10-KSB
PERIOD ENDING 6/30/03
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Under
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended
June 30, 2003
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)
333 Main Street, Park City, Utah 84060
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(Address of principal executive offices)
(435) 649-2221
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(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
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Common Stock, $.01 Par Value Over-the-Counter Bulletin Board
Outstanding as of October 10, 2003
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216,104,271 (2,344 shareholders)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. (1) [ XX ] Yes [ ] No ; (2) [XX] yes [ ] No.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the year ended June 30, 2003 were $5,350,182.
The aggregate market value of the stock held by non-affiliates of the registrant
is approximately $4,374,000, calculated using a price of $0.05 per share on
October 10, 2003.
TABLE OF CONTENTS TO ANNUAL REPORT
ON FORM 10-KSB
YEAR ENDED JUNE 30, 2003
PART I
Item 1 Description of Business 3
Item 2 Description of Properties 7
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 8
Item 6 Management's Discussion and Analysis or Plan of Operation 9
Item 7 Financial Statements 15
Item 8 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 15
Item 8A Controls and Procedures 15
PART III
Item 9 Directors, Executive Officers, Promoters and Control
Persons 16
Item 10 Executive Compensation 18
Item 11 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 20
Item 12 Certain Relationships and Related Transactions 21
Item 13 Exhibits and Reports on Form 8-K 21
Signatures 22
Consolidated Financial Statements June 30, 2003 and
June 30, 2002
Independent Auditor's Report 24
Consolidated Balance Sheet as of June 30, 2003 25
Consolidated Statements of Operations 26
Consolidated Statements of Stockholders' Deficit 27
Consolidated Statements of Cash Flows 28
Notes to Consolidated Financial Statements June 30, 2003
and June 30, 2002 29
Exhibit 31 Certification pursuant to 18 U.S.C. Sec. 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32 Certification 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 within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. 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" within the meaning of the Private
Securities Litigation Reform Act of 1995. 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
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General
The Company was incorporated in the State of Delaware on December 8, 1964 as
Infotec, Inc. From June 20, 1999 to approximately June 12, 2001, it was known as
Amerinet Group.com, Inc.
On June 13, 2001, the Company entered into a "Reorganization Agreement" with
Randall K. Fields and Riverview Financial Corporation (hereafter referred to as
"Reorganization Agreement,") whereby it acquired substantially all of the
outstanding stock of Park City Group, Inc., a Delaware corporation ("PCG"),
which became a 98.67% owned subsidiary. This business combination was treated as
a reverse acquisition or a recapitalization of PCG, with PCG being treated as
the acquirer. In connection with the Reorganization, the then Board of Directors
resigned and was replaced by the Board of Directors of PCG. The stockholders of
PCG gained voting control of the common stock of the Company and the name was
changed from Amerinet Group.com, Inc. to Fields Technologies, Inc.
Operations are conducted through the subsidiary, PCG, which was incorporated in
the State of Delaware in May 1990. PCG on April 5, 2001, acquired its wholly
owned subsidiary, Fresh Market Manager, LLC ("FMM"), which is a Limited
Liability Company formed in the State of Utah. PCG has conducted its operations
since 1990. PCG provides, develops licenses and delivers consulting services
through various software applications identified as "ActionManager" and "Fresh
Market Manager."
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, PCG. In this Annual Report Form 10-KSB when the terms "we",
"Company" or "Park City Group" are used, it is referring to the Park City Group,
Inc., a Nevada corporation, as well as to Fields Technologies, Inc., the
Delaware corporation, which was reincorporated in Nevada under the name of Park
City Group, Inc. The stock trades under the symbol PKCY.
The principal executive offices are located at 333 Main Street, P.O. Box 5000,
Park City, Utah 84060. The telephone number is (435) 649-2221. The website
address is HTTP://WWW.PARKCITYGROUP.COM.
The Company has not been involved in any bankruptcy, receivership, or similar
proceeding.
Business
Park City Group is an established software company providing business operation
management solutions, such as labor management and cost/category management
software and consulting services to the retail sector of the market. The
ActionManager and Fresh Market Manager applications are offered as a superior
set of software solutions to retailers in the store operations management and
perishable product management areas. Because the product concepts originated in
the environment of actual multi-unit-retail chain ownership, the products are
strongly oriented to an operation's bottom line results. The products are highly
pragmatic in their approach to standardizing and improving managerial actions.
Finally, the products are executed on a fully developed, contemporary patented
technology platform that is not only capable of supporting existing offerings,
but can also be expanded to support related products.
3
The critical strength of the products is its artificial intelligence-like rules
based technology that allows customers to tailor the operating rules to
replicate the expert knowledge and practices of their most successful managers.
Rules based systems are applications in which the action to be taken is
determined by the rules defined by the user. As such, customers who use rules
based system determine what action the system will perform when an identified
condition occurs, usually based on the policies and procedures or "rules" of the
customer's business operations. In this way, the customer decomposes its
business operation into different rules or the way in which it wants certain
conditions or actions to be addressed. In comparison, in non-rules based
systems, the applications perform action as they have been designed and coded by
the vendor, regardless of the action the customer might wish to take.
ActionManager
ActionManager applications are designed to replace costly paper-based and manual
processes with systems that substantially reduce time spent on administrative
tasks, non-productive (non-selling) labor costs, and excess headcount in the
corporate office while insuring that each geographically distributed location
adheres to the company's defined operational standards. ActionManager
applications provide an automated method for managers to plan, schedule, and
administer virtually every administrative task at store-level. In addition to
automating the bulk of all administrative processes, ActionManager also provides
the local manager with a real-time "dashboard" view of the business, as well as
a "cockpit management" type alert system to notify the manager when something is
or is not to be planned, and suggests best practice advice as to what course of
action to be taken. By automating a great deal of the "process" and
administrative burden of management, ActionManager allows management, at all
levels, to devote more time to customer-related and employee related activities
and to improve their over-all planning and decision making. The use of the
ActionManager applications are intended to result in cost savings and improved
staff and customer focus in the store. ActionManager applications have been
marketed to large, as well as small to mid-size retailers with 50 or more
locations.
ActionManager is a suite of software applications grouped into three distinct
solutions or "workbenches." Each ActionManager Workbench incorporates the core
ActionBase and ActionBoard technologies that allow a multi-unit organization to
embed a company's "best practice" solutions into the system.
ActionBase
ActionBase provides a set of utilities for menu creation, maintenance
and security. ActionBase is designed to efficiently and effectively
manage and control the software deployed to remote locations and insure
that all locations have the same consistent interfaces.
ActionBoard
ActionBoard is a user defined, rules based, and real-time display of
events requiring immediate managerial attention. ActionBoard provides
best practices advice to location managers through the critical alerts
process and the recommended action to be taken. This is accomplished by
embedding corporate rules and practices in an application that
cross-references and consolidates operating data.
ActionBoard is intended to be used by employees, managers, and the
company as a whole. It displays operational information and guides
employee and manager action. ActionBoard has been designed to provide
the following potential advantages to employees:
o Alerts managers to issues that require immediate attention
o Gives advice on actions to be taken
o Maintaining employees focus on essential activities and tasks to
ensure that a critical task is not overlooked or delayed
o Improving performance quality and consistency
o Improving employee response time and level of contribution
o Spotlighting achievements and successes for management
The following describes the ActionManager software workbenches and the
individual applications within them:
Information Manager's Workbench
The Information Manager's Workbench consists of the applications:
ActionForm, ActionMail, CashSheet, ScoreTracker, Internet Mail Gateway,
Action Gatekeeper, ReadyReference, and ReportBuilder which automate
data collection and distribution, insuring consistent data flow both to
and from the locations and the corporate office.
4
Labor Manager's Workbench
The Labor Manager's Workbench consists of the applications: Scheduler,
Forecaster and TimeMeter. These applications are designed to address
the problems of managing staff and insuring that staff is performing
the right tasks at the right time and in the right place. Labor
requirements are determined by analyzing the results created by the
Forecaster and compliance to schedules and monitoring time punches are
provided by the TimeMeter application.
HR Manager's Workbench
The HR Manager's workbench consists of the applications: SmartHire,
Interactive Tutor, Checkup, and HRAction, which provide an automated
process for personnel selection, training, and retention. These
applications are intended to assist managers by automating many of the
time consuming tasks that are associated with the hiring and training
process.
Fresh Market Manager
Fresh Market Manager is a fully integrated system for managing perishable
grocery departments such as deli, bakery, food service, meat, seafood and
produce. This software enables item management and category analysis by
exception, with particular emphasis on managing the production processes taking
place within the store. In addition, this application provides accurate cost of
goods identification and sales profitability analysis to determine gross profit
and net profit by item.
Fresh Market Manager provides corporate, store and department managers with
total item information, allowing extensive category analysis of perishable
products. Category and store department managers can leverage this information
to increase sales, decrease shrinkage, and improve overall gross profit.
Combined with demand forecasting and automated production, Fresh Market Manager
is designed to ensure that variety and item freshness increase, while overall
waste decreases.
Focusing initially on perishable inventory needs, the applications gather point
of sale and production data, which is especially helpful in areas where better
product delivery based on real demand, can help eliminate unnecessary waste, and
can improve "right product" availability. The applications assist in the timely
ordering of materials and provides real time demand management (based on
patented forecasting algorithms) by using alerting functions. Store management
may use this software application for:
o Assortment planning to respond to customer preferences for variety
and selection within the store
o Forecasting, to attempt to improve sales by anticipating the
expected demand
o Production planning, to build produced items efficiently, when
they are needed
o Item management, to quickly and accurately enter transactions into
the system
o Reporting, to see what the business is doing now and make
decisions based on current information
Corporate management may use the Fresh Market Manager software to control
detailed data through well-defined information groupings to:
o Determine the product mix for the enterprise at any level of
detail
o Create rules that drive production scheduling to meet the
company's specific needs
o Apply labor standards for production and for category management
The Fresh Market Manager applications are Cost Control and Category Management,
Demand Forecast and Production Planner, Inventory and Computer Assisted
Ordering, and Alert Advisor.
Cost Control & Category Management
This application assists managers in reporting the amount of product
produced, production waste as well as losses from throwaways and
markdowns. The software decomposes the Point-of-Sale data to determine
the timing of products sold and by using all the information, delivers
cost and category management information down to the item level. The
visibility gained through the use of the software assists all levels of
a company's management to focus on profitability and product
contribution.
Demand Forecast and Production Planner
Demand Forecast and Production Planner: (a) delivers assortment plans
and production schedules; (b) delivers corporate standards for core
items; (c) assists managers in selecting customer/market driven items;
and (d) develops a daily production plan based on forecasted needs.
This application is intended to assist an organization in making the
right product in the right quantity to improve the profitability of the
perishable business by effective production planning and accurate
assortment planning.
Inventory & Computer Assisted Ordering
This aspect of the application provides cost control and inventory
management of perishable product ingredients (i.e. raw materials). It
includes computer-assisted ordering and item receiving modules. The
Inventory capability is intended to address the needs of businesses to
control the cost of inventory while minimizing lost sales from items
not produced due to out of stock ingredients.
5
Alert Advisor
Alert Advisor delivers demand monitoring, exception analysis and
production schedule revisions to relevant managers on a real-time
basis.
Business Operations Consulting (consulting services)
The consulting group's staff has extensive knowledge of the business operations
aspects of retail businesses. The consulting group provides consulting services
ranging from accelerated implementations (consultation support in conjunction
with the customer's staff), to project level advisory consulting. Focused
primarily on the implementation of the ActionManager and Fresh Market Manager
applications, the professional services consultants assist customers in
decision-making and implementing the software.
Accelerated Implementation Strategy
Using experience and industry expertise, the team focuses on
identifying the company's mission, crucial business elements within the
client company, developing a rapid implementation program, and
providing the customer with continued assistance. The elements of this
strategy include:
o On-site support for pre-implementation analysis of requirements
o Consultants to augment the customer's project team
o Defined project plans with time lines created to meet customer
requirements
o On-site support for installation and verification
o Completion and delivery of post-implementation and return on
investment analysis
Implementation Assistance Services
An additional service provided to the customers including:
o Project management and consulting support for customer project
teams
o Business rule recommendations and tailoring
o Technical systems analysis, assessment and configuration
o On-site training and educational services
Patents and Proprietary Rights
The Company owns or controls 8 U.S. patents, 5 patents pending, 8 U.S.
trademarks and 37 U.S. copyrights relating to its software technology. The
Company has 14 international patents and patent applications pending. The
patents referred to above are continuously reviewed and renewed as their
expiration dates come due.
Company policy is to seek patent protection for all developments, inventions and
improvements that are patentable and have potential value to the Company and to
protect as trade secrets other confidential and proprietary information. The
Company intends to vigorously defend its intellectual property rights to the
extent its resources permit.
Future success may depend upon the strength of the Company's intellectual
property. Although management believes that the scope of patents/patent
applications are sufficiently broad to prevent competitors from introducing
devices of similar novelty and design to compete with the Company's current
products and that such patents and patent applications are or will be valid and
enforceable, there are no assurances that if such patents are challenged, this
belief will prove correct. The Company has, however, successfully defended one
of these patents in two separate instances and as such, has some level of
confidence in the Company's ability to maintain its patents. In addition, patent
applications filed in foreign countries and patents granted in such countries
are subject to laws, rules and procedures, which differ from those in the U.S.
