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
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June 30, 2004
Commission file number
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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 September 10, 2004
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268,716,159 (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) [X] Yes [ ] No ; (2) [X] Yes [ ] No.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form , and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the year ended June 30, 2004 were $6,029,823.
The aggregate market value of the stock held by non-affiliates of the registrant
is approximately $5,248,800, calculated using a price of $0.06 per share on
September 24, 2004.
1
TABLE OF CONTENTS TO ANNUAL REPORT
ON FORM 10-KSB
YEAR ENDED JUNE 30, 2004
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 10
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
Item 8B Other Information
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
Item 14 Principal Accountant Fees and Services
Signatures 22
Consolidated Financial Statements June 30, 2004 and
June 30, 2003
Independent Auditor's Report 26
Consolidated Balance Sheet as of June 30, 2004 27
Consolidated Statements of Operations 28
Consolidated Statements of Stockholders' Deficit 29
Consolidated Statements of Cash Flows 30
Notes to Consolidated Financial Statements June 30, 2004
and June 30, 2003 31
Exhibit 31 Certifications of the Chief Executive and Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. 44
Exhibit 32 Certifications pursuant to 18 U.S.C. Sec. 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. 46
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
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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
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The Company was incorporated in the State of Delaware on December 8, 1964 as
Infotec, Inc. From June 20, 1999 to approximately June 12, 2001, it was known as
Amerinet Group.com, Inc.
On June 13, 2001, the Company entered into a "Reorganization Agreement" with
Randall K. Fields and Riverview Financial Corporation (hereafter referred to as
"Reorganization Agreement,") whereby it acquired substantially all of the
outstanding stock of Park City Group, Inc., a Delaware corporation ("PCG"),
which became a 98.67% owned subsidiary. This business combination was treated as
a reverse acquisition or a recapitalization of PCG, with PCG being treated as
the acquirer. In connection with the Reorganization, the then Board of Directors
resigned and was replaced by the Board of Directors of PCG. The stockholders of
PCG gained voting control of the common stock of the Company and the name was
changed from Amerinet Group.com, Inc. to Fields Technologies, Inc.
Operations are conducted through the subsidiary, PCG, which was incorporated in
the State of Delaware in May 1990. PCG on April 5, 2001, acquired its wholly
owned subsidiary, Fresh Market Manager, LLC ("FMM"), which is a Limited
Liability Company formed in the State of Utah. PCG has conducted its operations
since 1990. PCG develops and licenses its software applications identified as
"Fresh Market Manager" and "ActionManager". PCG also provides implementation and
profit optimization consulting services for its application products.
On August 7, 2002, Fields Technologies, Inc., (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 the
Park City Group, Inc. The stock trades under the symbol PKCY.
The principal executive offices are located at 333 Main Street, P.O. Box 5000,
Park City, Utah 84060. The telephone number is (435) 649-2221. The website
address is http://www.parkcitygroup.com.
The Company has not been involved in any bankruptcy, receivership, or similar
proceeding.
Business
--------
Park City Group develops and markets patented computer software and profit
optimization consulting services that help its retail customers to reduce their
inventory and labor costs; the two largest controllable expenses in the retail
industry, while increasing the customer's sales and gross margin. The technology
has its genesis in the operations of Mrs. Fields Cookies co-founded by Randy
Fields, CEO of Park City Group, Inc. Industry leading customers such as The Home
Depot, Victoria's Secret, Limited Brands, Anheuser Busch Entertainment and Tesco
Lotus benefit from the Company's software. Park City Group products, Fresh
Market Manager and ActionManager are proven, patented technologies that address
the needs of retailers in store operations management and perishable product
management. Because the product concepts originated in the environment of actual
multi-unit-retail chain ownership, the products are strongly oriented to an
operation's bottom line results. The products are highly pragmatic in their
approach to standardizing and improving managerial actions. The products use a
fully developed, contemporary patented technology platform that is not only
capable of supporting existing offerings, but can also be expanded to support
related products.
3
The critical strength of the products is its artificial intelligence-like rules
based technology that allows customers to tailor the operating rules to
replicate the expert knowledge and practices of their most successful managers.
Rules based systems are applications in which the action to be taken is
determined by the rules defined by the user. As such, customers who use rules
based system determine what action the system will perform when an identified
condition occurs, usually based on the policies and procedures or "rules" of the
customer's business operations. In this way, the customer decomposes its
business operation into different rules or the way in which it wants certain
conditions or actions to be addressed. In comparison, in non-rules based
systems, the applications perform action as they have been designed and coded by
the vendor, regardless of the action the customer might wish to take.
The success achieved by our customers in both their economic as well as
operational performance improvement is the best measure of our performance and
success.
The Company now offers an alternative licensing method other than direct
licensing of the software to its customer companies. A monthly subscription
deployment option was introduced in Q3FY2004. With its lower initial
implementation cost and monthly charge for the software by department by
location, the Company can now offer its products to a larger potential market
and estimates increasing its recurring revenue stream, although no assurances
can be given.
Fresh Market Manager
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Fresh Market Manager is a fully integrated system for managing perishable
grocery departments such as deli, bakery, food service, meat, seafood and
produce. The product has also been deployed in supermarkets, convenience stores,
commissaries and offers a center store inventory management option. This
software enables item level management and category analysis by exception, with
particular emphasis on managing the production processes taking place within the
store. In addition, this application provides accurate cost of goods
identification and sales profitability analysis to determine gross profit and
net profit by item.
Fresh Market Manager provides corporate, store and department managers with
total item information, allowing extensive category analysis of perishable
products. Category and store department managers can leverage this information
to increase sales, decrease shrinkage, and improve overall gross profit.
Combined with demand forecasting and automated production, Fresh Market Manager
is designed to ensure that variety and item freshness increase, while overall
waste decreases.
Focusing initially on perishable inventory needs, the applications gather point
of sale and production data, which is especially helpful in areas where better
product delivery based on real demand, can help eliminate unnecessary waste, and
can improve "right product" availability. The application assists customers in
the timely ordering of materials and provides real time demand management (based
on patented forecasting algorithms) by using alerting functions.
Store management may use this software application for:
o Assortment planning to respond to customer preferences for variety and
selection within the store
o Forecasting, to attempt to improve sales by anticipating the expected
demand
o Production planning, to build produced items efficiently, when they are
needed
o Item management, to quickly and accurately enter transactions into the
system
o Reporting, to see what the business is doing now and make decisions
based on current information
Corporate management may use the Fresh Market Manager software to
control detailed data through well-defined information groupings
to:
o Determine the product mix for the enterprise at any level of detail
o Create rules that drive production scheduling to meet the company's
specific needs
o Apply labor standards for production and for category management
The Fresh Market Manager applications are Cost Control and Category Management,
Demand Forecast and Production Planner, Inventory and Computer Assisted
Ordering, and Alert Advisor.
Cost Control & Category Management
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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
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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;
4
and (d) develops a daily production plan based on forecasted needs.
This application is intended to assist an organization in making the
right product in the right quantity to improve the profitability of the
perishable business by effective production planning and accurate
assortment planning.
Inventory & Computer Assisted Ordering
--------------------------------------
This aspect of the application provides cost control and inventory
management of perishable product ingredients (i.e. raw materials). It
includes computer-assisted ordering and item receiving modules. The
inventory capability is intended to address the needs of businesses to
control the cost of inventory while minimizing lost sales from items
not produced due to out of stock ingredients.
Alert Advisor and Task Manager
------------------------------
Alert Advisor delivers demand monitoring, exception analysis and
production schedule revisions to relevant managers on a real-time
basis. A task management component is also available to direct task
activities whether from the corporate office or at the specific
locations and the system provides visibility to the status of those
tasks.
ActionManager
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ActionManager applications are designed to replace costly paper-based and manual
processes with systems that substantially reduce time spent on administrative
tasks, non-productive (non-selling) labor costs, and excess headcount in the
corporate office while insuring that each geographically distributed location
adheres to the company's defined operational standards. ActionManager
applications provide an automated method for managers to plan, schedule, and
administer virtually every administrative task at store-level. In addition to
automating the bulk of all administrative processes, ActionManager also provides
the local manager with a real-time "dashboard" view of the business, as well as
a "cockpit management" type alert system to notify the manager when something is
or is not to be planned, and suggests best practice advice as to what course of
action to be taken. By automating a great deal of the "process" and
administrative burden of management, ActionManager allows management, at all
levels, to devote more time to customer-related and employee related activities
and to improve their over-all planning and decision making. The use of the
ActionManager applications are intended to result in cost savings and improved
staff and customer focus in the store. ActionManager applications have been
marketed to large, as well as small to mid-size retailers with 50 or more
locations.
ActionManager is a suite of software applications grouped into three distinct
solutions areas. Each ActionManager solution incorporates the core ActionBase
and ActionBoard technologies that allow a multi-unit organization to embed a
company's "best practice" solutions into the system.
