SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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FINDEX.COM, INC.
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(Name of small business issuer in its charter)
Nevada 7372 88-0379462
----------------- ------------------- ------------------
(State or Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation Classification Code Number) Identification Number)
or Organization)
11640 Arbor Street, Suite 201
Omaha, Nebraska
(402) 333-1900
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(Address and telephone number of principal executive offices
and principal place of business)
Steven Malone
Chief Executive Officer
FindEx.com, Inc.
11640 Arbor Street, Suite 201
Omaha, Nebraska
(402) 333-1900
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(Name, address and telephone number of agent for service)
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Copies to:
Michael Membrado, Esq.
Membrado & Montell, LLP
535 West 34th Street
New York, New York 10001
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Approximate date of proposed sale to the public: From time to time after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
--------------------------------
PROPOSED
PROPOSED MAXIMUM MAXIMUM
TITLE OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
REGISTERED REGISTERED SHARE (1) OFFERING PRICE REGISTRATION FEE
- ----------------------------- ----------------- ----------------------- ---------------- --------------------
Common Stock, par value 26,162,818 (2) $0.07 $1,831,397.26 $457.85
$.001 per share
- ----------------------------- ----------------- ----------------------- ---------------- --------------------
Common Stock, par value
$.001 per share 2,859,350 (3) $0.07 $200,154.50 $50.04
- ----------------------------- ----------------- ----------------------- ---------------- --------------------
Total 29,022,168 $0.07 $2,031,551.76 $507.89
- ----------------------------- ----------------- ----------------------- ---------------- --------------------
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as
amended (the "Act"), based on the average of the closing bid and asked
prices for our common stock as reported on the OTC Electronic Bulletin
Board on July 27, 2001.
(2) Includes up to an aggregate of 25,000,000 shares of our common stock
issuable as put shares to Swartz Private Equity, LLC ("Swartz")
pursuant to an Investment Agreement, dated June 6, 2001 (the "Equity
Line Investment Agreement"). Also includes 1,162,818 outstanding shares
of our common stock held by other selling shareholders.
(3) Includes (i) 510,000 shares of our common stock issuable upon exercise
of a commitment warrant issued to Swartz, and (ii) 2,349,350 shares of
our common stock issuable upon exercise of options and warrants issued
to other selling shareholders.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
SUBJECT TO COMPLETION, DATED AUGUST 1, 2001
2
PROSPECTUS
FindEx.com, Inc.
The Resale of 29,022,168 Shares of Common Stock
This prospectus relates to the resale by the selling shareholders of up to
29,022,168 shares of our common stock. The selling shareholders may sell the
stock from time to time in the over-the-counter market at the prevailing market
price or in negotiated transactions. Of the shares we are registering, Swartz,
one of the selling shareholders, may acquire up to 25,510,000 shares under the
Equity Line Investment Agreement with our Company. Swartz is an underwriter,
within the meaning of Section 2(11) of the Securities Act of 1933, with respect
to these shares. [See "Selling Shareholders - Investment Agreement"]
Our common stock is quoted on the over-the counter electronic bulletin board
under the symbol "FIND.OB". On July 25, 2001, the average of the bid and asked
prices of our common stock was $.07 per share.
Investing in our common stock involves a high degree of risk. You should invest
in our common stock only if you can afford to lose your entire investment. [See
"Risk Factors"]
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is August 1, 2001
3
The following table of contents has been designed to help you find important
information contained in this prospectus. We have included subheadings to aid
you in searching for particular information you might want to return to. We
encourage you to read the entire prospectus.
TABLE OF CONTENTS
PROSPECTUS SUMMARY...........................................................6
About our Company...................................................6
About our Investment Agreement......................................6
Additional Shares We Are Registering................................6
THE OFFERING.................................................................7
RISK FACTORS.................................................................9
USE OF PROCEEDS.............................................................16
SELLING SHAREHOLDERS........................................................17
Investment Agreement...............................................21
Additional Securities Being Registered.............................27
PLAN OF DISTRIBUTION........................................................28
MANAGEMENT..................................................................30
Directors and Executive Officers...................................30
Executive Compensation.............................................31
Employment Agreement...............................................32
Director Compensation..............................................32
Information Concerning Stock Options...............................32
Stock Option Plan..................................................33
BUSINESS....................................................................33
Overview...........................................................33
Our Key Products...................................................34
Our Market.........................................................35
Acquisition Strategy...............................................36
Formation and Certain Corporate History............................36
Marketing and Sales................................................36
Significant Customers and Suppliers................................37
Regulatory Environment.............................................37
Competition........................................................37
Employees..........................................................38
Litigation.........................................................38
Properties.........................................................39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................39
General............................................................39
4
Three Months Ended March 31, 2001, Compared with Three Months
Ended March 31, 2000...............................................40
Results of Operations.....................................40
Revenues..................................................40
Cost of Sales.............................................41
Sales, General and Administrative.........................41
Fiscal Year Ended December 31, 2000 Compared with Fiscal Year
Ended December 31, 1999............................................42
Results of Operations.....................................42
Revenues..................................................42
Cost of Sales.............................................43
Sales, General and Administrative.........................43
Income Tax Benefits.......................................44
Liquidity and Capital Resources....................................44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................45
INTEREST OF NAMED EXPERTS AND COUNSEL.......................................45
MARKET INFORMATION..........................................................45
DIVIDEND POLICY.............................................................46
PRINCIPAL STOCKHOLDERS......................................................46
DESCRIPTION OF SECURITIES...................................................47
Common Stock.......................................................47
Preferred Stock....................................................48
Dividends..........................................................48
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS...........................48
TRANSFER AGENT..............................................................48
LEGAL MATTERS...............................................................49
EXPERTS.....................................................................49
ADDITIONAL INFORMATION......................................................49
INDEX TO FINANCIAL STATEMENTS..............................................F-1
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PROSPECTUS SUMMARY
This summary highlights information found in greater detail elsewhere in this
prospectus. This summary is not complete and does not contain all of the
information you should consider before investing in our common stock. You should
read the entire prospectus carefully, including the "Risk Factors." This
prospectus describes our company, finances and products. Federal and state
securities laws require that we include in this prospectus all the important
information that you will need to make an investment decision.
About our Company
FindEx.com, Inc. ("FindEx" or the "Company" and collectively referred to as
"we"," us" or "our" as required by the context) is a retail, wholesale, and
Internet (www.quickverse.com, www.parsonschurch.com) supplier of software
products to business and religious organizations and individuals. As the premier
Bible study software provider, we develop and publish church and Bible study
software products designed to simplify Biblical research, streamline church
office tasks, provide easy access to Bible-related stories and enhance the
user's understanding of the Bible. FindEx.com also offers financial information
and decision support services online through its Website,
www.findexfinancial.com. [See "Business"]
About our Investment Agreement
We have entered into an Equity Line Investment Agreement with Swartz to raise up
to $15 million through a series of sales of our common stock to Swartz. The
dollar amount of each sale is limited by our common stock's trading volume and
price. A minimum period of time must occur between sales. In turn, Swartz may
sell our stock in the open market, sell our stock to other investors through
negotiated transactions, or hold our common stock in its own portfolio. This
prospectus covers Swartz's resale of our common either in the open market or to
other investors. [See "Selling Shareholders - Investment Agreement"]
Additional Shares We Are Registering
We are also registering for resale:
o 1,162,818 shares of our common stock previously sold in various exempt
private offerings
o 2,859,350 shares of our common stock underlying options and warrants
granted to various employees and consultants of our company in
consideration for services rendered to us.
[See "Selling Shareholders - Additional Securities Being Registered"]
6
The Offering
Common stock outstanding
prior to this offering ................ 10,588,359 (1)
Common stock being offered for resale
to the public............................. 29,022,168 (2)(3)
Common stock outstanding after this
Offering................................. 38,447,709 (4)
Percentage of common stock
Outstanding following this offering
that shares being offered for resale
represent................................ 75.5%
Price per share to the public.......... $0.07 (5)
Total proceeds raised by offering.... None, however we have received
proceeds in the amount
of $800,000 from the sale of common
shares that are presently
outstanding. We may receive up to
$15 million from Swartz under the
investment agreement and we may
receive additional amounts from the
sale of shares to Swartz and the
other selling shareholders upon the
exercise of outstanding options and
warrants.
Use of proceeds........................ We plan to use the proceeds for
expenses of financing,
expenses of registration, issuance
and distribution, working capital,
payment of short term debt,
marketing collateral and
advertisement, product development,
an infrastructure upgrade, office
relocation, other working capital
needs, acquisitions and new content
licenses.
- --------------------------
(1) Does not include 510,000 shares underlying warrants issued to Swartz in
connection with the Equity Line Investment Agreement. Also does not
include 2,349,350 shares underlying options and warrants currently
outstanding and held by the remaining selling shareholders.
(2) Includes (a) 1,162,818 shares that are presently outstanding, (b) up to
25,000,000 shares that may be issued to Swartz pursuant to the Equity
Line Investment Agreement, (c) 510,000 shares underlying warrants
issued to Swartz in connection with the Equity Line Investment
Agreement, and (d) 2,349,350 shares underlying outstanding options and
warrants held by the remaining selling shareholders.
(3) The current number of shares that Swartz could receive and resell under
the Equity Line Investment Agreement for each of our puts is the lesser
of (a) 1,500,000 shares per put or (b) 15% of the aggregate daily
reported trading volume of our common stock for the last 20 days, which
currently calculates to approximately 63,000 shares.
(4) Includes (i) up to 25,000,000 shares that may be issued to Swartz
pursuant to the Equity Line Investment Agreement, (ii) 510,000 shares
underlying warrant issued to Swartz in
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connection with the Equity Line
Investment Agreement, (these shares would not be deemed to be
beneficially owned within the meaning of Sections 13(d) and 13(g) of
the securities Exchange Act of 1934 before their acquisition by
Swartz), and (iii) 2,349,350 shares underlying outstanding options and
warrants held by the remaining selling shareholders.
(5) This figure represents the average of the bid and asked prices of our
common stock on July 25, 2001.
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RISK FACTORS
An investment in the common stock being offered for resale by the selling
shareholders is very risky. You should carefully consider the risk factors
described below, together with all other information in this prospectus before
making an investment decision. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks actually occurs, our business,
financial conditions or operating results could be materially adversely
affected. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
OUR INDEPENDENT AUDITORS ISSUED A GOING CONCERN OPINION FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2000, AND WE EXPERIENCE CONTINUED INABILITIES TO MEET ONGOING
OPERATING AND OTHER FINANCIAL OBLIGATIONS.
Our independent auditors have included an explanatory paragraph regarding our
ability to continue as a going concern for the fiscal year ended December 31,
2000. Their conclusion is drawn from the fact that we incurred a net loss of
$2,354,139 during the year ended December 31, 2000, and, as of that date, our
current liabilities exceeded our current assets by $392,780. Our accumulated
deficit as of December 31, 2000 was $2,163,281. Although we are continuously
exploring and pursuing various potential financing alternatives in an effort to
overcome these problems, and have entered into the Equity Line Investment
Agreement with Swartz, to date, our expenses continue to exceed our revenues and
we consistently lack sufficient funds to meet our operating requirements and
other financial obligations. Any continuing inability to meet such operating
requirements and financial obligations will have a material adverse effect on
our ability to continue operations. There can be no assurance that any such
financing will be obtained or that, if obtained, it will be on terms which are
favorable. [See "Note 16 to Financial Statements" and Financial Statements
generally]
UP TO 29,022,168 SHARES OF COMMON STOCK OF FINDEX WILL BECOME ELIGIBLE FOR
PUBLIC SALE THAT COULD HAVE A DEPRESSIVE EFFECT ON THE STOCK.
When our registration statement, of which this prospectus is a part, is declared
effective by the SEC, 1,162,818 shares of our common stock will be eligible for
immediate resale on the public market and 2,859,350 shares of our common stock
underlying warrants and options, upon their exercise, will be eligible for
immediate resale on the public market for our common stock. Also 25,000,000
shares will be available for sale upon the issuance of stock to Swartz based on
limitations of our trading volume and stock price. Additionally, if a
significant number of shares are offered for sale simultaneously, it would have
a depressive effect on the trading price of our common stock on the public
market. If and when we exercise our put rights and sell shares of our common
stock to Swartz, if and to the extent that Swartz sells the common stock, our
common stock price may decrease due to the additional shares in the market.
Assuming that Swartz and the investor group would exercise the warrants
registered in this prospectus based on a current stock price above the exercise
price of the warrants, the following chart shows the number of new shares that
would be issued.
Stock Price Number of Shares
$0.15 -0-
$0.20 -0-
$0.25 510,000 (All warrants issued to Swartz)
9
Additionally, if the Company put the maximum number of shares possible based on
volume limitations to Swartz, the following chart shows the number of new shares
that could be issued during the three year agreement and its dilutive effects
based on average daily trading volumes.
Avg Daily Volume Number of Shares % Dilution (a) % Dilution (b)
15,000 1,620,000 13.30% 16.79%
25,000 2,700,000 20.37% 23.32%
50,000 5,400,000 33.84% 35.89%
75,000 8,100,000 43.42% 44.92%
100,000 10,800,000 50.57% 51.72%
231,481 25,000,000 70.31% 70.73%
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(a) Indicates the percentage dilution to existing shareholders based solely on
the shares put to Swartz.
(b) Indicates the percentage dilution to existing shareholders based on the
shares put to Swartz and the exercise of all their existing warrants. We
assume that Swartz will exercise all of their warrants provided the
Company's stock price exceeds $.23 as that is the maximum exercise price of
their warrants.
THE SALE OF MATERIAL NUMBERS OF SHARES OF OUR COMMON STOCK COULD REDUCE THE
PRICE OF OUR COMMON STOCK AND RESULT IN INCREASING NUMBERS OF SHORT SALES.
If and when we exercise our put rights and sell shares of our common stock to
Swartz under the Equity Line Investment Agreement, if and to the extent that
Swartz sells the common stock, our common stock price may decrease due to the
additional shares entering the market. If the price of our common stock
decreases, and if we decide to exercise our right to put shares to Swartz, we
must issue more shares of our common stock for any given dollar amount invested
by Swartz. This may encourage short positions and short sales, which could place
further downward pressure on the price of our common stock. [See "Selling
Shareholders - The Swartz Equity Line Investment Agreement - Put Rights"]
WE ARE CURRENTLY IN A DISPUTE WITH THE LEARNING COMPANY ("TLC") OVER AMOUNTS DUE
EACH OTHER.
TLC is a customer of ours which, together with its subsidiaries, accounted for
41% of our consolidated revenue in 2000. We are currently in a dispute with TLC
over amounts that we believe are owed to us by them and amounts that they assert
are owed by us to them. Depending on the outcome of mediation or arbitration in
this matter, we may be forced to restate our financials for 2000 and for 1999.
Our periodic filings with the SEC state that, as of December 31, 2000, our
accounts receivable, net of offsets, relating to TLC was $2,867,293. TLC
disputes that this amount is due to us and further contends that we owe them
approximately $1,000,000 in combined license fees and service fees. Although
mediation is ongoing, and binding arbitration is scheduled for, and is likely to
begin in, September 2001 to the extent mediation proves ineffective, there can
be no assurance as to the resolution of this dispute and any negative outcome
could have an adverse affect on our business, operations, financial condition
and prospects.
