensed on a straight-line basis over the vesting
period of the related stock option. During 2005 and 2004, the Company did not
grant any stock options to employees or members of the Company's Board of
Directors with exercise prices below the market price on the measurement date.
An alternative method to the intrinsic value method of accounting for
stock-based compensation is the fair value based method prescribed by Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." If the Company used the fair value
based method, the Company would be required to record deferred compensation
based on the fair value of the stock option at the date of grant as computed
using an option-pricing model, such as the Black-Scholes option pricing model.
The deferred compensation calculated under the fair value based method would
then be amortized over the vesting period of the stock option
Capitalization of Software Development Costs The Company accounts for
research and development costs in accordance with several accounting
pronouncements, including SFAS No. 2, Accounting for Research and Development
Costs, and SFAS No. 86, Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed. SFAS No. 86 specifies that costs incurred
internally in researching and developing a computer software product should be
charged to expense until technological feasibility has been established for the
product. Once technological feasibility is established, all software costs
should be capitalized until the product is available for general release to
customers. Judgment is required in determining when technological feasibility of
a product is established. We have determined that technological feasibility for
our software products is reached shortly after a working prototype is complete
and meets or exceeds design specifications including functions, features, and
technical performance requirements. Costs incurred after technological
feasibility is established have been and will continue to be capitalized until
such time as when the product or enhancement is available for general release to
customers.
Off-Balance Sheet Arrangements
------------------------------
None
Item 7. Financial Statements
----------------------------
See the index to consolidated financial statements and consolidated financial
statement schedules included herein as Item 13.
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
-----------------------------------
On August 12, 2005, the Company dismissed Tanner LC as its principal accountant
to audit its financial statements. There have been no disagreements between
Tanner and the Company on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to the satisfaction of Tanner, would have caused it to make a reference
to the subject matter of any such disagreement within its report. We filed a
Form 8-K to report on the above described change of accountants. Attached as an
exhibit to each of such filings was a letter from Tanner LC stating that it
agreed with the statements we made in such filings relating to our change of
auditor. Also on August 12, 2005 the Company hired HJ & Associates, LLC as its
principal accountant.
Item 8A. Controls and Procedures
--------------------------------
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our Management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of the design
and operations of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as of June 30, 2006. Based on this evaluation, with the exception
of the matters discussed in the following paragraph our chief executive
officer and chief financial officer concluded that our disclosure
controls and procedures were effective to ensure that information
required to be disclosed in the reports submitted under the Securities
and Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange
Commission ("SEC") rules and forms, including to ensure that
information required to be disclosed by the Company is accumulated and
communicated to management, including the principal executive officer
and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
The Company has found significant internal control deficiencies in its
accounting for property, plant and equipment and deficiencies in
disclosure control. The Company's systems currently do not allow it to
account for depreciation of individual assets and consequently are
unable to accurately identify specific amounts to be adjusted when
assets are disposed of or sold. The Company has also noted deficiencies
in its systems for evaluating and implementing new accounting
pronouncements and internal review of its filings. In conjunction with
conducting a self-assessment and in preparation for compliance for
Section 404 of the Sarbanes-Oxley Act of 2002, the Company is
evaluating options including changes in accounting software and
changing responsibilities of personnel and consultants and changing its
policies to remedy these deficiencies. The Company believes it will be
able to adopt changes that will resolve these deficiencies within the
next nine months.
17
(b) Changes in internal controls over financial reporting.
The Company's Chief Executive Officer and Chief Financial Officer have
determined that there have been no changes, other than those noted
above, in the Company's internal control over financial reporting
during the period covered by this report identified in connection with
the evaluation described in the above paragraph that have materially
affected, or are reasonably likely to materially affect, Company's
internal control over financial reporting.
Item 8B. Other Information
--------------------------
Not applicable
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18
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act
----------------------------------------------------------
The Board of Directors and executive officers consist of the persons named in
the table below. Vacancies in the Board of Directors may only be filled by the
Board of Directors by majority vote at a Board of Director's meeting of which
stockholders holding a majority of the issued and outstanding shares of capital
stock are present. The directors are elected annually by the stockholders at the
annual meeting. Each director shall be elected for the term of one year, and
until his or her successor is elected and qualified, or until earlier
resignation or removal. The bylaws provide for at least one director. The
directors and executive officers are as follows:
Name Age Position - Committee
---- --- --------------------
Randall K. Fields 59 Chief Executive Officer
Chairman of the Board and Director
*William Dunlavy 51 Chief Financial Officer and Secretary
Thomas W Wilson 74 Director and Compensation Committee Chairman
**Edward C. Dmytryk 60 Director and Audit Committee Chairman
--------------
*Appointed CFO on 8/23/04
**Appointed Audit Committee Chairman 10/1/2004
Randall K. Fields has been the Chief Executive Officer, and Chairman of the
Board of Directors since June, 2001. Mr. Fields founded Park City Group, Inc., a
software development company based in Park City, Utah, in 1990 and has been its
President, Chief Executive Officer, and Chairman of the Board since its
inception in 1990. Mr. Fields has been responsible for the strategic direction
of Park City Group, Inc. since its inception. Mr. Fields co-founded Mrs. Fields
Cookies with his then wife, Debbi Fields. He served as Chairman of the Board of
Mrs. Fields Cookies from 1978 to 1990. In the early 1970's Mr. Fields
established a financial and economic consulting firm called Fields Investment
Group. Mr. Fields received a Bachelor of Arts degree in 1968 and a Masters of
Arts degree in 1970 from Stanford University, where he was Phi Beta Kappa,
Danforth Fellow and National Science Foundation Fellow.
William Dunlavy has been appointed CFO and Secretary as of August, 2004. Mr.
Dunlavy joined Fresh Market Manager LLC in 1999 as its Chief Operating Officer
and continued in the same capacity with the acquisition of Fresh Market Manager
LLC in 2001. He has been responsible for the design of the business
functionality in the Fresh Market Manager product in addition to his business
operations activities for Park City Group. He was formerly the Chief Operating
Officer at Mrs. Fields Cookies, Director of Operations at Golden Corral Family
Restaurants, head of Fresh Foods at Harris Teeter, Inc. and head of Fresh Foods
at Raley's and Bel Air Supermarkets. He has also served as a board member of the
International Deli, Dairy, Bakery Association.
Thomas W. Wilson, Jr. has been a director since August, 2001. From 1995 to 1999,
Mr. Wilson was the Chairman of the Board Information Resources, Inc., a Chicago,
Illinois-based provider of point-of-sale information based business solutions to
the consumer packaged goods industry. From 1998 to 1999, Mr. Wilson was the
Interim Chief Executive Officer of Information Resources, Inc. From 1966 to
1990, Mr. Wilson was employed in various capacities with McKinsey & Co., a
management consulting company. In 1968, Mr. Wilson was elected a Partner of
McKinsey and Co., and in 1972 he was elected a Senior Partner. Mr. Wilson
received a Bachelor of Arts Degree from Dartmouth College and a Masters of
Business Administration Degree from the Wharton School of the University of
Pennsylvania.
Edward C. Dmytryk has been a director since June, 2000. In October 2002, Mr.
Dmytryk took on additional responsibilities as acting Chief Financial Officer
and as such resigned from the Audit Committee. He served in this capacity until
19
June 2003. Later in 2003, Mr. Dmytryk became the Chief Executive Officer of
Safescript Pharmacies, Inc ( SAFS) due to a request by the Safescript
Pharmacies, Inc. Board of Directors to restructure the Company during a
liquidity crisis and a SEC investigation. He restructured the Company and helped
arranged the sale of assets to a group of interested investors. He remains the
CEO due to the complications of the sale and the damage caused by hurricane
Katrina in New Orleans where 3 operating pharmacies were located. Currently, Mr.