ActionBase
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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
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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 solutions and the individual
applications within them:
Workflow and Information Management
-----------------------------------
The Workflow and Information Management solution consists of the
applications: ActionForm, ActionMail, CashSheet, ScoreTracker, Internet
Mail Gateway, Action Gatekeeper, ReadyReference, and ReportBuilder
which automate data collection and distribution, insuring consistent
data flow both to and from the locations and the corporate office.
5
Labor Management
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The Labor Management solution consists of the applications: Scheduler,
Forecaster and TimeMeter. These applications are designed to address
the problems of managing staff and insuring that staff is performing
the right tasks at the right time and in the right place. Labor
requirements are determined by analyzing the results created by the
Forecaster and compliance to schedules and monitoring time punches are
provided by the TimeMeter application.
HR Management
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The HR Management solution consists of the applications: SmartHire,
Interactive Tutor, Checkup, and HRAction, which provide an automated
process for personnel selection, training, and retention. These
applications are intended to assist managers by automating many of the
time consuming tasks that are associated with the hiring and training
process.
Profit Optimization and Business Operations Consulting (consulting services)
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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
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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, 4 patents pending, 8 U.S.
trademarks and 37 U.S. copyrights relating to its software technology. The
Company has 14 international patents and patent applications pending. The
patents referred to above are continuously reviewed and renewed as their
expiration dates as they come due.
Company policy is to seek patent protection for all developments, inventions and
improvements that are patentable and have potential value to the Company and to
protect as trade secrets other confidential and proprietary information. The
Company intends to vigorously defend its intellectual property rights to the
extent its resources permit.
Future success may depend upon the strength of the Company's intellectual
property. Although management believes that the scope of patents/patent
applications are sufficiently broad to prevent competitors from introducing
devices of similar novelty and design to compete with the Company's current
products and that such patents and patent applications are or will be valid and
enforceable, there are no assurances that if such patents are challenged, this
belief will prove correct. The Company has, however, successfully defended one
of these patents in two separate instances and as such, has some level of
confidence in the Company's ability to maintain its patents. In addition, patent
applications filed in foreign countries and patents granted in such countries
are subject to laws, rules and procedures, which differ from those in the U.S.
Patent protection in such countries may be different from patent protection
provided by U.S. Laws and may not be as favorable. The Company plans to timely
file international patents in all countries in which we seek market share.
The Company is not aware of any patent infringement claims against it; however,
there are no assurances that litigation to enforce patents issued to the
Company, to protect proprietary information, or to defend against the Company's
alleged infringement of the rights of others will not occur. Should any such
litigation occur, the Company may incur significant litigation costs, the
Company's resources may be diverted from other planned activities, and result in
a materially adverse effect on the results of operations and financial
condition.
6
The Company relies on a combination of patent, copyright, trademark, and other
laws to protect its proprietary rights. There are no assurances that the
Company's attempted compliance with patent, copyrights, trademark or other laws
will adequately protect its proprietary rights or that there will be adequate
remedies for any breach of our trade secrets. In addition, should the Company
fail to adequately comply with laws pertaining to its proprietary protection,
the Company may incur additional regulatory compliance costs.
Government Regulation and Approval
----------------------------------
Like all businesses, the Company is subject to numerous federal, state and local
laws and regulations, including regulations relating to patent, copyright, and
trademark law matters.
Cost of Compliance with Environmental Laws
------------------------------------------
The Company currently has no costs associated with compliance with environmental
regulations, and does not anticipate any future costs associated with
environmental compliance; however, there can be no assurance that it will not
incur such costs in the future.
Research and Development
------------------------
Total research and development expenditures were $1,304,151 and $2,100,695 for
the years ended June 30, 2004 and 2003, respectively; a 38% decrease. 2003
expenditures include $948,788, which were capitalized. With the completion of
the Fresh Market Manager and ActionManager products, fewer resources will be
necessary for enhancements and other maintenance activities.
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, 2004, the Company had 30 employees, including 9 software
developers and programmers, 8 sales, marketing and account management employees,
7 software service and support employees and 6 accounting and administrative
employees. All of these employees work for the Company on a full time basis. The
employees are not represented by any labor union.
Item 2. Description of Properties
---------------------------------
The principal place of business operations is 333 Main Street, Park City, Utah.
The Company leases approximately 9,500 square feet at this location, consisting
primarily of office and storage areas. The Company is currently investigating
other locations.
Item 3. Legal Proceedings
-------------------------
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. That case is still in the discovery stage with a trial date
of April 18, 2005. Settlement efforts are on-going.
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
None
7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
----------------------------------------------------------------
Dividend Policy
---------------
To date, the Company has not paid dividends on common stock. The payment of
dividends, if any, is within the discretion of the Board of Directors and will
depend upon earnings, capital requirements and financial condition, and other
relevant factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation." The Board does not intend to declare any
dividends in the foreseeable future, but instead intends to retain all earnings,
if any, for use in operations.
Share Price History
-------------------
Common stock (the "Common Stock") is traded in the over-the-counter market in
what is commonly referred to as the "Electronic" or "OTC Bulletin Board" or the
"OTCBB" under the trading symbol "PKCY." The following table sets forth the high
and low bid information of the Common Stock's closing price for the periods
indicated. The price information contained in the table was obtained from
internet sources considered reliable. Note that such over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission and the quotations may not necessarily represent actual transactions
in the Common Stock.
Fiscal Year 2003 Low High
---------------- --- ----
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
Fiscal Year 2004
----------------
September 30, 2003 $0.03 $0.07
December 31, 2003 $0.02 $0.05
March 31, 2004 $0.04 $0.17
June 30, 2004 $0.07 $0.14
Holders of Record
-----------------
At September 10, 2004 there were 2,344 holders of record of Common Stock and
shares issued and outstanding of 266,663,741. The number of holders of record
and shares issued and outstanding was calculated by reference to the stock
transfer agent's books.
Issuance of Securities
----------------------
Subsequent to June 30, 2002 shares of common stock were issued as follows:
o In August and November 2002, the CEO of the Company and two members of
the Board of Directors received in accordance with anti-dilution
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.
8
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 to
certain directors, an officer and others in connection with the
extension of the Bridge Loan notes payable.
o In October 2003 100,000 shares of common stock were issued for
consulting services.
o In October 2003 1,250,000 shares of common stock were issued for legal
fees.
o In November 2003 1,000,000 shares of common stock were issued for legal
fees.
o In November 2003 100,000 shares of common stock were issued for
consulting services.
o In November 2003 1,000,130 shares of common stock were issued to
employees in lieu of cash compensation.
o In November 2003 1,738,680 shares of common stock were issued to
certain directors, an officer and others in connection with the
extension of the Bridge Loan notes payable.
o In December 2003 100,000 shares of common stock were issued for
consulting services.
o In December 2003 15,714,286 shares of common stock were issued to
Riverview Financial Corporation ("Riverview") for conversion of
$1,100,000 of outstanding accrued interest. A new note was signed for
the remaining accrued interest and original principal balance.
o In January 2004 168,000 shares of common stock were issued for
consulting services.
o In January 2004 100,000 shares of common stock were issued for
consulting services.
o In January 2004 the Company issued 1,896,079 shares in settlement of a
lawsuit with Leonard Tucker arising from the Reorganization with
Amerinet.
o In February 2004 the Company issued 562,503 shares of common stock to
the CEO in lieu of cash compensation.
o In February 2004 100,000 shares of common stock were issued for
consulting services.
o In February 2004 414,672 shares of common stock were issued to
employees in lieu of cash compensation.
o In February 2004 1,448,891 shares of common stock were issued to
certain directors, an officer and others in connection with the
extension of the Bridge Loan notes payable.
o In February 2004 66,000 shares of common stock were issued for
consulting services.
o In March 2004 116,000 shares of common stock were issued for consulting
services.
o In March 2004 168,420 shares of common stock were issued to board
members in lieu of cash compensation.
o In March 2004 86,923 shares of common stock were issued for consulting
services.
o In March 2004 the company issued 7,966,667 shares of common stock to
certain directors and an officer as exercise of options. These shares
included 2,000,000 to the CEO.
o In March 2004 the company issued 1,529,917 for conversion of two notes
payable.
o In March 2004 the Company issued 2,608,796 shares of common stock to
officers and members of management in lieu of cash compensation. These
shares included 71,759 to the CEO and 634,262 to the CFO.
o In April 2004 225,000 shares of common stock were issued for legal
fees.
o In April 2004 66,000 shares of common stock were issued for consulting
services.
o In April 2004 14,354,247 shares of common stock were issued to certain
directors, an officer and others in connection with the conversion of
the Bridge Loan notes payable into stock. In May 2004, 4,852,864 shares
were surrendered pursuant to the conversion agreements, which had
previously been issued October 2003, November 2003 and February 2004
for extension of the Bridge Loan notes payable.
o In May 2004 358,694 shares of common stock were issued to employees in
lieu of cash compensation.
o In May 2004 66,000 shares of common stock were issued for consulting
services.
o In June 2004 66,000 shares of common stock were issued for consulting
services.
o In June 2004 the Company issued 608,850 shares of common stock to
officers and members of management in lieu of cash compensation. These
shares included 121,770 to the CEO and 121,770 to the CFO.
o In June 2004 2,484,072 shares of common stock were issued to the CEO
due to the extension of the Riverview Note.
o In July 2004 the company issued 1,000,000 share of common stock as
consideration for extension of payment on the Note Payable to Whale
Investments.