Patent protection in such countries may be different from patent protection
provided by U.S. Laws and may not be as favorable. The Company plans to timely
file international patents in all countries in which we seek market share.
The Company is not aware of any patent infringement claims against it; however,
there are no assurances that litigation to enforce patents issued to the
Company, to protect proprietary information, or to defend against the Company's
alleged infringement of the rights of others will not occur. Should any such
litigation occur, the Company may incur significant litigation costs, the
Company's resources may be diverted from other planned activities, and result in
a materially adverse effect on the results of operations and financial
condition.
The Company relies on a combination of patent, copyright, trademark, and other
laws to protect its proprietary rights. There are no assurances that the
Company's attempted compliance with patent, copyrights, trademark or other laws
will adequately protect its proprietary rights or that there will be adequate
remedies for any breach of our trade secrets. In addition, should the Company
fail to adequately comply with laws pertaining to its proprietary protection,
the Company may incur additional regulatory compliance costs.
6
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 $2,100,695 and $2,427,412 for
the years ended June 30, 2003 and 2002, respectively; a 14% decrease. These
expenditures include $948,788 and $1,701,850, respectively, which were
capitalized. The decrease is attributable primarily to the reduction of
development efforts after the release to customers of the Fresh Market Manager
applications in September 2002.
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, 2003, the Company had 47 employees, including 23 software
developers and programmers, 8 sales, marketing and account management employees,
7 software service and support employees and 9 accounting and administrative
employees. All of these employees work for the Company on a full time basis. The
employees are not represented by any labor union. In September 2003 the Company
reduced the total employees to 32.
Item 2. Description of Properties
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The principal place of business operations is 333 Main Street, Park City, Utah.
The Company leases approximately 14,000 square feet at this location, consisting
primarily of office and storage areas under a lease expiring on December 31,
2003 with an unrelated third party. The Company is currently negotiating for new
office space to replace the existing space at the end of the lease term.
Item 3. Legal Proceedings
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Debra Elenson vs. Fields Technologies, and Randall K. Fields (Filed -January
2002, in the Circuit Court of the 11th Judicial Circuit in and for Dade County,
Florida): The plaintiff alleged, among other causes of actions, that a private
placement memorandum pursuant to which the plaintiff had purchased shares of
Fields Technologies, contained financial statements which were not prepared in
accordance with U.S. generally accepted accounting principles and the
requirements of SEC regulation S-X. The plaintiff alleged fraud,
misrepresentation, unregistered sales of securities and other causes of actions.
The lawsuit was settled in September 2003 for an additional 1,125,000 shares of
common stock to be issued to Debra Elenson and payment of plaintiff's legal fees
of $21,348.
In August 2002, the Company filed legal action against The Yankee Companies,
Inc. et al. The defendants were entities and individuals involved in the
reorganization of Amerinet and its acquisition of control of Park City Group
(Delaware). These causes of actions include: violation of Florida's Securities
and investor Protection Act, Fraud, negligent misrepresentation, violation of
Federal Securities Acts 1933 and 1934 and breach of promissory note. This action
has been filed in the State of Utah.
Approximately two weeks following the filing of the complaint against The Yankee
Companies, the Company was served with a complaint by Yankee Companies and
others, alleging sales of unregistered securities, securities fraud,
registration violations, fraud negligent misrepresentation, and breach of loan
agreement. On or about February 5, 2003 the case was dismissed based on the fact
that the Utah case filed by the Company was filed first and all issues can be
argued in that case. Both cases are still in the discovery stage.
Item 4. Submission of Matters to a Vote of Security Holders
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None
7
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters
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Dividend Policy
To date, the Company has not paid dividends on common stock. The payment of
dividends, if any, is within the discretion of the Board of Directors and will
depend upon earnings, capital requirements and financial condition, and other
relevant factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation." The Board does not intend to declare any
dividends in the foreseeable future, but instead intends to retain all earnings,
if any, for use in operations.
Share Price History
Common stock (the "Common Stock") is traded in the over-the-counter market in
what is commonly referred to as the "Electronic" or "OTC Bulletin Board" or the
"OTCBB" under the trading symbol "PKCY." The following table sets forth the high
and low bid information of the Common Stock's closing price for the periods
indicated. The price information contained in the table was obtained from
internet sources considered reliable. Note that such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and the quotations may not necessarily represent actual transactions
in the Common Stock.
Fiscal Year 2002 Low High
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September 30, 2001 $0.17 $0.60
December 31, 2001 $0.07 $0.17
March 31, 2002 $0.09 $0.32
June 30, 2002 $0.09 $0.22
Fiscal Year 2003
September 30, 2002 $0.05 $0.10
December 31, 2002 $0.01 $0.07
March 31, 2003 $0.01 $0.10
June 30, 2003 $0.01 $0.10
Holders of Record
At October 10, 2003 there were 2,344 holders of record of Common Stock and
shares issued and outstanding of 216,104,271. The number of holders of record
was calculated by reference to the stock transfer agent's books.
Issuance of Securities
Subsequent to June 30, 2001, shares of common stock were issued as follows:
o In December 2001, 6,800,000 shares of common stock were sold in a
private placement at $0.25 per share. In addition to the common
stock, purchasers received various additional rights. In March
2002, certain of these additional rights were relinquished in
exchange for additional shares of the Company's common stock. The
exchange was for every 1.67 shares with rights held 1 share of
additional common stock was issued.
o In March 2002, 1,666,667 shares of common stock were sold in a
private placement, at $0.15 per share, with an option to purchase
1,666,667 additional shares that expired September 2002.
o In December 2001, 400,000 shares were issued as payment for
consulting services.
o In March, 2002, the Company issued convertible debt, of $1,750,000
at 10% interest due October 31, 2005. This debt was converted into
11,666,667 shares of common stock in June 2002, and carries a
warrant for 11,666,667 shares to be purchased at $.17 per share
expiring, March 27, 2005. The warrant and debt carried
anti-dilution rights. Adjustments to the warrant price and
additional shares were issued in accordance with the anti-dilution
rights in August and November 2002. In August 2002, 8,458,334
additional shares of common stock were issued, the exercise price
of the warrants was decreased to $0.10 per share, and the number
of shares of common stock to be purchased under the warrant was
increased to 20,125,001. In November 2002, 8,625,000 additional
shares of common stock were issued the exercise price of the
warrants was decreased to $0.07 per share, and the number of
shares of common stock to be purchased under the warrant was
increased to 28,750,001. This shareholder was allowed further
anti-dilution of the warrant exercise price to $0.04 per share of
common stock (and a corresponding increase in the number of shares
of common stock to be purchased under the warrant), but the
shareholder waived this right and opted for $0.07 exercise price
per share on the warrant.
8
o In May 2002 166,667 shares of common stock were issued for
consulting services.
o In August and November 2002, the CEO of the Company and two
members of the Board of Directors received in accordance with
antidilution rights, additional shares of common stock and
adjustments to the corresponding warrants. In August 2002,
1,450,000 additional shares of common stock were issued to the
CEO, the exercise price of the warrants was decreased to $0.10 per
share from $0.11 and $0.24, and the number of shares of common
stock to be purchased under the warrants was increased to 880,000
and 2,880,000 from 800,000 and 1,200,000, respectively. In
November 2002, 1,478,571 additional shares of common stock were
issued to the CEO, the exercise price of the warrants was
decreased to $0.04 per share, and the number of shares of common
stock to be purchased under the warrant was increased to 9,400,000
in total. In August 2002, 2,658,334 additional shares of common
stock were issued to the two directors, the exercise price of the
warrants was decreased to $0.10 per share from $0.11 and $0.24,
respectively, and the number of shares of common stock to be
purchased under the warrants was increased to 1,980,000 and
4,480,001 from the 1,800,000 and 1,866,667, respectively. In
November 2002, 2,710,714 additional shares of common stock were
issued, the exercise price of the warrants was decreased to $0.04
per share, and the number of shares of common stock to be
purchased under the warrants was increased to 16,150,002.
o In December 2002, as consideration for extension of payment on the
Note Payable to Riverview Financial Corporation ("Riverview"), the
majority shareholder of PCG, the Company issued 7,000,000 shares
of common stock to Riverview. The CEO of PCG is also majority
owner and CEO of Riverview.
o In December 2002 the Company obtained a $2,000,000 note payable
funding from a related party, a $250,000 advance from Riverview
and a credit facility of $200,000 from Riverview. The Company
issued 3,809,524 shares of common stock as a fee for the
financing, and issued 857,143 shares of common stock to Riverview
in connection with the financing.
o In May 2003 349,901 shares of common stock were issued for
consulting services.
o In June 2003 the Company issued 4,575,033 shares of common stock
to officers and members of management in lieu of cash
compensation. These shares included 750,006 to the CEO and 450,000
to a director in his capacity of Acting CFO.
o In June 2003 the Company issued 1,575,000 shares in settlement of
a claim arising from the Reorganization with Amerinet Group.com,
Inc. ("Amerinet") in June 2001.
o In September 2003 the Company issued 525,000 shares in settlement
of a lawsuit with Debra Elenson arising from the Reorganization
with Amerinet.
o In September 2003 100,000 shares of common stock were issued for
consulting services.
o In October 2003 the Company issued 1,738,680 shares of common
stock in to certain directors, an officer and others in connection
with the extension of the Bridge Loan notes payable. See notes 8
and 19 to the audited financial statements.
Item 6. Management's Discussion and Analysis of Financial Condition
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and Results of Operation
------------------------
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition. The terms "Company", "we", "our"
or "us" are used in this discussion to refer to Park City Group, Inc. (formerly
Fields Technologies, Inc.) along with Park City Group, Inc.'s wholly owned
subsidiary, Fresh Market Manager, LLC, on a consolidated basis, except where the
context clearly indicates otherwise.
Overview
The principal business is the design, development, marketing and support of
proprietary software products. 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.
In accordance with U.S. generally accepted accounting principles, all software
development costs were expensed as incurred through December 31, 2000, with the
software having been viewed as an evolving product. During January 2001,
technological feasibility of major revisions to the Fresh Market Manager
software and the ActionManager 4x development platform was established. In
accordance with U.S. generally accepted accounting principles, 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. Development costs for
ActionManager totaling $2,242,079, incurred from January 2001 through March
2003, when the product became available for release to customers, were
capitalized. The Company has focused it sales and marketing resources on its
Fresh Market Manager software products, and intends to continue selling
ActionManager software primarily through alliances with other software companies
or software resellers. These distribution channels for ActionManager software
have not yet been proven to provide the level of sales necessary to support the
continued economic viability of the ActionManager capitalized development costs.
Consequently, $2,242,079 of capitalized development costs associated with the
ActionManager products were charged to expense in June 2003.
9
The consolidated balance sheet does not reflect any value attributable to
intellectual property, the cost of which has been expensed as incurred. To date,
development and intellectual property expenditures have resulted in the
development of applications of the ActionManager and Fresh Market Manager
software, along with eight granted software patents and five patent
applications, with numerous separate trademarks and copyrights.
Through June 30, 2003 the Company has accumulated aggregate consolidated losses
totaling $16,482,923 which includes net losses of $5,003,355 and $3,390,760 for
years ended June 30, 2003, and 2002, respectively.
Management's Discussion and Analysis
Years Ended June 30, 2003 and 2002
During the year ended June 30, 2003, the Company had total revenues of
$5,350,182, compared to $3,869,420 in 2002, a 38% increase. Software license
sales were $2,647,188 and $1,664,207 for 2003 and 2002, respectively, a 59%
increase. This increase was primarily attributable to sales to new Fresh Market
Manager ("FMM") customers and to a strategic alliance with a consulting firm to
the grocery industry. This firm purchased FMM licenses for resale, resulting in
revenue to the Company of $600,000. Maintenance and support revenue increased by
8% over 2002, primarily from maintenance agreements with new customers. The
average customer of Park City Group purchases maintenance support services for 5
years. Consulting revenue increased by 111% over 2002 primarily attributable to
implementation services for new Fresh Market Manager customers. The Company
expects maintenance and support revenue for the year ending June 30, 2004 to be
consistent with 2003. Some customers may discontinue maintenance agreements, but
maintenance agreements with new customers should replace discontinuing
customers, and may result in a similar growth in maintenance revenue.
Deferred revenue was $1,218,070 and $1,630,868 at June 30, 2003 and 2002,
respectively, a decrease of 26%. This decrease is primarily attributable to
decreased outstanding contractual obligations on contracts.
Research and development expenses (after capitalization of software development
costs) were $1,151,907 and $725,562 for 2003 and 2002, respectively, a 59%
increase. This increase is primarily because the Company stopped capitalizing
software development costs for FMM in September 2002 and for ActionManager in
March 2003. Research and development costs continue for both products for
enhancements and upgrades.
Sales and marketing expenses were $1,460,283 and $1,614,710 for 2003 and 2002,
respectively, a decrease of 10%. This decrease is primarily attributable to a
reduction in the sales force during the later half of the year ended June 30,
2003. Continuing sales efforts are now performed primarily by senior management
personnel.
General and administrative expenses were $2,181,089 and $1,908,983 for 2003 and
2002, respectively, a 14% increase. This increase is primarily attributable to
legal fees for ongoing lawsuits and settlement costs of claims and lawsuits.