Dmytryk is the CEO of RxPert, Inc., a Pharmacy company located in Ponte Vedra,
Florida. Mr. Dmytryk graduated Summa Cum Laude from the Citadel, the Military
College of South Carolina in 1968 with a Bachelor of Science Degree and was an
Instructor Pilot in the United States Air Force..
Our Executive Officers are elected by the Board on an annual basis and serve at
the discretion of the Board.
Compliance with Section 16(a)
-----------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who
beneficially own more than 10% of a registered class of the Company's equity
securities, to file reports of beneficial ownership and changes in beneficial
ownership of the Company's securities with the SEC on Forms 3 (Initial Statement
of Beneficial Ownership), 4 (Statement of Changes of Beneficial Ownership of
Securities) and 5 (Annual Statement of Beneficial Ownership of Securities).
Directors, executive officers and beneficial owners of more than 10% of the
Company's Common Stock are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms that they file. The Company believes
that, during the year ended June 30, 2006, the Reporting Persons met all
applicable Section 16(a) filing requirements
Code of Ethics
--------------
The Company adopted their code of ethics by unanimous board of directors vote in
our October 2005 Board Meeting and is included by reference herein in Item 13,
Exhibits.
Committees of the Board of Directors
------------------------------------
Our board of directors has an audit committee, a compensation committee
and a nominating and corporate governance committee, each of which has the
composition and responsibilities described below:
Audit Committee. The audit committee provides assistance to the board
of directors in fulfilling its legal and fiduciary obligations in matters
involving our accounting, auditing, financial reporting, internal control and
legal compliance functions by approving the services performed by our
independent accountants and reviewing their reports regarding our accounting
practices and systems of internal accounting controls. The audit committee also
oversees the audit efforts of our independent accountants and takes those
actions as it deems necessary to satisfy itself that the accountants are
independent of management. The audit committee currently consists of Edward C.
Dmytryk (Chairman) and Thomas W. Wilson Jr., each of whom is a non-management
member of our board of directors. Edward C. Dmytryk is also our audit committee
financial expert as currently defined under Securities and Exchange Commission
rules. We believe that the composition of our audit committee meets the criteria
for independence under, and the functioning of our audit committee complies with
the applicable requirements of, the Sarbanes-Oxley Act of 2002, the current
rules of the Over-the-Counter Bulletin Board Stock Market and Securities and
Exchange Commission rules and regulations. We intend to comply with future audit
committee requirements as they become applicable to us.
Compensation Committee. The compensation committee determines our
general compensation policies and the compensation provided to our directors and
officers. The compensation committee also reviews and determines bonuses for our
officers and other employees. In addition, the compensation committee reviews
and determines equity-based compensation for our directors, officers, employees
and consultants and administers our stock option plans and employee stock
purchase plan. The current members of the compensation committee are Thomas W.
Wilson Jr. (Chairman), and Edward C. Dmytryk, each of whom is a non-management
member of our board of directors. We believe that the composition of our
compensation committee meets the criteria for independence under, and the
functioning of our compensation committee complies with the applicable
requirements of, the Sarbanes-Oxley Act of 2002, the current rules of the
Over-the-Counter Bulletin Board Stock Market and Securities and Exchange
Commission rules and regulations. We intend to comply with future compensation
committee requirements as they become applicable to us.
20
Nominating and Corporate Governance Committee. The nominating and
corporate governance committee is responsible for making recommendations to the
board of directors regarding candidates for directorships and the size and
composition of the board. In addition, the nominating and corporate governance
committee is responsible for overseeing our corporate governance guidelines and
reporting and making recommendations to the board concerning corporate
governance matters. The current members of the nominating and governance
committee are Randall K Fields (Chairman), and Edward C. Dmytryk. We believe
that the composition of our nominating and governance committee meets the
criteria for independence under, and the functioning of our nominating and
corporate governance committee complies with the applicable requirements of, the
Sarbanes-Oxley Act of 2002, the current rules of the Over-the-Counter Bulletin
Board Stock Market and Securities and Exchange Commission rules and regulations.
We intend to comply with future nominating and corporate governance committee
requirements as they become applicable to us.
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21
Item 10. Executive Compensation
-------------------------------
The following table sets forth information concerning the compensation paid to
the Company's Chief Executive Officer, and all persons serving as the Company's
most highly compensated executive officers other than its chief executive
officer, who were serving as executive officers as of June 30, 2006 and whose
annual compensation exceeded $100,000 during such year (collectively the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation Awards
------------------- -----------------------------
Restricted Securities
Other Annual Stock Underlying LTIP
Name and Principal Year/ Compensation Awards Options/SARs Payouts
Position Period Salary ($) Bonus ($) ($) ($) (#) ($)
------------------ ------ ---------- --------- ------------ ----------- ------------- ---------
Randall K. Fields 2006 279,167* - 71,126 (1) 45,833 - -
Chairman and CEO 2005 317,500* - 61,037 (1) 50,000 - -
2004 317,500* 4,377 46,760 (1) 50,000 - -
James Horton 2006 243,750** - - - -
President and COO 2005 270,833** - - - 8,336
William Dunlavy 2006 197,625 - (2) 22,500 -
CFO 2005 198,958 - - - 6,772 -
2004 100,000 4,377 - 50,000 - -
---------------------
* A significant part of Mr. Fields compensation is paid to a management
company wholly owned by Mr. Fields. Effective October 2002, Mr. Fields
agreed to voluntary reduction of cash compensation in exchange for
restricted stock.
** Mr. Horton joined the Company in September 2004 and resigned March 2006.
(1) These amounts include premiums paid on Life Insurance policies of $52,958,
$46,622 and $27,614 for 2006, 2005 and 2004, respectively, Company car
related expenses of $15,347, $13,003 and $14,880 for 2006, 2005 and 2004,
respectively; and medical premiums of $2,821 and $1,412 for 2006 and 2005,
respectively.
(2) 80,000 warrants were granted to Mr. Dunlavy effective June 30, 2006
incorporated by reference. See Exhibit 10.11.
22
Stock Options Granted in the Last Fiscal Year
---------------------------------------------
The following table sets forth information on grants of options to
purchase shares of our common stock in fiscal year 2006 to our officers and
directors.
Individual Grants
--------------------------------------------------------------------------------
% of Total Options and
Number of Securities Warrants Granted to Exercise
Underlying Options and Employees & Directors Price
Name Warrants Granted in Fiscal Year ($/Sh)(1) Expiration Date
------------------------------------ ------------------------ ------------------------ ------------- ----------------
William Dunlavy 80,000 86% $3.25 06/30/2011
Edward Dmytryk 6,667 7% $3.00 01/01/2008
Thomas Wilson 6,667 7% $3.00 01/01/2008
(1) The exercise price was equal to 100% of the fair market value on the date of grant.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option Values
Securities Underlying Value of Unexercised
Shares Acquired on Value Unexercised Options and Warrant In-the-Money Options at
June 30, 2006 at June 30, 2006 June 30, 2006
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
James Horton - N/A 128,571 - N/A -
Riverview Financial(1) - N/A 175,232 - 175,232.28 -
William Dunlavy - N/A 10,000 - 15,000.00 -
William Dunlavy - N/A 6,772 - N/A -
William Dunlavy - N/A 80,000 - N/A -
(1) Riverview Financial is an affiliate of Mr. Fields.
Employment Agreement
--------------------
Park City Group has an employment agreement with its chief executive officer,
Randall K. Fields, dated July 1, 2005. The compensation for Mr. Fields, under
the terms of the agreement, provides for a portion of the compensation to be
provided pursuant to an employment agreement and the balance to be provided
pursuant to the terms of a services agreement between the Company and Fields
Management, Inc., an executive management services provider, a company wholly
owned by Mr. Fields. The term of the two agreements is five years ending June
30, 2008, with automatic one-year renewals. The combined agreements provide for:
o An annual base compensation of $350,000. Effective October 2002,
voluntary reduction of cash compensation, reduction paid in
restricted stock,
o Use of a company vehicle,
o Employee benefits that are generally provided to Park City Group,
Inc. employees, and
o A bonus to be determined annually by the Compensation Committee of
the Board of Directors.