ONE OF OUR PRIMARY CONTENT SUPPLIERS FOR THE SOFTWARE PRODUCTS THAT WE PRODUCE
AND DISTRIBUTE HAS TERMINATED OUR LICENSING AGREEMENT BASED ON OUR NON-PAYMENT
OF ROYALTIES.
10
We reproduce and distribute the Zondervan NIV Bible pursuant to a certain
licensing agreement with the Zondervan Corporation which provides, among other
things, that we will pay a royalty fee of 10% of net sales on the stand-alone
(NIV Bible) product and $8.00 per unit on total net units of QuickVerse, which
is our own product but which incorporates the Zondervan NIV Bible as part of it.
The products containing the Zondervan NIV Bible, including QuickVerse, accounted
for approximately 31% of our revenues in fiscal 2000. There are currently
approximately 4000 units of our own product in the market containing content
subject to the Zondervan licensing agreement, as well as another 15,000 units in
inventory, the combined aggregate value of which is approximately $6,000. Due to
our current shortage in working capital, we are currently $ 617,000 in arrears
on the royalty payments due under such licensing agreement, $ 562,000 (91%) of
which has been overdue for over 90 days. On April 5, 2001, we received a notice
from the Zondervan Corporation informing us that they are terminating our rights
under the licensing agreement and instructing us to cease and desist from making
any further sales of product subject to the licensing agreement. Fifty percent
of the product subject to the licensing agreement which is either out in the
market or currently in our inventory can be modified in such a way as to remove
any content which renders it subject to such agreement. It is unlikely,
moreover, that any product resulting from the removal of the content subject to
the licensing agreement would be marketable (once re-packaged) or that, if
marketable, it would provide revenues and profit margins comparable to that
which we have historically produced. [See "Business - Religious Software
Business"]
We are currently in the process of attempting to negotiate a settlement or other
arrangement with the Zondervan Corporation, which we believe will allow us to
continue reproducing and distributing products containing their content, but
which is highly likely to be dependent upon our ability to make payments to them
in the near term in amounts which we cannot afford without significant
additional equity financing. There can be no assurance, therefore, that we will
be able to negotiate a satisfactory settlement or other arrangement, or, if we
are able to negotiate a satisfactory settlement or other arrangement, that we
will be able to meet our obligations thereunder. Any continued termination of
our rights under the Zondervan licensing agreement and/or restriction on our
ability to continue to sell product subject to such agreement would necessarily
have a material adverse effect on our business and may result in our inability
to continue operating.
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE OUR POTENTIAL
FOR FUTURE SUCCESS.
We began to introduce our products and services during 1999. Although we have
generated revenue from operations, we have a very limited operating history on
which you can evaluate our potential for future success. Rather than relying on
historical financial information to evaluate our Company, you should evaluate
our Company in light of the expenses, delays, uncertainties, and complications
typically encountered by early-stage businesses, many of which will be beyond
our control. Early-stage businesses commonly face risks such as the following:
o lack of sufficient capital,
o unanticipated problems, delays, and expenses relating to product
development and implementation,
o lack of intellectual property,
o licensing and marketing difficulties,
o competition,
o technological changes, and
11
o uncertain market acceptance of products and services.
WE HAVE EXPERIENCED, AND MAY CONTINUE TO EXPERIENCE, REDUCED REVENUES DUE TO
DELAYS IN THE INTRODUCTION AND DISTRIBUTION OF OUR PRODUCTS.
We cannot be certain that we will be able to meet our planned release dates for
our new software releases. If we cannot release an important new product during
the scheduled quarter, our revenues are likely to be negatively affected. In the
past, we have experienced significant delays in our introduction of some new
products. For instance, delays in duplication, packaging and distribution caused
our QuickVerse version 7.0 to begin arriving at retailers over the 2000
Thanksgiving holiday. As a result, we experienced fewer sales of these products
than we would have if the products were in stores before the holiday selling
season began, which delay resulted in a materially adverse effect on our
operating results for the 2000 fourth quarter. It is likely in the future that
delays will continue to occur and that some new products will not be released in
accordance with our internal development schedule or the expectations of public
market analysts and investors. [See "Business - Our Key Products"]
THE LOSS OF OUR KEY EXECUTIVES OR OUR FAILURE TO ATTRACT, INTEGRATE, MOTIVATE
AND RETAIN ADDITIONAL KEY EMPLOYEES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
Our success depends to a large degree upon the skills of our senior management
team and key employees and upon our ability to identify, hire, and retain
additional sales, marketing, technical, and financial personnel. The loss of any
of our key executives or the failure to attract, integrate, motivate, and retain
additional key employees could have a material adverse effect on our business.
We may be unable to retain our existing key personnel or attract and retain
additional key personnel. Competition for these personnel in the Internet and
technology industry is intense and identifying personnel with experience in this
industry is even more difficult. We are in a relatively new market, and there
are a limited number of people with the appropriate combination of skills needed
to provide the services that our customers require. We depend particularly upon
the services of Steven Malone, our Chief Executive Officer and President. [See
"Management - Directors and Executive Officers"]
IF WE CANNOT OBTAIN MANUFACTURING AND PACKAGING SERVICES FOR OUR PRODUCTS ON AN
AS-NEEDED BASIS, WE MAY NOT BE ABLE TO TIMELY DELIVER OUR PRODUCTS TO
DISTRIBUTORS AND RETAILERS AND OUR SALES WILL BE ADVERSELY AFFECTED.
We use third party vendors to press CD-ROM disks, assemble purchased product
components, and print product packaging and user manuals in connection with the
retail distribution of our software. We do not have contractual agreements with
any of our third party vendors, which may result in our inability at any given
time to secure adequate production services in a timely manner. If we cannot
obtain adequate manufacturing services as needed, we will not be able to timely
produce and deliver our products to distributors and retail stores for ultimate
sale to consumers, which will adversely affect our sales and operating results.
[See "Business - Our Key Products"]
PRODUCT RETURNS OR PRICE PROTECTION CONCESSIONS THAT EXCEED OUR ANTICIPATED
RESERVES COULD HAVE A NEGATIVE IMPACT UPON OUR OPERATING RESULTS.
At the time we ship our products to retailers we establish reserves, which
reserves reflect an estimate of what we believe to be the potential for future
product returns in connection with sales
12
that are not based on consignment. Product returns or price protection
concessions (price reductions) that exceed our anticipated reserves are likely
to increase the magnitude of quarterly fluctuations in our operating and
financial results. Furthermore, if it turns out that we were unable to
accurately assess the creditworthiness of any of our customers to which we ship
our products on credit, we could be required to significantly increase the
reserves previously established. Actual returns to date have been within
management's estimates, we cannot be certain that any such occurrences will not
result in any future write-offs or that any amounts written-off will not have a
material adverse effect on our business and result in a decrease in the market
price of our common stock. [See "Management's Discussion and Analysis of
Financial Condition and Results of Operations"]
FLUCTUATIONS IN OPERATING RESULTS MAY RESULT IN UNEXPECTED REDUCTIONS IN OUR
REVENUE AND VOLATILITY IN OUR STOCK PRICE.
We operate in an industry that is subject to significant fluctuations in
operating results from quarter to quarter, which may lead to unexpected
reductions in revenues and stock price volatility. Factors that may influence
our quarterly operating results include:
o the introduction or enhancement of software products and
technology bus and our competitors;
o our ability to produce and distribute retail packaged versions of
our software in advance of peak retail selling seasons; and
o our ability to create appealing content within our software
products.
A majority of the unit sales for our products typically occurs in the quarter in
which the product is introduced. As a result, our revenues may increase
significantly in a quarter in which a major product introduction occurs but
decline thereafter in following quarters.
ERRORS OR DEFECTS IN OUR SOFTWARE PRODUCTS MAY CAUSE A LOSS OF MARKET ACCEPTANCE
AND RESULT IN FEWER SALES OF OUR PRODUCTS.
Our products are complex and may contain undetected errors or defects. In the
past, we have discovered software errors in some of our new products and
enhancements after their introduction into the market. We anticipate that
software errors and defects will continue to be present in our new products or
releases from time to time in the future. While to date these errors have not
resulted in material consequences of any kind, there can be no assurance that
future errors and defects will not result in adverse product reviews, damage to
our reputation, and a loss of, or delay in, market acceptance of our products,
any of which occurrences would have a material adverse effect on our business.
[See "Business - Our Key Products"]
TO DEVELOP PRODUCTS THAT CONSUMERS DEMAND, WE MUST MAKE SUBSTANTIAL INVESTMENTS
IN RESEARCH AND DEVELOPMENT TO KEEP UP WITH THE RAPID TECHNOLOGICAL DEVELOPMENTS
THAT ARE TYPICAL IN OUR INDUSTRY.
The entertainment software market and the personal computing industry are
subject to rapid technological developments. To develop products that consumers
desire and demand, we must continually improve and enhance our existing products
and technologies and develop new products and technologies that incorporate
these technological developments. This requires us to make substantial and
continuous investments in research and development, often times well in
13
advance of the widespread release of the products in the market and any revenues
these products may generate. We cannot be certain that we will continuously have
the financial and technical resources available to make these improvements,
particularly while remaining competitive in terms of performance and price.
OUR PROPRIETARY TECHNOLOGY MAY NOT BE ADEQUATELY PROTECTED FROM UNAUTHORIZED
USE.
Our ability to compete with other Bible software companies depends in part upon
the strength of our proprietary rights in our technologies. Unauthorized use by
others of our proprietary technology could result in an increase in competing
products and a reduction in our sales. We rely on trademark, trade secret and
copyright laws to protect our technology. We cannot be certain, however, that
the steps that we have taken to protect our proprietary rights to date will
provide meaningful protection from unauthorized use by others. If we must pursue
litigation in the future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of the proprietary
rights of others, we may not prevail and we are likely to incur substantial
expenditures and divert valuable resources in the process. In addition, many
foreign countries' laws may not protect us from improper use of our proprietary
technologies. Consequently, we may not have adequate remedies if our proprietary
rights are breached or our trade secrets are disclosed.
NEW INTERNET ACCESS DEVICES MAY CHANGE THE WAY INFORMATION IS DISPLAYED
REQUIRING US TO CHANGE OUR PRODUCTS.
Recent increases in the use of Internet devices to access inspirational content
and the continued development of Internet devices as a medium for the delivery
of network-based information, content, and services may require us to change our
products. Our success depends in part on our ability to understand the method
upon which our search engines operate and our ability to service new and
emerging devices to access the Internet, such as browser phones, personal
digital assistants, and other wireless devices. To the extent these new Internet
access devices change the way that information is displayed to the end user or
causes a change in the medium that is searched, we may be required to revise the
methodology of our products. We cannot predict the impact that these new devices
will have on our services, and any such required revisions may result in loss of
revenue and goodwill, increased expenses, and reduced operating margins. [See
"Business - Our Key Products"]
IF OUR PRODUCTS INFRINGE ANY PROPRIETARY RIGHTS OF OTHERS, A LAWSUIT MAY BE
BROUGHT AGAINST US THAT COULD REQUIRE US TO PAY LARGE LEGAL EXPENSES AND
JUDGMENTS AND REDESIGN OR DISCONTINUE SELLING OUR PRODUCT.
Although there can be no assurance, we believe that our products do not infringe
any valid existing proprietary rights of third parties. Any infringement claims,
however, whether or not meritorious, could result in costly litigation or
require us to enter into royalty or licensing agreements. Further, if we are
found at any time to have infringed the proprietary rights of others, we could
be required to pay damages, which could be significant, and we could
additionally be required to redesign the products or discontinue their sale. Any
of these outcomes, individually or collectively, could have a material adverse
effect on our business and financial condition.
WE WILL FACE A VARIETY OF ADDITIONAL RISKS AS WE EXPAND INTO INTERNATIONAL
MARKETS.
14
Although there can be no assurance, we plan in the future to expand our product
sales into selected international markets. Any such initiatives may cost more
than we expect or can reasonably anticipate in advance. Further, we may prove
unsuccessful in such initiatives, and lose all or part of our investment in
those operations. If we expand into international markets, we will be
increasingly subject to various risks associated with international operations
in addition to the other business risks described in this prospectus. These
risks include the following:
o management of a multi-national organization,
o compliance with local laws and regulatory requirements, as well as
changes in those laws and requirements,
o restrictions on the repatriation of funds,
o maritime and other shipping issues,
o employment and severance issues,
o overlap of tax issues,
o the business and financial condition of any overseas business
partners,
o political and economic conditions abroad, and
o the possibility of:
- expropriation or nationalization of assets,
- supply disruptions,
- currency controls,
- exchange rate fluctuations, or
- changes in tax laws, tariffs, and freight rates.
Our inability to manage these and other risks effectively could increase our
expenses or decrease our opportunities to generate revenues from international
markets. [See "Business - Our Market"]
WE HAVE NOT PAID ANY DIVIDENDS SINCE INCEPTION AND HAVE NO CURRENT PLANS TO PAY
ANY DIVIDENDS.
We have never declared or paid any cash dividends on our common stock since our
inception. We currently intend to retain any future earnings for funding growth
and, therefore, do not expect to pay any dividends in the foreseeable future.
[See "Dividends Policy"]
OUR STOCK PRICE WILL FLUCTUATE AFTER THIS OFFERING, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES FOR INVESTORS.
The market price for our common stock may fluctuate significantly in response to
a number of factors, some of which are beyond our control. These factors
include:
o Quarterly variations in operating results;
o Changes in financial estimates by securities analysts;
o Announcements by us or our competitors of new products,
significant contracts, acquisitions or strategic relationships;
o Disputes concerning our proprietary rights;
o Publicity about our company, our products or our competitors or
their products;
15
o Additions or departures of key personnel;
o Any future sales of our common stock or other securities; and
o Stock market price and volume fluctuations of publicly-traded
companies generally.
These and other external factors have caused and may continue to cause the
market price and demand for our common stock to fluctuate substantially, which
may limit or prevent investors from readily selling their shares of common stock
and may otherwise negatively affect the liquidity of our common stock.
In the past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of their
securities. If securities class action litigation is brought against us it could
result in substantial costs and a diversion of our management's attention and
resources, which could hurt our business.
OUR COMMON STOCK IS SUBJECT TO PENNY STOCK REGULATION THAT MAY AFFECT THE
LIQUIDITY FOR OUR COMMON STOCK.
Our common stock is subject to regulations of the Securities and Exchange
Commission relating to the market for penny stocks. These regulations generally
require that a disclosure schedule explaining the penny stock market and the
risks associated therewith be delivered to purchasers of penny stocks and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors. The
regulations applicable to penny stocks may severely affect the market liquidity
of our common stock and could limit your ability to sell your securities in the
secondary market.
TRADING IN OUR COMMON STOCK ON THE OTC BULLETIN BOARD MAY BE LIMITED THEREBY
MAKING IT MORE DIFFICULT FOR INVESTORS TO RESELL THEIR SHARES OF OUR COMMON
STOCK.
Our common stock trades on the OTC Bulletin Board. The OTC Bulletin Board is not
an exchange and, because trading of securities on the OTC Bulletin Board is
often more sporadic than the trading of securities listed on an exchange or
Nasdaq, you may have difficulty reselling any of the shares of our common stock
that you purchase from the selling shareholders.