Interest expense was $2,216,308 and $771,225 for 2003 and 2002, respectively, a
187% increase. This increase is attributable principally to: (i) interest and
amortization of warrants associated with the Bridge Note financing from
directors and an officer; (ii) a change from simple interest to compounding
interest on the note payable to Riverview; and (iii) increased interest rates
and additional borrowings associated with the debt restructuring in December
2002.
Financial Position, Liquidity and Capital Resources
The Company had $69,305 in cash at June 30, 2003 compared with $140,972 at June
30, 2002, a decrease of $71,667. Working capital deficit at June 30, 2003
increased to $5,988,254, compared to $3,201,600 at June 30, 2002. The increase
in the working capital deficit is principally attributable to an increase in the
current portion of long-term debt as the result of the unfinished renegotiation
to extend the note payable to Riverview, which is due in January 2004. The
Company believes that the negotiations will conclude shortly with the note and
related accrued interest being extended. This restructuring has not taken place
as of October 13, 2003. If the extension of this debt had been accomplished, the
working capital deficit would have been $1,754,725. This improvement in proforma
working capital deficit is primarily attributable to the restructuring of and
probable restructuring of current debt in December 2002 to notes due in December
2004, and extension of payments to vendors.
During the year ended June 30, 2003 the operations of the Company provided net
cash of $23,278, compared to net cash used of $1,242,859 for 2002. The
improvement is primarily attributable to a smaller loss from operations in 2003
(after the non-cash expense of the write-off of capitalized software development
costs is removed).
The Company reduced its overall monthly cash operating expenses by approximately
$90,000 in October 2002. In October 2003 the Company again reduced monthly cash
operating expenses by another approximately $70,000. A combination of efforts to
judiciously monitor, control and, where appropriate, reduce ongoing expenses has
been adopted by the Company's management team. The marketing focus of the
Company is primarily on the promotion of Fresh Market Manager (FMM), by
parlaying the success of our most recent licensees to drive sales momentum in
this industry segment (grocery), and taking advantage of the sales potential by
increasing the licensing of new customers. The sales cycle for FMM has proven to
be extended, with most customers requiring several months from initial contact
to licensing. Therefore, FMM licensing sales have been lower than anticipated in
the second half of 2003. However, demonstrations of the product have been made
to a significant number of potential customers, and proposals are outstanding to
many of these potential customers. Management believes that new license sales
will increase as the sales pipeline, although longer than anticipated, begins to
10
yield additional revenue, although there is no assurance that the additional
sales will happen. Our working capital and other capital requirements for the
foreseeable future will vary based upon a number of factors, including: (i)
changes in the software industry and environment which may require additional
modifications to our software and platforms; (ii) the pace at which our products
are accepted by and sold into the market and the related sales and marketing
effort and support requirements, and (iii) changes in existing financing
arrangements. The Company is pursuing opportunities to sell its ActionManager
products through alliances with other software vendors and companies selling to
the retail industry. The success of this selling strategy is dependent on
establishing these alliances and the efforts of the other companies.
To date, the Company has financed its operations through operating revenues,
loans from directors, officers and stockholders, loans from the CEO and majority
shareholder, and private placements of equity securities. The Company may be
unable to raise additional equity capital until it achieves profitable
operations and refinances its debt. Because essentially all of the Company's
assets are pledged to secure existing debt, additional debt financing may be
unavailable. The Company anticipates that it will meet its working capital
requirements primarily through increased revenue, while controlling and reducing
costs and expenses. However, no assurances can be given that the Company will be
able to meet its working capital requirements.
Inflation
The impact of inflation is not expected to have a significant effect on
operations.
Risk Factors
The Company is subject to certain other risk factors due to the organization and
structure of the business, the industry in which it competes and the nature of
its operations. These risk factors include the following:
Risk Factors Related to the Company's Operations
Continued net losses could impair the ability to raise capital.
The Company cannot accurately predict future revenues. The future marketing
strategy emphasizes sales activities for the Fresh Market Manager applications;
if this marketing strategy fails, revenues and operations will be negatively
affected. All Park City Group applications are designed to be highly flexible so
that they can work in multiple retail and supplier environments such as grocery
stores, convenience stores, and quick service restaurants. There is no assurance
that the market will accept the Fresh Market Manager applications in proportion
to the increased marketing of this product line, although current business
activity might suggest that the market opportunity and acceptance of the Fresh
Market Manager product line are positive. It is possible that the Company may
face significant competition that may negatively affect demand for the Fresh
Market Manager applications, including the public's preference for competitor's
new product releases or updates over the Company's releases or updates. If the
Fresh Market Manager applications marketing emphasis fails, the Company will
need to refocus its marketing strategy to ActionManager product offerings, which
could lead to increased marketing costs, delayed revenue streams, and otherwise
negatively affect operations.
There can be no assurance that the Company will be able to generate significant
revenues or that it will achieve or maintain profitability, or generate revenues
from operations in the future. Management believes that success will depend upon
the ability to generate and retain new customers, which cannot be assured, and
in many circumstances, may be beyond the Company's control. The ability to
generate sales will depend on a variety of factors, including:
o Sales and marketing efforts as well as the co-marketing efforts of
strategic partners,
o The reliability and cost-effectiveness of services, and
o Customer service and support.
The Company faces competition from existing and emerging technologies that may
affect our profitability. The markets for our type of software products and that
of our competitors are characterized by: (i) Development of new software,
software solutions, or enhancements that are subject to constant change, (ii)
Rapidly evolving technological change, (iii) Unanticipated changes in customer
needs.
Because these markets are subject to such rapid change, the life cycle of the
products is difficult to predict; accordingly, the Company is subject to
the following risks:
o Whether or how the Company will respond to technological changes
in a timely or cost-effective manner,
o Whether the products or technologies developed by competitors will
render the products and services less attractive to potential
buyers or shorten the life cycle of the Company's products and
services, and
o Whether products and services will achieve and sustain market
acceptance.
11
If the Company is unable to adapt to the constantly changing markets and to
continue to develop new products and technologies to meet customers' needs,
revenues and profitability will be negatively affected. Future revenues are
dependent on the successful development and licensing of new and enhanced
versions of the products and potential product offerings. If the Company fails
to successfully upgrade existing products and develop new products or the
product upgrades and new products do not achieve market acceptance, revenues
will be negatively impacted.
Operating results may fluctuate, which makes it difficult to predict future
performance.
Management expects a portion of the revenue stream to come from license sales,
maintenance and services charged to new customers, which will fluctuate in
amounts because software sales to retailers tend to be cyclical in nature. In
addition, the Company may potentially experience significant fluctuations in
future operating results caused by a variety of factors, many of which are
outside of its control, including:
o Demand for and market acceptance of new products,
o Introduction or enhancement of products and services by the
Company or its competitors,
o Capacity utilization,
o Technical difficulties, system downtime,
o Fluctuations in data communications and telecommunications costs,
o Maintenance subscriber retention,
o The timing and magnitude of capital expenditures and requirements,
o Costs relating to the expansion or upgrading of operations,
facilities, and infrastructure,
o Changes in pricing policies and those of competitors,
o Changes in regulatory laws and policies, and
o General economic conditions, particularly those related to the
information technology industry.
Because of the foregoing factors, Management expects future operating results to
fluctuate. As a result of such fluctuations, it will be difficult to predict
operating results. Period-to-period comparisons of operating results are not
necessarily meaningful and should not be relied upon as an indicator of future
performance. In addition, a relatively large portion of the Company's expenses
will be relatively fixed in the short-term, particularly with respect to
depreciation, facilities and personnel. Therefore, future operating results will
be particularly sensitive to fluctuations in revenues because of these and other
short-term fixed costs.
The Company may be unable to collect receivables in amounts previously
estimated.
In accordance with United States generally accepted accounting principles, the
Company has established allowances against its receivables for the estimated
uncollectible portion of receivables. However, the Company may experience
collection rates below its established allowances, which could reduce the amount
of available funds and require additional allowances. There can be no assurance
that the Company will be able to collect its receivables in sufficient amounts.
Failure to collect adequate amounts of its receivables could materially
adversely affect the business and results of operations.
Some competitors are larger and have greater financial and operational resources
that may give them an advantage in the market.
Many of the Company's competitors are larger and have greater financial and
operational resources. This may allow them to offer better pricing terms to
customers in the industry, which could result in a loss of potential or current
customers or could force the Company to lower prices. Any of these actions could
have a significant effect on revenues. In addition, the competitors may have the
ability to devote more financial and operational resources to the development of
new technologies that provide improved operating functionality and features to
their product and service offerings. If successful, their development efforts
could render the Company's product and service offerings less desirable to
customers, again resulting in the loss of customers or a reduction in the price
the Company can demand for our offerings.
The Company needs to hire and retain qualified personnel to sustain its
business.
The Company is currently managed by a small number of key management and
operating personnel. There are no employment agreements with most of the
employees. Future success depends, in part, on the continued service of key
executive, management, and technical personnel, some of whom have only recently
been hired, and the ability to attract highly skilled employees. If key officers
or employees are unable or unwilling to continue in their present positions,
business could be harmed. From time to time, the Company has experienced, and
expects to continue to experience, difficulty in hiring and retaining highly
skilled employees. Competition for employees in the industry is intense. If the
Company is unable to retain key employees or attract, assimilate or retain other
highly qualified employees in the future, it may have a material adverse effect
on the business and results of operations.
12
The Company is dependent on the continued participation of certain key
executives and personnel to effectively execute its business plan and strategies
and must effectively integrate its management team.
The business is dependent on the continued services of its founder and Chief
Executive Officer, Randall K. Fields. Should the services of Mr. Fields be lost,
operations will be negatively impacted. The Company currently maintains key man
insurance on Mr. Fields life in the amount of $10,000,000. The loss of the
services of Mr. Fields would have a materially adverse effect on the business.
The Company depends on the ability of its management team to effectively execute
its business plan and strategies. During the last year, key executives have had
to forgo a portion of their salary, and as such are at risk for their continued
commitment. If the management group is unable to effectively integrate its
activities, or if the Company is unable to integrate new employees into its
operations, its business plan and strategies will not be effectively executed
and operations could suffer.
The business is currently dependent on a limited customer base; should any of
these customer accounts be lost, revenues will be negatively impacted.
The Company expects that existing customers will continue to account for a
substantial portion of total revenues in future reporting periods. The ability
to retain existing customers and to attract new customers will depend on a
variety of factors, including the relative success of marketing strategies and
the performance, quality, features, and price of current and future products.
Accordingly, if customer accounts are lost or customer orders decrease, revenues
and operating results will be negatively impacted. In addition, future revenues
will be negatively impacted if the Company fails to add new customers that will
make purchases of its products and services.
The Company may be unable to raise necessary funds for operations.
The Company anticipates that we need to raise additional funds to meet cash flow
and capital requirements. In the past, the Company has frequently experienced
cash flow shortages because not enough cash has been generated from operations
to cover expenses. Raising additional funds will be necessary to meet capital
needs. There can be no assurance that such financing will be available in
amounts or on acceptable terms, if at all. Further, the lack of tangible assets
to pledge could prevent the Company from establishing debt-based sources of
financing. The inability to raise necessary funding would adversely affect the
ability to successfully implement the business plan. There can be no assurance
that the Company will be able to obtain additional financing to meet the current
or future requirements on satisfactory terms, if at all. Failure to obtain
sufficient capital could materially adversely affect the business and results of
operations.
The Company faces risks associated with proprietary protection of its software.
The Company's success depends on its ability to develop and protect existing and
new proprietary technology and intellectual property rights. It seeks to protect
its software, documentation and other written materials primarily through a
combination of patents, trademark, and copyright laws, confidentiality
procedures and contractual provisions. While the Company has attempted to
safeguard and maintain its proprietary rights, there are no assurances there it
will be successful in doing so. Competitors may independently develop or patent
technologies that are substantially equivalent or superior.
Despite efforts to protect proprietary rights, unauthorized parties may attempt
to copy aspects of the Company's products or obtain and use information regarded
as proprietary. Policing unauthorized use of the Company's products is
difficult. While the Company is unable to determine the extent to which piracy
of its software exists, software piracy can be expected to be a persistent
problem, particularly in foreign countries where the laws may not protect
proprietary rights as fully as the United States. The Company can offer no
assurance that its means of protecting its proprietary rights will be adequate
or that its competitors will not reverse engineer or independently develop
similar technology.
The Company incorporates third party software providers' licensed technologies
into its products; the loss of these technologies may prevent sales of its
products or lead to increased costs.
The Company now licenses, and in the future will license, technologies from
third party software providers that are incorporated into its products. The loss
of third-party technologies could prevent sales of products and increase costs
until substitute technologies, if available, are developed or identified,
licensed and successfully integrated into the products. Even if substitute
technologies are available, there can be no guarantee that the Company will be
able to license these technologies on commercially reasonable terms, if at all.
The Company may discover software errors in its products that may result in a
loss of revenues or injury to its reputation.
Non-conformities or bugs ("errors") may be found from time to time in the
existing, new or enhanced products after commencement of commercial shipments,
resulting in loss of revenues or injury to the Company's reputation. In the
past, the Company has discovered errors in its products and, as a result, has
experienced delays in the shipment of products. Errors in its products may be
caused by defects in third-party software incorporated into the products. If so,
these defects may not be able to be fixed without the cooperation of these
software providers. Since these defects may not be as significant to the
software provider as they are to the Company, it may not receive the rapid
cooperation that may be required. The Company may not have the contractual right
to access the source code of third-party software and, even if it does have
access to the source code, it may not be able to fix the defect. Since its
customers use its products for critical business applications, any errors,
defects or other performance problems could result in damage to the customers'
business. These customers could seek significant compensation from the Company
for their losses. Even if unsuccessful, a product liability claim brought
against the Company would likely be time consuming and costly.