Park City Group had an employment agreement with its President and chief
operating officer, James Horton, dated effective September 1, 2004. Mr. Horton
resigned from the Compamy on March 31, 2006. This agreement provided Mr. Horton
with the following compensation:
o An annual base compensation of $325,000,
o An annual bonus based on the percent of his base pay that is equal
to the revenue growth of the Company provided that the company's
revenue grows at least 25% and that the pretax profits grow at an
equal or greater percent, 1/2 of this bonus will be paid in cash and
1/2 will be paid in stock,
o Employee benefits that are generally provided to Park City Group,
Inc. employees, and
o Stock options equal to 3 to 1 for each share of stock purchased at a
cost of $3.50 or the current market price, which ever is higher,
through September 30, 2005 with an exercise price of $3.50 or the
current market price, which ever is higher,
o Stock options equal to 2 to 1 for each share of stock purchased at a
cost of $3.50 or the current market price, which ever is higher,
$3.50 or the current market price, which ever is higher, there
after.
Park City Group has an employment agreement with its Chief Financial Officer,
William Dunlavy, dated effective July 1, 2006. This agreement provides Mr.
Dunlavy with the following compensation:
o An annual base compensation of $225,000,
o Employee benefits that are generally provided to Park City Group,
Inc. employees,
o Participation in Senior Executive Bonus Plan, and
o Stock options equal to 2 to 1 for each share of stock purchased,
with an exercise price of $3.50 or the current market price, which
ever is higher.
Director Compensation
---------------------
The continuing outside directors, Edward C. Dmytryk and Thomas W. Wilson, Jr.,
receive the following compensation:
Annual cash compensation of $10,000 payable at the rate of $2,500 per
quarter. The Company has the right to pay this amount in the form of shares
of Company Stock.
Annual options to purchase $20,000 of the Company restricted common stock
at the market value of the shares on the date of the grant, which is to be
the first day the stock market is open in January of each year.
401(k) Retirement Plan.
-----------------------
The Company offers an employee benefit plan under Benefit Plan Section 401(k) of
the Internal Revenue Code. Employees who have attained the age of 21 are
immediately eligible to participate. The Company, at its discretion, matches 50%
of the first 4% of each employee's contributions. No matching contribution has
been made after September 30, 2002.
Indemnification for Securities Act Liabilities
----------------------------------------------
Nevada law authorizes, and the Company's Bylaws and Indemnity Agreements provide
for, indemnification of the Company's directors and officers against claims,
liabilities, amounts paid in settlement and expenses in a variety of
circumstances. Indemnification for liabilities arising under the Act may be
23
permitted for directors, officers and controlling persons of the Company
pursuant to the foregoing or otherwise. However, the Company has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
Stock Options and Warrants
--------------------------
The Company has stock option plans that enable it to issue to officers,
directors, consultants and employees nonqualified and incentive options to
purchase common stock. At June 30, 2006, a total of 93,288 of such options were
outstanding with exercise prices ranging from $1.50 to $7.00 per share.
At June 30, 2006 a total of 896,837 warrants to purchase shares of common stock
were outstanding. Of those warrants, 506,448 were issued in connection with
certain debt financings; 128,571 were issued in connection with an equity
investment by an officer; 181,818 were issued as a commission for placement of
equity securities; and 80,000 were issued to an officer as additonal
compensation. These warrants have exercise prices ranging from $2.00 to $3.65
per share and expire between August 16, 2007 and June 30, 2011.
Compensation Committee Interlocks and Insider Participation
No executive officers of the Company serve on the Compensation Committee (or in
a like capacity) for the Company or any other entity.
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24
Item 11. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------
Security Ownership of Certain Beneficial Owners
-----------------------------------------------
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 28, 2006, for
each person or entity that is known to beneficially own more than 5 percent of
the Common Stock. As of September 28, 2006, there were 8,930,766 shares of
Common Stock outstanding.
Amount of
Title of Beneficial Nature of
Class Name and Address of Beneficial Owner Ownership(1) Ownership Percent of Class
----- ------------------------------------ ----------- --------- ----------------
Common Randall K. Fields, Park City, Utah 487,206 Direct 5.46%
Common Riverview Financial Corp., Park City, Utah (2) 3,845,140 (3) Direct 43.05%
--------- ------
Total 4,332,346 48.51%
========= ======
(1) Beneficial ownership is determined in accordance with SEC rules and
generally includes holding voting and investment power with respect to the
securities. Shares of common stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for
computing the percentage of the total number of shares beneficially owned by
the designated person, but are not deemed outstanding for computing the
percentage for any other person.
(2) Randall K. Fields is the president and 100% shareholder of Riverview
Financial Corp.
(3) Includes warrants to purchase 175,232 shares of common stock and 2,688
shares of common stock held in the name Fields Management, Inc. a wholly
owned subsidiary of Riverview Financial Corp.
Security Ownership of Management
--------------------------------
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of September 28, 2006, for each of the
Named Executive Officers, all directors and 5% or greater shareholders as a
group. As of September 28, 2006, there were 8,930,766 shares of Common Stock
outstanding.
Amoumt of
Beneficial Nature of
Title of Class Name, Position and Address of Beneficial Owner Ownership(1) Ownership Percent of Class
-------------- ---------------------------------------------- ----------- --------- ----------------
Common Randall K. Fields, CEO, Chairman and Director 4,332,346 (2) Direct and 48.51%
Park City, Utah Indirect
Common Edward C. Dmytryk, Director 52,140 (3) Direct *
Ocala, Florida
Common Thomas W. Wilson Jr., Director 300,218 (4) Direct 3.37%
Westport, Connecticut
Common William Dunlavy, CFO 132,314 (5) Direct 1.49%
Park City, Utah
Common Executive Officers & Directors as a Group 4,817,018 53.94%
======
-----------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with SEC rules and
generally includes holding voting and investment power with respect to the
securities. Shares of common stock subject to options or warrants currently
exercisable, or exercisable within 60 days, are deemed outstanding for
computing the percentage of the total number of shares beneficially owned by
the designated person, but are not deemed outstanding for computing the
percentage for any other person.
(2) Includes 3,845,140 shares of common stock beneficially owned by Riverview
Financial Corp., which is 100% owned by Randall K. Fields.
(3) Includes options to purchase 14,167 shares of common stock.
(4) Includes options and warrants to purchase 100,014 shares of common stock.
(5) Includes options to purchase 96,772 shares of common stock.
25
Change in Control
-----------------
The Company is not currently engaged in any activities or arrangements that it
anticipates will result in a change in control of the Company.
Item 12. Certain Relationships and Related Transactions
-------------------------------------------------------
The Company had a note payable to Riverview Financial Corporation (Riverview),
in the principal amount of $3,296,406 at June 30, 2005 with accrued interest of
$841,995. The chief executive of Riverview is also the chief executive of the
Company. In June 2004, the Company issued 49,600 shares of common stock to
Riverview to subordinate to the extended Whale Investments note. In March 2006
the note payable and accrued interest of $294,334 were converted to 1,324,693
shares of common stock. See Note 12 and 16 to the audited financial statements.
Riverview had loaned the Company $345,000 under a note payable bearing interest
at 18%. Payments were made monthly for interest only, with the principal due in
December 2005. Riverview was issued 17,143 shares of common stock as an
inducement to make the loan. The note was extended in June 2004 to December 2005
and again in January 2006 to December 2006. The loan was retired with cash
proceeds from a note payable funding from a bank in March 2006.
The Company's CEO has made loans to the Company through Riverview Financial
Corp. a wholly owned entity, to cover short term cash needs pursuant to a line
of credit promissory note payable. Repayments are made as funds are available,
with an extended due date of June 15, 2007 and interest is at 12%. In February
2006, the line of credit the Company has with Riverview was cancelled and
reissued in the amount of $800,000. The reissued line of credit carries an
interest rate of 12% with a fee for draws on the line. There was no balance due
under the line of credit at June 30, 2006. See note 7 to the audited financial
statements.