USE OF PROCEEDS
FindEx will not receive any proceeds from the resale of our common stock
pursuant to this offering. We may, however, receive proceeds from the sale of
our common stock to Swartz pursuant to the Equity Line Investment Agreement,
and, if exercised, we will receive proceeds from the sale of shares to Swartz
and the other selling shareholders upon their exercise of warrants or options.
Based on our current share price, if all of the shares of common stock that we
offer to Swartz are sold, and the warrants and options are exercised, we
estimate that we will realize net proceeds of approximately $1,400,000. In
theory, however, and based on the terms of Equity Line Investment Agreement
described more fully in the "Selling Shareholders" section of this prospectus,
we may realize up to $14,900,000 in net proceeds. In either case, net proceeds
are determined after deducting all of the expenses associated with this offering
(estimated to be $100,000).
16
If we realize $1,400,000 in net proceeds, and although there can be no
assurance, we intend to use the net proceeds from this offering as follows:
Payment of short term debt 500,000
Product Development 500,000
Infrastructure Upgrade and Office Relocation 100,000
Other working capital needs 200,000
New Content Licenses 100,000
Total Net Proceeds $ 1,400,000
===========
If we realize $14,900,000 in net proceeds, and although there can be no
assurance, we intend to use the net proceeds from this offering as follows:
Working Capital
Payment of short term debt 1,500,000
Marketing collateral and advertisement 500,000
Product Development 2,000,000
Infrastructure Upgrade and Office Relocation 250,000
Other working capital needs 8,150,000
Acquisitions and New Content Licenses 2,500,000
Total Net Proceeds $ 14,900,000
============
The amounts that we actually expend on each of the items listed above will vary
significantly depending on a number of factors, including our future results of
operations. As a result, we will retain broad discretion in the allocation of
the net proceeds of this offering. Pending the use of any proceeds as discussed
above, we intend to invest these funds in short-term, interest-bearing
investment-grade obligations.
SELLING SHAREHOLDERS
The following table sets forth certain information as of the date of this
prospectus, with respect to Swartz and the other selling shareholders for whom
we are registering shares for resale to the public. Swartz and the other selling
shareholders propose selling all of their shares, in which case each would
beneficially own no shares after the offering. Except as set forth below, none
of the selling shareholders currently is an affiliate of ours, and none of them
has had a material relationship with us during the past three years. None of the
selling shareholders are or were affiliated with registered broker-dealers. An
asterisk in the table indicates a corresponding common stock ownership of less
than one percent.
Shares Maximum No. of Amount and Percentage
Beneficially Shares to be sold of Common Stock after
Owned Prior to Pursuant to this the offering (1)
Name of Stockholder Offering Prospectus Number %
- ------------------- -------- ---------- ------- --
Swartz Private Equity, LLC 25,510,000 (2) 25,510,000 0 *
Ardt Investment Management, Inc. 100,000 (3) 100,000 0 *
Ronald Ardt 58,375 (4) 58,375 0 *
Thomas Ardt 4,000 (5) 4,000 0 *
17
Sheldon H. Becher 175,000 (6) 175,000 0 *
Bing Bingham 5,000 (7) 5,000 0 *
Stan Blair 5,000 (7) 5,000 0 *
Thomas Bradford, Jr. 6,250 (8) 6,250 0 *
W. P. Buck 6,250 (8) 6,250 0 *
Business Investor Services, Inc. 110,000 (9) 110,000 0 *
Robert Crowe 6,250 (8) 6,250 0 *
Jacques de Groote, Ph.D. 175,000 (10) 175,000 0 *
Del Norte Ltd. 27,333 (11) 27,333 0 *
Dawn Dvorak 2,000 (12) 2,000 0 *
Lila Dvorak 2,000 (12) 2,000 0 *
Britt Edwards 7,600 (13) 7,600 0 *
Ralph Ewing 6,000 (14) 6,000 0 *
Walter Foss 25,000 (15) 25,000 0 *
Andrew M. Friis 54,666 (16) 54,666 0 *
David Gardner 3,000 (17) 3,000 0 *
Holly Gardner 8,000 (18) 8,000 0 *
Marianne Gelski 5,400 (19) 5,400 0 *
Genesis Financial Group, LLC 150,000 (20) 150,000 0 *
Barrett Geoghegan 50,695 (21) 50,695 0 *
Roy Gilbert, Jr. 6,250 (8) 6,250 0 *
Micki Gorup 8,000 (18) 8,000 0 *
Michelle Hanson 1,000 (22) 1,000 0 *
Donald Harrison 15,625 (23) 15,625 0 *
Bob Heusinkveld 10,000 (24) 10,000 0 *
Investor Communications Co. 120,000 (25) 120,000 0 *
Hugh Jacks 9,375 (26) 9,375 0 *
Jager Companies, Inc. 1,875 (27) 1,875 0 *
Charles Jager 2,188 (28) 2,188 0 *
Steve Jager 2,188 (28) 2,188 0 *
Jim Johnsen 3,000 (17) 3,000 0 *
Zaid Hani Al-Khaiyat 1,500 (29) 1,500 0 *
Ahmad Al Khiyami 12,500 (30) 12,500 0 *
John A. Kuehne 175,000 (31) 175,000 0 *
Gwen Lee 2,000 (12) 2,000 0 *
LifeWay Christian Resources
of the SBC 125,000 (32) 125,000 0 *
Steven Malone 125,000 (33) 125,000 0 *
Benjamin Marcovitch 175,000 (34) 175,000 0 *
Michael Martin 8,000 (18) 8,000 0 *
Membrado & Montell, LLP 150,000 (35) 150,000 0 *
Mer Du Nord Corp 27,333 (11) 27,333 0 *
MHE, Inc. 250,000 (36) 250,000 0 *
Charles Moskowitz 91,250 (37) 91,250 0 *
Jeff Morgan 6,000 (14) 6,000 0 *
James Mueller 3,000 (17) 3,000 0 *
Sheila Nekuda 3,000 (17) 3,000 0 *
John Padgett 3,125 (38) 3,125 0 *
Jernigan Family Partnership II 15,625 (23) 15,625 0 *
Kelly Peters 15,000 (39) 15,000 0 *
Leonard Reimer 2,000 (12) 2,000 0 *
18
John Richardson 3,125 (38) 3,125 0 *
Julia Rosen 54,666 (16) 54,666 0 *
Kirk Rowland 25,000 (40) 25,000 0 *
Cory Rueb 12,500 (41) 12,500 0 *
Sonia Ruelas 2,000 (12) 2,000 0 *
Ollie Sandlin 9,375 (26) 9,375 0 *
Billy Spain 6,250 (8) 6,250 0 *
Dennis Stahlnecker 5,000 (42) 5,000 0 *
D R Jack Sullivan 9,375 (26) 9,375 0 *
Walter Tee 4,200 (43) 4,200 0 *
Debra Thiemann 2,000 (12) 2,000 0 *
Kent Upton 9,375 (26) 9,375 0 *
James Walker 12,500 (41) 12,500 0 *
Henry M. Washington, Ph.D. 175,000 (44) 175,000 0 *
Craig Wells 2,000 (12) 2,000 0 *
Betty Wolfe 6,000 (14) 6,000 0 *
Ron Wolfe 10,000 (45) 10,000 0 *
Total 28,221,019 28,221,019 0 *
- -----------------------
* Represents less than one percent.
(1) Assumes that the selling shareholders will resell all of the offered shares
and the selling shareholders will retain no shares for their own accounts.
(2) Represents up to 25,000,000 shares of our common stock that we may sell to
Swartz pursuant to the Investment Agreement and 510,000 shares of our common
stock that we may issue to Swartz upon Swartz's exercise of the commitment
warrant issued to them in connection with the Equity Line Investment Agreement
(these shares would not be deemed to be beneficially owned within the meaning of
Sections 13(d) and 13(g) of the securities Exchange Act of 1934 before their
acquisition by Swartz). It is expected that Swartz will not own beneficially
more than 9.9% of our outstanding common stock at any time. [See "Selling
Shareholders - The Swartz Equity Line Investment Agreement - Put Rights"]
(3) Includes 100,000 shares of our common stock issuable upon exercise of
outstanding stock purchase warrants.
(4) Includes 58,375 shares of our common stock issued pursuant to a Regulation D
Section 506 exemption.
(5) Includes 4,000 shares of our common stock issued pursuant to a Regulation D
Section 506 exemption.
(6) Includes 175,000 shares of our common stock issuable upon exercise of
outstanding stock options. Mr. Becher is a member of our Board of Directors.
(7) Includes 5,000 shares of our common stock issued pursuant to a Regulation D
Section 506 exemption.
(8) Includes 5,000 shares of our common stock issued pursuant to a Regulation D
Section 506 exemption and 1,250 shares of our common stock issuable upon
exercise of outstanding stock purchase warrants.
(9) Includes 60,000 shares of our common stock issued pursuant to a Regulation D
Section 506 exemption and 50,000 shares of our common stock issued as
compensation pursuant to a Corporate Development Consulting Agreement.
(10) Includes 175,000 shares of our common stock issuable upon exercise of
outstanding stock options. Dr. de Groote is a member of our Board of Directors.
19
(11) Includes 27,333 shares of our common stock issued pursuant to the
conversion of Preferred Series B stock.
(12) Includes 2,000 shares of our common stock issuable upon exercise of
outstanding employee stock options.
(13) Includes 7,600 shares of our common stock issuable upon exercise of
outstanding employee stock options.
(14) Includes 6,000 shares of our common stock issued pursuant to a Regulation D
Section 506 exemption.
(15) Includes 25,000 shares of our common stock issuable upon exercise of
outstanding employee stock options.
(16) Includes 54,666 shares of our common stock issued pursuant to the
conversion of Preferred Series B stock.
(17) Includes 3,000 shares of our common stock issuable upon exercise of
outstanding employee stock options.
(18) Includes 8,000 shares of our common stock issuable upon exercise of
outstanding employee stock options.
(19) Includes 5,400 shares of our common stock issuable upon exercise of
outstanding employee stock options.
(20) Includes 50,000 shares of our common stock issued as compensation pursuant
to a Corporate Consulting Agreement and 100,000 shares of our common stock
issuable upon exercise of outstanding stock purchase warrants.
(21) Includes 50,695 shares of our common stock issued pursuant to the
conversion of Preferred Series B stock.
(22) Includes 1,000 shares of our common stock issuable upon exercise of
outstanding employee stock options.
(23) Includes 12,500 shares of our common stock issued pursuant to a Regulation
D Section 506 exemption and 3,125 shares of our common stock issuable upon
exercise of outstanding stock purchase warrants.
(24) Includes 10,000 shares of our common stock issued pursuant to a Regulation
D Section 506 exemption.
(25) Includes 120,000 shares of our common stock issued as compensation pursuant
to a Corporate Consulting Agreement.
(26) Includes 7,500 shares of our common stock issued pursuant to a Regulation D
Section 506 exemption and 1,875 shares of our common stock issuable upon
exercise of outstanding stock purchase warrants.
(27) Includes 1,500 shares of our common stock issued pursuant to a Regulation D
Section 506 exemption and 375 shares of our common stock issuable upon exercise
of outstanding stock purchase warrants.
(28) Includes 1,750 shares of our common stock issued pursuant to a Regulation D
Section 506 exemption and 438 shares of our common stock issuable upon exercise
of outstanding stock purchase warrants.
(29) Includes 1,500 shares of our common stock issued pursuant to a Regulation D
Section 506 exemption.
(30) Includes 12,500 shares of our common stock issued pursuant to a Regulation
D Section 506 exemption.
(31) Includes 175,000 shares of our common stock issuable upon exercise of
outstanding stock options. Mr. Kuehne is a member of our Board of Directors.
(32) Includes 100,000 shares of our common stock issued pursuant to a Regulation
D Section 506 exemption and 25,000 shares of our common stock issuable upon
exercise of outstanding stock purchase warrants.
20
(33) Includes 125,000 shares of our common stock issuable upon exercise of
outstanding employee stock options. Mr. Malone is our Company's President and
Chief Executive Officer.
(34) Includes 175,000 shares of our common stock issuable upon exercise of
outstanding stock options. Mr. Marcovitch is Chairman of our Board of Directors.
(35) Includes 150,000 shares of our common stock issuable upon exercise of
outstanding stock purchase warrants.
(36) Includes 250,000 shares of our common stock issued as compensation pursuant
to a Corporate Consulting Agreement.
(37) Includes 91,250 shares of our common stock issued as compensation pursuant
to a Corporate Consulting Agreement.
(38) Includes 2,500 shares of our common stock issued pursuant to a Regulation D
Section 506 exemption and 625 shares of our common stock issuable upon exercise
of outstanding stock purchase warrants.
(39) Includes 15,000 shares of our common stock issuable upon exercise of
outstanding employee stock options.
(40) Includes 25,000 shares of our common stock issuable upon exercise of
outstanding employee stock options. Mr. Rowland is our Chief Financial Officer.
(41) Includes 10,000 shares of our common stock issued pursuant to a Regulation
D Section 506 exemption and 2,500 shares of our common stock issuable upon
exercise of outstanding stock purchase warrants.
(42) Includes 5,000 shares of our common stock issuable upon exercise of
outstanding employee stock options.
(43) Includes 4,200 shares of our common stock issuable upon exercise of
outstanding employee stock options.
(44) Includes 175,000 shares of our common stock issuable upon exercise of
outstanding stock options. Dr. Washington is a member of our Board of Directors.
(45) Includes 10,000 shares of our common stock issuable upon exercise of
outstanding employee stock options.
The securities we issued to the selling shareholders were sold in private,
unsolicited transactions that did not involve a public offering pursuant to an
exemption from registration under Section 4(2) or Rule 506 of Regulation D of
the Securities Act of 1933. All of the selling shareholders other than Swartz
are our current or former employees or consultants.
Investment Agreement
Overview
On June 6, 2001, we entered into an Equity Line Investment Agreement with
Swartz. The Equity Line Investment Agreement entitles us to issue and sell up to
$15 million of our common stock to Swartz, subject to a formula based on our
stock price and trading volume, from time to time over a three year period
following the effective date of this registration statement. For each common
share put to Swartz, we will receive the lesser of 91% of the market price or
the market price less $.05. Throughout this registration statement, we refer to
each election by us to sell stock to Swartz under the Equity Line Investment
Agreement as a "Put."
As partial consideration for entering into the Equity Line Investment Agreement,
Swartz was issued a warrant to purchase 510,000 shares of common stock
exercisable at $0.23 per share until March 26, 2007, which is referred to
throughout this registration statement as the commitment warrant.
21
Put Rights
We may begin exercising Puts on the date of effectiveness of this registration
statement and continue for a three-year period (or until we have exhausted the
$15 million equity line)]. To exercise a Put, we must have an effective
registration statement on file with the Securities and Exchange Commission
covering the resale to the public by Swartz of any shares that it acquires under
the Equity Line Investment Agreement. Also, we must give Swartz at least 10, but
not more than 20, business days advance notice of the date on which we intend to
exercise a particular Put. The notice must indicate the date we intend to
exercise the Put and the maximum number of shares of common stock we intend to
sell to Swartz as part of such Put. At our option, we may also specify a maximum
dollar amount (not to exceed $2 million) of common stock that we will sell under
the Put. We may also specify a minimum purchase price per share at which we will
sell shares to Swartz. The minimum purchase price cannot exceed the lesser of
(i) 80% of the closing bid price of our common stock on the date we give Swartz
notice of the Put, and (ii) the closing bid price of our common stock on the
business day preceding the date we send Swartz advance notice of our intent to
exercise a Put, minus $0.075.