9
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation
--------------------------------------------------------------------
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition. The terms "Company", "we", "our"
or "us" are used in this discussion to refer to Park City Group, Inc. (formerly
Fields Technologies, Inc.) along with Park City Group, Inc.'s wholly owned
subsidiary, Fresh Market Manager, LLC, on a consolidated basis, except where the
context clearly indicates otherwise.
Overview
--------
The principal business is the design, development, marketing and support of
proprietary software products. 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 version 4 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.
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 four patent
applications, with numerous separate trademarks and copyrights.
Through June 30, 2004 the Company has accumulated aggregate consolidated losses
totaling $17,051,168 which includes net losses of $675,243 and $5,003,355 for
years ended June 30, 2004, and 2003, respectively.
Management's Discussion and Analysis
------------------------------------
Years Ended June 30, 2004 and 2003
----------------------------------
During the year ended June 30, 2004, the Company had total revenues of
$6,029,823, compared to $5,350,182 in 2003, a 16% increase. Software license
sales were $3,245,557 and $2,647,188 for 2004 and 2003, respectively, a 23%
increase. This increase was primarily attributable to sales to new Fresh Market
Manager ("FMM") customers and to a software reseller. Maintenance and support
revenues increased by 12% over 2003, primarily from maintenance agreements with
new customers. The average customer of Park City Group purchases maintenance
support services for 5 years. Consulting revenue decreased by 24% over 2003
primarily attributable to implementation services for new Fresh Market Manager
customers during 2003. The Company expects maintenance and support revenue for
the year ending June 30, 2005 to be consistent with 2004. 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 $1,111,915 and $1,218,070 at June 30, 2004 and 2003,
respectively, a decrease of 9%. This decrease is primarily attributable to
decreased outstanding contractual obligations on contracts.
Research and development expenses (after capitalization of software development
costs) were $1,304,151 and $1,151,907 for 2004 and 2003, respectively, a 13%
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 $977,890 and $1,460,283 for 2004 and 2003,
respectively, a decrease of 33%. This decrease is primarily attributable to a
reduction in the sales force during the later half of the year ended June 30,
2003 and the addition of a strategic alliance partnership with CRS Retail
Systems to exclusively marketing the Company's products in the specialty retail
segment.
General and administrative expenses were $2,058,054 and $2,181,089 for 2004 and
2003, respectively, a 6% decrease. This decrease is primarily attributable to
legal fees for ongoing lawsuits and settlement costs of claims and lawsuits.
10
Interest expense was $1,540,417 and $2,216,308 for 2004 and 2003, respectively,
a 30% decrease. This decrease is attributable principally to: (i) expiration of
amortization on warrants associated with the Bridge Note financing from
directors and an officer; (ii) conversion of 1.1 million in debt that was
accruing interest on the note payable to Riverview into stock.
The gain on settlement of payable in 2004 is attributable to the Company and its
office space lessor re-negotiating the amount payable to the lessor.
The gain on forgiveness of debt in 2004 is attributable to certain bridge note
holders, including an officer and directors, agreeing to cancel certain amounts
payable to them pursuant to the terms of the Bridge Note C agreements.
Financial Position, Liquidity and Capital Resources
---------------------------------------------------
The Company had $312,817 in cash at June 30, 2004 compared with $69,305 at June
30, 2003, an increase of $243,512. Working capital deficit at June 30, 2004
decreased to $587,977, compared to $5,988,254 at June 30, 2003. The decrease in
the working capital deficit is principally attributable to the extension of
payment dates on the notes payable to Riverview and Whale Investments, which are
now due in July, 2007 and December, 2005, respectively.
During the year ended June 30, 2004 the operations of the Company provided net
cash of $62,264, compared to net cash provided $23,278 for 2003.
The sales 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 direct
licensing sales cycle for FMM has proven that most customers requiring several
months from initial contact to licensing. Therefore, the PAYGo (Pay-As-You-Go)
subscription service offering has been put into place. Prospective customers
find that the monthly subscription offering gives them a low cost, low risk
option to try the Company's software. The average sales cycle for a PAYGo
license is 3-4 months, shorter than for the license software decision and
provides the additional benefit of recurring revenue to the company.
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 yield additional revenue.
Our working capital and other capital requirements for the foreseeable future
will vary based upon a number of factors, including: (i) changes in the software
industry and environment which may require additional modifications to our
software and platforms; (ii) the pace at which our products are accepted by and
sold into the market and the related sales and marketing effort and support
requirements, and (iii) changes in existing financing arrangements. The Company
is pursuing opportunities to sell its ActionManager and Fresh Market Manager
products through alliances with other software vendors (CRS Retail Systems) and
companies ( Kurt Salmon Associates) selling to the retail industry. 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
------------------------------------------------
Initially revenues will be smaller due to the subscription service model.
-------------------------------------------------------------------------
The Company anticipates that there will be an impact of smaller quarterly
revenues because of the nature of the PAYGo (Pay-As-You-Go) subscription service
offering. It will mean that evaluation of the Company's overall revenue growth
will need to be seen on a longer timeframe basis as the revenues through
anticipated increases in recurring revenue will ultimately result in more
consistent revenue flow.
11
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
following risks: o Whether or how the Company will respond to technological
changes in a timely or cost-effective manner, o Whether the products or
technologies developed by competitors will render the products and services less
attractive to potential buyers or shorten the life cycle of the Company's
products and services, and o Whether products and services will achieve and
sustain market acceptance.
If the Company is unable to adapt to the constantly changing markets and to
continue to develop new products and technologies to meet customers' needs,
revenues and profitability will be negatively affected. Future revenues are
dependent on the successful development and licensing of new and enhanced
versions of the products and potential product offerings. If the Company fails
to successfully upgrade existing products and develop new products or the
product upgrades and new products do not achieve market acceptance, revenues
will be negatively impacted.
Operating results may fluctuate, which makes it difficult to predict future
performance.
--------------------------------------------------------------------------------
Management expects a portion of the revenue stream to come from license sales,
maintenance and services charged to new customers, which will fluctuate in
amounts because software sales to retailers tend to be cyclical in nature. In
addition, the Company may potentially experience significant fluctuations in
future operating results caused by a variety of factors, many of which are
outside of its control, including: o Demand for and market acceptance of new
products, o Introduction or enhancement of products and services by the Company
or its competitors, o Capacity utilization, o Technical difficulties, system
downtime, o Fluctuations in data communications and telecommunications costs, o
Maintenance subscriber retention, o The timing and magnitude of capital
expenditures and requirements, o Costs relating to the expansion or upgrading of
operations, facilities, and infrastructure, o Changes in pricing policies and
those of competitors, o Changes in regulatory laws and policies, and o General
economic conditions, particularly those related to the information technology
industry.
Because of the foregoing factors, Management expects future operating results to
fluctuate. As a result of such fluctuations, it will be difficult to predict
operating results. Period-to-period comparisons of operating results are not
necessarily meaningful and should not be relied upon as an indicator of future
performance. In addition, a relatively large portion of the Company's expenses
will be relatively fixed in the short-term, particularly with respect to
facilities and personnel. Therefore, future operating results will be
particularly sensitive to fluctuations in revenues because of these and other
short-term fixed costs.
12
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.
The Company is dependent on the continued participation of certain key
executives and personnel to effectively execute its business plan and strategies
and must effectively integrate its management team.
--------------------------------------------------------------------------------
The business is dependent on the continued services of its founder and Chief
Executive Officer, Randall K. Fields. Should the services of Mr. Fields be lost,
operations will be negatively impacted. The Company currently maintains three
key man insurance policies on Mr. Fields life in the amount of $10,000,000 each.
The beneficiary of each policy is (1) to the Fields Trust, (2) to Park City
Group, Inc. and (3) to the Fields Trust. The third policy is a new policy which
will replace the first policy as soon as all contingencies and waiting periods
have been removed from the new policy.. The loss of the services of Mr. Fields
would have a materially adverse effect on the business.
The Company depends on the ability of its management team to effectively execute
its business plan and strategies. During the last year, key executives have had
to forgo a portion of their salary, and as such are at risk for their continued
commitment. If the management group is unable to effectively integrate its
activities, or if the Company is unable to integrate new employees into its
operations, its business plan and strategies will not be effectively executed
and operations could suffer.
The business is currently dependent on a limited customer base; should any of
these customer accounts be lost, revenues will be negatively impacted.
--------------------------------------------------------------------------------
The Company expects that existing customers will continue to account for a
substantial portion of total revenues in future reporting periods. The ability
to retain existing customers and to attract new customers will depend on a
variety of factors, including the relative success of marketing strategies and
the performance, quality, features, and price of current and future products.
Accordingly, if customer accounts are lost or customer orders decrease, revenues
and operating results will be negatively impacted. 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.