In December 2002 the Company obtained a $2,000,000 note payable funding from
Whale Investment, Ltd. The note bore interest at 18%, payable monthly, and was
due in December 2005, as extended. Whale Investment, Ltd. is controlled by an
individual who was already a shareholder of the Company at the time of the loan.
The extended note was due December 2005 and the Company paid to Whale
Investments $40,000 in cash and 20,000 in common stock valued at $80,000 as
consideration for the extension. The note payable was retired with cash
generated from operations in August 2005.
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26
Item 13. Exhibits
-----------------
Exhibits, Financial Statements and Schedules
The Consolidated Financial Statements of the Company and its subsidiaries are
filed as part of this Report:
o Report of Independent Registered Public Accounting Firm
o Consolidated Balance Sheet as of June 30, 2006
o Consolidated Statement of Operations for the years ended June 30,
2006 and 2005
o Consolidated Statement of Stockholders' Deficit for the years ended
June 30, 2006 and 2005
o Consolidated Statement of Cash Flows for the years ended June 30,
2006 and 2005
o Notes to Consolidated Financial Statements
Exhibit
Number Description
------ -----------
2.1 Reorganization Agreement by and Among Amerinet.com,
Inc., Randall K. Fields and Riverview Financial Corp.
(1)
2.2 First Amendment to Reorganization Agreement (1)
2.3 Second Amendment to Reorganization Agreement (1)
3.1 Article Of Incorporation (2)
3.2 Certificate Of Amendment (3)
3.3 Bylaws (2)
3.4 Certificate of Amendment(9)
10.1 Warrant To Purchase Common Stock (4)
10.2 Form Of Securities Purchase Agreement (5)
10.3 Placement Agent Agreement (5)
10.4 Form Of Warrant, Dated June 14, 2006 (5)
10.5 Consulting Services Agreement (7)
10.6 Right Of First Offer Agreement (7)
10.7 Warrant To Purchase Common Stock (8)
10.8 Amended Employment Agreement Randall K. Fields
10.9 Services Agreement with Fields Management, Inc.
10.10 Commercial Real Estate Lease - Pinebrook(9)
10.11 Warrant to Purchase Common Stock(9)
10.12 Accord and Satisfaction of an Employment Agreement
with William Dunlavy
10.13 Employment Agreement William Dunlavy
14.1 Code of Ethics (10)
31.1 Certification of Principal Executive Officer pursuant
to Section 302 of the Sarbanes Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant
to Section 302 of the Sarbanes Oxley Act of 2002
32.1 Certification of Principal Executive Officer pursuant
to 18 U.S.C Section 1350
32.2 Certification of Principal Financial Officer pursuant
to 18 U.S.C Section 1350
(1) Incorporated by reference from our Form 8-K dated June 13, 2001.
(2) Incorporated by reference from our Form DEF 14C dated June 5, 2002.
(3) Incorporated by reference from our Form 10-QSB for the quarter
ended Sept 30, 2005.
(4) Incorporated by reference from our Form 8-K dated November 27,
2002.
(5) Incorporated by reference from our Form 8-K dated June 14, 2006.
(6) Incorporated by reference from our Form 10-KSB for the year ended
June 30, 2005.
(7) Incorporated by reference from our Form 8-K dated August 05, 2005.
(8) Incorporated by reference from our Form 8-K dated August 16, 2002.
(9) Incorporated by reference from our Form 10-KSB dated September 29,
2006.
(10) Incorporated by reference from our Form 10-QSB dated November 10,
2005.
Item 14. Principal Accounting Fees and Services
-----------------------------------------------
The Audit Committee has adopted policies and procedures to oversee the external
audit process including engagement letters, estimated fees and solely
pre-approving all permitted non-audit work performed by HJ & Associates, LLC and
Tanner LC. The Committee has pre-approved all fees for work performed.
The Audit Committee has considered whether the services provided by HJ &
Associates, LLC and Tanner LC as disclosed below in the captions "Audit-Related
Fee", "Tax Fees" and "All Other Fees" and has concluded that such services are
compatible with the independence of HJ & Associates, LLC and Tanner LC as the
Company's principal accountants.
For the fiscal years 2006 and 2005, the Audit Committee pre-approved all
services described below in the captions "Audit Fees", "Audit-Related Fees",
"Tax Fees" and "All Other Fees". For fiscal year 2006 and 2005, no hours
expended on HJ & Associates, LLC's and Tanner LC's engagement to audit the
Company's financial statements were attributed to work performed by persons
other than full-time, permanent employees of HJ & Associates, LLC and Tanner LC.
The aggregate fees billed for professional services by HJ & Associates, LLC in
fiscal year 2006 and 2005 and Tanner LC in fiscal year 2005 for these various
services were:
Type of Fees 2006 2005
---------------- ------- -------
Audit Fees $49,500 $53,450
Audit-Related Fees - -
Tax Fees - 8,400
All Other Fees - -
------- -------
Total $49,500 $64,850
======= =======
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
27
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PARK CITY GROUP, INC.
(Registrant)
Date: October 13, 2006 By /s/ Randall K. Fields
----------------------------------
Principal Executive Officer,
Chairman of the Board and Director
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Randall K. Fields Chief Executive Officer, October 13, 2006
------------------------- Chairman of the Board and Director
Randall K. Fields (Principal Executive Officer)
/s/ William Dunlavy Chief Financial Officer and October 13, 2006
------------------------- Secretary (Principal Financial
William Dunlavy Officer and Principal Accounting
Officer)
/s/ Edward C. Dmytryk Director October 13, 2006
-------------------------
Edward C. Dmytryk
/s/ Thomas W. Wilson, Jr. Director October 13, 2006
-------------------------
Thomas W. Wilson, Jr.
28
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders of
Park City Group, Inc and Subsidiaries
Park City, Utah
We have audited the accompanying consolidated balance sheets of Park City Group,
Inc. and Subsidiaries as of June 30, 2006 and 2005, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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. 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
opinions.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Park
City Group, Inc. and Subsidiaries as of June 30, 2006 and 2005, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ HJ & Associates, LLC
HJ & Associates, LLC
Salt Lake City, Utah
September 22, 2006
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
29
PARK CITY GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Assets June 30, 2006 June 30, 2005
--------------- ---------------
Current Assets:
Cash and cash equivalents $ 3,517,060 $ 209,670
Receivables, net of allowance of $126,324 and $56,000 at
June 30, 2006 and 2005, respectively 103,190 327,214
Unbilled receivables 237,641 29,125
Prepaid expenses and other current assets 173,687 37,060
--------------- ---------------
Total current assets 4,031,578 603,069
--------------- ---------------
Property and equipment, net 84,741 109,512
--------------- ---------------
Other assets:
Deposits and other assets 29,958 25,000
Capitalized software costs, net 680,187 332,349
--------------- ---------------
Total other assets 710,145 357,349
--------------- ---------------
Total assets $ 4,826,464 $ 1,069,930
=============== ===============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 112,136 $ 628,398
Accrued liabilities 230,062 316,706
Deferred revenue 648,686 883,425
Current portion of capital lease obligations 16,774 23,159
Derivative liability 489,624 -
Related party payable lines of credit - 619,743
Related party accrued interest - 848,258
Related party notes payable, net of discount of $12,375 at June 30, 2005 - 332,625
Notes payable, net of discounts of $54,976 at June 30, 2005 - 1,945,024
--------------- ---------------
Total current liabilities 1,497,282 5,597,338
--------------- ---------------
Long-term liabilities:
Long-term note payable, net of discount of $97,404 1,842,596 -
Long-term related party note payable, net of discount of $122,992
at June 30, 2005 - 3,173,414
Capital lease obligations, less current portion 4,948 2,127
--------------- ---------------
Total long-term liabilities 1,847,544 3,175,541
--------------- ---------------
Total liabilities 3,344,826 8,772,879
--------------- ---------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.01 par value, 30,000,000 shares authorized, none issued
Common stock, $0.01 par value, 50,000,000 shares authorized; 8,931,234 and
5,651,118 issued and outstanding at June 30, 2006 and 2005, respectively 89,312 56,511
Additional paid-in capital 20,564,933 12,806,743
Accumulated deficit (19,172,607) (20,566,203)
--------------- ---------------
Total stockholders' equity (deficit) 1,481,638 (7,702,949)
--------------- ---------------
Total liabilities and stockholders' equity (deficit) $ 4,826,464 $ 1,069,930
=============== ===============
See accompanying notes to consolidated financial statements.