13
The Company's officers and directors serve as officers and directors of other
corporations and have ownership interests in other corporations; conflicts of
interest may arise which are not resolved in the Company's favor and which may
negatively impact its operations and financial condition.
The officers and directors are in a position to control their own compensation
and to approve dealings by the Company with other entities with which these
principals are also involved. For example, if a company affiliated with one of
the directors were to be considered as a possible strategic alliance, the
director would have a conflict of interest in negotiating the most favorable
terms for the director's affiliated company or Park City Group. As a result
there will be conflicts of interest. There is no assurance that these conflicts
will be resolved in the Company's favor.
The Chief Executive Officer, Randall K. Fields, has a 100% ownership interest in
Riverview Financial Corp. that has entered into financial transactions with the
Company; these transactions present conflicts of interest that may not be
resolved in the Company's favor.
Park City Group has an unpaid promissory note due to Riverview Financial Corp.
("Riverview") in the amount of $3,260,714 with interest payable at 12% per
annum. In addition, another agreement provides that the Company's subsidiary,
Park City Group, will pay to Riverview, an amount equal to 5% of the value of
any acquisition the Company enters into during the term of Mr. Fields'
employment agreement.
The Company may continue to have other transactions with Riverview that may
create conflicts of interest between its interests and Mr. Fields' sole
ownership of Riverview. There is no assurance that these conflicts will be
resolved in the Company's favor.
The Company's officers and directors have limited liability and indemnification
rights under its organizational documents, which may impact its results.
The officers and directors are required to exercise good faith and high
integrity in the management of the Company's affairs. The certificate of
incorporation and bylaws, however, provide, that the officers and directors
shall have no liability to the stockholders for losses sustained or liabilities
incurred which arise from any transaction in their respective managerial
capacities unless they violated their duty of loyalty, did not act in good
faith, engaged in intentional misconduct or knowingly violated the law, approved
an improper dividend or stock repurchase, or derived an improper benefit from
the transaction. The certificate of incorporation and bylaws also provide for
the Company to indemnify the officers and directors against any losses or
liabilities they may incur as a result of the manner in which they operate the
business or conduct the internal affairs, provided that the officers and
directors reasonably believe such actions to be in, or not opposed to, the
Company's best interests, and their conduct does not constitute gross
negligence, misconduct or breach of fiduciary obligations.
Market and Capital Risks
Future issuances of the Company's shares may lead to future dilution in the
value of its common stock, a reduction in shareholder voting power, and prevent
a change in Company control.
The shares may be substantially diluted due to the following:
o Issuance of common stock in connection with funding agreements
with third parties and future issuances of common and preferred
stock by the Board of Directors, and
o The Board of Directors has the power to issue additional shares of
common stock and preferred stock and the right to determine the
voting, dividend, conversion, liquidation, preferences and other
conditions of the shares without shareholder approval.
Stock issuances may result in reduction of the book value or market price of
outstanding shares of common stock. If the Company issues any additional shares
of common or preferred stock, proportionate ownership of common stock and voting
power will be reduced. Further, any new issuance of common or preferred shares
may prevent a change in control or management.
Issuance of preferred stock could depress the market value of current
shareholders and could have a potential anti-takeover effect.
The Company has 30,000,000 authorized shares of preferred stock that may be
issued by action of the Board of Directors. The Board of Directors may designate
voting control, liquidation, dividend and other preferred rights to preferred
stock holders. The Board of Directors' authority to issue preferred stock
without shareholder consent may have a depressive effect on the market value of
the common stock. The issuance of preferred stock, under various circumstances,
could have the effect of delaying or preventing a change in control or other
take-over attempt and could adversely affect the rights of holders of the shares
of common stock.
Preferred stock holders would receive dividends, if any, at a rate twenty times
that paid per share of the common stock holders; accordingly, if dividends are
declared, preferred stock holders will have preferential rights in the payment
of dividends.
14
The holders of shares of preferred stock are entitled to receive, out of Company
assets, legally available, and as when declared by the Board of Directors,
dividends of every kind declared and paid to holders of commons stockholders, at
a rate of twenty times that paid for shares of common stock. Because the Board
of Directors has the authority to issue preferred stock to such preferred stock
holders will have preferential rights in the payment of dividends.
Because the common stock is considered a penny stock, any investment in the
common stock is considered to be a high-risk investment and is subject to
restrictions on marketability.
The common stock has traded on the Over-the-Counter Bulletin Board since June
2001. The bid price of the common stock has been less than $5.00 during this
period. The Company is subject to the penny stock rules adopted by the
Securities and Exchange Commission that require brokers to provide extensive
disclosure to its customers prior to executing trades in penny stocks. These
disclosure requirements may cause a reduction in the trading activity of the
common stock.
Broker-dealer practices in connection with transactions in penny stocks are
regulated by certain penny stock rules adopted by the Securities and Exchange
Commission.
Penny stocks generally are equity securities with a price of less than $5.00.
Penny stock rules require a broker dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules generally require that prior to a
transaction in a penny stock, the broker-dealer make a special written
determination that the penny stock is a suitable investment for the purchaser
and receives the purchaser's written agreement to the transaction.
Because the Company is subject to the penny stock rules its shareholders may
find it difficult to sell their shares.
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
------------------------
None.
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, 2003. Based on this evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective such that the material
information required to be included in our Securities and Exchange Commission
("SEC") reports is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms relating to Park City Group, Inc.,
including our consolidated subsidiaries, and was made known to them by others
within those entities, particularly during the period when this report was being
prepared.
(b) Changes in internal controls over financial reporting.
In addition, there were no significant changes in our internal control over
financial reporting that could significantly affect these controls during fiscal
year ended June 30, 2003. We have not identified any significant deficiency or
materials weaknesses in our internal controls, and therefore there were no
corrective actions taken.
15
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 56 President, Chief Executive Officer
Chairman of the Board and Director
*Peter Jensen 53 Chief Financial Officer and Secretary
Thomas W. Wilson 71 Director and Compensation Committee Chairman
William R. Jones 68 Director and Audit Committee Chairman
Bernard F. Brennan 65 Director
**Edward C. Dmytryk 57 Director
***Anthony E. Meyer 42 Director
****Terry R. Peets 59 Director
*****Stephen D. Weinroth 64 Director
*Appointed CFO on 6/3/03
** Became acting CFO of the Company on 10/11/02, resigned as acting CFO on
6/3/03
***Joined Board 10/14/02
****Resigned from the Board 11/21/02
*****Resigned from the Board 10/14/02
Randall K. Fields has been the President, Chief Executive Officer, and Chairman
of the Board of Directors since June, 2001. Mr. Fields founded Park City Group,
Inc., a software development company based in Park City, Utah, in 1990 and has
been its President, Chief Executive Officer, and Chairman of the Board since its
inception in 1990. Mr. Fields has been responsible for the strategic direction
of Park City Group, Inc. since its inception. Mr. Fields co-founded Mrs. Fields
Cookies with his then wife, Debbi Fields. He served as Chairman of the Board of
Mrs. Fields Cookies from 1978 to 1990. In the early 1970's Mr. Fields
established a financial and economic consulting firm called Fields Investment
Group. Mr. Fields received a Bachelor of Arts degree in 1968 and a Masters of
Arts degree in 1970 from Stanford University, where he was Phi Beta Kappa,
Danforth Fellow and National Science Foundation Fellow.
Peter Jensen has been Chief Financial Officer since June 3, 2003. Prior to
joining Park City Group Mr. Jensen was a partner at the CPA firm of Niederhauser
& Davis, LLC in Park City, Utah from July 2000. From 1996 to 2000 Mr. Jensen was
a vice president of Enstor, LP, a developer of energy projects. Mr. Jensen has
previously served as Treasurer of Plantronics, Inc., a publicly traded
communications equipment manufacturer, and as Senior Manager at the CPA firm of
KPMG. Mr. Jensen received a Bachelor of Science degree in Accounting from
Brigham Young University and a Masters of Business Administration from Santa
Clara University.
Thomas W. Wilson, Jr. has been a director since August, 2001. Mr. Wilson is also
currently a director and the Chairman of the Board of Productivity Solutions,
Inc., a Jacksonville, Florida builder of customer self-checkout point-of-sale
equipment. From 1995 to 1999, Mr. Wilson was the Chairman of the Board and
currently serves as a member of the Board of 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.
16
William R. Jones has been a director since August, 2001. Mr. Jones founded WR
Jones Associates in 1996, a consulting firm that assists startup software
companies to form marketing strategies, management processes and management
teams. Mr. Jones served as a vice-president of Park City Group from 1991 to
1994. From 1984 to 1991, Mr. Jones was employed at International Business
Machines in various capacities, including having served as a vice-president and
was in charge of all marketing to the U.S. retail industry. Mr. Jones
participated in bringing IBM's technologies to market, including: (i) Universal
Product Code for item identification, (ii) The original IBM Personal Computer,
(iii) Computer Assisted Manufacturing (iv) Just-in-Time inventory management and
(v) Quick Response - supply chain inventory management
Bernard F. Brennan has been a director since August, 2001. Mr. Brennan has been
a senior executive (CEO and President) with such organizations as Sears Roebuck
& Company, Montgomery Ward Corporation, Von's Supermarkets as well as an
additional broad spectrum of retail operations. He became President & CEO of
Household Merchandising, Inc., a $5 billion division of Household International,
Inc. where he also served on Household International's board of directors. There
he oversaw a diversity of retail operations, including Von's Supermarkets, Ben
Franklin Stores, Coast-To-Coast Stores, TG & Y Discount Stores, Barker Brothers,
Colby's and American Furniture Stores. In 1985, Brennan rejoined Montgomery Ward
Corporation as Chairman & CEO of the holding company, including the Retail Group
and Signature Direct Marketing Group, where he served until 1997. Mr. Brennan
has also served as chairman of the National Retail Federation. Mr. Brennan
currently serves on the board for Marketmax, a retail merchandising technology
company, and Spotlight Solutions, a retail pricing optimization technology
company.
Edward C. Dmytryk has been a director since June, 2000. In October 2002, Mr.
Dmytryk took on additional responsibilities as acting Chief Financial Officer
and as such resigned from the Audit Committee. He served in this capacity until
June 2003. Since September 1999, Mr. Dmytryk has also been the Acting President
of GNR Health Systems, Inc., a physical therapy products sales company located
in Ocala, Florida and is on the Board of Directors of Colmena Corporation. Since
June of 1990, Mr. Dmytryk has also been the owner and Chief Executive Officer of
Benchmark Industries, Inc., a metal fabrications company headquartered in Fort
Worth, Texas. Mr. Dmytryk graduated Summa Cum Laude from the Citadel, the
Military College of South Carolina in 1968 with a Bachelor of Science Degree.
Anthony E. Meyer has been a director since October, 2002. Mr. Meyer is the
Chairman of privately held Meyer and Company LLC, a diversified merchant-banking
firm based in New York City. He has extensive experience and relationships in
the real estate, finance, venture capital, technology, and media sectors. Prior
to founding Meyer and Company, Meyer was a Managing Director at Lazard Freres &
Company LLC, a leading global private investment bank. Prior to joining Lazard
Freres, Meyers was a General Partner of Trammell Crow Company, one of the
largest diversified real estate companies in the US. After co-founding Trammell
Crow Ventures, he served as the Chief Investment Officer and led the $2.6
billion investment management company's efforts in real estate, private equity
and venture capital. In his positions of entrepreneur, adviser and private
investor, Meyer worked with many private and public company representing a wide
variety of industries some of which he continues to serve as a member of the
Board of Directors. Mr. Meyer graduated from Harvard University with a degree in
Economics and he received his MBA from Harvard Business School.
Terry R. Peets joined the Board of Directors in April 2002 and resigned his
position in November 2002. Mr. Peets is currently an advisor to J P Morgan
Partners and holds director positions with Diamond Brands, Inc., SuperMarkets
Online, PSC/Spectra Physics, Doane Pet Care, Inc., City of Hope and the
Children's Museum of Orange County.
Stephen D. Weinroth joined the Board of Directors on March 11, 2002, to
represent the interests of AW Fields Acquisition, Inc. AW Fields Acquisition
resigned its board representation on October 14, 2002. Mr. Weinroth serves on
the board of the following entities: K. Hovnanian Enterprises, Inc., Central
Asian-American Enterprise Fund, Financial Federal Corporation and First
Britannia Mezzanine N.V.
Our Executive Officers are elected by the Board on an annual basis and serve at
the discretion of the Board.
17
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, 2003 and whose
annual compensation exceeded $100,000 during such year (collectively the "Named
Executive Officers).