The number of common shares we sell to Swartz in any given Put may not exceed
the lesser of:
o 1.5 million shares,
o 15% of the aggregate daily reported trading volume of our common
stock, excluding certain block trades, during the 20 business days
after the date of our put notice, excluding any trading days in
which the common stock trades below a minimum price, if any, that
we specify in our put notice,
o 15% of the aggregate daily reported trading volume of our common
stock, excluding certain block trades, during the 20 business days
before the put date, or
o a number of shares that, when added to the number of shares
acquired by Swartz under the Equity Line Investment Agreement
during the 61 days preceding the Put date, would exceed 9.99% of
the total number of shares of our common stock then outstanding.
Swartz will pay us a percentage of the market price for each share of common
stock under the Put. The market price of our common stock during the 20 business
days immediately following the date we exercise a Put is used to determine the
purchase price Swartz will pay and the number of shares we will issue in return.
This 20 day period is referred to throughout this registration statement as the
pricing period. For each share of common stock sold to Swartz, Swartz will pay
us the lesser of:
o the Market Price for each share, minus $.05; or
o 91% of the market price for each share.
The Equity Line Investment Agreement defines market price as the average of the
two lowest daily volume weighted average prices of our common stock during the
20 business day pricing period. However, Swartz must pay at least the designated
minimum per share price, if any, that we specify in our notice. If the price of
our common stock is below the greater of the designated minimum per share price
plus $.05, or the designated minimum per share price divided by .91 during any
of the 20 days during the pricing period, that day is excluded from the 15%
volume
22
limitation described above. Therefore, the amount of cash that we can receive
for any such corresponding Put may be reduced if we elect to apply a minimum
price per share and our stock price declines.
The Equity Line Investment Agreement requires that we wait a minimum of 5
business days after the end of the 20 business day pricing period for a prior
Put before exercising a subsequent Put. We may, however, give advance notice of
our subsequent Put during the pricing period for the prior Put. We can only
exercise one Put during each pricing period.
Sample Calculation
The following is an example of the calculation of a Put we would issue to Swartz
in connection with that Put based on hypothetical assumptions:
Sample drawdown amount calculation:
For purposes of this example, suppose for our first Put we provide a put notice
to Swartz, and that we set the threshold price at $0.20 per share, below which
we will not sell any shares to Swartz during this purchase period. Suppose
further that the total daily trading volume for the 20 trading days immediately
preceding the put date is 500,000 shares with no block trades exceeding 20,000
or more shares. Under these hypothetical numbers, the maximum amount of shares
that could be sold to Swartz is as follows:
* the total trading volume for the 20 days prior to our Put
notices (500,000 shares) multiplied by 15% equals 75,000
If the total daily trading volume for the 20 trading days during the actual
purchase period was greater than 500,000 (like our example that follows) then
the maximum amount of shares that could be sold will be 75,000.
Sample calculation of number of shares:
For example, for the first trading day in the example in the table below, the
calculation is as follows: multiply 15% times the total shares traded (40,000)
to get 6,000 shares. Perform this calculation for each of the 20 trading days
during the purchase period, excluding any days on which daily trading price
traded below the $0.20 threshold price set by us. In the table below there are
no days which must be excluded.
Closing Total Number of
Trading Day Bid Price ($) (1) Shares Traded Shares Sold
----------- ----------------- ------------- -----------
1 0.25 40,000 6,000
2 0.25 38,000 5,700
3 0.27 4,000 600
4 0.27 20,000 3,000
5 0.25 32,000 4,800
6 0.22 25,000 3,750
7 0.25 10,000 1,500
8 0.22 32,000 4,800
9 0.22 40,000 6,000
10 0.23 17,000 2,550
11 0.28 3,000 480
23
12 0.28 8,000 1,200
13 0.25 45,000 6,750
14 0.27 53,000 7,950
15 0.27 25,000 3,750
16 0.25 31,000 4,650
17 0.27 23,000 3,450
18 0.28 2,000 300
19 0.30 55,000 8,250
20 0.30 49,000 7,350
Totals: 552,000 82,800
- ----------
(1) The share prices are illustrative only and should not be relied upon as a
forecast of share prices or the expected or historical volatility of the
share prices of our common stock.
The total number of shares that we would issue to Swartz for this Put would be
75,000 shares, which was previously calculated as the maximum number of shares
that could have been sold based on multiplying 15% by the total trading volume
for the 20 trading days prior to the Put date (even though 15% multiplied by the
total shares traded during the purchase period equals 82,800). Swartz will
purchase the shares at a purchase price equal to the lesser of: the market price
for the applicable pricing period (market price is defined as the lowest closing
bid price during the pricing period) minus $0.05 or 91% of the market price. In
this case, Swartz would pay $.17 per share for 75,000 shares equaling $12,750.
There is no placement agent involved in this transaction to which any fees would
be payable.
We are registering a total of 25,000,000 shares to be sold to Swartz in Puts.
Therefore, in order for the company to receive $15,000,000, the average sale
price of these shares would need to be $.60. Unless our share price increases
drastically, we will need to register additional shares in order to access the
$15,000,000 maximum.
Our average closing price for the 30 day trading period beginning on June 25,
2001, on the Over-The-Counter Bulletin Board was $.14. The maximum allowable
number of shares per Put under the Investment Agreement is 1,500,000 shares.
Assuming our trading price remained at its current level, even if we Put the
maximum allowable shares per Put to Swartz under the Equity Line Investment
Agreement, each Put would yield only $135,000 in proceeds to us. The
restrictions discussed, such as the restriction limiting the put amount to a
percentage of our aggregate trading volume, may operate to prevent us from
putting the maximum allowable number of shares. The average trading volume for
the 30 day trading period beginning on June 25, 2001, was 28,165 shares per day.
Therefore, the Company would have been restricted to putting 4,225 (15% of
28,165) shares per day yielding approximately $7,605 in the 20 day Put period.
The 25,000,000 shares that Swartz may sell under this prospectus would represent
70.31% of the Company if they were all issued assuming that no other shares are
issued in the future.
Warrants
We have delivered to Swartz warrants to purchase 510,000 shares of our common
stock at anytime for up to six years. Each warrant will be immediately
exercisable and have a term beginning on the date of issuance and ending six
years thereafter. All shares underlying these warrants are being registered in
this prospectus.
Limitations and conditions to our Put rights
24
Our ability to Put shares of our common stock, and Swartz's obligation to
purchase the shares, is subject to the satisfaction at the time of each Put of
certain conditions. These conditions include, among others:
o we have satisfied all obligations under the agreements entered
into between us and Swartz in connection with and including the
Equity Line Investment Agreement;
o our common stock is listed and traded on Nasdaq or an exchange, or
quoted on the O.T.C. Bulletin Board and the Company has
not received any notice of suspension or delisting of the shares;
o our representations and warranties in the Equity Line Investment
Agreement are accurate;
o we have reserved for issuance a sufficient number of shares of our
common stock to satisfy our obligations to issue shares under any
Put and upon exercise of 510,000 warrants;
o this registration statement is effective and no stop order
relating to it is in effect.
Our right to Put shares to Swartz will terminate permanently if:
o we, or any of our directors or executive officers, have engaged
in a transaction or conduct related to us that resulted in:
o a Securities and Exchange Commission enforcement action,
administrative proceeding or civil lawsuit; or
o a civil judgment or criminal conviction or for fraud or
misrepresentation or any other offense that, if prosecuted
criminally, would constitute a felony under applicable law;
o the aggregate number of days which this registration statement is
not effective or our common stock is not listed and traded on
Nasdaq or an exchange or quoted on the O.T.C. Bulletin Board
exceeds four months;
o we file for bankruptcy or any other proceeding for the relief of
debtors;
o we materially breach covenants contained in Section 6 or Section 9
of the Equity Line Investment Agreement; or
o if this registration statement is not declared effective by June 6
2002.
Commitment and Termination Fees
If we do not Put at least $500,000 worth of common stock to Swartz during the
first year after the effective date of this Registration Statement, and
$1,000,000 during each one year period following thereafter, we must pay Swartz
an annual non-usage fee. This fee equals the difference between $100,000 and 10%
of the value of the shares of common stock we Put to Swartz during the one year
period. The fee is due and payable on the last business day of each one year
period. Each annual non-usage fee is payable to Swartz, in cash, within five (5)
business days of the date it is accrued. We are not required to pay the annual
non-usage fee to Swartz in years we have met the Put requirements. If the Equity
Line Investment Agreement is terminated, we must pay Swartz the greater of (i)
the non-usage fee described above, or (ii) the difference between $150,000 and
10% of the value of the shares of common stock Put to Swartz during all Puts to
date. We may terminate our right to initiate further Puts or terminate the
Equity Line Investment Agreement at any time by providing Swartz with written
notice of our intention to terminate. However, any termination will not affect
any other rights or obligations we have concerning the Equity Line Investment
Agreement or any related agreement.
25
Short Sales
The Equity Line Investment Agreement prohibits Swartz and its affiliates from
engaging in short sales of our common stock unless Swartz has received a Put
notice and the amount of shares involved in the short sale does not exceed the
number of shares we specify in the Put notice.
Cancellation of Puts
A Put will be deemed cancelled if, between the date we give advance notice of an
intended Put and the date we exercise the Put,:
o we announced or implemented a stock split or combination of our
common stock;
o we paid a dividend on our common stock;
o we made a distribution of all or any portion of our assets or
evidences of indebtedness to the holders of our common stock;
o we consummated a major transaction, such as a sale of all or
substantially all of our assets or a merger or tender or exchange
offer that results in a change in control; or
o we discover an undisclosed material fact which would cause this
registration statement not to be current and effective until it is
amended or supplemented to incorporate such fact.
If any of the above events occurs during any pricing period, then the pricing
period shall be extended or shortened so that the last day of such pricing
period is the date which is ten days after we provide Swartz with notice of such
event.
Termination of Investment Agreement
We may terminate our right to initiate further Puts or terminate the Equity Line
Investment Agreement at any time by providing Swartz with written notice of our
intention to terminate. However, any termination will not affect any other
rights or obligations we have concerning the Equity Line Investment Agreement or
any related agreement.
Capital Raising Limitations
During the term of the Equity Line Investment Agreement and for a period of
ninety (90) days after the termination of the Equity Line Investment Agreement,
we are prohibited from entering into any private equity line agreements similar
to the Equity Line Investment Agreement without obtaining Swartz's prior written
approval.
The above restrictions do not apply to the following items and we may engage in
and issue securities in the following transactions without notifying or
obtaining approval from Swartz:
o in connection with acquisitions;
o upon exercise of options by employees or directors;
o in an underwritten public offering of our common stock;
o upon conversion or exercise of currently outstanding options,
warrants or other convertible securities;
26
o under any option or restricted stock plan for the benefit of
employees or directors; or
o upon the issuance of debt securities with no equity
feature for working capital purposes.
Swartz's Right of Indemnification
We have agreed to indemnify Swartz, including its owners, employees, investors
and agents, from all liability and losses resulting from any misrepresentations
or breaches by us under the Equity Line Investment Agreement, certain related
agreements including a registration rights agreement, or this registration
statement. We have also agreed to indemnify these persons for any claims based
on (i) a breach by us, or our directors or officers, of their fiduciary duties,
or (ii) a violation of Section 5 of the Securities Act caused by the integration
of the private sale of our common stock to Swartz and the public offering under
this registration statement.
Additional Securities Being Registered
On June 23, 1999, we granted an option to purchase 25,000 common shares to
Steven P. Malone in consideration for services rendered to our company. The
option expires on June 22, 2002 and the exercise price is $1.00. On June 30,
2000, we granted an additional option to Mr. Malone to purchase 100,000 common
shares at an exercise price of $1.00 per share. The option expires on June 22,
2009.
On February 1, 2000, pursuant to a consulting agreement with Investor
Communications Company to provide investor relations services, we issued 120,000
common shares with 36,000 shares vesting immediately and the remaining 84,000
shares vesting ratably over the twelve-month term of the agreement. The
cumulative value based on the closing price of the common stock on the date of
vesting was $555,363.
On February 1, 2000, pursuant to a consulting agreement with MHE, Inc., we
issued 250,000 common shares valued at $8.69 per share.
On April 20, 2000, pursuant to a consulting agreement with Business Investor
Services, Inc., we issued 50,000 common shares valued at $3.13 per share.
On April 20, 2000, we granted a warrant to purchase 100,000 common shares to
Ardt Investment Management, Inc. as compensation for a Corporate Development
Consulting Agreement. The warrant is immediately exercisable at an exercise
price of $3.00 per share. The warrant expires on April 19, 2002.
On June 16, 2000, in compromise and settlement of a consulting agreement with
Genesis Financial Group, LLC, we issued 50,000 common shares valued at $3.63 per
share. On February 19, 2001, we granted Genesis Financial Group, LLC, a warrant
to purchase 100,000 common shares as additional compromise and settlement. The
warrant is immediately exercisable at an exercise price of $.50 per share. The
warrant expires on February 18, 2008.
In July 2000, we converted 5,000 shares of Preferred Series A into 50,000 common
shares and 27,500 shares of Preferred Series B into 183,333 common shares. In
addition, we converted $3,541 unpaid accumulated Preferred Series A dividends
into 695 common shares and $51,133 unpaid accumulated Preferred Series B
dividends into 17,109 common shares.
On December 12, 2000, we granted Mr. Marcovitch, Mr. Becher, Mr. Kuehne, Dr.
Washington, and Dr. de Groote each an option to purchase 175,000 common shares
in exchange for their continued services as directors. These options expire on
December 11, 2010 and carry an exercise price of $1.03 per share.
27
On December 15, 2000, pursuant to a consulting agreement with Mr. Moskowitz for
investor relations services, we issued 12,500 common shares valued at $.81 per
share. In addition, we issued Mr. Moskowitz 12,500 common shares valued at $.45
per share on January 15, 2001; 12,500 common shares valued at $.42 per share on
February 15, 2001; 10,750 common shares valued at $.68 per share on March 15,
2001; 10,750 common shares valued at $.30 on April 16, 2001; 10,750 common
shares valued at $.27 on May 15, 2001, 10,750 common shares valued at $.23 on
June 15, 2001; and 10,750 common shares valued at $.109 on July 17, 2001.
During 2000, we issued 362,500 common shares to investors pursuant to a stock
subscription agreement dated April 28, 2000. As compensation for this
subscription agreement, we issued 22,875 common shares to Mr. Ardt and 1,500
common shares to Mr. Al-Khaiyat. We granted warrants to purchase 50,000 common
shares to certain of these investors. The warrants are immediately exercisable
at an exercise price of $2.00 per share. The warrants expire in August 2003.
On March 5, 2001, we granted an option to purchase 25,000 common shares to Kirk
R. Rowland in consideration for services rendered to our company. The option
expires on March 4, 2004 and the exercise price is $1.00 per share.