30
PARK CITY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended June 30, 2006 and 2005
2006 2005
------------- -------------
Revenues:
Software licenses $ 3,626,821 $ 479,615
Maintenance and support 2,271,997 2,312,308
Application server provider 182,083 104,367
Consulting and other 1,004,224 735,522
------------- -------------
7,085,125 3,631,812
Cost of revenues 1,586,535 1,448,726
------------- -------------
Gross margin 5,498,590 2,183,086
------------- -------------
Operating expenses:
Research and development 292,191 1,019,411
Sales and marketing 1,375,794 1,337,318
General and administrative 1,518,092 2,055,940
------------- -------------
Total operating expenses 3,186,077 4,412,669
------------- -------------
Income (loss) from operations 2,312,513 (2,229,583)
Other income (expense):
Loss on derivative liability (34,513) -
Interest expense (884,404) (1,178,454)
------------- -------------
Income (loss) before income taxes 1,393,596 (3,408,037)
(Provision) benefit for income taxes - -
------------- -------------
Net income (loss) $ 1,393,596 $ (3,408,037)
============= =============
Weighted average shares, basic 6,084,000 5,489,000
============= =============
Weighted average shares, diluted 6,263,000 5,489,000
============= =============
Basic income (loss) per share $ 0.23 $ (0.62)
============= =============
Diluted income (loss) per share $ 0.22 $ (0.62)
============= =============
See accompanying notes to consolidated financial statements.
31
Park City Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended June 30, 2006 and 2005
Common Stock Additional
------------------- Paid-In Treasury Accumulated
Shares Amount Capital Stock Deficit Total
------ ------ ------- ----- ------- -----
Balance, June 30, 2004 5,374,323 $53,743 $11,966,546 $ - $(17,158,166) $(5,137,877)
Common stock issued for:
Compensation 173,817 1,738 470,517 - - 472,255
Services 14,320 143 39,617 - - 39,760
Settlement 41,300 413 164,787 - - 165,200
Debt refinancing 4,500 45 15,705 - - 15,750
Cash, net of offering
costs 42,857 429 149,571 - - 150,000
Net loss - - - - (3,408,037) (3,408,037)
------------ ----------- ------------- ------------- ------------ ------------
Balance, June 30, 2005 5,651,118 56,511 12,806,743 - (20,566,203) (7,702,949)
Common stock issued for:
Compensation 74,248 742 204,105 - - 204,847
Debt refinancing 4,500 45 15,705 - - 15,750
Debt conversion 1,324,693 13,247 3,460,356 - - 3,473,603
Exercise of options 58,571 586 116,557 - - 117,143
Cash, net of offering
costs 1,818,182 18,181 3,961,467 - - 3,979,648
Net income - - - - 1,393,596 1,393,596
------------ ----------- ------------- ------------- ------------ ------------
Balance, June 30, 2006 8,931,312 $89,312 $20,564,933 $ - $(19,172,607) $ 1,481,638
============ =========== ============= ============= ============ ============
See accompanying notes to consolidated financial statements.
32
PARK CITY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2006 and 2005
2006 2005
----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 1,393,596 $ (3,408,037)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 288,433 337,851
Bad debt expense 70,324 358,158
Loss on derivative liability 34,513 -
Stock issued for services and expenses 204,849 677,215
Amortization of discounts on debt 224,389 177,506
(Increase) decrease in:
Trade Receivables 153,700 457,786
Other receivables (208,515) (29,125)
Prepaids and other assets (141,585) 169,109
(Decrease) increase in:
Accounts payable (516,262) 301,227
Accrued liabilities (86,646) (108,377)
Deferred revenue (234,738) (228,490)
Related party payable 97,000 -
Accrued interest, related party (553,924) 500,859
------------------ -------------------
Net cash provided by (used in) operating activities 725,134 (794,318)
------------------ -------------------
Cash Flows From Investing Activities:
Purchase of property and equipment (22,146) (35,345)
Capitalization of software costs (564,651) -
Proceeds from disposal of property - 3,400
------------------ -------------------
Net cash used in investing activities (586,797) (31,945)
------------------ -------------------
Cash Flows From Financing Activities:
Net (payments) proceeds in lines of credit (716,743) 619,743
Proceeds from issuances of stock, net of offering costs of $431,577 4,434,764 150,000
Payment to extend note (9,000) (9,000)
Proceeds from debt 1,833,300 -
Payments on notes payable and capital leases (2,373,268) (37,627)
------------------ -------------------
Net cash provided by financing activities 3,169,053 723,116
------------------ -------------------
Net increase (decrease) in cash and cash equivalents 3,307,390 (103,147)
Cash and cash equivalents at beginning of period 209,670 312,817
------------------ -------------------
Cash and cash equivalents at end of period $ 3,517,060 $ 209,670
================== ===================
See accompanying notes to consolidated financial statements.
33
Park City Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2006 and June 30, 2005
1. Summary of Significant Accounting Policies, Organization and Principles
of Consolidation
Business Activity
-----------------
The Company designs, develops, markets and supports proprietary software
products. These products are designed to be used in retail businesses having
multiple locations to assist in the management of business operations on a daily
basis and communicate results of operations in a timely manner. In addition the
Company has built a consulting practice for business improvement that centers
around the companies proprietary software products. The principal markets for
the Company's products are retail companies, financial services, branded food
manufacturers and display manufacturing companies which have operations in North
America and, to a lesser extent, in Europe and Asia.
Principles of Consolidation
---------------------------
The financial statements presented herein reflect the consolidated financial
position of Park City Group, Inc. and Subsidiaries. All inter-company
transactions and balances have been eliminated in consolidation.
Use of Estimates and Reclassifications
--------------------------------------
The preparation of consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that materially affect the amounts reported in the consolidated
financial statements. Actual results could differ from these estimates. The
methods, estimates and judgments the Company uses in applying its most critical
accounting policies have a significant impact on the results it reports in its
financial statements. The U.S. Securities and Exchange Commission has defined
the most critical accounting policies as the ones that are most important to the
portrayal of the Company's financial condition and results, and require the
Company to make its most difficult and subjective judgments, often as a result
of the need to make estimates of matters that are inherently uncertain. Based on
this definition, the Company's most critical accounting policies include:
revenue recognition, allowance for doubtful accounts, capitalization of software
development costs and impairment of long-lived assets.
Cash and Cash Equivalents
-------------------------
The Company considers all short-term instruments with an original maturity of
three months or less to be cash equivalents.
Concentration of Credit Risk and Significant Customers
------------------------------------------------------
The Company maintains cash in bank deposit accounts, which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on cash
and cash equivalents.
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which when realized have been within the range of
management's expectations. The Company does not require collateral from its
customers.
The Company's accounts receivable are derived from sales of products and
services primarily to customers operating multi-location retail and grocery
stores. At June 30, 2006, net accounts receivable includes amounts due from
customers totaling $103,190.
During the year ended June 30, 2006, the Company received approximately $4.57
million of its revenue from new customers and approximately $2.5 million in
revenue from existing customers for continued support and additional license
sales.