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation Awards
------------------- -----------------------------
Restricted Securities
Other Annual Stock Underlying LTIP
Name and Principal Year/ Salary Compensation Awards Options/SARs Payouts
Position Period ($) Bonus ($) ($) ($) (#) ($)
Randall K. Fields
Chairman, President
and CEO *2001 175,000 - 30,942 (1) - - -
2002 358,750 - 48,334 (1) - - -
2003 330,000 6,477 41,185 (1) 24,167 - -
Shaun Broadhead
PCG Director of
Research &
Development *2001 55,000 - 1,098 (2) - - -
2002 127,708 - 2,554 (2) - - -
2003 108,750 6,477 675 (2) 24,167 - -
Carolyn Doll
PCG Vice-President
Marketing *2001 60,000 - 13,605 (3) - - -
2002 120,000 - 2,400 (3) - - -
2003 105,000 6,477 600 (3) 24,167 - -
Will Dunlavy
PCG Vice-President
Operations *2001 57,500 6,250 1,148 (4) - - -
2002 115,000 6,250 2,425 (4) - - -
2003 103,750 31,477 575 (4) 24,167 - -
Paul Baird
PCG Vice-President
Consulting Services 2002 75,000 10,080 40,938 (5) - - -
2003 112,500 6,477 625 (5) 24,167 - -
Peter Jensen
Chief Financial Officer
Corporate Secretary 2003 13,333 - - (6) 5,667 - -
* Compensation amounts for 2001 are for the period January 1, 2001 through June
30, 2001.
(1) These amounts include employer contributions to the Company's 401(k) Plan
for the benefit of Mr. Fields in the amounts of $1,608, $5,278, and $2,997 for
2003, 2002, and 2001, respectively, as well as payments for unused accrued
vacation and sick leave of $39,577, $43,076, and $27,945 for 2003, 2002 and
2001, respectively; (2) These amounts represent employer contributions to the
Company's 401(k) Plan for the benefit of Mr. Broadhead; (3) These amounts
include employer contributions to the Company's 401(k) Plan for the benefit of
Mrs. Doll, as well as commissions of $12,406 in 2001; (4) These amounts
represent the employer contribution to the Company's 401(k) Plan for the benefit
of Mr. Dunlavy; (5) Mr. Baird started with Park City Group in January 2002 and
left the Company in July 2003. These amounts includes employer contributions to
the Company 401K plan for the benefit of Mr. Baird, as well as $40,000 of
reimbursed relocation expenses in 2002; (6) Mr. Jensen started with Park City
Group in May 2003 and was appointed CFO in June 2003.
18
Employment Agreement with Randall K. Fields
Park City Group has an employment agreement with its president and chief
executive officer, Randall K. Fields, dated effective January 1, 2001, and
revised effective July 1, 2003. The term of the revised agreement is five years
ending June 30, 2008, with automatic one-year renewals. This revised employment
agreement provides for:
o An annual base salary of $350,000,
o Use of a company vehicle,
o Employee benefits that are generally provided to Park City Group,
Inc. employees, and
o A bonus to be determined annually by the Compensation Committee of
the Board of Directors.
Effective October 1, 2002, Mr. Fields agreed to a temporary, but indefinite,
reduction of his base salary to $317,500.
Director Compensation
The continuing outside directors, Edward C. Dmytryk, Thomas W. Wilson, Jr.,
William R. Jones, Bernard F. Brennan, and Anthony E. Meyer receive the following
compensation:
o Annual cash compensation of $6,000 reflecting $2,000 per scheduled
in person director's meetings.
o Options to acquire 125,000 shares of common stock (adjusted for
any stock splits) to be granted annually at the beginning of the
fiscal year, July 1, with an exercise price equal to the market
price on the date of grant with such options to fully vest at the
end of the respective fiscal year .
o During his tenure as Acting CFO, Mr. Dmytryk received $62,500 in
salary, $6,477 in bonuses, and stock valued at $14,490.
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 was
made after September 30, 2002. The expenses related to the plan for the years
ended June 30, 2003 and 2002 were $12,903 and $53,910, respectively.
Indemnification for Securities Act Liabilities
Nevada law authorizes, and the Company's Bylaws and Indemnity Agreements provide
for, indemnification of the Company's directors and officers against claims,
liabilities, amounts paid in settlement and expenses in a variety of
circumstances. Indemnification for liabilities arising under the Act may be
permitted for directors, officers and controlling persons of the Company
pursuant to the foregoing or otherwise. However, the Company has been advised
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
Stock Options and Warrants
The Company has stock option plans that enable it to issue to officers,
directors, consultants and employees nonqualified and incentive options to
purchase common stock. At June 30, 2003, a total of 18,458,334 of such options
were outstanding with exercise prices ranging from $0.08 to $0.24 per share.
At June 30, 2003 a total of 62,269,536 warrants to purchase shares of common
stock were outstanding. Of those warrants, 300,000 have been issued to former
officers of Amerinet; 248,273 were assumed in the reverse acquisition;
32,465,310 were issued in connection with certain debt financings; 1,575,000
were issued in settlement of a legal claim; and 27,680,953 were issued based on
antidilution provisions associated with shares and warrants issued with certain
transactions. These warrants have exercise prices ranging from $0.04 to $1.4325
per share and expire between August 31, 2003 and November 12, 2007.
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.
[Balance of page intentionally left blank]
19
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 June 30, 2003, for each
person or entity that is known to beneficially own more than 5 percent of the
Common Stock. As of June 30, 2003, there were 213,740,591 shares of Common Stock
outstanding.
Title of Amount of Beneficial Nature of
--------- -------------------- ---------
Class Name and Address of Beneficial Owner Ownership Ownership Percent of Class
----- ------------------------------------ --------- --------- ----------------
Common Randall K. Fields, Park City, Utah 35,181,662 (8) Direct 16.46%
Common Riverview Financial Corp., Park City, Utah (1) 92,780,243 Direct 43.41%
Common AW Fields Acquisition, LLC, New York, New York 57,500,002 (3) Direct 26.90%
----------- -----
Total 185,461,907 86.77%
=========== =====
(1) Randall K. Fields is the president and 100% shareholder of Riverview
Financial Corp.
Security Ownership of Management
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of June 30, 2003, for each of the
directors, each of the Named Executive Officers, and all directors and executive
officers as a group. As of June 30, 2003, there were 213,740,591 shares of
Common Stock outstanding.
Amount of
Beneficial Nature of
Title of Class Name, Position and Address of Beneficial Owner Ownership (1) Ownership Percent of Class
-------------- ---------------------------------------------- ----------- --------- ----------------
Common Randall K. Fields, President, CEO, Chairman
and Director 127,961,905 (2) Direct and 59.87%
Park City, Utah Indirect
Common Edward C. Dmytryk, Director
Ocala, Florida 862,660 Direct *
Common Thomas W. Wilson Jr., Director 13,406,648 (4) Direct 6.27%
Westport, Connecticut
Common William R. Jones; Director
Cumming, Georgia 158,300 Direct *
Common Bernard F. Brennan, Director 14,055,654 (5) Direct 6.58%
Point Vedra Beach, Florida
Common Terry R. Peets, Director (8) *
Balboa Island, California 397,540 (6) Direct
Common Anthony E. Meyer 6,773,913 (7) Direct 3.17%
New York, New York
Common Peter Jensen, CFO and Secretary 133,334 Direct *
Park City, Utah
Common Executive Officers & Directors as a Group 163,749,954 76.61%
* 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 92,780,243 shares of common stock owned by Riverview Financial
Corp., which is 100% owned by Randall K. Fields.
(3) Includes warrants to purchase 28,750,001 shares of common stock.
(4) Includes warrants and options to purchase 9,299,505 shares of common stock.
20
(5) Includes warrants and options to purchase 9,127,083 shares of common stock.
(6) Includes warrants to purchase 397,540 shares of common stock.
(7) Includes warrants to purchase 6,773,913 shares of common stock.
(8) Includes warrants and options to purchase 13,690,185 shares of common stock.
Change in Control
The Company is not currently engaged in any activities or arrangements that it
anticipates will result in a change in control of the Company.
Pursuant to the terms of the note payable with Whale Investments, Ltd., the
Company stock partially securing the note payable equates to a controlling
interest in the Company. In the event of the Company's default on the Whale
Investments, Ltd. note payable, the note holder may choose to foreclose on the
Company stock partially securing the note, which would result in Whale
Investment, Ltd. becoming the majority shareholder of the Company.
Item 12. Certain Relationships and Related Transactions
-------------------------------------------------------
The Company has a note payable to Riverview Financial Corporation (Riverview),
in the principal amount of $3,260,714, a discount of $131,250, and a net balance
of $3,129,464, at June 30, 2003 with accrued interest of $1,049,065. The chief
executive of Riverview is also the chief executive of the Company. In August
2002 the interest rate was increased from 10% to 12% and from simple to
compounded interest. Riverview was issued 7,000,000 shares of common stock in
November 2002 in consideration for an extension of the due date to January 2004.
See notes 7 and 12 to the audited financial statements.
Riverview has loaned the Company $345,000 under a note payable bearing interest
at 18%. Payments are made monthly for interest only, with the principal due in
December 2004. Riverview was issued 857,143 shares of common stock in as an
inducement to make the loan. See notes 8 and 12 to the audited financial
statements.
The Company's CEO has made loans to the Company to cover short term cash needs
pursuant to a line of credit promissory note payable. Repayments are made as
funds are available, with a due date of July 31, 2004. Interest is at 12%. The
balance due under the line of credit at June 30, 2003 was $55,000. 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 bears interest at 18%, payable monthly, and is
due in December 2004. Whale Investment, Ltd. is controlled by an individual who
was already a shareholder of the Company at the time of the loan. See notes 8
and 12 to the audited financial statments.
The Company has a payable to chief executive officer of $54,989 at June 30, 2003
for unreimbursed business expenses, which is included in accounts payable.
The Company issued shares of common stock and warrants to an officer and
directors pursuant to antidilution rights triggered by terms of the bridge note
financings. See notes 8 and 12 to the audited financial statements.
Item 13. Exhibits and Reports on Form 8-K
-----------------------------------------
On May 21, 2003, the Company filed a Current Report on Form 8-K dated May 21,
2003 disclosing under Item 9 the operating and financial results for the quarter
ended March 31, 2003.
On June 4, 2003, the Company filed a Current Report on Form 8-K dated June 4,
2003 disclosing under Item 5 the resignation of Edward C. Dmytryk as Acting CFO
and the appointment of Peter Jensen as CFO.
On July 14, 2003, the Company filed a Current Report on Form 8-K dated July 2,
2003 disclosing under Item 2 the cancellation of 6,283,529 shares of common
stock pledged under Subscription Agreements from three shareholders. The
Promissory Notes related to the Subscription Agreements were in default.
Exhibits, Financial Statements and Schedules
The Consolidated Financial Statements and Report of Independent Accountants are
contained in this Form 10-KSB beginning on page 24.
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
21
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 14, 2003 By /s/ Randall K. Fields
---------------- --------------------------
Randall K. Fields
President, Chief 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 President, Chief Executive Officer, October 14, 2003
-------------------------- Chairman of the Board and Director ----------------
Randall K. Fields (Principal Executive Officer)
/s/ Peter Jensen Chief Financial Officer and October 14, 2003
-------------------------- Secretary ----------------
Peter Jensen
/s/ Edward C. Dmytryk Director October 14, 2003
-------------------------- ----------------
Edward C. Dmytryk
/s/ William R. Jones Director October 14, 2003
-------------------------- ----------------
William R. Jones
/s/ Thomas W. Wilson, Jr. Director October 14, 2003
-------------------------- ----------------
Thomas W. Wilson, Jr.
/s/ Bernard F. Brennan Director October 14, 2003
-------------------------- ----------------
Bernard F. Brennan
/s/ Anthony E. Meyer Director October 14, 2003
-------------------- ----------------
Anthony E. Meyer
22
Park City Group, Inc. & Subsidiaries
------------------------------------
Consolidated Financial Statements
---------------------------------
June 30, 2003 and 2002
----------------------
Index to Consolidated Financial Statements
------------------------------------------
Page No.
Independent Auditors' Report
Tanner + Co. 24
Consolidated Balance Sheet as of June 30, 2003 25
Consolidated Statements of Operations for the years
ended June 30, 2003 and 2002 26
Consolidated Statements of Stockholders' Deficit for
the years ended June 30, 2003 and 2002 27
Consolidated Statements of Cash Flows for the years
ended June 30, 2003 and 2002 28
Notes to Consolidated Financial Statements 29
23
Park City Group, Inc. & Subsidiaries
------------------------------------
Independent Auditors' Report
----------------------------
To the Board of Directors and
Shareholders of Park City Group, Inc.
We have audited the accompanying consolidated balance sheet of Park City Group,
Inc. and Subsidiaries as of June 30, 2003, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the years
ended June 30, 2003 and 2002. 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 auditing standards generally accepted
in the United States of America. 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 opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Park City Group,
Inc. and subsidiaries as of June 30, 2003 and the results of their operations
and their cash flows for the years ended June 30, 2003 and 2002, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has a working capital deficit and
has suffered recurring losses that raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters are also
described in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Tanner + Co.