On March 7, 2001, we granted a warrant to purchase 100,000 common shares to
Membrado & Montell, LLP, in exchange for legal services rendered. The warrant is
immediately exercisable at an exercise price of $.01 per share. The warrant
expires on March 6, 2006. On May 11, 2001, we granted an additional warrant to
Membrado & Montell, LLP, to purchase 50,000 common shares. The warrant is
immediately exercisable at an exercise price of $.01 per share. The warrant
expires on May 10, 2006.
During 1999, we granted employees options to purchase an aggregate of 88,200
common shares in consideration for services rendered to our company. These
options expire periodically in the year 2002 and carry an exercise price of
$1.00 per share. During 2000, we granted employees options to purchase an
aggregate of 3,000 common shares. These options expire periodically in the year
2003 and carry an exercise price of $1.00 per share. On March 5, 2001, we
granted employees options to purchase an aggregate of 32,000 common shares in
consideration for services rendered to our company. These options expire on
March 4, 2004 and carry an exercise price of $1.00 per share.
PLAN OF DISTRIBUTION
Each selling shareholder is free to offer and sell his or her shares of our
common stock at such times, in such manner and at such prices as he or she may
determine. The types of transactions in which the shares of our common stock are
sold may include transactions in the over-the-counter market (including block
transactions), negotiated transactions, the settlement of short sales of our
common stock, or a combination of such methods of sale. The sales will be at
market prices prevailing at the time of sale or at negotiated prices. Such
transactions may or may not involve brokers or dealers. The selling shareholders
have advised us that they have not entered into agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the
28
sale of their shares. The selling shareholders do not have an underwriter or
coordinating broker acting in connection with the proposed sale of our common
stock.
The selling shareholders may sell their shares directly to purchasers or to or
through broker-dealers, which may act as agents or principals. These
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling shareholders. They may also receive compensation
from the purchasers of our common stock for whom such broker-dealers may act as
agents or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
Swartz is, and each remaining selling shareholder and any broker-dealer that
assists in the sale of our common stock may be deemed to be, an "underwriter"
within the meaning of Section 2(a)(11) of the Securities Act. Any commissions
received by such broker-dealers and any profit on the resale of the shares of
our common stock sold by them while acting as principals might be deemed to be
underwriting discounts or commissions. The selling shareholders may agree to
indemnify broker-dealers for transactions involving sales of our common stock
against certain liabilities, including liabilities arising under the Securities
Act.
Because Swartz is, and each remaining selling shareholder may be deemed to be,
an underwriter within the meaning of Section 2(a)(11) of the Securities Act, the
selling shareholders will be subject to prospectus delivery requirements.
We have informed Swartz that the anti-manipulation rules of the SEC, including
Regulation M promulgated under the Securities Exchange Act, will apply to its
sales in the market, and we have informed the other selling shareholders that
these anti-manipulation rules may apply to their sales in the market. We have
provided all of the selling shareholders with a copy of such rules and
regulations.
Regulation M may limit the timing of purchases and sales of any of the shares of
our common stock by the selling shareholders and any other person distributing
our common stock. The anti-manipulation rules under the Securities Exchange Act
may apply to sales of shares of our common stock in the market and to the
activities of the selling shareholders and their affiliates. Furthermore,
Regulation M of the Securities Exchange Act may restrict the ability of any
person engaged in the distribution of shares of our common stock to engage in
market-making activities with respect to the particular shares of common stock
being distributed for a period of up to five business days prior to the
commencement of such distribution. All of the foregoing may affect the
marketability of our common stock and the ability of any person or entity to
engage in market-making activities with respect to our common stock.
Rules 101 and 102 of Regulation M under the Securities Exchange Act, among other
things, generally prohibit certain participants in a distribution from bidding
for or purchasing for an account in which the participant has a beneficial
interest, any of the securities that are the subject of the distribution. Rule
104 of Regulation M governs bids and purchases made to stabilize the price of a
security in connection with a distribution of the security.
The selling shareholders, other than Swartz, also may resell all, or a portion,
of the common shares in open market transactions in reliance upon Rule 144 under
the Securities Act, provided they meet the criteria and conform to the
requirements of such Rule. Swartz may not rely upon Rule 144 since Swartz is an
underwriter within the meaning of Section 2(a)(11) of the Securities Act and the
safe-harbor provided by Rule 144 is not available to underwriters of our common
stock.
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Swartz and the other selling stockholders will pay all commissions, transfer
taxes and other expenses associated with their sales. The shares offered hereby
are being registered pursuant to our contractual obligations, and we have agreed
to pay the expenses of the preparation of this prospectus.
MANAGEMENT
Directors and Executive Officers
The following persons are our current directors, executive officers and
significant employees:
Our directors and executive officers and their ages as of March 31, 2001 are as
follows:
Name Age Position
Benjamin Marcovitch 65 Director and Chairman
of the Board
Jacques de Groote, Ph.D. 73 Director
Henry M. Washington, Ph.D. 53 Director
Sheldon H. Becher, CPA 72 Director
John A. Kuehne 42 Director
Steven Malone 34 President
Each director is elected to hold office until the next annual meeting of
stockholders and until his or her successor is duly elected and qualified. All
officers serve at the discretion of our Board of Directors.
Benjamin Marcovitch - Mr. Marcovitch began his career in the development,
marketing and distribution of fuel oils in Montreal. He has had broad experience
in developing and financing companies in many different industries. Mr.
Marcovitch is currently the Chairman of Tera Financial, a Nevada corporation
engaged in the business of financial investment activities, as well as Chairman
and President of Gemini Capital Partners, Ltd., a European company that conducts
financial transactions and provides funding and business expertise to its
clients and their projects. From 1994 to 1996, he was Chairman and President of
Triumph Investments, which managed investment portfolios and invested in
specialized securities. From 1996 to 1998, he was a private financial advisor
and investor.
Jacques de Groote, Ph.D. - Dr. de Groote is currently President of the Appian
Group, an international private holding company. From 1973 to 1994, Dr. de
Groote served as the Executive Director of the International Monetary Fund. From
1973 to 1991, he served as the Executive Director of the World Bank, the
International Finance Corporation (IFC), and the International Development
Corporation (IDC).
30
Henry M. Washington, Ph.D. - Dr. Washington has been Managing Director of Rilas
& Rogers, LLC, an international consulting firm located in Detroit, since 1994.
Rilas & Rogers has 23 consultants specializing in labor relations, human
resources, community and government relations services for major manufacturing
and utility firms. Dr. Washington held short-term assignments with the U.S.
Department of Commerce, where he was Executive Director of the Department's
Minority Business Opportunity Committee (MBOC). He serves on several discussion
groups including the World Bank, USAID, and the International Monetary Fund.
Sheldon H. Becher, CPA - Mr. Becher has been a partner in the accounting and
business-consulting firm of Becher, Yeager, Nall, Sherburne, Bernard & Company
in Miami for over 20 years. He served as a director of Noven Pharmaceuticals,
Inc. for over ten years until his retirement from that position in September of
2000.
John A. Kuehne, CPA - Mr. Kuehne is currently a management consultant with
Alliance Corporate Services, Inc. John has many years of experience in finance
and accounting, which includes nine years with Deloitte & Touche in Edmonton and
Chicago, and in industry, which includes over seven years with Doman Industries
Limited culminating as Chief Financial Officer. Mr. Kuehne holds a Bachelor of
Commerce degree from the University of Alberta and a Masters of management from
the highly rated J.L. Kellog Graduate School of Management at Northwestern
University. He qualified as a Canadian Chartered Accountant in 1983 and as an
American Certified Public Account in 1985.
Steven Malone - Mr. Malone has served as President of FindEx since March 2001.
Between July 2000 and March 2001, Steven was our Senior Vice President and
between June 1999 and July 2000 he was a Vice President. Mr. Malone possesses
over twelve years of experience in the computer industry, with the last seven
focused on software sales. As a National Account Manager for Grolier
Interactive, he was responsible for their largest retail and distribution
accounts. As Director of Corporate Sales for Software Publishing Corporation
(SPC), he was responsible for the ongoing sales growth of premiere corporate
products, such as Harvard Graphics, as well as the introduction of several new
products to the corporate marketplace. As Director of Sales for InfoUSA, he was
responsible for all sales and marketing of InfoUSA's products to retail,
distribution, OEM and corporate accounts.
Executive Compensation
The following table sets forth the total compensation paid to the Company's
former chief executive officer during the last three completed fiscal years and
each of the other executive officers of the Company who received compensation of
$100,000 or more during any such year. Joseph V. Szczepaniak served as the
Company's chief executive officer from May, 1999 until February 28, 2001. Steven
Malone has served as the Company's President and Chief Executive Officer since
that date. No other individuals employed by the Company received a salary and
bonus in excess of $100,000 during 2000.
Annual Long-Term
Compensation Compensation
Securities
Other Annual Underlying
Name and Principal Position Year Salary Bonus Compensation Options (#)
--------------------------- ---- ------ ----- ------------ -----------
Steven Malone, 2000 $125,000 $12,500 -0- 100,000
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President and Chief Executive 1999 $ 90,000 $20,000 -0- 25,000
Officer 1998 $-0- -0- -0- -0-
Joseph V. Szczepaniak 2000 $200,000 -0- -0- -0-
Former Chairman 1999 $200,000 -0- -0- 300,000
Chief Executive Officer 1998 $-0- -0- -0- -0-
Employment Agreement
Mr. Malone is employed pursuant to a three year employment agreement which
commenced on June 22, 2000. The agreement provides for a base annual salary
equal to $150,000 and an annual bonus at the discretion of our Board of
Directors. In the event Mr. Malone is terminated by us for anything other than
cause, we are required to pay him his then base salary until the later of (i)
the expiration of the employment agreement, and (ii) one year. Mr. Malone has
agreed to refrain from competing with us for a period of one year following the
termination of his employment.
Director Compensation
Non-officer directors are entitled to a fee of $1,000 for attendance at meetings
of the Board of Directors, plus reimbursement for reasonable travel expenses. In
addition, on December 12, 2000, the Company granted each of its director stock
options to purchase up to 175,000 shares of common stock at a price per share of
$1.03. These options are fully vested and have a term of ten years.
Information Concerning Stock Options
The following table provides information about the stock options granted to the
named executive officer during the fiscal year ended December 31, 2000. We
granted a total of 100,000 options during the fiscal year ended December 31,
2000.
Options Granted in Fiscal Year 2000
% of Total
Number of Shares Date of Options Granted
Underlying Options Option to Employees Exercise
Name Granted Grant in Fiscal Year Price Expiration Date
- ---- ------- ----- -------------- ----- ---------------
Steven Malone 100,000 6-30-00 100% $ 2.00 June 22, 2009
The following table sets forth the number of stock options held by the executive
officers named in the Summary Compensation Table as of December 31, 2000 and the
value of unexercised "in-the-money" options held which represents the positive
difference between the exercise price and the market price at fiscal year end.
No such executive exercised any options during the fiscal year 2000.
2000 Fiscal Year End Option Values
Number of Unexercised Value of Unexercised
Name Options at Fiscal Year End in-the-money Option Fiscal Year End
- ---- ------------------------ -----------------------------------
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Joseph V. Szczepaniak 300,000 -0-
Steven Malone 125,000 -0-
Stock Option Plan
Our Stock Incentive Plan (the "Plan") authorizes the issuance of various forms
of stock-based awards including incentive and nonqualified stock options, stock
appreciation rights attached to stock options, and restricted stock awards to
directors, officers and other key employees of the Company. Stock options are
granted at an exercise price as determined by the Board at the time the Option
is granted and shall not be less than the par value of such shares of common
stock. Stock options vest quarterly over three years and have a term of ten
years.
BUSINESS
Overview
FindEx.com, Inc. ("FindEx" or the "Company" and collectively referred to as
"we"," us" or "our" as required by the context) is a retail, wholesale, and
Internet (www.quickverse.com and www.parsonschurch.com) supplier of software
products to business and religious organizations and individuals. As the premier
Bible study software provider, we develop and publish church and Bible study
software products designed to simplify Biblical research, streamline church
office tasks, provide easy access to Bible-related stories and enhance the
user's understanding of the Bible. FindEx.com also offers financial information
and decision support services online through its Website,
www.findexfinancial.com. As discussed in more detail below, we have adopted a
two-part business plan related to the development and sale of religious software
products and Financial Information Products and Services.
Religious Software Business
The first step is to be the premier provider of Bible study and related products
and content to the domestic and international markets, through both acquiring
established companies and ongoing internal development of products and
Bible-related content. On June 30, 1999, we completed an exclusive licensing
agreement (the "Mattel License Agreement") with Mattel Corporation ("Mattel")
for their Parsons Church Division. In so doing, we obtained the exclusive
worldwide right to market, sell, and continue to develop several top-selling
Bible study software products including the Zondervan NIV Bible and QuickVerse
to churches or other places of worship, religious schools and religious
organizations. The Mattel License Agreement is valid for a period of ten years.
QuickVerse is currently our largest-selling product with over 1,000,000
certified copies sold.
As part of our strategy, we intend to extend our current Bible software category
into one that is more of a broad-based "inspirational" category, thereby
allowing us to broaden our existing product lines. Such an initiative might
include, for example, children's educational titles, Christian graphics
programs, Sunday school teaching aides, and inspirational commentaries and
devotionals.
In addition to the Mattel License Agreement, we also entered into a distribution
agreement with Mattel whereby we acquired the exclusive right to sell other
Mattel software titles into the Christian Bookseller Association ("CBA") market.
We also now employ the strength of The Learning Company's (formerly Mattel)
direct marketing group to market and sell our products directly to
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consumers.
Financial Information Products & Services
The second step is to build upon our existing base of financial information
products and services. We currently market Membership Plus and Membership Plus -
Church Office. Each of these products provides church database, financial
management and church productivity tools. We have sold this suite of products to
over 25,000 church and para-church ministries. As we continue to develop the
financial information and financial decision-making tools through our Findex.com
website, it has the natural base of existing users to provide a broad range of
products and services. We believe that we can rely upon a brand and affinity
group marketing strategy to extend our product lines beyond our existing core of
Bible, reference and inspirational productivity tools and into broader market
segments including fundraising, debt management and building fund decision
tools. The first step in extending our plan to accomplish this is making these
products and services available to the church and para-church ministries. The
second step will be to provide similar tools customized to the members and other
attendees of these churches.
Our Key Products
Our two most significant products are QuickVerse, a Bible study search engine
tool, and the Membership Plus product, a Windows-based financial and data
management product for churches currently used in over 25,000 churches.
QuickVerse Software
QuickVerse software simplifies Biblical research, allowing the user to view
multiple reference materials, including Bibles, dictionaries, commentaries and
encyclopedias side-by-side on the computer screen. A built-in QuickSearch
feature enables the user to highlight a word or Bible verse and find all of its
occurrences in a particular text. Advanced search options also enable users to
search by word, phrase or verse in any language across multiple books.
QuickVerse Version 7 ("QV7") is available in three CD-ROM editions: the
QuickVerse Standard Edition which includes 8 Bibles and 38 reference titles, the
QuickVerse Expanded Edition which includes 11 Bibles and 54 reference titles,
and the QuickVerse Deluxe Edition which includes 16 Bibles and 76 reference
titles. Each QuickVerse purchase includes access to various online books via the
QuickVerse(TM) Online Library, with complete access to all library titles for a
monthly fee.