13
Despite efforts to protect proprietary rights, unauthorized parties may attempt
to copy aspects of the Company's products or obtain and use information regarded
as proprietary. Policing unauthorized use of the Company's products is
difficult. While the Company is unable to determine the extent to which piracy
of its software exists, software piracy can be expected to be a persistent
problem, particularly in foreign countries where the laws may not protect
proprietary rights as fully as the United States. The Company can offer no
assurance that its means of protecting its proprietary rights will be adequate
or that its competitors will not reverse engineer or independently develop
similar technology.
The Company incorporates third party software providers' licensed technologies
into its products; the loss of these technologies may prevent sales of its
products or lead to increased costs.
--------------------------------------------------------------------------------
The Company now licenses, and in the future will license, technologies from
third party software providers that are incorporated into its products. The loss
of third-party technologies could prevent sales of products and increase costs
until substitute technologies, if available, are developed or identified,
licensed and successfully integrated into the products. Even if substitute
technologies are available, there can be no guarantee that the Company will be
able to license these technologies on commercially reasonable terms, if at all.
The Company may discover software errors in its products that may result in a
loss of revenues or injury to its reputation.
--------------------------------------------------------------------------------
Non-conformities or bugs ("errors") may be found from time to time in the
existing, new or enhanced products after commencement of commercial shipments,
resulting in loss of revenues or injury to the Company's reputation. In the
past, the Company has discovered errors in its products and, as a result, has
experienced delays in the shipment of products. Errors in its products may be
caused by defects in third-party software incorporated into the products. If so,
these defects may not be able to be fixed without the cooperation of these
software providers. Since these defects may not be as significant to the
software provider as they are to the Company, it may not receive the rapid
cooperation that may be required. The Company may not have the contractual right
to access the source code of third-party software and, even if it does have
access to the source code, it may not be able to fix the defect. Since its
customers use its products for critical business applications, any errors,
defects or other performance problems could result in damage to the customers'
business. These customers could seek significant compensation from the Company
for their losses. Even if unsuccessful, a product liability claim brought
against the Company would likely be time consuming and costly.
The Company's officers and directors serve as officers and directors of other
corporations and have ownership interests in other corporations; conflicts of
interest may arise which are not resolved in the Company's favor and which may
negatively impact its operations and financial condition.
--------------------------------------------------------------------------------
The officers and directors are in a position to control their own compensation
and to approve dealings by the Company with other entities with which these
principals are also involved. For example, if a company affiliated with one of
the directors were to be considered as a possible strategic alliance, the
director would have a conflict of interest in negotiating the most favorable
terms for the director's affiliated company or Park City Group. As a result
there will be conflicts of interest. There is no assurance that these conflicts
will be resolved in the Company's favor.
The Chief Executive Officer, Randall K. Fields, has a 100% ownership interest in
Riverview Financial Corp. that has entered into financial transactions with the
Company; these transactions present conflicts of interest that may not be
resolved in the Company's favor.
Park City Group has an unpaid promissory note due to Riverview Financial Corp.
("Riverview") in the amount of $3,296,406 with interest payable at 12% per
annum.
The Company may continue to have other transactions with Riverview that may
create conflicts of interest between its interests and Mr. Fields' sole
ownership of Riverview. There is no assurance that these conflicts will be
resolved in the Company's favor.
The Company's officers and directors have limited liability and indemnification
rights under its organizational documents, which may impact its results.
--------------------------------------------------------------------------------
The officers and directors are required to exercise good faith and high
integrity in the management of the Company's affairs. The certificate of
incorporation and bylaws, however, provide, that the officers and directors
shall have no liability to the stockholders for losses sustained or liabilities
incurred which arise from any transaction in their respective managerial
capacities unless they violated their duty of loyalty, did not act in good
faith, engaged in intentional misconduct or knowingly violated the law, approved
an improper dividend or stock repurchase, or derived an improper benefit from
the transaction. The certificate of incorporation and bylaws also provide for
the Company to indemnify the officers and directors against any losses or
liabilities they may incur as a result of the manner in which they operate the
business or conduct the internal affairs, provided that the officers and
directors reasonably believe such actions to be in, or not opposed to, the
Company's best interests, and their conduct does not constitute gross
negligence, misconduct or breach of fiduciary obligations.
14
Market and Capital Risks
------------------------
Future issuances of the Company's shares may lead to future dilution in the
value of its common stock, a reduction in shareholder voting power, and prevent
a change in Company control. The shares may be substantially diluted due to the
following:
o Issuance of common stock in connection with funding agreements with
third parties and future issuances of common and preferred stock by the
Board of Directors, and
o The Board of Directors has the power to issue additional shares of
common stock and preferred stock and the right to determine the voting,
dividend, conversion, liquidation, preferences and other conditions of
the shares without shareholder approval.
Stock issuances may result in reduction of the book value or market price of
outstanding shares of common stock. If the Company issues any additional shares
of common or preferred stock, proportionate ownership of common stock and voting
power will be reduced. Further, any new issuance of common or preferred shares
may prevent a change in control or management.
Issuance of preferred stock could depress the market value of current
shareholders and could have a potential anti-takeover effect.
--------------------------------------------------------------------------------
The Company has 30,000,000 authorized shares of preferred stock that may be
issued by action of the Board of Directors. The Board of Directors may designate
voting control, liquidation, dividend and other preferred rights to preferred
stock holders. The Board of Directors' authority to issue preferred stock
without shareholder consent may have a depressive effect on the market value of
the common stock. The issuance of preferred stock, under various circumstances,
could have the effect of delaying or preventing a change in control or other
take-over attempt and could adversely affect the rights of holders of the shares
of common stock.
Preferred stock holders would receive dividends, if any, at a rate twenty times
that paid per share of the common stock holders; accordingly, if dividends are
declared, preferred stock holders will have preferential rights in the payment
of dividends.
The holders of shares of preferred stock are entitled to receive, out of Company
assets, legally available, and as when declared by the Board of Directors,
dividends of every kind declared and paid to holders of commons stockholders, at
a rate of twenty times that paid for shares of common stock. Because the Board
of Directors has the authority to issue preferred stock to such preferred stock
holders will have preferential rights in the payment of dividends.
Because the common stock is considered a penny stock, any investment in the
common stock is considered to be a high-risk investment and is subject to
restrictions on marketability.
--------------------------------------------------------------------------------
The common stock has traded on the Over-the-Counter Bulletin Board since June
2001. The bid price of the common stock has been less than $5.00 during this
period. The Company is subject to the penny stock rules adopted by the
Securities and Exchange Commission that require brokers to provide extensive
disclosure to its customers prior to executing trades in penny stocks. These
disclosure requirements may cause a reduction in the trading activity of the
common stock.
Broker-dealer practices in connection with transactions in penny stocks are
regulated by certain penny stock rules adopted by the Securities and Exchange
Commission.
--------------------------------------------------------------------------------
Penny stocks generally are equity securities with a price of less than $5.00.
Penny stock rules require a broker dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the 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.
15
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, 2004. 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, 2004. We have not identified any
significant deficiency or material weaknesses in our internal controls,
and therefore there were no corrective actions taken.
Item 8B. Other Information
--------------------------
None.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
16
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 57 Chief Executive Officer
Chairman of the Board and Director
*Peter Jensen 55 Chief Financial Officer and Secretary
**William Dunlavy 49 Chief Financial Officer and Secretary
William R. Jones 69 Director and Audit Committee Chairman
Bernard F. Brennan 66 Director
***Edward C. Dmytryk 58 Director
Anthony E. Meyer 43 Director
* Appointed CFO on 6/3/03 - Deceased 8/21/04
** Appointed to CFO on 8/23/04
*** Became acting CFO of the Company on 10/11/02, resigned as acting CFO
on 6/3/03
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 had been Chief Financial Officer from June 3, 2003 to August 21,
2004. 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 had 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. Mr. Jensen unexpectedly passed away
on August 21, 2004.
William Dunlavy has been appointed CFO and Secretary as of August, 2004. Mr.
Dunlavy joined Fresh Market Manager LLC in 1999 as its Chief Operating Officer
and continued in the same capacity with the acquisition of Fresh Market Manager
LLC in 2001. He has been responsible for the design of the business
functionality in the Fresh Market Manager product in addition to his business
operations activities for Park City Group. He was formerly the Chief Operating
Officer at Mrs. Fields Cookies, Director of Operations at Golden Corral Family
Restaurants, head of Fresh Foods at Harris Teeter, Inc. and head of Fresh Foods
at Raley's and Bel Air Supermarkets. He has also served as a board member of the
International Deli, Dairy, Bakery Association.
17
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.
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.
Our Executive Officers are elected by the Board on an annual basis and serve at
the discretion of the Board.