-------------------
Salt Lake City, Utah
October 9, 2003
24
Park City Group, Inc. & Subsidiaries
------------------------------------
Consolidated Balance Sheet
--------------------------
June 30, 2003
-------------
Assets
------
Current assets:
---------------
Cash $ 69,305
Receivables, net of allowance for doubtful
accounts 945,402
Prepaid expenses and other current assets 49,267
--------------
Total current assets 1,063,974
--------------
Property and equipment, net of accumulated
depreciation and amortization 105,355
--------------
Other assets:
Deposits and other assets 117,049
Capitalized software costs, net
of accumulated amortization 864,106
--------------
Total other assets 981,155
--------------
Total assets $ 2,150,484
==============
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities
-------------------
Accounts payable $ 763,914
Accrued liabilities 637,167
Deferred revenue 1,218,070
Advances payable 175,000
Current portion of long-term debt and 24,548
capital lease obligations
Notes payable to related parties, net
of discount of $131,250 3,184,464
Accrued interest on notes payable to
related parties 1,049,065
-------------
Total current liabilities 7,052,228
Long-term debt and related party note
payable, less current portion, net of
discount of $242,166 3,027,576
--------------
Total liabilities 10,079,804
--------------
Commitments and contingencies -
Stockholders' deficit:
Preferred stock, $.01 par value, 30,000,000 shares
authorized no shares issued, -
Common stock, $.01 par value, 300,000,000 shares
authorized, 213,740,591 issued and outstanding 2,138,407
Additional paid-in-capital 6,445,196
Treasury stock, 100,000 shares (30,000)
Accumulated deficit (16,482,923)
--------------
Total stockholders' deficit (7,929,320)
--------------
Total liabilities and stockholders'
deficit $ 2,150,484
==============
See accompanying notes to consolidated financial statements.
25
Park City Group, Inc. & Subsidiaries
------------------------------------
Consolidated Statement of Operations
------------------------------------
For the Years Ended June 30, 2003 and 2002
------------------------------------------
Year Ended Year Ended
June 30, 2003 June 30, 2002
------------- -------------
Revenues:
Software licenses $ 2,647,188 $ 1,664,207
Maintenance and support 2,035,891 1,888,415
Consulting and other 667,103 316,798
------------- -------------
Total revenues 5,350,182 3,869,420
Cost of revenues 1,101,871 839,700
------------- -------------
Gross margin 4,248,311 3,029,720
------------- -------------
Operating expenses:
Research and development 1,151,907 725,562
Sales and marketing 1,460,283 1,614,710
General and administrative expenses 2,181,089 1,908,983
Impairment of capitalized software costs 2,242,079 -
------------- -------------
Total operating expenses 7,035,358 4,249,255
------------- -------------
Loss from operations (2,787,047) (1,219,535)
------------- -------------
Interest expense (2,216,308) (771,225)
------------- -------------
Loss before income taxes (5,003,355) (1,990,760)
------------- -------------
Income tax (expense) benefit:
Current - -
Deferred - (1,400,000)
------------- -------------
- (1,400,000)
------------- -------------
Net loss $ (5,003,355) $ (3,390,760)
------------- -------------
Preference dividend to shareholders - (670,000)
------------- -------------
Net loss available to common shareholders $ (5,003,355) $ (4,060,760)
------------- -------------
Weighted average shares, basic and diluted 198,027,000 155,737,000
------------- -------------
Basic and diluted loss per share $ (0.03) $ (0.02)
------------- -------------
See accompanying notes to consolidated financial statements.
26
Park City Group, Inc. & Subsidiaries
------------------------------------
Consolidated Statement of Stockholders' Deficit
-----------------------------------------------
For the Years Ended June 30, 2003 and 2002
------------------------------------------
Additional
Common Stock Paid-In Subscription Treasury Accumulated
Shares Amount Capital Receivable Stock Deficit Total
----------- ----------- ----------- ------------- ---------- ------------- -------------
Balance, June 30, 2001 149,276,564 $ 1,492,766 $ 1,829,539 $ (1,323,200) $ - $ (8,088,808) $ (6,089,703)
Beneficial conversion
feature on AW Fields note - - 233,334 - - - 233,334
Payment received on stock
subscription receivable - - - 255,000 - - 255,000
Common stock issued for:
Cash 10,466,667 104,667 2,072,083 - - - 2,176,750
Services 566,667 5,667 67,333 - - - 73,000
Cancellation of
rights 4,466,667 44,667 (44,667) - - - -
Conversion of debt 11,666,667 116,667 1,456,795 - - - 1,573,462
Purchase of treasury stock (100,000) - - - (30,000) - (30,000)
Net loss - - - - - (3,390,760) (3,390,760)
----------- ----------- ------------ ------------ --------- ------------- -------------
Balance, June 30, 2002 176,343,232 1,764,434 5,614,417 (1,068,200) (30,000) (11,479,568) (5,198,917)
Common stock issued for:
Compensation 4,708,367 47,083 105,584 - - - 152,667
Services 349,901 3,499 20,994 - - - 24,493
Settlement 1,575,000 15,750 74,551 - - - 90,301
Debt refinancing 11,666,667 116,667 402,857 - - - 519,524
Antidilution
provisions 25,380,953 253,809 119,179 - - - 372,988
Warrants issued with - - 922,090 - - - 922,090
related party Bridge Notes
Repricing of related - - 11,178 - - - 11,178
party Bridge Note warrants
Warrants issued with - - 179,711 - - - 179,711
related party note payable
Cancellation under
subscription agreements (6,283,529) (62,835) (1,005,365) 1,068,200 - - -
Net loss - - - - - (5,003,355) (5,003,355)
----------- ----------- ------------ ------------ --------- ------------- -------------
Balance, June 30, 2003 213,740,591 $ 2,138,407 $ 6,445,196 $ - $ (30,000) $ (16,482,923) $ (7,929,320)
=========== =========== ============ ============ ========= ============= =============
See accompanying notes to consolidated financial statements.
27
Park City Group, Inc. & Subsidiaries
------------------------------------
Consolidated Statement of Cash Flows
------------------------------------
For the Years Ended June 30, 2003 and 2002
------------------------------------------
Year Ended Year Ended
June 30, 2003 June 30, 2002
------------- -------------
Cash flows from Operating Activities:
Net loss $ (5,003,355) $ (3,390,760)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 296,135 146,452
Bad debt expense 78,920 10,840
Impairment of capitalized software costs 2,242,079 -
Loss on disposition of assets 32,931 2,189
Deferred income taxes - 1,400,000
Stock issued for services and compensation 640,450 73,000
Amortization of beneficial conversion feature - 77,777
Amortization of discounts on debt 1,195,713 -
Repricing of warrants 11,178 -
Decrease (increase) in:
Trade receivables (288,558) (212,429)
Related party receivables - (23,625)
Prepaid and other assets 60,097 (4,264)
Stock subscription receivable - 206,800
Increase (decrease) In:
Accounts payable 204,056 (110,940)
Accrued liabilities 266,534 73,218
Related party payable (45,000) 100,000
Deferred revenue (412,798) 95,126
Advances payable 175,000 -
Accrued interest, related party 569,896 313,757
------------- -------------
Net cash used in operating activities 23,278 (1,242,859)
Cash flows from investing activities:
Purchase of property and equipment (14,889) (50,789)
Capitalization of software costs (948,788) (1,701,850)
Proceeds from disposal of property - 1,946
------------- -------------
Net cash used in investing activities (963,677) (1,750,693)
Cash flows from financing activities:
Net increase (decrease) in line of credit (62,500) 395,000
Receipt of subscription receivable - 255,000
Purchase of treasury stock - (30,000)
Proceeds from debt 1,135,000 -
Proceeds from convertible promissory note - 1,667,587
Payments on notes payable and capital leases (203,768) (1,548,295)
Proceeds from issuance of common stock - 2,176,750
------------- -------------
Net cash provided by financing activities 868,732 2,916,042
------------- -------------
Net decrease in cash (71,667) (77,510)
Cash at beginning of year 140,972 218,482
------------- -------------
Cash at end of year $ 69,305 $ 140,972
============= =============
See accompanying notes to consolidated financial statements.
28
Park City Group, Inc. & Subsidiaries
------------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
June 30, 2003 and June 30, 2002
-------------------------------
1. Summary of Significant Accounting Policies, Organization and Principles of
---------------------------------------------------------------------------
Consolidation
-------------
The Company was incorporated in Delaware on May 11, 1990 as Riverview Software,
Inc. In 1990, the Company changed its name to Fields Software Group, Inc. and in
1993, the Company's name was changed again to Park City Group, Inc. (PCG).
On June 13, 2001, Park City Group, Inc. (formerly known as Fields Technologies,
Inc.(FTI) and prior to that AmeriNet Group.com, Inc.) issued 109,623,600 shares
of common stock in exchange for 98.76% of the issued and outstanding shares of
PCG. For accounting purposes the business combination is treated as a reverse
acquisition or a recapitalization of PCG, with PCG being treated as the
accounting acquirer. On August 7, 2002 Fields Technologies, Inc., changed its
name to Park City Group, Inc., and reincorporated in Nevada. Throughout these
financial statements when the terms "Company" or "Park City Group" are used it
is referring to the current Nevada successor Park City Group, Inc.
The financial statements presented herein reflect the consolidated financial
position of PCG and FTI as of June 30, 2003, and operations of PCG and FTI for
the years ended June 30, 2003 and 2002. All intercompany transactions and
balances have been eliminated in consolidation.
On April 5, 2001, the Company acquired for $3,750,000 Fresh Market Manager
(FMM), which was substantially owned by the primary shareholder of the Company
and another individual. In as much as the transaction was between entities of
common ownership and FMM had a deficit in equity, the deficit in equity and the
purchase price were accounted for as a distribution to the primary shareholder.
The consolidated statements include the operations of FMM since April 5, 2001,
the date of the transaction.
Riverview Financial Corp. (Riverview) is a stockholder and creditor of the
Company. Riverview is wholly owned by the Company's CEO.
Business Activity
-----------------
The Company designs, develops, markets and supports proprietary software
products. These products are designed to be used in retail businesses having
multiple locations to assist in the management of business operations on a daily
basis and communicate results of operations in a timely manner. The principal
markets for the Company's products are retail companies which have operations in
North America and, to a lesser extent, in Europe and Asia.
Use of Estimates and Reclassifications
--------------------------------------
The preparation of consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that materially affect the amounts reported in the consolidated
financial statements. Actual results could differ from these estimates. The
methods, estimates and judgments the Company uses in applying its most critical
accounting policies have a significant impact on the results it reports in its
financial statements. The U.S. Securities and Exchange Commission has defined
the most critical accounting policies as the ones that are most important to the
portrayal of the Company's financial condition and results, and require the
Company to make its most difficult and subjective judgments, often as a result
of the need to make estimates of matters that are inherently uncertain. Based on
this definition, the Company's most critical accounting policies include:
revenue recognition, allowance for doubtful accounts, capitalization of software
development costs and impairment of long-lived assets.
Cash and Cash Equivalents
-------------------------
The Company considers all short-term instruments with an original maturity of
three months or less to be cash equivalents.
Concentration of Credit Risk
----------------------------
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, 2003, accounts receivable includes amounts due from
customers totaling $945,402. Substantially all of these receivables are due from
three new customers and four long-standing customers.
29
During the year ended June 30, 2003, the Company received approximately $2.1
million of its revenue from new customers and approximately $3.2 million in
revenue from existing customers for continued support and additional license
sales.
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 3 - 7
Computer equipment 3 - 7
Equipment under capital leases 3 - 7
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.
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.
Software Development Costs
--------------------------
The Company accounts for software development costs in accordance with Statement
of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed. Research and development
costs have been charged to operations as incurred. From inception through
January 2001, the Company viewed the software as an evolving product. Therefore,
all costs incurred for research and development of the Company's software
products through January 2001 were expensed as incurred. During January 2001,
technological feasibility of a major revision to the Company's Fresh Market
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.
Development costs for ActionManager totaling $2,242,079, incurred from January
2001 through March 2003, when the product became available for release to
customers, were capitalized. The Company has focused it sales and marketing
resources on its Fresh Market Manager software products, and intends to continue
selling ActionManager software primarily through alliances with other software
companies or software resellers. These distribution channels for ActionManager
software have not yet been proven to provide the level of sales necessary to
support the continued economic viability of the ActionManager capitalized
development costs. Consequently, $2,242,079 of capitalized development costs
associated with the ActionManager products were charged to expense in June 2003.
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.
30
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 80,727,870 shares of common stock at prices
ranging from $.04 to $1.43 per share were outstanding at June 30, 2003, but were
not included in the diluted loss per share calculation because the effect would
have been antidilutive.
The shares used in the computation of the Company's basic and diluted earnings
per common share are reconciled as follows:
June 30, 2003 June 30, 2002
------------- -------------
Weighted average 198,027,000 155,737,000
Dilutive effect of options and warrants - -
----------- -----------
Weighted average shares outstanding
assuming dilution 198,027,000 155,737,000
=========== ===========
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. Going Concern
-------------
The accompanying consolidated financial statements have been prepared under the
assumption that the Company will continue as a going concern. Such assumption
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the consolidated financial
statements, the Company incurred losses for the years ended June 30, 2003 and
2002. The Company also has a working capital deficit at June 30, 2003. The
consolidated financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitability. Potential sources of cash include new sales contracts, external
debt, the sale of new shares of Company stock or alternative methods such as
mergers or sale transactions. No assurances can be given, however, that the
Company will be able to obtain any of these potential sources of cash. The
Company currently requires additional cash to sustain existing operations and to
meet current obligations and ongoing capital requirements.