In February 2000, we released QuickVerse Essentials, a new addition to the
QuickVerse Bible software family. Positioned as an affordable, entry-level
version of the original flagship QuickVerse software, Essentials includes 6
Bibles and 22 reference titles. Essentials provides the same simplified access
and personal Bible study features found in the higher-end versions, as well as
advanced search options and the ability to transfer text for word processing
applications.
Membership Plus Software
The Membership Plus church management software is designed to streamline church
office tasks and organize church membership databases. Membership Plus makes it
easier to produce targeted mailings, attendance reports and IRS-compliant
contribution receipts. It also includes financial management software designed
to give users a better understanding of church finances.
Information services are also available through our financial information
Website www.findexfinancial.com. We deliver financial information and decision
support in the areas of
34
accounting and taxes, banking information and services, insurance, investments,
and legal, regulatory and mortgage information. Each category on our Website
supplies users with information to support an informed decision through
conducting a search and/or providing access to professionals within each
category by linking to other Websites.
Other Software Products
Our other software products include:
o Bible Illustrator, which provides quick access to
thousands of Bible-related stories, quotes and anecdotes,
and various biblical language tutorials, sermons and
stories.
o Calendar Creator Christian Edition software, which allows
the user to create custom, personalized calendars for church,
classroom, and personal use. Other benefits include the
ability to view multiple calendars at once, a fully integrated
address book and the ability to select images from the
products inspirational photo collection and then complete the
calendar with Bible verses to give a spiritual touch to the
user's schedule.
o Clickart Christian Graphics Deluxe, which is a graphic program
with over 13,000 high-quality illustrative and photographic
images, fonts and alphabets. Included is PrintMaster Classic
7.0, which aids in the creation of custom logos, graphics and
easy Webpage publishing in addition to providing thousands of
professional templates and images free via the Online Art
Gallery.
Our Market
A 1999 Gallup poll found 55 percent of Americans identified themselves as
Protestant, while 28 percent identified themselves as Catholic. The number of
people who describe themselves as born-again or evangelical Christians is at an
all-time high of 47 percent. Religious retailing is a $3 billion business
according to the CBA. The 3,500-store segment has a few chains, Family Christian
Stores being the largest with 340 stores. We believe that the growth in
religious sales has been, and is currently being, driven in part by the
increased spending power of churchgoer's generally. According to the CBA, the
average Christian shopper is well-educated, aged 30 to 49 and has a net income
of more than $40,000.
As religious retailing increases, secular stores are offering more religious
products. Wal-Mart, for example, is offering more shelf space to religious
products. Moreover, 70 percent of religious books are now generally available at
chains such as Barnes and Noble. Finally, Amazon.com is credited as presently
being the largest seller of Christian books and music on the Internet.
Jupiter Communications, an Internet commerce research Company predicts the
online retail market for religious commerce will be $7 billion by 2003.
According to SOMA Communications, Inc. (a Christian broadcast market research
firm utilizing data supplied by Simmons) over 70 percent of Christians on the
Internet have an annual income in excess of $40,000 and over 30 percent of
Christians on the Internet have annual income of over $75,000. According to
Christianity Today, Inc., a publisher of Christian periodicals, when compared to
the general U.S. population, Christians are approximately 25 percent more likely
to own a computer and approximately 15 percent more likely to own a modem
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Acquisition Strategy
A major aspect of our development strategy includes the pursuit of acquisition
or other strategic growth opportunities with respect to companies in the Bible
Study, e-commerce and/or financial information marketplace. Although we have no
current intentions or plans to do so, we have not ruled out the pursuit of
transactional opportunities in areas outside of these as well.
As part of our strategy, we may acquire businesses that (i) only recently
commenced operations, or (ii) which are development-stage enterprises in need of
additional funds to expand into new products or markets, or (iii) are
established but which may be experiencing financial or operating difficulties
and need additional capital. We may also pursue opportunities to acquire assets
of other companies and establish wholly-owned subsidiaries in various businesses
or purchase existing businesses as subsidiaries.
Because acquisition and related opportunities may occur in relation to
businesses at various stages of development, the task of comparative
investigation and analysis of such business opportunities is likely to be
extremely difficult and complex. We are also likely to incur significant legal
and accounting costs in connection with our pursuit of such opportunities,
including the legal fees for preparing acquisition documentation, due diligence
investigation costs and the costs of preparing reports and filings with the
Securities and Exchange Commission.
Formation and Corporate History
We were incorporated under the laws of the State of Delaware on December 26,1995
as FinSource, Ltd. In April 1999, we merged with FINdex Acquisition Corporation,
a Delaware corporation, in a stock-for-stock transaction. Then on April 30,
1999, we were acquired by EJH Entertainment, Inc., a Nevada corporation, in a
stock-for-stock transaction and, in connection therewith, we changed our name to
FindEx.com, Inc. Pursuant to a Share Exchange Agreement dated March 7, 2000, we
acquired all of the issued and outstanding capital stock of Reagan Holdings,
Inc., a public company ("Reagan") from the shareholders of Reagan (the "Share
Exchange"). As a result of the Share Exchange, we owned 100% of the outstanding
capital stock of Reagan, Reagan became our wholly-owned subsidiary, and we
became the successor issuer to Reagan for reporting purposes under the
Securities Exchange Act of 1934.
Marketing and Sales
One of our challenges is consistently reaching the - mostly independent - 3,500
CBA stores in order to keep them informed of new releases, promotional offers,
etc. In addition to advertising in trade publications and maintaining a large
presence at CBA Trade shows and events, we believe that it is critical to see
each customer routinely in order to stay ahead of the competition. Towards that
end, we employ an in-house sales force consisting of five representatives. Our
representatives contact each of the 3,500 independent stores at least once each
calendar quarter and present them with the latest in our products and
promotions. We believe our personalized approach to marketing provides us with
an edge over our competition, which we believe rely more on advertising to reach
the CBA customers.
At secular retail, we continue to be the top seller of Bible study software and
are developing additional product offerings and promotions to grow our market
share.
36
In the direct sales market, we use the strength of The Learning Company's (TLC
and formerly Mattel) direct marketing and sales force to sell our products
directly to the consumer. TLC sends out several million catalogs, emails and
direct offerings for the Company's products annually and has a direct sales
infrastructure of telephone sales reps to handle both inbound and outbound sales
campaigns. Additionally, in 2000, over 12% of our direct sales came through our
Internet site www.quickverse.com, which is driven by TLC's www.learningco.com.
Significant Customers and Suppliers
For the years ended December 31, 2000 and 1999, sales to TLC (formerly Mattel)
and subsidiaries accounted for 41% and 69% of consolidated revenues
respectively, and sales to Navarre Corporation accounted for 14% and 0%
respectively of consolidated revenue. We expect that sales of our products to
TLC and Navarre will continue to account for a high percentage of our revenue in
the foreseeable future.
Also for the years ended December 31, 2000 and 1999, product and material
purchases from TLC accounted for 17% and 47%, respectively, purchases from
SonoPress, Inc. accounted for 3% and 14%, respectively, purchases from Cedar
Graphics, Inc. accounted for 28% and 12%, respectively, purchases from Zomax
Optical Media, Inc. accounted for 13% and 6%, respectively, and purchases from
N-Lightning Software Development, Inc. accounted for 12% and 0%, respectively,
of the total product and material purchases made by the Company.
Regulatory Environment
We are not currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally. However, due to the
rapid growth of the Internet, it is possible that additional laws and
regulations may be adopted with respect to the Internet, covering issues such as
user privacy pricing and characteristics and quality of products and services.
The adoption of any such laws or regulations may decrease the growth of the
Internet, which could in turn decrease the demand for our products and increase
our cost of doing business or cause us to modify our operations, or otherwise
have an adverse effect on our business, operating results or financial
condition.
Competition
The market for our products is rapidly evolving, particularly as a result of the
Internet and mobile computing, and is highly competitive. We face competition in
secular, CBA, direct and Internet sales. We currently or potentially compete
with a variety of companies, including Logos Research Systems, Inc., Biblesoft,
Inc., Thomas Nelson, Inc. and iExalt. Certain of our competitors have longer
operating histories, larger customer bases and greater financial, marketing,
service, support, technical and other resources than us. Moreover, we believe
that competition from new entrants will increase as the market for religious
products and services expands.
We compete in the religious software market primarily based upon the breadth and
quality of our products and service offerings. With our exclusive agreement to
market TLC products into CBA, we already offer many more titles to CBA than any
other software provider. We have the advantage of offering titles with such
brand names as American Greetings (i.e. American Greetings Spiritual
Expressions, American Greetings Sunday School Crafts and American Greetings
Scrapbooks and More). Additionally, we offer the CBA Market educational and
family titles from TLC that we believe are synergistic to its current offering
and consistent with the
37
desires of the CBA shopper. With our partnership with TLC, we can offer more
than 500 software titles to the CBA Market.
Employees
We currently have twenty-six full-time employees and four part-time employees
operating the software publishing business. In addition, we have engaged the
services of several consulting firms who are working full or part-time for the
company. We rely heavily on our current officers and directors in operating our
businesses. We are not subject to any collective bargaining agreements and
believe that our relationship with our employees is good.
Litigation
Except as provided below, we are not currently a party to any material legal
proceedings.
The Learning Company
TLC is a customer of ours which, together with its subsidiaries, accounted for
41% of our consolidated revenue in 2000. We are currently in a dispute with TLC
over amounts that we believe are owed to us by them and amounts that they assert
are owed by us to them. Depending on the outcome of mediation or arbitration in
this matter, we may be forced to restate our financials for 2000 and for 1999.
Our periodic filings with the SEC state that, as of December 31, 2000, our
accounts receivable, net of offsets, relating to TLC was $2,867,293. TLC
disputes that this amount is due to us and further contends that we owe them
approximately $1,000,000 in combined license fees and service fees. Although
mediation is ongoing, and binding arbitration is scheduled for, and is likely to
begin in, September 2001 to the extent mediation proves ineffective, there can
be no assurance as to the resolution of this dispute and any negative outcome
could have an adverse affect on our business, operations, financial condition
and prospects.
Except as provided below, we are unaware of any threatened material litigation.
Claim by LifeWay
In August 2000, LifeWay Christian Resources of the Southern Baptist Convention
("LifeWay") purchased 100,000 shares of our common stock for a total of $200,000
pursuant to certain subscription agreements which obligated us to register such
shares within 60 days of purchase. To date, the shares have not been registered.
On July 10, 2001, we received written notice from LifeWay that, unless we
honored their request for rescission by returning to them the amount of their
original investment within a very short period, they intended to file an action
for damages in Federal Court consisting of a series of claims involving alleged
violations of certain Federal and state securities laws, fraudulent inducement,
and breach of contract. Although no such action has been filed to date, and
there can be no way to predict in advance the outcome of any such action to the
extent filed, the defending of any such action would likely result in our having
to incur significant legal costs and our having to divert our management's
attention away from operational and other matters. Any finding that we are
liable to LifeWay could result in an award of money damages, the amount of which
cannot be predicted, and the payment of which in any amount could have a
material adverse effect on our business, financial condition and results of
operations.
38
Properties
Our principal executive offices are located at 11640 Arbor St, Suite 201, Omaha,
Nebraska. We sublease these corporate offices under a lease agreement with Ervin
& Smith Inc. We also lease warehouse space in La Vista, Nebraska which we use as
our distribution and fulfillment facility. We also lease office space in Cedar
Rapids, Iowa for certain sales activity.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion of our financial condition and
operations in conjunction with the consolidated financial statements and the
related notes included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of many factors, including but not limited to, those
described under "Risk Factors" and elsewhere in this prospectus.
General
FindEx.com, Inc. ("FindEx" or the "Company" and collectively referred to as
"we"," us" or "our" as required by the context) was incorporated under the laws
of the State of Delaware on December 26,1995 as FinSource, Ltd. In April 1999,
we merged with Findex Acquisition Corporation, ("FAC") a Delaware corporation in
a stock-for-stock transaction. Then, on April 30, 1999 the Company was acquired
by EJH Entertainment, Inc.("EJH") a Nevada corporation in a stock-for-stock
transaction and the name of the Company was changed to FindEx.com, Inc. Both the
merger with FAC and the acquisition by EJH were treated as reorganization
mergers with the Company.
Pursuant to a Share Exchange Agreement dated March 7, 2000, FindEx.com, Inc., a
Nevada corporation, acquired all of the issued and outstanding capital stock of
Reagan Holdings, Inc. ("Reagan") from the shareholders of Reagan in a pro rata
exchange for an aggregate of 150,000 shares of FindEx.com's common stock, par
value $0.001 per share (the "Share Exchange"). As a result of the Share
Exchange, 100% of the outstanding capital stock of Reagan is owned by FindEx.com
and Reagan became a wholly-owned subsidiary of FindEx.com. Upon effectiveness of
the Share Exchange, pursuant to Rule 12g-3(a) of the General Rules and
Regulations of the Securities and Exchange Commission, FindEx.com became the
successor issuer to Reagan for reporting purposes under the Securities Exchange
Act of 1934.
We are a retail, wholesale and Internet supplier of software products to
business and religious organizations and individuals. In July of 1999, we
completed an exclusive license agreement with Mattel Corporation for the Parsons
Church Division of Mattel. In so doing, we obtained the exclusive right to
market, sell and continue to develop several Bible study software products. We
currently develop and publish church and Bible study software products designed
to simplify biblical research, and streamline church office tasks.
Since our acquisition of the Parsons Church Division from Mattel Corporation, we
have expanded our presence in the Christian Booksellers Association (CBA)
marketplace, lost our presence in the secular retail marketplace, re-established
our presence in the secular market and expanded that presence to the point that
we now have a larger presence than before. We have been aggressively pursuing
our objective of becoming the premier provider of Bible study and
39
related products and content to the domestic and international markets through
both acquisition of established companies and ongoing internal development of
products and Bible-related content, to build upon the Company's existing
financial information products and services, and to offer additional technology,
products and services that are synergistic to the affinity group FindEx already
serves. We have developed two (2) enhanced releases of our flagship product,
QuickVerse, one (1) new product targeted mainly to the secular market,
QuickVerse Essentials, and one (1) enhanced release of our top financial
product, Membership Plus. We are currently researching new opportunities in
technology for our existing software titles and expanding our financial product
line.
Our software product sales and revenues have a significant seasonality
associated with them. More than 50% of our annual sales are expected to occur in
the five months of September through January; the five months of April through
August are expected to be the weakest generating only about 33% of our annual
sales.
Three Months Ended March 31, 2001, Compared With Three Months Ended March 31,
2000
Results of Operations
Our earnings before interest, taxes, depreciation, and amortization (EBITDA) for
the three months ended March 31, 2001 was a loss of approximately $175,500. This
loss includes non-cash expenses recorded during the period. We recognized
expenses of $18,185 relating to 35,750 common shares issued to an individual for
investor relations services, $39,501 relating to a warrant to purchase up to
100,000 shares of our common stock issued to Genesis Financial Group, LLC for
consulting services, and $36,859 relating to a warrant to purchase up to 100,000
shares of our common stock issued to a law firm in consideration of legal
services.