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18
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, 2004 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 2004 317,500* 4,377 46,760 (1) 50,000 - -
Chairman, President 2003 330,000 6,477 41,185 (1) 24,167 - -
and CEO 2002 358,750 - 48,335 (1) - - -
Shaun Broadhead 2004 100,000 4,377 - 50,000 - -
PCG Director of 2003 108,750 6,477 675 (2) 24,167 - -
Research & 2002 127,708 - 2,554 (2) - - -
Development
Carolyn Doll 2004 100,000 4,377 - 50,000 - -
PCG Vice-President 2003 105,000 6,477 600 (3) 24,167 - -
Marketing 2002 120,000 - 2,400 (3) - - -
Will Dunlavy 2004 100,000 4,377 - 50,000 - -
PCG Vice-President 2003 103,750 31,477 575 (4) 24,167 - -
Operations 2002 115,000 6,250 2,425 (4) - - -
Peter Jensen 2004 99,167 (6) 4,377 - 50,000 - -
Chief Financial Officer 2003 13,333 - - 5,667 - -
Corporate Secretary
Paul Baird 2004 8,333 (5) - - - - -
PCG Vice-President 2003 112,500 6,477 625 (5) 24,167 - -
Consulting Services 2002 75,000 10,080 40,938 (5) - - -
----------------------
* A significant part of Mr. Fields salary is paid to a management company
wholly owned by Mr. Fields.
(1) These amounts include Employer contributions to the Company's 401(k) Plan
for the benefit of Mr. Fields in the amounts of $0.00, $1,608 and $5,278 for
2004, 2003,and 2002, respectively, as well as payments for unused accrued
vacation and sick leave of $0.00, $39,577 and $43,076 for 2004, 2003 and
2002, respectively; Premiums paid on Life Insurance policy of $27,614,
Company car related expenses of 14,880, and medical premiums of $4,267
(2) These amounts represent employer contributions to the Company's 401(k) Plan
for the benefit of Mr. Broadhead;
19
(3) These amounts include employer contributions to the Company's 401(k) Plan
for the benefit of Ms. Doll;
(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) Deceased, August 21, 2004.
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 compensation for Mr. Fields, under the terms
of the revision, provides for a portion of the compensation to be provided
pursuant to an employment agreement and the balance to be provided pursuant to
the terms of a services agreement between the Company and Fields Management,
Inc., an executive management services provider, a company wholly owned by Mr.
Fields. The term of the two agreements is five years ending June 30, 2008, with
automatic one-year renewals. The combined agreements provide for: o An annual
base compensation of $350,000, o Use of a company vehicle, o Employee benefits
that are generally provided to Park City Group, Inc. employees, and o A bonus to
be determined annually by the Compensation Committee of the Board of Directors.
Effective October 1, 2002, Mr. Fields agreed to a temporary, but indefinite,
reduction of his base compensation to $317,500.
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:
Annual cash compensation of $10,000 payable at the rate of $2,500 per
quarter. The Company has the right to pay this amount in the form of
shares of Company Stock.
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 expense related to the plan for the year
ended June 30, 2004 was $12,903.
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, 2004, a total of 3,309,000 of such options
were outstanding with exercise prices ranging from $0.03 to $0.14 per share.
At June 30, 2004 a total of 71,861,203 warrants to purchase shares of common
stock were outstanding. Of those warrants, 248,273 were assumed in the reverse
acquisition; 44,131,977 were issued in connection with certain debt financings;
2,100,000 were issued in settlement of legal claims; and 25,380,953 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
$0.75 per share and expire between November 30, 2004 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.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
20
Item 11. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------
Security Ownership of Certain Beneficial Owners
-----------------------------------------------
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 23, 2004, for
each person or entity that is known to beneficially own more than 5 percent of
the Common Stock. As of September 23, 2004, there were 268,716,231 shares of
Common Stock outstanding.
Amount of
Title of Beneficial Nature of
Class Name and Address of Beneficial Owner Ownership Ownership Percent of Class
-------- ------------------------------------ ---------- --------- ----------------
Common Randall K. Fields, Park City, Utah 35,196,567 (7) Direct 13.20%
Common Riverview Financial Corp., Park City, Utah (1) 111,006,785 Direct 41.63%
Common AW Fields Acquisition, LLC, New York, New York 45,833,335 (3) Direct 17.19%
------------ ------
Total 192,036,687 88.31%
============ ======
(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 September 23, 2004, for each of the
directors, each of the Named Executive Officers, and all directors and executive
officers as a group. As of September 23, 2004, there were 268,716,631 shares of
Common Stock outstanding.
Amount of
Title of Beneficial Nature of
Class Name, Position and Address of Beneficial Owner Ownership(1) Ownership Percent of Class
-------- ----------------------------------------------- ----------- --------- ----------------
Common Randall K. Fields, President, CEO, Chairman 146,203,352 (2) Direct and 54.83%
and Director Indirect
Park City, Utah
Common Edward C. Dmytryk, Director 1,026,660 Direct *
Ocala, Florida
Common Thomas W. Wilson Jr., Director 15,374,505 (4) Direct 5.77%
Westport, Connecticut
Common William R. Jones; Director 283,300 Direct *
Cumming, Georgia
Common Bernard F. Brennan, Director 15,457,552 (5) Direct 5.80%
Point Vedra Beach, Florida
Common Anthony E. Meyer 8,241,852 (6) Direct 3.09%
New York, New York
Common Peter Jensen, CFO and Secretary 1,089,368 Direct *
Park City, Utah
Common William Dunlavy, CFO 1,964,580 Direct *
Park City, Utah
Common Executive Officers & Directors as a Group 189,641,169 71.12%
* 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 111,006,785 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 6,482,839 shares of common stock.
21
(5) Includes warrants and options to purchase 5,977,083 shares of common stock.
(6) Includes warrants to purchase 397,540 shares of common stock.
(7) Includes options and warrants and options to purchase 6,898,913 shares of
common stock.
(8) Includes options and warrants to purchase 11,690,185 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 $3,296,406 at June 30, 2004 with accrued interest of
$344,679. 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. In September, 2003 the Company agreed to convert $1.1 million of
accrued interest to common stock and issued a new notes payable to Riverview
with a payment date of July 31, 2007. The Company issued 15,714,286 shares of
common stock for the conversion. In June 2004, the Company issued 2,484,072
shares of common stock to Riverview to extend the note payable to Juuly 2007.
See note 8 to the audited financial statements.
Riverview has loaned the Company $345,000 under a note payable bearing interest
at 18%. Payments are made monthly for interest only, with the principal due in
December 2005. Riverview was issued 857,143 shares of common stock as an
inducement to make the loan. The note was extended in June, 2004 to December
2005. See note 8 to the audited financial statements.
The Company's CEO has made loans to the Company to cover short term cash needs
pursuant to a line of credit promissory note payable. Repayments are made as
funds are available, with a due date of June 15, 2005 and interest is at 12%.
There was no balance due under the line of credit at June 30, 2004 is $0. 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 2005, as extended. Whale Investment, Ltd. is controlled by an
individual who was already a shareholder of the Company at the time of the loan.
The extended note is due December 2005 and the Company paid to Whale Investments
$40,000 in cash and 1,000,000 in common stock valued at $80,000 as consideration
for the extension. See note 8 to the audited financial statements.
The Company has payables to employees of $36,474 at June 30, 2004 for
un-reimbursed business expenses, including $2,748 due to the chief executive
officer.
Item 13. Exhibits and Reports on Form 8-K
-----------------------------------------
On April 27, 2004 the company filed a Current Report on Form 8K dated April 25,
2004 announcing its financial results under Item 12 for the quarter and 9 months
ending March 31, 2004.
On April 28, 2004 the company filed a Current Report on Form 8K dated April 25,
2004 announcing its financial results under Item 12 for the quarter and 9 months
ending March 31, 2004.
On July 15, 2004 the company filed a Current Report on Form 8K dated July 15,
2004 announcing its preliminary financial results under Item 9 for the year
ending June 30, 2004.
On August 26, 2004 the company filled a Current Report on Form 8K dated August
24, 2004 under Item 7.01 announcing the sudden death of the current Chief
Financial Officer, Peter Jensen and the interim appointment of Will Dunlavy as
Interim Chief Financial Officer.
22
Exhibits, Financial Statements and Schedules The Consolidated Financial
Statements and Report of Independent Accountants are contained in this Form
10-KSB beginning on page 26.
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 of Chief Executive Officer pursuant to 18 U.S.C
Section 1350
Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C
Section 1350
Item 14. Principal Account Fees and Services
--------------------------------------------
The aggregate fees billed for professional services by Tanner + Co. in fiscal
year 2004 and 2003 for these various services were:
Type of Fees 2004 2003
------------ ---- ----
Audit Fees $ 55,700 $ 91,700
Audit-Related Fees - -
Tax Fees 8,400 16,300
All Other Fees 900 -
-------- --------
Total $ 65,000 $108,000
======== ========
In the above table, in accordance with the SEC's definitions and rules, "audit
fees" are fees the Company paid Tanner + Co. for professional services for the
audit of the Company's consolidated financial statements included in Form 10-K
and review of financial statements included in Form 10-Qs, and for services that
are normally provided by the accountant in connection with statutory and
regulatory filings or engagements; "audit-related fees" are fees for assurance
and related services that are reasonably related to the performance of the audit
or review of the Company's financial statements; "tax fees" are fees for tax
compliance, tax advice and tax planning; and "all other fees" are fees for any
services not included in the first three categories.