During the years ended June 30, 2006 and 2005, the Company had sales to major
customers that exceeded 10 percent of revenues are as follows:
2006
Customer A $3,547,185
2005
Customer B $489,045
Customer C $374,249
The Company also has an account receivable from a major customer as of June 30,
2006 as follows:
Customer D $141,623
34
Allowance for Doubtful Accounts Receivable
------------------------------------------
The Company offers credit terms on the sale of the Company's products to a
significant majority of the Company's customers and require no collateral from
these customers. The Company performs ongoing credit evaluations of the
Company's customers' financial condition and maintains an allowance for doubtful
accounts receivable based upon the Company's historical experience and a
specific review of accounts receivable at the end of each period. As of June 30,
2006, the allowance for doubtful accounts was $126,324.
Depreciation and Amortization
-----------------------------
Depreciation and amortization of property and equipment is computed using the
straight line method based on the following estimated useful lives:
Years
-----
Furniture and fixtures 7
Computer equipment 3
Equipment under capital leases 3
Leasehold improvements see below
Leasehold improvements are amortized over the shorter of the remaining lease
term or the estimated useful life of the improvements.
Warranties
----------
The Company offers a limited warranty against software defects for a general
period of ninety days. Customers who are not completely satisfied with their
software purchase may attempt to be reimbursed for their purchases outside the
warranty period. The Company accrues amounts for such warranty settlements that
are probable and can be reasonably estimated.
Revenue Recognition
-------------------
Revenue from the sale of software licenses is recognized upon delivery of the
software unless specific delivery terms provide otherwise. If not recognized
upon delivery, revenue is recognized upon meeting specified conditions, such as,
meeting customer acceptance criteria. In no event is revenue recognized if
significant Company obligations remain. Customer payments are typically received
in part upon signing of license agreements, with the remaining payments received
in installments pursuant to the agreements. Until revenue recognition
requirements are met, the cash payments received are treated as deferred
revenue.
Maintenance and support services that are sold with the initial license fee are
recorded as deferred revenue and recognized ratably over the initial service
period. Revenues from maintenance and other support services provided after the
initial period are generally paid in advance and are recorded as deferred
revenue and recognized on a straight-line basis over the term of the agreements.
Consulting service revenues are recognized in the period that the service is
provided or in the period such services are accepted by the customer if
acceptance is required by agreement.
ASP Services are sold, on a contractual bases, for one or more years. These fees
are collected in advance of the services being performed and the revenue is
recognized ratably over the respective months, as services are provided.
Software Development Costs
--------------------------
The Company accounts for research and development costs in accordance with
several accounting pronouncements, including SFAS No. 2, Accounting for Research
and Development Costs, and SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed. SFAS No. 86 specifies that
costs incurred internally in researching and developing a computer software
product should be charged to expense until technological feasibility has been
established for the product. Once technological feasibility is established, all
software costs should be capitalized until the product is available for general
release to customers
From inception through January 2001, the Company viewed the software as an
evolving product. Therefore, all costs incurred for research and development of
the Company's software products through January 2001 were expensed as incurred.
During January 2001, technological feasibility of a major revision to the
Company's Fresh Market Manager and the Company's ActionManager 4x development
platform was established. Development costs for Fresh Market Manager software
incurred from January 2001 through September 2002, totaling $1,063,515, were
capitalized. These costs are being amortized on a straight-line basis over four
years, beginning in September 2002 when the product was available for general
release to customers. During 2006 and 2005, $265,876 of the capitalized
development costs were amortized into expense each year.
In July 2005 the Company reached technological feasibility on 1 new product and
2 major enhancements to existing product offerings. During the period July 2005
through June 2006 the Company capitalized $613,717 of development costs
associated with these products and enhancements. We anticipate these products
being available for general release in the later part of FY2007. We will
continue capitalization until that time.
35
Research and Development Costs
------------------------------
Research and development costs include personnel costs, engineering, consulting,
and contract labor and are expensed as incurred for software that has not
achieved technological feasibility.
Income Taxes
------------
The Company accounts for income taxes under the provision of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. This method
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between tax bases and financial
reporting bases of other assets and liabilities.
Earnings Per Share
------------------
The computation of basic (loss) earnings per common share is based on the
weighted average number of shares outstanding during each year. The computation
of diluted earnings per common share is based on the weighted average number of
shares outstanding during the year, plus the common stock equivalents that would
arise from the exercise of stock options and warrants outstanding, using the
treasury stock method and the average market price per share during the year.
Options and warrants to purchase 990,125 and 1,052,760 shares of common stock at
prices ranging from $1.50 to $7.00 per share were outstanding at June 30, 2006
and 2005, respectively. Of these 431,807 and 1,052,760 for 2006 and 2005,
respectively, were not included in the diluted loss per share calculation
because the effect would have been anti-dilutive.
The shares used in the computation of the Company's basic and diluted earnings
per common share are reconciled as follows:
June 30, 2006 June 30, 2005
------------- -------------
Weighted average 6,084,000 5,489,000
Dilutive effect of options and warrants 179,000 -
---------- ---------
Weighted average shares outstanding
assuming dilution 6,263,000 5,489,000
========= =========
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123) which established financial accounting and reporting standards for
stock-based compensation. The new standard defines a fair value method of
accounting for an employee stock option or similar equity instrument. This
statement gives entities the choice between adopting the fair value method or
continuing to use the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 with footnote disclosures of the pro forma effects if the
fair value method had been adopted. The Company has opted for the latter
approach.
Had compensation expense for the Company's option plan been determined based on
fair value at the grant dates, as prescribed in SFAS No. 123 as amended by SFAS
No. 148, the Company's net loss would have been as follows:
Year Ended Year Ended
June 30, June 30,
2006 2005
Net Income (Loss)
As reported $1,393,596 $(3,408,037)
Pro forma $1,113,946 $(4,038,715)
Income (loss) per common share-basic-as reported $0.23 $(0.62)
Income (loss) per common share-diluted-as reported $0.22 $(0.62)
Income (loss) per common share-basic-pro forma $0.18 $(0.74)
Income (loss) per common share-diluted-pro forma $0.18 $(0.74)
The weighted-average grant-date fair value of options granted during years ended
June 30, 2006 and 2005 were $3.00 and $3.24 per share, respectively. The fair
value for the options granted in 2006 and 2005 were estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
6/30/06 6/30/05
------- -------
Risk-free interest rate 4.34% - 5.16% 1.63% - 3.73%
Expected life (in years) 2 - 5 2 - 10
Expected volatility 369.58% 404.47%
Expected dividend yield 0.00% 0.00%
36
The following table summarizes information about fixed stock options and
warrants outstanding at June 30, 2006:
Options and Warrants Outstanding Options and Warrants
at June 30, 2006 Exercisable at June 30, 2006
---------------- ----------------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of Outstanding at contractual exercise Exercisable at exercise
exercise prices June 30, 2006 life(years) price June 30, 2006 price
--------------- ------------- ----------- ----- ------------- -----
$1.50 - $2.50 558,318 1.62 $ 1.98 558,318 $ 1.98
$3.00 - $4.00 421,807 4.25 3.51 421,807 3.53
$7.00 10,000 0.36 7.00 10,000 7.00
------ ------
990,125 2.74 $ 2.69 990,125 $ 2.69
======= =======
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist of cash, receivables, payables,
accruals and notes payable. The carrying amount of cash, receivables, payables
and accruals approximates fair value due to the short-term nature of these
items. The notes payable also approximate fair value based on evaluations of
market interest rates.
2. Liquidity
As shown in the consolidated financial statements for the fiscal year ended,
June 30, 2006, the Company has achieved positive cash flow provided by
operations in the amount of $725,134, compared to a ($794,318) cash deficit from
operations in FYE 2005. Furthermore, during Fiscal Year Ending, June 30, 2006,
the Company restructured its debt and equity portfolio, refinancing note
payables and paying off a revolving line of credit from its net proceeds of
issuing 3,636,364 shares of restricted common stock, as described under Item
1.01 of Form 8K date June 14, 2006. The total net proceeds to the company from
this sale were approximately $4,570,000. The Company anticipates a comparative
reduction in interest costs by approximately $800,000 during Fiscal Year Ending,
June 30 2007.