3. Receivables
-----------
Trade accounts receivable consist of the following at June 30, 2003:
Trade Accounts Receivable $ 986,542
Allowance for doubtful accounts (41,140)
------------
$ 945,402
============
4. Property and Equipment
----------------------
Property and equipment are stated at cost and consist of the following at June
30, 2003:
Computer equipment $ 1,302,420
Furniture and equipment 173,031
Equipment under capital lease 23,259
Leasehold improvements 85,795
------------
1,584,505
Less accumulated depreciation
and amortization (1,479,150)
------------
$ 105,355
============
31
5. Intangible Asset
----------------
Intangible assets consists of the following at June 30, 2003
Capitalized software costs $ 1,063,516
Less accumulated amortization (199,410)
------------
$ 864,106
============
6. Accrued Liabilities
-------------------
Accrued liabilities consist of the following at June 30, 2003:
Accrued vacation $ 133,305
Other payroll liabilities 182,905
Commissions 140,979
Other accrued liabilities 179,978
------------
$ 637,167
============
7. Notes Payable and Current Portion of Long-Term Debt and Capital Lease
---------------------------------------------------------------------
Obligations
-----------
The Company has the following short-term notes payable and current portion or
long-term debt and capital lease obligations at June 30, 2003.
Notes payable to a Riverview bearing interest at 12%,
due in January 2004, unsecured, net of discount of
$131,250 $ 3,129,464
Note payable to an officer bearing interest at 12%, due
July 2003, unsecured 55,000
------------
$ 3,184,464
============
In August 2002, Riverview agreed to subordinate the note payable to the rights
of the holders of the Bridge Notes (see footnote 8). In exchange for this
subordination the interest rate on the note was changed to 12% compounded
annually. In November 2002 the Company negotiated with Riverview an extension of
the payment date for the note payable from December 2002 to January 4, 2004. In
consideration for the extension of the due date, 7,000,000 common shares were
issued to Riverview. The fair value of these shares was $350,000, which is being
amortized into interest expense over the extended term of the note. During the
year ended June 30, 2003, $218,750 of the discount was recognized as interest
expense. Interest is accrued but not payable until maturity. The Company is in
negotiations with Riverview for a further extension of the payment date for the
note and accrued interest.
In May 2003 the Company arranged an unsecured, revolving line of credit for
$350,000 with its CEO. Advances bear interest at 12%, and are repaid as funds
availability permits. The line of credit expires July 31, 2004. Because advances
under the line of credit are expected to be repaid as soon as cash flow allows,
borrowings under the line of credit of $55,000 at June 30, 2003 have been
classified as a current liability.
32
8. Long-term and related party notes payable
-----------------------------------------
The Company had the following long-term notes payable at June 30, 2003:
Note payable to an entity controlled by a stockholder
at an interest rate of 18%, due in December 2004,
secured by Company stock owned and controlled by the
CEO, and substantially all assets of the Company,
net of discount of $134,784 $ 1,865,216
Note payable to Riverview bearing interest at
18%, due in December 2004, net of discount of
$12,856 332,145
Notes payable to related parties bearing interest 18%,
due in July 2004, net of discount of $94,526 704,372
Notes payable to unrelated parties bearing
interest at 8%, due in December 2005 105,000
Capital lease obligation on computer equipment,
net of depreciation $16,349, due in monthly
installments of $2,358 through April 2005, imputed
interest rate of 10.9% 45,391
-------------
3,052,124
Less current portion (24,548)
-------------
$ 3,027,576
=============
Maturities of long-term debt at June 30, 2003 are as follows:
Year Amount
---- ----------
2004 $ 24,548
2005 3,027,576
----------
$3,052,124
==========
In December 2002, the Company obtained a $2,000,000 note payable funding from
Whale Investment, Ltd., an entity controlled by a shareholder of the Company.
The proceeds were used to repay existing notes payable and accrued interest. The
$2,000,000 note payable has an interest rate of 18%, a due date of December 24,
2004, and a monthly interest only payments until the due date. In connection
with the new $2,000,000 note payable, the Company incurred a fee paid in
3,809,524 shares of common stock and a warrant to purchase 7,142,857 shares of
common stock, exercisable at $0.07 per share, immediately exercisable and
expiring in December 2004. The discount from the warrants was determined to be
$179,711, which is being amortized into interest expense over the two-year term
of the note. The value of the shares of common stock issued as a finders fee had
a fair market value of $152,381, which is being amortized into interest expense
over the two-year term of the note. Total interest expense over the expected
term of the note, including the 18% interest and $179,711 warrants discount, is
$899,711, or an effective annual interest rate of 23%. The Company has pledged
substantially all of its assets as security for this debt, and the CEO has
personally guaranteed the note and pledged his all of his Company stock as well
as Company stock owned by Riverview.
As a condition of obtaining the funding from Whale Investment, Ltd., Riverview
provided additional funding to the Company under terms of a promissory note for
$345,000. The note has an interest rate of 18%, a due date of December 24, 2004,
and monthly interest only payments until the due date. No principal payments can
be made without a corresponding repayment to Whale Investments, Ltd. The Company
incurred a fee paid with 857,143 shares of common stock, the fair value of which
was determined to be $17,143. This amount is being amortized into interest
expense over the two-year term of the note. During the year ended June 30, 2003,
$4,286 of the $17,143 was recogized as interest expense.
In August 2002 the Company issued approximately $575,000 in Bridge Note
financing, at a stated interest rate of 10% per annum with a due date of
December 15, 2002 and which were issued at a 7% discount. This financing carried
warrants to purchase 5,350,000 common shares at $.10 per share, expiring in
August 2007. The discount from the warrants was determined to be $183,109, which
was amortized into interest over the term of the Bridge Notes. Total interest
expense including the 7% interest discount, 10% interest and $183,109 warrants
discount was $242,553, or an effective annual interest rate of 49%. The
individual note holders include the Company's CEO and certain directors, a
former director and an individual associated with AW Fields Acquisition.
33
As a result of the price of Bridge Note A warrants being issued at $.10 per
share the antidilution rights associated with the sale of shares made earlier in
the year ( AW Fields Acquisition and private placement including directors and
officer) were triggered. Resulting in 12,556,667 additional shares being issued
and the number of shares to be purchased under warrants with antidilution rights
increased by 8,458,334 shares, the warrant price to purchase a total of
20,125,001 common shares was reduced to $0.10.
In November 2002 Bridge Note A was repaid and replaced with a new Bridge Note
totaling approximately $799,000 at a stated interest rate of 10% per annum, a
due date of July 31, 2003 and was issued at a 7.5% discount. The new Bridge Note
B carried warrants to purchase 19,972,451 shares of common stock at $.04 per
share, expiring in November 2007. The discount from the warrants was determined
to be $738,981, which is being amortized into interest over the term of the
Bridge Note B. During the year ended June 30, 2003, $651,504 of the warrant
discount was recogized as interest expense. Total interest expense including the
7.5% interest discount, 10% interest and $738,981 warrants discounts is $848,829
or an effective annual interest rate of 110%.
As a result of the price of the warrants in Bridge Note B being $.04 per share,
this triggered the anti-dilution rights associated with warrants of the first
Bridge Note and the anti-dilution rights associated with the sale of shares made
earlier in the year ( AW Fields Acquisition and private placement including
directors and officer). As a result an additional 12,814,286 common shares were
issued and the number of shares to be purchased under warrants with
anti-dilution rights increased by 8,625,000 shares, the warrant price to
purchase a total of 28,750,001 and 8,297,619 common shares were reduced to $.07
and $.04 per share, respectively. The AW Fields Acquisition agreement allows for
the further anti-dilution right to the $.04 per share level, but AW Fields
Acquisition has waived this right for this transaction.
In July 2003 Bridge Note B was repaid and replaced with a new Bridge Note
totaling $868,457 at a stated interest rate of 18% and a due date of July 31,
2004. The new Bridge Note C required an incentive fee of 1,738,680 shares of
common stock to be issued to the note holders. The fair value of these shares is
$86,934 ($.05 per share), which is to be amortized into interest expense over
the term of Bridge Note C. The AW Fields Acquisition agreement and agreements
with certain directors allow for the further anti-dilution right to the $.05 per
share level, but they have waived their right for this transaction. Because
Bridge Note B, which was due July 31, 2003, was refinanced into Bridge Note C,
which is due July 31, 2004, the balance at June 30, 2003 is shown as a long-term
liability.
9. Deferred Revenue
----------------
Deferred revenue consisted of the following at June 30, 2003:
Software licenses $ 175,000
Maintenance and Support 1,043,140
-------------
$ 1,218,140
=============
10. Income Taxes
------------
The Company provides for deferred income taxes on temporary differences that
represent tax effects of transactions reported for tax purposes in periods
different than for book purposes.
The provisions for income taxes differ from the amount computed at statutory
rates as follows:
Year Ended Year Ended
June 30, 2003 June 30, 2002
-------------- --------------
Income tax benefit at statutory rates $ 1,574,000 $ 1,225,000
Change in valuation allowance (1,573,000) (2,559,000)
------------- --------------
Other (1,000) (66,000)
------------- --------------
$ - $ (1,400,000)
============= ==============
Current income tax expense $ - $ -
Deferred income tax expense - (1,400,000)
------------- --------------
$ - $ (1,400,000)
============= ==============
34
The deferred income tax benefit for the years ended June 30, 2003 and 2002 is as
follows:
June 30, 2003 June 30, 2002
------------- -------------
Short Term
----------
Allowance for bad debts $ 16,000 $ 22,000
Accrued vacation 52,000 66,000
Accrued sick pay - 26,000
Deferred revenue 407,000 305,000
Valuation allowance (475,000) (419,000)
------------- --------------
Deferred tax asset $ - $ -
------------------ ============= ==============
Long Term
---------
Depreciation $ 51,000 $ 52,000
Net Operating loss carry forward 2,887,000 1,369,000
Valuation allowance (2,938,000) (1,421,000)
------------- --------------
Deferred tax asset $ - $ -
------------------ ============= ==============
As of June 30, 2003, the Company had available net operating losses (NOL) for
federal and state tax purposes of approximately $7,404,000. The NOL carry
forward is limited to use against future taxable income due to changes in
ownership and control. If a substantial change in the Company's ownership should
occur, there would be an annual limitation of the amount of the NOL carry
forward which could be utilized. The following schedule summarizes the net
operating losses available to the Company with the corresponding expiration
periods:
Period of Loss Amount Expiration Year
-------------- ------ ---------------
2001 1,040,000 2021
2002 2,470,000 2022
2003 3,894,000 2023
----------
$7,404,000
11. Preference Dividend
-------------------
On March 14 and 15, 2002, certain shareholders and the Company entered into
Conversion Agreements, whereby these certain shareholders received 4,466,667
additional shares of the Company's common stock for the cancellation of certain
rights and provisions of the original subscription agreements, all of which had
been entered into during fiscal year 2002. The Company's issuance of additional
shares to these shareholders was deemed a preference dividend to shareholders,
and is valued at $670,000.
12. Supplemental Disclosure of Cash Flow Information
------------------------------------------------
Interest paid during the years ended June 30, 2003 and 2002 was $339,341 and
$401,911, respectively. No income taxes were paid during the years ended June
30, 2003 or 2002.
Non-Cash Transactions Disclosure
--------------------------------
During the year ended June 30, 2002, the Company entered into a convertible note
payable with detachable warrants with a principal balance of $1,750,000 and cash
proceeds of $1,667,587. During June 2002, the note holder converted the
principal balance of $1,750,000 into 11,666,667 shares of the Company's common
stock. The convertible note payable had been issued with detachable warrants,
which were valued at $233,334. Prior to the conversion, $77,777 of the warrants'
value had been amortized into interest expense, and the remaining $155,557 of
the warrant's unamortized value at the date of conversion affected the value of
the 11,666,667 shares of the Company's common stock issued upon conversion of
the note payable.
In connection with the Bridge Notes A issued in August 2002 (see note 8), the
Company recorded a $40,268 discount related to the 7% interest discount at which
the notes were financed. The Company also recorded an $183,109 discount related
to the fair value of the warrants. For the period from the date of the Bridge
Notes A to June 30, 2003, the Company amortized all of the interest and warrants
discounts.
In connection with the Bridge Notes B issued in November 2002 (see note 8),
Bridge Note A was repaid and the Company recorded a $59,917 discount related to
the 7.5% interest discount at which the notes were financed. The Company also
recorded a $738,981 discount related to the warrants. For the period from the
date of the Bridge Notes B to June 30, 2003, the Company amortized $52,868 and
$651,504 of the interest and warrants discounts on Bridge Note B, respectively.
35
The Company issued 8,625,000 shares of common stock pursuant to antidilution
rights to AW Fields Acquisition (see note 8), which was recorded as an increase
to common stock and decrease to additional paid-in capital of $86,250, thus
increasing the shares issued under antidilution for AW Fields to 17,083,334.
The Company issued 4,189,285 shares of common stock pursuant to antidilution
rights to an officer and directors (see note 8), which was recorded as an
increase to common stock of $41,893, an increase to additional paid-in capital
of $125,678 and an expense of shares issued for services of $167,571, which was
included in general and administrative expense during the year ended June 30,
2003. This increased the number of shares issued under antidilution for an
officer and directors to 8,297,620, and the total expense for these shares
increased to $372,988.
The modification of Bridge Note A warrants from an exercise price of $.07 to
$.04 resulted in an interest expense of $11,178 (see note 8).