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23
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 12, 2004 By /s/ Randall K. Fields
--------------------------------------
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
--------- ----- ----
Chief Executive Officer, October 12, 2004
/s/ Randall K. Fields Chairman of the Board and Director
------------------------- (Principal Executive Officer)
Randall K. Fields
Chief Financial Officer and October 12, 2004
/s/ William Dunlavy Secretary
-------------------------
William Dunlavy
Director October 12, 2004
/s/ Edward C. Dmytryk
-------------------------
Edward C. Dmytryk
Director October 12, 2004
/s/ William R. Jones
-------------------------
William R. Jones
Director October 12, 2004
/s/ Thomas W. Wilson, Jr.
--------------------------
Thomas W. Wilson, Jr.
Director October 12, 2004
/s/ Bernard F. Brennan
--------------------------
Bernard F. Brennan
Director October 12, 2004
/s/ Anthony E. Meyer
--------------------------
Anthony E. Meyer
24
Park City Group, Inc. & Subsidiaries
Consolidated Financial Statements
June 30, 2004 and 2003
Index to Consolidated Financial Statements
Page No.
Independent Auditors' Report Tanner + Co. 26
Consolidated Balance Sheet as of June 30, 2004 27
Consolidated Statements of Operations for the years ended
June 30, 2004 and 2003 28
Consolidated Statements of Stockholders' Deficit for the years
ended June 30, 2004 and 2003 29
Consolidated Statements of Cash Flows for the years ended
June 30, 2004 and 2003 30
Notes to Consolidated Financial Statements 31
25
Park City Group, Inc. & Subsidiaries
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Park City Group, Inc.
We have audited the accompanying consolidated balance sheet of Park City Group,
Inc. and Subsidiaries as of June 30, 2004, and the related consolidated
statements of operation, stockholders' deficit, and cash flows for the years
ended June 30, 2004 and 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. 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, 2004 and the results of their operations
and their cash flows for the years ended June 30, 2004 and 2003, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Tanner + Co.
Salt Lake City, Utah
August 12, 2004
26
Park City Group, Inc. & Subsidiaries
Consolidated Balance Sheet
June 30, 2004
Assets
------
Current assets:
Cash $ 312,817
Receivables, net of allowance for doubtful
accounts of $5,342 1,143,158
Prepaid expenses and other current assets 199,113
------------
Total current assets 1,655,088
------------
Property and equipment, net of accumulated
depreciation and amortization 127,346
Other assets:
Deposits and other assets 32,056
Capitalized software costs, net
of accumulated amortization
of $465,289 598,227
------------
Total other assets 630,283
------------
Total assets $ 2,412,717
============
Liabilities and Stockholders'
-----------------------------
Deficit
Current liabilities
Accounts payable $ 327,171
Accrued liabilities 772,481
Deferred revenue 1,111,915
Current portion of capital lease
obligations 31,498
------------
Total current liabilities 2,243,065
Notes payable to related parties 3,463,235
Long-term debt to related party, net of
discounts of $164,927 1,835,072
Capital lease obligations, less current
portion 9,222
------------
Total liabilities 7,550,594
------------
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, 268,716,159 issued and outstanding 2,687,163
Additional paid-in-capital 9,333,126
Accumulated deficit (17,158,166)
------------
Total stockholders' deficit (5,137,877)
------------
Total liabilities and stockholders' deficit $ 2,412,717
============
See accompanying notes to consolidated financial statements.
27
Park City Group, Inc. & Subsidiaries
Consolidated Statement of Operations
For the Years Ended June 30, 2004 and 2003
2004 2003
Revenues:
Software licenses $ 3,245,557 $ 2,647,188
Maintenance and support 2,274,338 2,035,891
Consulting and other 509,928 667,103
------------- -------------
Total revenues 6,029,823 5,350,182
Cost of revenues 1,030,689 1,101,871
------------- -------------
Gross margin 4,999,134 4,248,311
------------- -------------
Operating expenses:
Research and development 1,304,151 1,151,907
Sales and marketing 977,890 1,460,283
General and administrative expenses 2,058,054 2,181,089
Impairment of capitalized software costs - 2,242,079
------------- -------------
Total operating expenses 4,340,095 7,035,358
------------- -------------
Income (loss) from operations 659,039 (2,787,047)
------------- -------------
Other income (expense)
Gain on forgiveness of debt 119,201 -
Gain on settlement of payable 89,934 -
Interest expense (1,540,417) (2,216,308)
------------- -------------
Loss before income taxes (675,243) (5,003,355)
------------- -------------
Income tax (expense) benefit:
Current - -
Deferred - -
------------- -------------
Net loss $ (675,243) $ (5,003,355)
============= =============
Weighted average shares, basic and diluted 235,563,000 198,027,000
============= =============
Basic and diluted loss per share $ (0.00) $ (0.03)
============= =============
See accompanying notes to consolidated financial statements.
28
Park City Group, Inc. & Subsidiaries
Consolidated Statement of Stockholders' Deficit
For the Years Ended June 30, 2004 and 2003
Common Stock Additional
----------------------- Paid-In Subscription Treasury Accumulated
Shares Amount Capital Receivable Stock Deficit Total
----------- ---------- ---------- ----------- -------- ------------ -----------
Balance, July 1, 2003 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
Anti-dilution
Provisions 25,380,953 253,809 119,179 - - - 372,988
Warrants issued with
related party Bridge Notes - - 922,090 - - - 922,090
Re-pricing of related
party Bridge Note warrants - - 11,178 - - - 11,178
Warrants issued with
related party note payable - - 179,711 - - - 179,711
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)
Common stock issued for:
Compensation 5,553,642 55,536 241,409 - - - 296,945
Services 3,278,343 32,783 190,254 - - - 223,037
Settlement 3,021,079 30,211 128,132 - - - 158,343
Debt refinancing 8,410,251 84,103 430,583 - - - 514,686
Debt Conversions 26,745,586 267,456 1,687,552 - - - 1,955,008
Exercise of Options 7,966,667 79,667 239,000 - - - 318,667
Cancel of treasury stock - (1,000) (29,000) - 30,000 - -
Net loss - - - - - (675,243) (675,243)
----------- ---------- ---------- ----------- -------- ------------ -----------
Balance, June 30, 2004 268,716,159 $2,687,163 $9,333,126 $ - $ - $(17,158,166) $(5,137,877)
=========== ========== ========== =========== ======== ============ ===========
See accompanying notes to consolidated financial statements.
29
Park City Group, Inc. & Subsidiaries
Consolidated Statement of Cash Flows
For the Years Ended June 30, 2004 and 2003
Year Ended Year Ended
June 30, 2004 June 30, 2003
------------- -------------
Cash flows from Operating Activities:
Net loss $ (675,243) $ (5,003,355)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 326,103 296,135
Bad debt expense - 78,920
Impairment of capitalized software costs - 2,242,079
Loss on disposition of assets - 32,931
Stock issued for services and compensation 678,326 640,450
Amortization of discounts on debt 389,870 1,195,713
Gain on settlement of payable (89,934) -
Gain on forgiveness of debt (119,201) -
Re-pricing of warrants - 11,178
Decrease (increase) in:
Trade receivables (197,756) (288,558)
Prepaid and other assets (64,852) 60,097
Increase (decrease) In:
Accounts payable (41,184) 204,056
Accrued liabilities 104,777 266,534
Related party payable - (45,000)
Deferred revenue (106,155) (412,798)
Advances payable (175,000) 175,000
Accrued interest, related party 32,513 569,896
------------ ------------
Net cash used in operating activities 62,264 23,278
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (56,742) (14,889)
Capitalization of software costs - (948,788)
------------ ------------
Net cash used in investing activities (56,742) (963,677)
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in line of credit 69,467 (62,500)
Proceeds from exercise of options 238,667 -
Payment to extend note payable (40,000) -
Proceeds from debt - 1,135,000
Payments on notes payable and capital leases (30,144) (203,768)
------------ ------------
Net cash provided by financing activities 237,990 868,732
------------ ------------
Net increase (decrease) in cash 243,512 (71,667)
Cash at beginning of year 69,305 140,972
------------ ------------
Cash at end of year $ 312,817 $ 69,305
============ ============
See accompanying notes to consolidated financial statements.
30
Park City Group, Inc. & Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2004 and June 30, 2003
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, 2004, and operations of PCG and FTI for
the years ended June 30, 2004 and 2003. All inter-company transactions and
balances have been eliminated in consolidation.
Riverview Financial Corp. (Riverview) is a stockholder and creditor of the
Company. Riverview is wholly owned by the Company's CEO.
Business Activity
-----------------
The Company designs, develops, markets and supports proprietary software
products. These products are designed to be used in retail businesses having
multiple locations to assist in the management of business operations on a daily
basis and communicate results of operations in a timely manner. 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, 2004, net accounts receivable includes amounts due from
customers totaling $1,143,158. Substantially all of these receivables are due
from three long-standing customers.
During the year ended June 30, 2004, the Company received approximately $1.4
million of its revenue from new customers and approximately $4.6 million in
revenue from existing customers for continued support and additional license
sales.