Revenues
Revenues from the sale of software are recognized when the product is shipped,
except in those cases where product is shipped on a consignment basis, in which
case revenues are recognized at the time of sale. Product return reserves are
based upon a percentage of total retail and direct sales for the period and may
increase or decrease as actual returns are processed. Product returns or price
protection concessions that exceed our reserves could materially adversely
affect our business and operating results and could increase the magnitude of
quarterly fluctuations in our operating and financial results. [See "Risk
Factors - Product Returns Or Price Protection Concessions That Exceed Our
Anticipated Reserves Could Result In Worse Than Expected Operating Results"] We
reproduce and distribute the Zondervan NIV Bible pursuant to a licensing
agreement with The Zondervan Corporation which provides that we will pay a
royalty fee of 10% of net sales on the stand-alone product and $8.00 per unit on
total net units of QuickVerse. The products containing the Zondervan NIV Bible,
including QuickVerse, accounted for approximately 31% of our revenues in fiscal
2000. Due to our shortage in working capital, we are significantly in arrears on
the royalty payments due under such licensing agreement. On April 5, 2001, we
received a notice from The Zondervan Corporation informing us that they are
terminating our rights under the licensing agreement. We are currently
negotiating a settlement with the Zondervan Corporation, which we believe will
allow us to continue reproducing and distributing products containing their
content. However there can be no assurance that we will be able to negotiate a
satisfactory settlement and a termination of our rights under the licensing
agreement would have a material adverse effect on our business.
40
Gross revenues decreased from $2,135,481 for the three months ended March 31,
2000 to $1,403,842 for the three months ended March 31, 2001. Gross revenues for
2000 reflect the introduction of one new title, QuickVerse Essentials. The
Company did not introduce any new titles or upgrades during the first quarter of
2001. In addition to the new title released in the first quarter of 2000, sales
would also reflect reorders resulting from the fourth quarter 1999 release of
QuickVerse version 6 and Membership Plus version 6. Sales for the first quarter
of 2001 reflect reorders from the fourth quarter 2000 release of only one title,
QuickVerse version 7 ("QV7"). In addition, due to our ongoing dispute with The
Learning Company ("TLC" and formerly Mattel Corporation) and their decision to
reduce their workforce and product lines, sales to their "direct to consumer"
division decreased from $1,128,389, or 53% of gross sales, for the three months
ended March 31, 2000, to $235,419, or 17% of gross sales, for the three months
ended March 31, 2001. Gross sales to customers other than TLC increased from
$1,007,092 for 2000 to $1,168,423 for 2001.
The provision for sales returns increased from $94,900 for the three months
ended March 31, 2000 to $203,400 for the three months ended March 31, 2001. The
Company experienced larger product returns during the first quarter of 2001 than
during the same period of 2000. Product returns are typically higher in the
secular marketplace than the Christian marketplace. As the distributors place
the products into the secular retail channel, they monitor the sell-through
rates of those products and generally return quantities of those that are not
selling as anticipated. This practice contrasts with the Christian marketplace
in that the quantities ordered are generally smaller and the retailer is willing
to hold on to the products for a longer period of time before making the
decision to return. The release of QV7 in November 2000 also increased the
quantity of returns of prior versions as stores made shelf space. With our
expanded presence in the secular retail market, we increased our provision for
anticipated returns of channel inventory at March 31, 2001 compared with the
prior year.
Cost of Sales
Cost of sales consists primarily of royalties to third party providers of
intellectual property and the direct costs and manufacturing overhead required
to reproduce and package software products. The direct costs and manufacturing
overhead remained steady increasing only slightly from 20.7% of gross revenues
in 2000 to 21.8% of gross revenues in 2001. Royalties to third party providers
of intellectual property also increased from 6.9% of gross revenues in 2000 to
9.9% of gross revenues in 2001. The primary reason for the royalty increase in
2001 stems from content additions to QV7. Several new titles were added and the
entire content of the QuickVerse Greek Edition was included as basic content of
the Deluxe version while continuing to be marketed as a separate product.
Sales, General and Administrative
Operating expenses for 2001 include approximately $94,500 in non-cash expenses
for stock and warrants issued for services. [See"Results of Operations"]
Sales expenses reflect a decrease in the provision for technical support costs
and advertising costs. The Company began providing our own technical support in
April 2001 effectively lowering the matching of future technical support costs
related to sales from the current year period. Prior to that point, the Company
operated under an agreement with The Learning Company whereby TLC provided
technical support and billed FindEx based on the monthly number of technical
support calls and emails received. It is anticipated that future technical
support costs will remain lower, on a per instance basis, than that provided by
TLC.
41
Personnel costs decreased approximately $30,000 from 2000 to 2001 primarily from
a reduction in development staff. It is anticipated that personnel costs will
increase in future periods as operating capital is available to fund full
staffing of our product development team and expansion of the technical support
and direct marketing staff. Corporate services decreased approximately $65,000
from a reduction in business consulting and valuation services contracts.
Investor services decreased approximately $41,000 from a change in service
providers. Legal costs increased approximately $105,000 from settlement of a
dispute with Genesis Financial Group, LLC, over payment for services provided
during 1999 and 2000, and from consultation provided regarding our dispute with
TLC. It is anticipated that legal costs will continue to be higher than those
recorded in the comparable prior year period until the dispute with TLC is
finally resolved.
Costs associated with acquiring Reagan Holdings, Inc. amounted to $150,000 for
the first quarter of 2000. The Company did not have any business combinations
during the first quarter of 2001. Acquisition costs are expected to continue as
we pursue our business plan for growth by acquiring companies that are
synergistic with our current product line and customer base.
Amortization decreased from $156,777 for the three months ended March 31, 2000,
to $135,076 for the three months ended March 31, 2001, due to the expiration of
a minor software license agreement on September 30, 2000.
Fiscal Year Ended December 31, 2000, Compared To Fiscal Year Ended
December 31, 1999
Results of Operations
FindEx.com was an inactive company until the acquisition of the Parsons Church
Division from Mattel Corporation in June 1999, and had no revenue and limited
expenses from January 1, 1999 through approximately mid-July, 1999. Therefore,
the results of operations for fiscal year 2000 are not comparable to the results
for the same period in 1999. Much of the discussion of results analyzes
operations solely for the twelve months ended December 31, 2000.
Our earnings before interest, taxes, depreciation, and amortization (EBITDA) for
the twelve months ended December 31, 2000 was a loss of approximately
$3,258,000. This loss, however, includes several non-cash expenses recorded
during the year. We recognized expenses of $555,363 relating to 120,000 common
shares issued to IC Capital, LLC for investor relations services, $181,250
relating to 50,000 common shares issued to Genesis Financial Group, LLC for
consulting services, $2,171,875 relating to 250,000 common shares issued to MHE,
Inc. for consulting services, and $328,571 to Business Investor Services, Inc.
relating to 100,000 shares and 100,000 warrants for consulting services. In
addition, we increased our reserve for sales returns by $150,720 and our reserve
for rebates by $92,300 to reflect higher expected future occurrences due to our
expanded presence in the secular retail marketplace.
Revenues
Revenues from the sale of software are recognized when the product is shipped,
except in those cases where product is shipped on a consignment basis, in which
case revenues are recognized at the time of sale. Product return reserves are
based upon a percentage of total retail and direct sales for the period and may
increase or decrease as actual returns are processed. Product returns or price
protection concessions that exceed our reserves could materially adversely
affect our business and operating results and could increase the magnitude of
quarterly fluctuations in our operating and financial results. [See "Risk
Factors - Product Returns Or Price Protection
42
Concessions That Exceed Our Anticipated Reserves Could Result In Worse Than
Expected Operating Results"]
Gross revenues increased from $6,802,000 for the year ended December 31, 1999 to
$7,947,000 for the year ended December 31, 2000. Sales returns and allowances
increased from $289,000 for the year ended December 31, 1999 to $792,000 for the
year ended December 31, 2000. On March 8, 2000, The Learning Company, a division
of Mattel Corporation, canceled the distribution agreement. Realizing the
importance of that marketplace to our business plan, we began the process of
establishing those relationships on our own behalf. Key distributors in the
secular market began placing orders with us on a test basis in early third
quarter and by late third quarter, they began placing significant orders in
preparation for the Christmas retail season. The full benefit of these efforts
was not realized until fourth quarter of 2000 and is continuing to expand. In
addition, Mattel Interactive, the direct sales division of Mattel Corporation,
made significant reductions in workforce and product lines. This decision on
their part resulted in significantly fewer and smaller orders during the last
three quarters of 2000. Finally, 1999 gross revenues reflect the release of our
top two titles; QuickVerse version 6.0 (QV6) in early October 1999, and
Membership Plus version 6.0 in mid November 1999. Gross revenues for 2000
reflect the introduction of one new title, QuickVerse Essentials, in the first
quarter, immediately before The Learning Company cancelled the distribution
agreement, and the release of QuickVerse version 7.0 (QV7) in mid November 2000.
The earlier release of QV6 in 1999 allowed our customers to sell down their
initial orders and place reorders in time for the Christmas season. The timing
of the release of QV7 did not provide adequate time for the initial orders to be
sold through.
The Company experienced larger product returns during the fourth quarter of 2000
than during the same period of 1999. Product returns are typically higher in the
secular marketplace than the Christian marketplace. As the distributors place
the products into the secular retail channel, they monitor the sell-through
rates of those products and generally return quantities of those that are not
selling as anticipated. This practice contrasts with the Christian marketplace
in that the quantities ordered are generally smaller and the retailer is willing
to hold on to the products for a longer period of time before making the
decision to return. The release of QV7 in November 2000 also increased the
quantity of returns of prior versions as stores made shelf space. With our
expanded presence in the secular retail market, we increased our reserve for
anticipated returns of channel inventory at December 31, 2000.
Cost of Sales
Cost of sales consists primarily of royalties to third party providers of
intellectual property and the direct costs and manufacturing overhead required
to reproduce and package software products. The direct costs and manufacturing
overhead remained steady increasing only slightly from 15.3% of gross revenues
in 1999 to 15.5% of gross revenues in 2000. Royalties to third party providers
of intellectual property also increased slightly from 11.2% of gross revenues in
1999 to 13.1% of gross revenues in 2000. The primary reason for the royalty
increase in 2000 stems from content additions to QV7. Several new titles were
added and the entire content of the QuickVerse Greek Edition was included as
basic content of the Deluxe version while continuing to be marketed as a
separate product.
Sales, General and Administrative
Operating expenses for 2000 reflect a full twelve months of operations whereas
1999 reflects only six months of activity. In addition, operating expenses for
2000 include approximately
43
$3,237,000 in non-cash expenses for stock and warrants issued for services and
approximately $243,000 in non-cash increases in reserve accounts.
Sales expenses reflect an increase in marketing efforts and travel directly
related to the establishment and expansion of our secular retail presence. Sales
expenses are expected to increase in future periods due to the continued
expansion of our sales force and marketing efforts and development of new and
enhanced products.
Research and development costs include salaries and benefits of personnel and
third parties conducting research and development of software products. Research
and development expenses increased in 2000 reflecting a full development period
for QV7. The research and development period for QV6 and Membership Plus version
6 was split between FindEx and Mattel Corporation in 1999. Research and
development expenses are expected to increase in future periods as we add new
products and versions to our product mix.
Costs associated with acquiring Reagan Holdings, Inc. amounted to $150,000 for
the year 2000 compared with costs of $86,362 in 1999 associated with the mergers
with FindEx Acquisition Corporation and EJH Entertainment, Inc. Acquisition
costs are expected to continue as we pursue our business plan for growth by
acquiring companies that are synergistic with our current product line and
customer base.
Income Tax Benefits
The Company's effective tax rate differs from the statutory federal rate due to
differences between income and expense recognition prescribed by the Internal
Revenue Code and Generally Accepted Accounting Principles. The Company utilizes
different methods and useful lives for depreciating property and equipment.
Amortization of the software license agreement is on a straight-line basis over
the ten-year term for financial reporting while deductible when paid for income
tax purposes. Changes in estimates (reserves) are recognized as expense for
financial reporting but are not deductible for income tax purposes.
The Company has recognized a net deferred tax asset whose realization depends on
generating future taxable income. We currently have net operating loss
carryforwards, for income tax purposes, of approximately $5,261,000. The
carryforwards are the result of income tax losses generated in 1996 ($50,000
expiring in 2011), 1997 ($77,000 expiring in 2012), 1998 ($54,000 expiring in
2018), and 2000 ($5,080,000 expiring in 2020). The Company will need to achieve
a minimum annual taxable income through the year 2020, before deduction of
operating loss carryforwards, of approximately $264,000 to fully utilize the
current loss carryforwards. We believe this is achievable, with our current
sales levels, through careful expense management and continued introduction of
new products and enhanced versions of our existing products. In addition, the
deductions currently taken for license agreement payments will expire within the
next year and taxable income will be greater than income for financial reporting
purposes.
Management expects the deductible temporary differences (reserves) to reverse
sometime beyond the next fiscal year, with the exception of accrued bonuses. The
future tax benefit associated with those bonuses is not expected to be realized
when paid due to the expected utilization of operating loss carryforwards.
Liquidity and Capital Resources
As of March 31, 2001, FindEx had $4,927,792 in current assets, $5,389,192 in
current liabilities
44
and a retained deficit of $2,444,489. We had a net loss of $281,207 for the
three months ended March 31, 2001. Operating expenses for the three-month period
ended March 31, 2001 included approximately $94,500 in non-cash expenses related
to stock issued for services. [See "Results of Operations"]. Positive cash flow
from operations for the period was $585.
To date, FindEx has funded its purchase of the Parsons Church Division primarily
through operations. In addition, a dispute with TLC over specific performance
provisions of and payments due on the Finished Goods Distribution Agreement has
also lead to a shortage of working capital. Discussions and negotiations are
ongoing with TLC and we believe that rapid resolution of the dispute will
provide cash flow sufficient to fund operation needs allowing equity capital to
fund product development and expansion of our business plan.
On June 6, 2001, we entered into the Equity Line Investment Agreement with
Swartz. The Equity Line Investment Agreement entitles us to issue and sell our
common stock to Swartz for up to an aggregate of $15 million from time to time
during a three-year period beginning on the date that this registration
statement is declared effective. Such sales are referred to throughout this
registration statement as "Puts". The trading volume limits the dollar amount of
each Put and a minimum period of time must occur between Puts. In order to sell
shares to Swartz, there must be an effective registration statement on file with
the SEC covering the resale of the shares by Swartz and we must meet certain
other conditions.
We have incurred recurring operating losses and positive cash flows from
operating activities and have negative working capital. We believe that our
available equity financing arrangement with Swartz will be sufficient to meet
our working capital and capital expenditure requirements for at least the next
two years. However, there can be no assurance that we will receive financing
from Swartz, that we will not require additional financing within this time
frame or that such additional financing, if needed, will be available on terms
acceptable to us, if at all.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no Related Transactions or Certain Relationships to be reported.
INTEREST OF NAMED EXPERTS AND COUNSEL
The validity of the securities being registered by this registration statement
is being passed upon for the registrant by Membrado & Montell, LLP. As of the
date of this registration statement, Membrado & Montell, LLP owned warrants to
purchase up to 150,000 shares of the registrant's common stock at a purchase
price of $0.01 per share.