In connection with the note payable funding from Whale Investment, Ltd. (see
note 8), the Company incurred a finders fee which was paid with 3,809,524 shares
of common stock and a warrant to purchase 7,142,857 shares of common stock. The
7,142,857 shares of common stock have a fair value of $152,381 which was
recorded as a prepaid expense and is being amortized into expense over the
two-year term of the note payable. The fair value of the warrants of $179,711
was recorded as a discount on the note payable and is being amortized into
interest expense over the two-year term of the note payable. For the period from
the date of the $2,000,000 note payable to June 30, 2003, the Company amortized
$44,928 of the warrants discount into interest expense, and $38,095 of the
prepaid finders fee into expense.
An additional 857,143 shares of common stock were issued in connection with the
$345,000 note payable funding from Riverview obtained as a condition of the
Whale Investment, Ltd. funding (see note 8). The 857,143 shares of common stock
have a fair value of $17,143 which was recorded as a discount on the advances
and is being amortized into interest expense over the two-year term of the
advances. For the period ended June 30, 2003, the Company amortized $4,286 of
the common shares discount into interest expense.
The Company issued 7,000,000 shares of common stock to Riverview in exchange for
extending the associated related party note payable to January 2, 2004. The fair
value of the shares of common stock of $350,000 is recorded as a discount to the
related party note payable. As of June 30, 2003, $218,750 of the discount had
been amortized into interest expense (see note 7).
During the years ended June 30, 2003 and 2002, the Company issued 349,901 and
536,667 shares of common stock, respectively, as payment for consulting and
legal services in the amounts of $24,493 and $73,000, respectively.
13. Commitments and Contingencies.
------------------------------
Capital Leases: Amortization expense related to capitalized leases is included
in depreciation expense and was $7,222 and $12,716 for the years ended June 30,
2003 and 2002, respectively. Accumulated amortization was $116,298 at June 30,
2003.
Operating Leases. In September 1998, the Company entered into a lease agreement
for office space. Under the terms of the lease agreement, the Company was
required to pay $16,723 per month with a 4% annual increase in the base rent
through December 2000. The lease agreement was renewed in February 2001, and
under the terms of the new agreement, the Company must pay $18,482 per month
with a 4% annual increase in base rent until December 31, 2003. Total rent
expense under this agreement for each of the years ended June 30, 2003 and 2002
was $221,784. The Company is currently negotiating for office space to replace
existing space at the end of the lease term. The Company expects to reduce its
office space and the corresponding monthly rental expense.
14. Legal
-----
Debra Elenson vs. Fields Technologies, Randall K. Fields (Filed -January 2002,
in the Circuit Court of the 11th Judicial Circuit in and for Dade County,
Florida): The plaintiff alleged, among other causes of actions, that a private
placement memorandum pursuant to which the plaintiff had purchased shares of
Fields Technologies, contained financial statements which were not prepared in
accordance with generally accepted accounting principles and the requirements of
SEC regulation S-X. The plaintiff alleged fraud, misrepresentation, unregistered
sales of securities and other causes of actions. The lawsuit was settled in
September 2003 for an additional 1,125,000 shares of common stock to be issued
to the plaintiff and payment of plaintiff's legal fees of $21,348.
36
In August 2002, the Company filed legal action against The Yankee Companies,
Inc. et al. The defendants were entities and individuals involved in the
reorganization of Amerinet and its acquisition of control of Park City Group
(Delaware). These causes of action include: violation of Florida's Securities
and investor Protection Act, Fraud, negligent misrepresentation, violation of
Federal Securities Acts 1933 and 1934 and breach of promissory note.
Approximately two weeks following the filing of the complaint against Yankee
Companies, the Company was served with a complaint by Yankee Companies and
others, alleging sales of unregistered securities, securities fraud,
registration violations, fraud negligent misrepresentation, and breach of loan
agreement. On or about February 5, 2003 the case was dismissed based on the fact
that the case filed by the Company was filed first and all issues can be argued
in that case. Both cases are still in the discovery stage.
15. 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. No matching contribution was made
after September 30, 2002. The expenses related to the plan for the years ended
June 30, 2003 and 2002 were $12,903 and $53,910 respectively.
16. 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
$.05 per share. During the year ended June 30, 2003 4,708,367 shares were issued
with a fair value of $152,667.
Officers and Directors Stock Compensation. In October 2001, the Board of
Directors approved the following compensation for directors who are not employed
by the Company.
o $2,000 for every Board of Directors meeting attended; four are
held each year.
o Stock Options to purchase 125,000 shares of the Company's common
stock, par value $.01 at the price listed on the OTC on the date
of grant, vesting over one year, and expiring in five years. These
options are to be granted for each year the director is a member
of the board and is prorated for any directors who may serve a
partial year. No shares were reserved for this plan.
o Reimbursement of all travel expenses related to performance of
Directors duties on behalf of the Company.
As of June 30, 2003 there were outstanding to directors fully vested options
outstanding to purchase 1,125,000 common shares at prices of $.08 - $.14 per
share, and expiring at various dates through July 2007.
In December 2001, the Board of Directors approved a plan to incentivize members
of the Board of Directors, including those employed by the Company, to purchase
shares of stock of the Company. Therefore, for any common stock purchased at
fair market value by a member of the Board of Directors, the Company matches
with an option to purchase additional shares equivalent to those purchased, at
the same price of the original purchased shares and expiring two years from the
date of grant. Under this plan the Company had options to purchase 5,666,667
shares of common stock at prices of $.11 - $.24 and expiring at various times
through March 2004.
Officers, Key Employees, Consultants and Directors Stock Compensation In January
2000, the Company entered into a non-qualified stock option & stock incentive
plan. Officers, key employees, consultants and directors of the Company are
eligible to participate. The maximum aggregate number of shares which may be
granted under this plan was originally 1,000,000 and was subsequently amended to
2,000,000 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.
37
A schedule of the options and warrants at June 30, 2003 is as follows:
Number of
Options Warrants Price per Share
--------- -------- ---------------
Outstanding at June 30, 2001 297,800 713,273 $0.27-1.44
Granted 24,700,001 - $0.10-0.25
Exercised - - -
Called (100,000) - $0.25
Cancelled (3,100,000) - $0.25
Expired (297,800) (150,000) $0.27-1.44
--------- --------- ----------
Outstanding at June 30, 2002 21,500,001 563,273 $0.10-1.44
Granted 750,000 61,721,263 $0.04-0.10
Exercised - - -
Called - - -
Cancelled (125,000) - $0.08
Expired (3,666,667) (15,000) $0.25-$1.28
----------- -------- -----------
Outstanding at June 30, 2003 18,458,334 62,269,536 $0.04-1.44
17. Stock-Based Compensation
------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123) which established financial accounting and reporting standards for
stock-based compensation. The new standard defines a fair value method of
accounting for an employee stock option or similar equity instrument. This
statement gives entities the choice between adopting the fair value method or
continuing to use the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 with footnote disclosures of the pro forma effects if the
air 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, the Company's net
loss would have been as follows:
Year Ended Year Ended
June 30, June 30,
2003 2002
---------- ----------
Net loss
As reported $(5,003,355) $(3,140,760)
Pro forma (5,063,320) (3,540,719)
Loss per common share-
basic and diluted-as reported $ (0.03) $ (0.02)
Loss per common share-
basic and diluted-pro forma $ (0.03) $ (0.03)
The weighted-average grant-date fair value of options granted during year ended
June 30, 2003 was $0.08 per share. The fair value for the options granted in
2003 were estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions:
Risk-free interest rate 4.00%
Expected life (in years) 5
Expected volatility 305.15%
Expected dividend yield 0.00%
38
The following table summarizes information about fixed stock options and
warrants outstanding at June 30, 2003:
Options and Warrants Outstanding Options and Warrants
at June 30, 2003 Exercisable at June 30, 2003
---------------- ----------------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of Outstanding at contractual exercise Exercisable at exercise
exercise prices June 30, 2003 life(years) price June 30, 2003 price
--------------- ------------- ----------- -------- -------------- --------
$0.04 - $0.09 67,287,390 3.55 $ 0.06 67,287,390 $ 0.06
$0.10 - $0.11 9,450,000 1.96 0.10 9,450,000 0.10
$0.12 - $0.14 375,000 3.32 0.14 375,000 0.14
$0.24 - $0.25 3,066,667 0.71 0.24 3,066,667 0.24
$0.56 - $0.69 250,000 0.67 0.61 250,000 0.61
$0.70 - $0.75 248,273 1.42 0.75 248,273 0.75
$1.28 - $1.44 50,000 1.00 1.43 50,000 1.43
---------- ----------
80,727,870 3.24 0.08 80,727,870 0.08
========== ==========
18. Related Party Transactions
--------------------------
The Company has a note payable to Riverview Financial Corporation (Riverview),
in the principal amount of $3,260,714, a discount of $131,250, and a net balance
of $3,129,464, at June 30, 2003 with accrued interest of $1,049,065. The chief
executive of Riverview is also the chief executive of the Company. In August
2002 the interest rate was increased from 10% to 12% and from simple to
compounded interest. Riverview was issued 7,000,000 shares of common stock in
November 2002 in consideration for an extension of the due date to January 2004.
See notes 7 and 12.
Riverview has loaned the Company $345,000 under a note payable bearing interest
at 18%. Payments are made monthly for interest only, with the principal due in
December 2004. Riverview was issued 857,143 shares of common stock in as an
inducement to make the loan. See notes 8 and 12.
The Company's CEO has made loans to the Company to cover short term cash needs
pursuant to a line of credit promissory note payable. Repayments are made as
funds are available, with a due date of July 31, 2004. Interest is at 12%. The
balance due under the line of credit at June 30, 2003 was $55,000. 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 bears interest at 18%, payable monthly, and is
due in December 2004. Whale Investment, Ltd. is controlled by an individual who
was already a shareholder of the Company at the time of the loan. See notes 8
and 12.
The Company has a payable to chief executive officer of $54,989 at June 30, 2003
for unreimbursed business expenses, which is included in accounts payable.
The Company issued shares of common stock and warrants to an officer and
directors pursuant to antidilution rights triggered by terms of the bridge note
financings. See notes 8 and 12.
19. Subsequent Events
-----------------
In July 2003 Bridge Note B was repaid and replaced with a new Bridge Note
totaling $868,457 at a stated interest rate of 18% and a due date of July 31,
2004. The new Bridge Note C required an incentive fee of 1,738,680 shares of
common stock to be issued to the note holders. The fair value of these shares is
$86,934 ($.05 per share), which is to be amortized into interest expense over
the term of Bridge Note C. The AW Fields Acquisition agreement and agreements
with certain directors allow for the further anti-dilution right to the $.05 per
share level, but they have waived their right for this transaction. Because
Bridge Note B, which was due July 31, 2003, was refinanced into Bridge Note c,
which is due July 31, 2004, the balance at June 30, 2003 is shown as a long-term
liability. See note 8.
In September 2003 a lawsuit against the Company was settled for the issuance of
an additional 1,125,000 shares of common stock and the payment of the
plaintiff's legal fees of $21,348. The costs of this settlement were accrued at
June 30, 2003. See note 14.
39
20. Recent Accounting Pronouncements
--------------------------------
In July 2002, the FASB issued SFAS No. 146 "Accounting for Exit or Disposal
Activities." The provisions of this standard are effective for disposal
activities initiated after December 31, 2002, with early application encouraged.
The adoption of this standard did not have a material impact on the consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities, an Interpretation of ARB 51." This Interpretation
addressed consolidation by business enterprises of certain variable interest
entities (VIEs). The Interpretation is effective immediately for all enterprises
with variable interests in VIEs created after January 31, 2003. For variable
interests in VIEs created before February 1, 2003, the provisions of this
Interpretation will be applicable no later than the beginning of the first
interim or annual period beginning after June 15, 2003. Further, the disclosure
requirements of the Interpretation are applicable for all financial statements
initially issued after January 31, 2003, regardless of the date on which the VIE
was created. The Company is currently investigating the potential impact on the
consolidated financial statements.
The EITF reached a consensus on Issue No. 02-17 "Recognition of Customer
Relationship Intangible Assets Acquired in a Business Combination," which
clarifies certain recognition requirements in SFAS No. 141 "Business
Combinations." The guidance in this Issue is to be applied to business
combinations consummated and goodwill impairment tests performed after October
25, 2002. The Company does not expect its application to have a material impact
on the consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This standard amends and
clarifies financial accounting and reporting for derivative instruments and
hedging activities, primarily as a result of decisions made by the FASB
Derivatives Implementation Group subsequent to the original issuance of SFAS No.
133 and in connection with other FASB projects. This standard is generally
effective prospectively for contracts and hedging relationships entered into or
modified after June 30, 2003. The Company does not expect its application to
have a material impact on the consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
changes the accounting for certain financial instruments that, under previous
guidance, could be classified as equity or "mezzanine" equity, by now requiring
those instruments to be classified as liabilities (or assets in some
circumstances) in the statement of financial position. Further, SFAS No. 150
requires disclosure regarding the terms of those instruments and settlement
alternatives. The guidance in SFAS No. 150 is generally effective for all
financial instruments entered into or modified after May 31, 2003, and is
otherwise effective at the beginning of the first interim period beginning after
June 15, 2003. The Company is in the process of evaluating this standard, but
does not expect the adoption to have a material impact on the consolidated
financial statements.
40