31
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. Until revenue recognition
requirements are met, the cash payments received are treated as deferred
revenue.
Maintenance and support services that are sold with the initial license fee are
recorded as deferred revenue and recognized ratably over the initial service
period. Revenues from maintenance and other support services provided after the
initial period are generally paid in advance and are recorded as deferred
revenue and recognized on a straight-line basis over the term of the agreements.
Consulting service revenues are recognized in the period that the service is
provided or in the period such services are accepted by the customer if
acceptance is required by agreement.
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.
During 2004, $265,876 of the capitalized development costs were amortized into
expense.
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.
32
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 75,170,203 shares of common stock at prices
ranging from $0.03 to $0.75 per share were outstanding at June 30, 2004, 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, 2004 June 30, 2003
------------- -------------
Weighted average 235,563,000 198,027,000
Dilutive effect of options and warrants - -
----------- -----------
Weighted average shares outstanding assuming
dilution 235,563,000 198,027,000
=========== ===========
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. Liquidity
As shown in the consolidated financial statements, the Company incurred losses
for the years ended June 30, 2004 and 2003 and had current liabilities in excess
of current assets at June 30, 2004, but the Company generated cash from
operations for the years ended June 30, 2004 and 2003.
The Company believes that cash flow from sales, as well as the ability and
commitment of its majority shareholder to contribute funds necessary to continue
to operate, will allow the Company to fund its currently anticipated working
capital, capital spending and debt service requirements during the year ended
June 30, 2005. The financial statements do not reflect any adjustments should
the Company's operations not be achieved.
3. Receivables
Trade accounts receivable consist of the following at June 30, 2004:
Trade accounts receivable $1,148,500
Allowance for doubtful accounts (5,342)
----------
$1,143,158
==========
4. Property and Equipment
Property and equipment are stated at cost and consist of the following at June
30, 2004:
Computer equipment $ 1,343,850
Furniture and equipment 207,251
Equipment under capital lease 29,825
Leasehold improvements 85,795
-----------
1,666,721
Less accumulated depreciation
and amortization (1,539,375)
-----------
$ 127,346
===========
5. Intangible Asset
Intangible assets consists of the following at June 30, 2004
Capitalized software costs $ 1,063,516
Less accumulated amortization (465,289)
-----------
$ 598,227
===========
33
6. Accrued Liabilities
Accrued liabilities consist of the following at June 30, 2004:
Accrued vacation $ 96,509
Other payroll liabilities 76,904
Commissions 12,649
Accrued board compensation 225,000
Accrued interest 350,940
Other accrued liabilities 10,479
-----------
$ 772,481
===========
7. Related party line of credit
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 June 15, 2005, and the balance
at June 30, 2004 is $0.
8. Long-term and related party notes payable
The Company had the following long-term notes payable at June 30, 2004:
Note payable to an entity controlled by a stockholder at
an interest rate of 18%, due in December 2005, secured
by Company stock owned and controlled by the CEO, and
substantially all assets of the Company, net of
discount of $164,927 $1,835,072
Note payable to Riverview bearing interest at 18%, due
in December 2005, net of discount of $4,286 340,714
Note payable to Riverview bearing interest at 12%
compounding, due July 31, 2007, unsecured, net of
discount of $ 173,885 3,122,521
Capital lease obligation on computer equipment, due in
monthly installments of $3,441 through February 2007,
imputed interest rate of 10.9% 40,720
----------
5,339,027
Less current portion of capital lease obligation (31,498)
----------
$5,307,529
==========
Maturities of long-term debt at June 30, 2004 are as follows:
Year Amount
---- ------
2005 $ 31,498
2006 2,183,203
2007 3,124,326
----------
$5,339,027
==========
34
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%, an original due date of
December 24, 2004, and monthly interest only payments until the due date. In
June 2004, the Company issued 1,000,000 shares of common stock valued at $80,000
and paid $40,000 to extend this note payable to December 2005, none of which is
amortized as of June 30, 2004. In connection with the inception of the
$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 term of the note as extended. 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 term
of the note as extended. 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. The balance at June 30, 2004 is $1,835,072, net of
discount of $164,927.
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
$450,000. The note has an interest rate of 18%, a due date of December 24, 2005,
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 extended term of the note. The balance at June 30, 2004 is
$340,714, including a net discount of $4,286.
9. Deferred Revenue
Deferred revenue consisted of the following at June 30, 2004:
Consulting Services $ 32,570
Maintenance and Support 1,079,345
----------
$1,111,915
==========
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, 2004 June 30, 2003
------------- -------------
Income tax benefit at statutory rates $ 263,000 $ 1,574,000
Change in valuation allowance (251,000) (1,573,000)
Other (12,000) (1,000)
---------- -----------
$ - $ -
========== ===========
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
35
The deferred income tax benefit for the years ended June 30, 2004 and 2003 is as
follows:
June 30, 2004 June 30, 2003
------------- -------------
Short Term
Allowance for bad debts $ 2,000 $ 16,000
Accrued vacation 38,000 52,000
Deferred revenue 434,000 407,000
Valuation allowance (474,000) (475,000)
------------ ------------
Deferred tax asset $ - $ -
============ ============
Long Term
Depreciation $ 46,000 $ 51,000
Net Operating loss carry forward 2,895,000 2,638,000
Valuation allowance (2,941,000) (2,689,000)
------------ ------------
Deferred tax asset $ - $ -
============ ============
As of June 30, 2004, the Company had available net operating losses (NOL) for
federal and state tax purposes of approximately $7,424,000. The NOL carry
forward is limited to use against future taxable income due to changes in
ownership and control. If a substantial change in the Company's ownership should
occur, there would be an annual limitation of the amount of the NOL carry
forward which could be utilized. The following schedule summarizes the net
operating losses available to the Company with the corresponding expiration
periods:
Expiration
Period of Loss Amount Year
-------------- ------ ----------
2001 1,040,000 2021
2002 2,470,000 2022
2003 3,254,000 2023
2004 660,000 2024
----------
$7,424,000
==========
11. Supplemental Disclosure of Cash Flow Information
Interest paid during the years ended June 30, 2004 and 2003 was $481,783 and
$339,341, respectively. No income taxes were paid during the years ended June
30, 2004 or 2003.
Non-Cash Transactions Disclosure
--------------------------------
In connection with the Bridge Notes A issued in August 2002, 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, 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.
During 2003, the Company issued 8,625,000 shares of common stock pursuant to
antidilution rights to AW Fields Acquisition, 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, 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.
36
In July 2003 Bridge Note B was repaid and replaced with a new Bridge Note C
totaling $868,334 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
$86,933 ($.05 per share), which was being amortized into interest expense over
the term of Bridge Note C through the date of conversion to shares of common
stock (see below). An additional 1,738,680 shares of common stock were issued to
the noteholders, as called for by the notes, in November 2003. The fair value of
these shares was $86,933, which was being amortized into interest expense over
the remaining term of Bridge Note C through the date of conversion. An
additional 1,448,892 shares of common stock were issued to the noteholders, as
called for by the notes, in February 2004. The fair value of these shares was
$86,933, which was being amortized into interest expense over the remaining term
of Bridge Note C through the date of conversion. During the period ended June
30, 2004 and prior to conversion, $119,201 was amortized into interest expense.
Pursuant to the terms of the conversion (see below), the bridge note holders
forfeited these shares, and the Company recorded a gain on settlement of debt of
$119,201. The remaining book value at the date of conversion was transferred
into equity. The AW Fields Acquisition agreement and agreements with certain
directors allow for the further antidilution right to the $.05 per share level,
but they have waived their rights for this transaction. The remaining Bridge
Note B discounts of $7,049 and $87,477 resulting from an interest discount and
discount associated with warrants issued, respectively, were amortized into
interest expense in July 2003.
In April 2004 and as amended in June 2004, an agreement was reached with the
Bridge Note holders to convert the notes and accrued interest, totaling
$950,138, to common stock at the closing market price of the stock on the day of
conversion. The Company issued 14,354,247 shares of common stock to effect this
transaction. The Bridge Note holders have entered into an agreement for an
orderly sale of these shares over the coming weeks. Additionally, the 4,852,864
shares of common stock issued to the Bridge Note C holders (separate issuances
of 1,738,680 shares, 1,738,680 shares and 1,448,892 shares) were cancelled
pursuant to the conversion agreement, and the Company recorded a gain on
settlement of debt of $119,201 as mentioned above.
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 term
of the note payable, as extended. The fair value of the warrants of $179,711 was
recorded as a discount on the note payable and is being amortized into interest
expense over the term of the note payable, as extended. 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. During 2004, the Company amortized $89,856 of
the warrant discount into interest expense, and $76,191 of the prepaid finders
fee into expense. During June 2004, the Company issued 1,000,000 shares of
common stock valued at $80,000 and paid $40,000 to extend this note payable to
December 2005, and the $120,000 in total extension fee was recorded as a debt
discount, none of which was amortized as of June 30, 2004.