In addition, the Company believes that cash flow from new business development
and renewed contracts, as well as a reduction of liabilities from $8,772,879 to
$3,344,826 combined with access to a $1.9 million revolving line of credit will
provide the funds necessary to operate, and will allow the Company to fund its
currently anticipated working capital, capital spending and debt service
requirements during the year ended June 30, 2007.
For the year ended, June 30, 2006, the Company experienced a surge in revenue.
The 95% increase in total comparative revenue, including seven new Supply Chain
Profit Link business contracts that were initiated in 2006, the Company's
anticipated release of SR5, and 2 new significant enhancements to existing
products will provide current and future operating cash flows. The Company
believes that anticipated revenue growth will allow the Company to meet its
minimum operating cash requirements for Fiscal Year 2007. The financial
statements do not reflect any adjustments should the Company's operations not be
achieved.
Although the Company anticipates that it will meet its working capital
requirements primarily through increased revenue, pay-downs on debt and other
liabilities while controlling costs there can be no assurances that the Company
will be able to meet its working capital requirements. Should the Company desire
to raise additional equity or debt financing, there are no assurances that the
Company could do so on acceptable terms.
3. Receivables
Trade accounts receivable consist of the following at June 30, 2006 and 2005:
2006 2005
---- ----
Trade accounts receivable $ 229,512 $ 383,214
Allowance for doubtful accounts (126,324) (56,000)
----------- -----------
$103,190 $327,214
=========== ===========
Unbilled receivables consists of amounts recognized as revenue during the year
for which invoices were sent subsequent to June 30, 2006
37
4. Property and Equipment
Property and equipment are stated at cost and consist of the following at June
30, 2006 and 2005:
2006 2005
---- ----
Computer equipment $ 1,455,396 $ 1,408,546
Furniture and equipment 207,251 207,251
----------- -----------
Leasehold improvements 85,795 85,795
----------- -----------
1,748,442 1,701,592
Less accumulated depreciation and amortization (1,663,701) (1,592,080)
----------- -----------
$ 84,741 $ 109,512
=========== ===========
5. Capitalized software costs
Capitalized software costs consists of the following at June 30, 2006 and 2005:
2006 2005
---- ----
Capitalized software costs $ 1,677,234 $ 1,063,516
Less accumulated amortization (997,047) (731,167)
----------- -----------
$ 680,187 $ 332,349
=========== ===========
Estimated aggregate amortization expenses for each of the next five years
is as follows:
Year ending June 30:
2007 $ 66,470
2008 153,429
2009 153,430
2010 153,429
--------------
2011 $ 153,430
` ==============
6. Accrued Liabilities
Accrued liabilities consist of the following at June 30, 2006 and 2005:
2006 2005
---- ----
Accrued vacation $ 110,717 $ 112,722
Other accrued liabilities 55,160 32,684
Accrued compensation 59,185 156,300
Accrued board compensation 5,000 15,000
----------- -----------
$ 230,062 $ 316,706
=========== ===========
7. Related party line of credit
In February 2006 the Company arranged an unsecured, revolving line of credit
with Riverview Financial Corp, a wholly owned affiliate of the Company's CEO.
The line bears interest at 12% with a fee for advances, and is repaid as funds
availability permits. The line of credit expires on June 15, 2007. The limit on
this line of credit is $800,000; there was no balance due at June 30, 2006.
38
8. Derivative Liability
In conjunction with raising capital through the issuance of convertible debt,
the Company has issued various warrants that have registration rights for the
underlying shares. As the contracts must be settled by the delivery of
registered shares and the delivery of the registered shares is not controlled by
the Company, pursuant to EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's own Stock," the
net value of the warrants at the date of issuance was recorded as long-term
derivative liability on the balance sheet as of June 21, 2006 $ 455,111 and the
change in fair value from the date of issuance to June 30, 2006 has been
included as a loss on derivative liability in the amount of $ 34,513 reflected
on the Consolidated Statement of Operations. The total derivative liability as
of June 30, 2006 was $489,624.
9. Long-term notes payable
The Company had the following long-term notes payable at June 30, 2006 and 2005:
2006 2005
---- ----
Note payable to a Bank bearing interest at
6.7%, due March 31, 2008, secured by a
certificate of deposit issued by the same bank
in and held in the name of Riverview Financial
Corp., net of discount of $97,404 $1,842,596 $ -
Note payable to Riverview bearing interest at
12% compounding, due July 31, 2007, unsecured,
net of discount of $122,992 - 3,173,414
Capital lease obligation on computer
equipment, due in monthly installments of
$3,303 decreasing through December 2007,
imputed interest rates of 10.9% 21,722 25,286
----------- -----------
1,864,318 3,198,700
Less current portion of capital lease
obligations (16,774) (23,159)
----------- -----------
$1,847,544 $3,175,541
=========== ===========
Maturities of long-term debt at June 30, 2006 are as follows:
Year ending June 30:
2007 $ 21,722
2008 1,842,596
--------------
$ 1,847,544
==============
Capital Leases: Amortization expense related to capitalized leases is included
in depreciation expense and was $29,350 and $25,926 for the years ended June 30,
2006 and 2005, respectively. Accumulated depreciation was $88,159 at June 30,
2006. This amortized depreciation expenses relates to $122,825 of equipment
purchased under capital lease agreements of which $54,908 is still under capital
lease at June 30, 2006.
10. Deferred Revenue
Deferred revenue consisted of the following at June 30, 2006 and 2005:
2006 2005
---- ----
License Sales $ 17,817 $ 17,817
Consulting Services 118,020 18,950
Maintenance and Support 512,849 846,658
---------- ----------
$ 648,686 $ 883,425
========== ==========
11. Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
40
Net deferred tax liabilities consist of the following components as of June 30,
2006 and 2005:
2006 2005
-------------------- -------------------
Deferred tax assets:
NOL Carryover $ 2,032,290 $ 4,250,000
Depreciation 58,260 52,000
Allowance for Bad Debts 57,655 22,000
Accrued Expenses 296,165 389,000
Deferred tax liabilities
Valuation allowance (2,444,370) (4,713,000)
-------------------- -------------------
Net deferred tax asset $ - $ -
==================== ===================
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income from continuing
operations for the years ended June 30, 2006 and 2005 due to the following:
2006 2005
-------------------- -------------------
Book Income $ 543,310 $ (1,329,000)
Stock for Services 128,960
Life Insurance 34,220
Meals & Entertainment 5,065
NOL Utilization (711,555)
Other 31,000
Valuation allowance - 1,298,000
-------------------- -------------------
$ - $ -
==================== ===================
At June 30, 2006, the Company had net operating loss carryforwards of
approximately $5,200,000 that may be offset against future taxable income from
the year 2006 through 2026. No tax benefit has been reported in the June 30,
2006 consolidated financial statements since the potential tax benefit is offset
by a valuation allowance of the same amount.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carryforwards for Federal income tax reporting purposes are
subject to annual limitations. Should a change in ownership occur, net operating
loss carryforwards may be limited as to use in future years.
12. Supplemental Disclosure of Cash Flow Information
Interest paid during the years ended June 30, 2006 and 2005 was $1,177,320 and
$460,085, respectively. No income taxes were paid during the years ended June
30, 2006 or 2005.
Non-Cash Transactions Disclosure for the Years Ended June 30, 2006 and 2005:
2006 2005
---- ----
Common stock issued for debt refinancing $ 15,750 $15,750
Common stock issued for debt conversion $3,473,606 $ -
Property and Equipment purchased by capital lease $ 24,703 $35,345
13. Commitments and Contingencies.
Operating Leases.
-----------------
Under terms originally entered into in September 1998 for office space the
Company is currently paying $10,500 on a month-to-month basis. Total rent
expense under this agreement for each of the years ended June 30, 2006 and 2005
was $122,000 and $114,000, respectively. The Company is currently negotiating a
new office space lease agreement at another location.
The Company has entered into a lease at 3160 Pinebrook Drive, Park City, UT,
84098 and anticipates relocating to the new facility on or about November 1,
2006, possession to be determined by timing of build-out of leasehold
improvements. The Company will lease approximately 10,000 square feet for a
period of 3 years, with an option to renew for an additional 3 year increments.
Monthly rent is $11,438 with annual increases of 3%.
14. Employee Benefit Plan
The Company offers an employee benefit plan under Benefit Plan Section 401(k) of
the Internal Revenue Code. Employees who have attained the age of 21 are
eligible to participate. The Company, at its discretion, matches 50% of the
first 4% of each employee's contributions. The Company currently does not match
employee contributions. There were no expenses for the years ended June 30, 2006
and 2005.
41
15. Stock Compensation Plans
Stock in Lieu of Cash Compensation. Beginning October 1, 2002, officers and
management of the Company received a portion of their compensation in common
stock of the Company. The number of shares was calculated based on the fair
value of the shares at the end of each payroll period, with a floor price of
$2.50 per share. During the year ended June 30, 2006 46,893 shares were issued
with a fair value of $139,473.
Officers and Directors Stock Compensation. In February 2004 to be effective
January 2004, the Board of Directors approved the following compensation for
directors who are not employed by the Company.
o Annual cash compensation of $10,000 payable at the rate of $2,500
per quarter. The Company has the right to pay this amount in the
form of shares of common stock of the Company.
o Annual options to purchase $20,000 of the Company restricted common
stock at the market value of the shares on the date of the grant,
which is to be the first day the stock market is open in January of
each year.
o Reimbursement of all travel expenses related to performance of
Directors duties on behalf of the Company.
As of June 30, 2006 there were outstanding to directors fully vested options
outstanding to purchase 53,334 common shares at $2.00 - $7.00 per share, and
expiring at various dates through January 2008.
Officers, Key Employees, Consultants and Directors Stock Compensation. In
January 2000, the Company entered into a non-qualified stock option & stock
incentive plan. Officers, key employees, consultants and directors of the
Company are eligible to participate. The maximum aggregate number of shares
which may be granted under this plan was originally 20,000 and was subsequently
amended to 40,000 on March 8, 2000. The plan is administered by a Committee. The
exercise price for each share of common stock purchasable under any incentive
stock option granted under this plan shall be not less than 100% of the fair
market value of the common stock, as determined by the stock exchange on which
the common stock trades on the date of grant. If the incentive stock option is
granted to a shareholder who possesses more than 10% of the Company's voting
power, then the exercise price shall be not less than 110% of the fair market
value on the date of grant. Each option shall be exercisable in whole or in
installments as determined by the Committee at the time of the grant of such
options. All incentive stock options expire after 10 years. If the incentive
stock option is held by a shareholder who possesses more than 10% of the
Company's voting power, then the incentive stock option expires after five
years. If the option holder is terminated, then the incentive stock options
granted to such holder expire no later than three months after the date of
termination. For options holders granted incentive stock options exercisable for
the first time during any fiscal year and in excess of $100,000 (determined by
the fair market value of the shares of common stock as of the grant date), the
excess shares of common stock shall not be deemed to be purchased pursuant to
incentive stock options.
Effective June 30, 2006 the Board of Directors authorized the granting to the
Company's CFO warrants to acquire 80,000 shares of common stock at $3.25 per
share with a five year term.
A schedule of the options and warrants at June 30, 2006 and 2005 is as follows:
Number of
Options Warrants Price per Share
Outstanding at July 1, 2004 66,181 1,437,224 $1.50-37.50
Granted 85,980 128,571 $1.50-3.50
Exercised - - -
Called - - -
Cancelled (21,020) (10,500) $1.50-4.00
Expired (22,210) (611,465) $2.00-37.50
-------- --------- -----------
Outstanding at June 30, 2005 108,931 943,830 $1.50-7.00
Granted 13,334 261,818 $3.00-3.65
Exercised - (58,572) $2.00
Called - - -
Cancelled - - -
Expired (28,977) (250,239) $1.50-4.00
-------- --------- ----------
Outstanding at June 30, 2006 93,288 896,837 $1.50-7.00
====== ======= ==========
42
16. Related Party Transactions
In March 2006, the Company obtained a Note Payable from a bank in the amount of
$1,940,000. Riverview Financial Corporation (Riverview), a wholly owned
affiliate of the Company's CEO, currently is the guarantor on this note payable
and receives a fee of 3% of the outstanding balance of the note payable as
consideration for the guarantee. See note 9.
The Company has a revolving Line of Credit with Riverview to cover short term
cash needs pursuant to a promissory note payable. The credit facility has a
maximum draw amount of $800,000 and bears interest at 12% with a fee for
advances. Repayments are made as funds are available, with a due date of June
15, 2007. See note 7.
The Company had a note payable to Riverview Financial Corporation (Riverview),
in the principal amount of $3,296,406 at June 30, 2005 with accrued interest of
$841,995. In March 2006 the note payable and accrued interest of $294,334 were
converted to 1,324,693 shares of common stock. See Note 12.
Riverview had loaned the Company $345,000 under a note payable bearing interest
at 18% and an extended due date of December 2006. The loan was retired with cash
proceeds from a note payable funding from a bank in March 2006.
17. Subsequent Events
In July 2006, the Company filed an amendment to its articles of incorporation in
the state of Nevada in order to effect a 1 for 50 reverse split and reduce the
number of common shares authorized from 500,000,000 to 50,000,000. The split had
an effective date of August 11th 2006. See exhibit 3.4 incorporated herein by
reference. All references to common stock have been retroctively restated.
In September 2006, the Company entered into a lease at 3160 Pinebrook Drive,
Park City, UT, 84098 and anticipates relocating to the new facility on or about
November 1, 2006, possession to be determined by timing of build-out of
leasehold improvements. The Company will lease approximately 10,000 square feet
for a period of 3 years, with an option to renew for an additional 3 year
increments.
18. Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R (revised 2004) "Share-Based
Payment." SFAS No. 123R requires employee stock-based compensation to be
measured based on the grant-date fair value of the awards and the cost to be
recognized over the period during which an employee is required to provide
service in exchange for the award. The Statement eliminates the alternative use
of Accounting Principles Board (APB) No. 25's intrinsic value method of
accounting for awards, which is the Company's accounting policy for stock
options. See Note 1 to the Consolidated Financial Statements for the pro forma
impact of compensation expense from stock options on net earnings and earnings
per share. SFAS No. 123R is effective for the Company's fiscal year beginning
July 1, 2006. The Company will adopt the provisions of SFAS No. 123R on a
prospective basis. The financial statement impact will be dependent on future
stock-based awards and any unvested stock options outstanding at the date of
adoption.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Correction - a replacement of APB No. 20 and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements. SFAS 154 changes the requirements for
the accounting for and reporting of a change in accounting principle. It also
applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions.
43
In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47) "Accounting
for Conditional Asset Retirement Obligations, an Interpretation of FASB
Statement No. 143." This Interpretation clarifies that a conditional retirement
obligation refers to a legal obligation to perform an asset retirement activity
in which the timing and (or) method of settlement are conditional on a future
event that may or may not be within the control of the entity. The obligation to
perform the asset retirement activity is unconditional even though uncertainty
exists about the timing and (or) method of settlement. Accordingly, an entity is
required to recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be reasonably
estimated. The liability should be recognized when incurred, generally upon
acquisition, construction or development of the asset. FIN 47 is effective no
later than the end of the fiscal years ending after December 15, 2005. The
Company is in the process of evaluating the impact of FIN 47 but does not expect
the adoption to have a material impact on the financial statements.
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