During 2003, 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. 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 term of the
advances. For the periods ended June 30, 2004 and 2003, the Company amortized
$8,571 and $4,286 of the common shares discount into interest expense,
respectively.
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, and the remaining $131,250 was amortized
into interest expense in 2004. In April 2004, $1,100,000 of accrued interest on
the Riverview note payable was converted into 15,714,286 shares of common stock.
In June 2004, the Company issued 2,484,000 shares of common stock valued at
$173,885 to extend the Riverview note payable to July 2007. The $173,885 was
recorded as a debt discount, none of which is amortized as of June 30, 2004.
37
Pursuant to the terms of the respective note payable agreements, the Company
converted $105,000 of notes payable and $2,094 of associated accrued interest
into 1,529,917 shares of common stock during April 2004.
During the years ended June 30, 2004 and 2003, the Company issued 3,109,923 and
349,901 shares of common stock, respectively, as payment for consulting and
legal services in the amounts of $27,037 and $24,493, respectively.
During the year ended June 30, 2004, the Company issued 1,773,496 shares and
3,780,146 and 168,420 shares of common stock in payment of employee payroll
valued at $84,445, management and officer payroll valued at $212,500, and
director compensation valued at $16,000, respectively.
During the year ended June 30, 2004, the Company's CEO exercised 2,000,000
options for shares of common stock, and the company reduced $80,000 of advances
previously due to the CEO upon exercise of the options.
During 2004, the Company issued 3,021,079 shares of common stock valued at
$132,093 and 525,000 stock options with an exercise price of $.10, life of two
years and immediately exercisable, valued at $26,350 to settle various legal
claims.
During 2004, $25,473 of property and equipment was purchased through a capital
lease.
During 2004, $30,000 of treasury stock was retired.
12. Commitments and Contingencies.
Capital Leases: Amortization expense related to capitalized leases is included
in depreciation expense and was $23,066 and $7,222 for the years ended June 30,
2004 and 2003, respectively. Accumulated amortization was $139,364 at June 30,
2004.
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, 2004 and 2003
was $208,486 and $221,784, respectively. The Company is currently negotiating a
new office space lease agreement, and is currently paying $12,500 on a
month-to-month basis in its existing location until a new office space lease
agreement is finalized.
13. 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.
38
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. The case is still in the discovery stage with a trial date of
April 18, 2005. Settlement efforts are on-going.
14. Employee Benefit Plan
The Company offers an employee benefit plan under Benefit Plan Section 401(k) of
the Internal Revenue Code. Employees who have attained the age of 21 are
eligible to participate. The Company, at its discretion, matches 50% of the
first 4% of each employee's contributions. The expense related to the plan for
the year ended June 30, 2003 was $12,903. There were no expenses as of June 30,
2004.
15. Stock Compensation Plans
Stock in Lieu of Cash Compensation. Beginning October 1, 2002, officers and
management of the Company received a portion of their compensation in common
stock of the Company. The number of shares was calculated based on the fair
value of the shares at the end of each payroll period, with a floor price of
$.05 per share. During the year ended June 30, 2004 3,780,146 shares were issued
with a fair value of $212,500.
Beginning October 1, 2003, employees received 10% of their compensation in
common stock of the Company. The 10% was deferred from employees salary and paid
quarterly in stock based on the after tax portion of the deferred compensation.
During the year ended June 30, 2004, 1,773,496 shares were issued with a fair
value of $84,445.
Officers and Directors Stock Compensation. In February 2004 to be effective
January 2004, the Board of Directors approved the following compensation for
directors who are not employed by the Company.
o Annual cash compensation of $10,000 payable at the rate
of $2,500 per quarter. The Company has the right to pay
this amount in the form of shares of common stock of the
Company.
o Reimbursement of all travel expenses related to
performance of Directors duties on behalf of the
Company.
As of June 30, 2004 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 has issued options to purchase
5,666,667 shares of common stock at prices of $.11 - $.24, all of which were
exercised or expired as of March 2004.
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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.
A schedule of the options and warrants at June 30, 2004 is as follows:
Number of
Options Warrants Price per Share
------- -------- ---------------
Outstanding at June 30, 2002 21,500,001 563,273 $0.10-1.44
Granted 750,000 62,246,263 $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 62,794,536 $0.04-1.44
Granted 2,223,000 - $0.03-0.05
Exercised (5,666,667) (2,300,000) $0.04
Reclassify (11,666,667) 11,666,667 $0.07
Called - - -
Cancelled - - -
Expired (39,000) (300,000) $0.05-$1.44
---------- ---------- -----------
Outstanding at June 30, 2004 3,309,000 71,861,203 $0.03-0.75
========== ========== ===========
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16. 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,
2004 2003
----------- -----------
Net loss
As reported $(675,243) $(5,003,355)
Pro forma (724,743) (5,063,320)
Loss per common share-basic and diluted-as reported $ (0.00) $ (0.03)
Loss per common share-basic and diluted-pro forma $ (0.00) $ (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) 10
Expected volatility 300.85%
Expected dividend yield 0.00%
The following table summarizes information about fixed stock options and
warrants outstanding at June 30, 2004:
Options and Warrants Outstanding Options and Warrants
at June 30, 2004 Exercisable at June 30, 2004
-------------------------------- ----------------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Range of Outstanding at contractual exercise Exercisable at exercise
exercise prices June 30, 2004 life(years) price June 30, 2004 price
--------------- -------------- ----------- -------- -------------- ---------
$0.03 - $0.05 22,156,453 3.93 $ 0.04 22,156,453 $ 0.04
$0.07 - $0.08 20,582,142 2.36 0.07 20,582,142 0.07
$0.10 - $0.14 32,183,335 2.11 0.10 32,183,335 0.10
$0.70 - $0.75 248,273 0.42 0.75 248,273 0.75
---------- ----------
75,170,203 2.71 0.08 75,170,203 0.08
========== ==========
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17. Related Party Transactions
The Company refinanced bridge notes payable with an officer and directors during
2004 and 2003, and converted the bridge notes payable into stock during 2004.
See note 11.
The Company has a note payable to Riverview Financial Corporation (Riverview),
in the principal amount of $3,296,403 at June 30, 2004 with accrued interest of
$344,679. 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. In April 2004, $1,100,000 of accrued interest on the Riverview
note payable was converted into 15,714,286 shares of common stock. In June 2004,
the Company issued 2,484,000 shares of common stock valued at $173,885 to extend
the Riverview note payable to July 2007.
Riverview has loaned the Company $345,000 under a note payable bearing interest
at 18%. Payments are made monthly for interest only, with the principal due in
December 2005. Riverview was issued 857,143 shares of common stock in as an
inducement to make the loan.
The Company's CEO has made loans to the Company to cover short term cash needs
pursuant to a promissory note payable. Repayments are made as funds are
available, with a due date of June 15, 2005, as amended. Interest is at 12%. See
note 8.
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 note 8 and
note 11.
The Company has payables to employees of $36,474 at June 30, 2004 for
un-reimbursed business expenses, including $2,748 due to the chief executive
officer.
Also see note 11.
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18. Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. ("FIN") 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. FIN 45 also clarifies
that a guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the guarantee. The disclosure requirements are
effective for financial statements of interim or annual periods ending after
December 31, 2002. Because the Company currently is not a guarantor on any
indebtedness, the adoption of FIN 45 did not have any effect on the Company's
consolidated financial position or results of operations.
In December 2003, the FASB issued Interpretation No. 46 ("FIN 46R") (revised
December 2003), Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin No. 51 ("ARB 51"), which addresses how a
business enterprise should evaluate whether it has a controlling interest in an
entity through means other than voting rights and accordingly should consolidate
the entity. FIN 46R replaces FASB Interpretation No. 46 (FIN 46), which was
issued in January 2003. Before concluding that it is appropriate to apply ARB 51
voting interest consolidation model to an entity, an enterprise must first
determine that the entity is not a variable interest entity ("VIE"). As of the
effective date of FIN 46R, an enterprise must evaluate its involvement with all
entities or legal structures created before February 1, 2003 to determine
whether consolidation requirements of FIN 46R apply to those entities. There is
no grandfathering of existing entities. Public companies must apply either FIN
46 or FIN 46R immediately to entities created after January 31, 2003 and no
later than the end of the first reporting period that ends after March 15, 2004.
The adoption of FIN 46 had no effect on the Company's consolidated financial
position, result of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The purpose of SFAS 149 is to
amend and clarify financial accounting and reporting for derivative and hedging
activities under SFAS 133. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003 and for designated hedging relationships after June
30, 2003. Since the Company does not currently participate in derivative and
hedging activities, the adoption of SFAS 149 did not have any effect on the
Company's consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments
With Characteristics of Both Liabilities and Equity." This statement establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those instruments were
previously classified as equity. The statement was effective on July 1, 2003 for
financial instruments entered into or modified after May 31, 2003, and otherwise
effective for existing financial instruments entered into before May 31, 2003.
Since the Company does not have any financial instruments within the scope of
this statement, the adoption of SFAS No. 150 did not have any effect on the
Company's consolidated financial position or results of operations.
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