MARKET INFORMATION
Our common stock is traded on the OTC Bulletin Board, a service provided by the
Nasdaq Stock Market Inc., under the symbol, "FIND". The Nasdaq Stock Market has
implemented a change in its rules requiring all companies trading securities on
the OTC Bulletin Board to become reporting companies under the Exchange Act of
1934. FindEx was required to become a reporting company by the close of business
on April 19, 2000.
45
We acquired all the outstanding shares of Reagan to become successor issuer to
it pursuant to Rule 12g-3 of the Securities Exchange Act in order to comply with
the reporting company requirements implemented by the Nasdaq Stock Market.
The following table sets forth for the periods indicated the high and low bid
prices for the common stock as reported each quarterly period within the last
two fiscal years on the OTC Bulletin Board. The prices have been adjusted to
reflect the 20-to-1 reverse split of our common stock effected in July 1999. The
prices are inter-dealer prices, do not include retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
Common Stock
1999 High Low
First Quarter -- --
Second Quarter $19.00 $4.75
Third Quarter $12.44 $5.75
Fourth Quarter $12.88 $4.38
2000 High Low
First Quarter $10.625 $5.8125
Second Quarter $7.750 $3.0000
Third Quarter $3.500 $0.9063
Fourth Quarter $1.500 $0.3750
2001 High Low
---- ---- ---
First Quarter $.680 $.156
Second Quarter $.410 $.160
On July 25, 2001, the closing bid price of our common stock was $.079 and
there were approximately 203 shareholders of record, excluding stock held in
street name.
DIVIDENDS POLICY
We have never declared cash dividends on our capital stock. We currently intend
to retain all available funds and any future earnings for use in the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of July 25, 2001, the stock ownership of each
officer and director of our company, of all our officers and directors as a
group, and of each person known by us to be a beneficial owner of five percent
or more of our common stock. Except as otherwise
46
noted, each person listed below is the sole beneficial owner of the shares and
has sole investment and voting power over such shares. Unless otherwise
indicated, the address of each names beneficial owner is the same as that of our
principal executive offices located at 11640 Arbor Street, Suite 201, Omaha,
Nebraska.
Percent of
Name Number of Shares Outstanding Common Stock
Steven Malone 125,000 (1) 0.0118
Benjamin Marcovitch 175,000 (2) 0.0165
Jacques de Groote, Ph.D. 175,000 (2) 0.0165
Henry M. Washington, Ph.D. 175,000 (2) 0.0165
Sheldon H. Becher, CPA 175,000 (2) 0.0165
John A. Kuehne 175,000 (2) 0.0165
All directors & officers as a group
(6 persons) 1,000,000 0.0947
- ------------------------------
* Less than 1%.
(1) Consists of a currently exercisable option to acquire 125,000 shares of
common stock.
(2) Consists of a currently exercisable option to acquire 175,000 shares of
common stock.
DESCRIPTION OF SECURITIES
The following summary description of our capital stock is a summary and is
qualified in its entirety by reference to our Articles of Incorporation, as
amended to date and our Bylaws. All material terms of these referenced documents
are disclosed in this document.
The Company has an authorized capitalization of 50,000,000 shares of common
stock, $.001 par value per share and 5,000,000 authorized shares of preferred
stock, $.001 par value per share. Our Articles of Incorporation authorize our
Board of Directors to direct the issuance of shares of preferred stock in one or
more series from time to time and to fix the designations, powers, preferences,
rights, qualifications, limitations and restrictions of each series of preferred
stock. These may include voting rights, dividend rates and whether dividends are
cumulative, terms and conditions of redemption or conversion, and rights upon
liquidation.
Common Stock
As of July 25, 2001, there were 10,588,359 shares of our common stock issued and
outstanding. The holders of our common stock are entitled to one non-cumulative
vote for each share held of record on all matters submitted to a vote of
shareholders. Subject to preferences that may be applicable to outstanding
shares of preferred stock, if any, the holders of common stock are entitled to
receive ratably any dividends that are declared by our Board of Directors out of
funds legally available therefor and are entitled to share ratably in all of the
assets of the Company available for distribution to holders of our common stock
upon liquidation, dissolution or winding up of the affairs of the Company.
Holders of our common stock have no preemptive, subscription or conversion
rights and there are no redemption or sinking fund provisions or rights
applicable thereto.
47
Preferred Stock
As of July 25, 2001, there were 15,000 shares of the FindEx Series A Convertible
Preferred Stock issued and outstanding at a face price of $10.00 per share. The
Series A Convertible Preferred Stock is entitled to receive a dividend of $.50
per annum per share, and no more when, as and if declared by our Board of
Directors. The Series A Convertible Preferred Stock has voting rights limited to
one vote for each share held. The Series A Convertible Preferred Stock may be
redeemed by us at any time after April 15, 2000 into fully paid and
nonassessable shares of common stock and such securities and property initially
at the rate of 10 shares of common stock for each full share of Convertible
Preferred Stock, plus an amount equal to the dividends accrued and unpaid
thereon to the conversion date.
As of July 25, 2001, there were 40,000 shares of FindEx Series B Convertible
Preferred Stock issued and outstanding at a face price of $20.00 per share. The
Series B Convertible Preferred Stock is entitled to receive a dividend of $1.60
per annum per share, and no more when, as and if declared by our Board of
Directors. The Series B Convertible Preferred Stock has voting rights limited to
one vote for each share held. The Series B Convertible Preferred Stock shall be
convertible into fully paid and nonassessable shares of common stock and such
securities and property initially at the rate of 1 share of common stock for
each full share of Convertible Preferred Stock.
The Board of Directors, without shareholder approval, may issue preferred stock
with voting and conversion rights that could materially and adversely affect the
voting power of the holders of our common stock. The issuance of preferred stock
could also decrease the amount of earnings and assets available for distribution
to holders of our common stock. In addition, the issuance of preferred stock may
have the effect of delaying or preventing a change of control of the Company. At
present, we have no plans to issue any additional shares of preferred stock.
Dividends
We have not paid any cash dividends to date, and we do not intend to declare any
cash dividends on our common shares in the foreseeable future. Payment of
dividends is solely at the discretion of our Board of Directors.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
Nevada law authorizes a Nevada corporation to indemnify its officers and
directors against claims or liabilities arising out of such person's conduct as
officers or directors if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the company
for which they serve. Our Articles of Incorporation provide for indemnification
of the directors of FindEx. In addition, our Bylaws provide for indemnification
of our directors, officers, employees or agents. In general, these provisions
provide for indemnification in instances when such persons acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of our Company.
TRANSFER AGENT
The transfer agent for FindEx common stock is Continental Stock Transfer and
Trust Company, 2 Broadway, New York, New York 10004. The Company serves as its
own transfer agent and registrar for each of the Series A and Series B
Convertible Preferred Stock.
48
LEGAL MATTERS
Membrado & Montell, LLP, New York, New York, 10001 has passed on the validity of
the common stock offered by us.
EXPERTS
The audited consolidated financial statements included in this prospectus have
been examined by Chisholm & Associates, independent certified public
accountants, and are included herein in reliance upon the report of said firm
given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities Exchange Commission a registration statement
on Form SB-2 under the Securities Act with respect to the common stock offered
hereby. This prospectus does not contain all of the information set forth in the
rules and regulations of the SEC. For further information with respect to our
company and this offering, we refer you to the registration statement and
exhibits filed as part of it. You may inspect the registration statement,
including the exhibits thereto, without charge at the Public Reference Room of
the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and
at the regional offices of the SEC located at 7 World Trade Center, 13th Floor,
New York, New York. You may also obtain copies of all or any portion of the
registration statement from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, upon payment of the
prescribed fees. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. You may also access such
material electronically by means of the SEC's home page on the Internet located
at www.sec.gov. Descriptions contained in this prospectus as to the contents of
any contract or other document filed as an exhibit to the registration statement
are not necessarily complete and each such description is qualified by reference
to such contract or document.
49
FindEx.com, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2001
December 31, 2000 (UNAUDITED)
-------------------- -------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 21,768 $ 30,392
Accounts receivable, trade
(net of allowance of $22,000 and $21,167, respectively) 3,884,858 3,575,213
Inventories 617,902 500,272
Other current assets 779,845 821,915
----------------------- -------------------
TOTAL CURRENT ASSETS 5,304,373 4,927,792
----------------------- -------------------
PROPERTY AND EQUIPMENT, net 107,126 102,047
----------------------- -------------------
OTHER ASSETS
Licenses, net 4,279,813 4,153,936
Other assets 340,005 352,919
----------------------- -------------------
TOTAL OTHER ASSETS 4,619,818 4,506,855
----------------------- -------------------
TOTAL ASSETS $ 10,031,317 $ 9,536,694
======================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,188,289 $ 1,189,086
Notes payable 749,000 749,000
Accrued royalties 1,625,427 1,762,427
Accrued income taxes 39,284 7,284
License fees payable 1,026,712 1,051,785
Other current liabilities 1,068,441 629,610
----------------------- -------------------
TOTAL CURRENT LIABILITIES 5,697,153 5,389,192
----------------------- -------------------
STOCKHOLDERS' EQUITY
Preferred stock, Series A, $.001 par value, 5,000,000
shares authorized, 15,000 shares issued and outstanding 15 15
Preferred stock, Series B, $.001 par value, 5,000,000
shares authorized, 40,000 shares issued and outstanding 40 40
Common stock, $.001 par value, 50,000,000 shares
authorized, 10,509,609 and 10,545,359 shares issued and
outstanding, respectively (Note 2) 10,509 10,545
Paid-in capital 6,486,881 6,581,391
Retained (deficit) (2,163,281) (2,444,489)
----------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 4,334,164 4,147,502
----------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,031,317 $ 9,536,694
======================= ===================
The accompanying notes are an integral part of these financial statements.
50
FindEx.com, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2000 2001
----------------------- ----------------------
REVENUES, net of reserves and allowances $ 2,040,291 $ 1,130,722
COST OF SALES 588,810 443,852
------------------------- -------------------------
GROSS PROFIT 1,451,481 686,870
OPERATING EXPENSES
Sales 172,696 148,428
eneral and administrative
G 1,014,020 713,943
------------------------- -------------------------
TOTAL OPERATING EXPENSES
1,186,716 862,371
------------------------- -------------------------
EARNINGS (LOSS) BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION
264,765 (175,501)
------------------------- -------------------------
OTHER INCOME (EXPENSES)
Interest income
1,482 6,469
Other income
1,500 2,477
Depreciation and amortization
(156,777) (135,076)
Interest expense
(13,673) (16,576)
----------------------- -------------------------
NET OTHER INCOME (EXPENSES)
(167,468) (142,706)
------------------------- -------------------------
NET INCOME (LOSS) BEFORE INCOME TAXES 97,297 (318,207)
INCOME TAXES
(41,000) 37,000
------------------------- -------------------------
NET INCOME (LOSS) $ 56,297 $ (281,207)
========================= =========================
NET EARNINGS (LOSS) PER SHARE (Note 3)
Basic
$ 0.01 $ (0.03)
========================= =========================
Diluted $ $
0.01 (0.03)
========================= =========================
WEIGHTED NUMBER OF SHARES OUTSTANDING
Basic
9,140,116 10,534,026
========================= =========================
Diluted
9,407,616 10,534,026
========================= =========================
The accompanying notes are an integral part of these financial statements.
51
FindEx.com, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2000 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 2,940,679 $ 1,306,958
Cash paid to suppliers and employees (1,968,853) (1,274,941)
Interest paid (1,423) -
Interest received 1,482 568
Income taxes paid - (32,000)
------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 971,885 585
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received in merger with Reagan Holdings, Inc. 701 -
Acquisition of property, plant and equipment (16,705) (2,034)
Deposits made - (15,000)
Cash received from software license adjustment - 25,073
Cash paid for software license agreement (1,536,375) -
------------------ ------------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (1,552,379) 8,039
------------------ ------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from issuance of notes payable 450,000 -
------------------ ----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (130,494) 8,624
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 147,272 21,768
------------------ ------------------
$ 16,777 $ 30,392
================== ==================
RECONCILIATION OF NET INCOME (LOSS) TO CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 56,297 $ (281,207)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation & amortization 156,777 135,076
Stock issued for services - 94,545
Change in assets and liabilities:
Decrease in accounts receivable 830,889 309,645
(Increase) decrease in inventories (57,645) 117,630
(Increase) decrease in prepaid expenses 11,519 (5,070)
Increase (decrease) in accounts payable (160,255) 798
52
Increase (decrease) in income taxes payable 41,000 (32,000)
(Decrease) in deferred taxes - (37,000)
Increase in accrued royalties 78,818 137,000
Increase (decrease) in other liabilities 14,485 (438,832)
------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 971,885 $ 585
================== ==================
The accompanying notes are an integral part of these financial statements.
FindEx.com, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited condensed consolidated
financial statements reflect all adjustments that, in the opinion of management,
are considered necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The accompanying
financial statements should be read in conjunction with the audited consolidated
financial statements of FindEx.com, Inc. included in our Form 10-KSB for the
fiscal year ended December 31, 2000.
NOTE 2 - STOCKHOLDERS' EQUITY
Common Stock
On January 15, 2001, pursuant to a consulting agreement with an individual to
provide investor relations services, FindEx issued 12,500 common shares valued
at $.45 per share.
On February 15, 2001, pursuant to a consulting agreement with an individual to
provide investor relations services, FindEx issued 12,500 common shares valued
at $.42 per share.
On March 15, 2001, pursuant to a consulting agreement with an individual to
provide investor relations services, FindEx issued 10,750 common shares valued
at $.68 per share.
Warrants
On February 19, 2001, in compromise and settlement of a consulting agreement,
FindEx issued warrants to purchase 100,000 common shares exercisable at $.50 per
share. The warrants are currently exercisable and expire in February 2008. The
fair value of the warrants is estimated
53
on the date of grant using the Black-Scholes option-pricing model with the same
assumptions indicated in Note 4 below. In association with the warrants, the
Company recognized $39,501 of consulting expense.
On March 7, 2001, pursuant to an agreement with a law firm to provide corporate
legal services, FindEx issued warrants to purchase 100,000 common shares
exercisable at $.01 per share. The warrants are currently exercisable and expire
in March 2006. The fair value of the warrants is estimated on the date of grant
using the Black-Scholes option-pricing model with the same assumptions indicated
in Note 4 below. In association with the warrants, the Company recognized
$36,859 of legal expense.
NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income (loss) by the
weighted average number of common shares and common stock equivalents
outstanding during the year. Common stock equivalents are the net additional
number of shares that would be issuable upon the exercise of the outstanding
common stock options (see Note 4), assuming that the Company reinvested the
proceeds to purchase additional shares at market value. A total of 1,870,450 and
588,000 potentially dilutive securities for the three months ended March 31,
2001 and 2000, respectively, have been excluded from the computation of diluted
earnings per share, as their inclusion would be anti-dilutive.
The following table shows the amounts used in computing earnings per share and
the effect on income (loss) and the average number of shares of dilutive
potential common stock:
Income (Loss) Shares Per-share
For the Three Months Ended March 31, 2000 (Numerator) (Denominator) Amount
------------------------------------------------- ---------------- ---------------- -----------
Net Income $56,297
Less preferred stock dividends --
----------------
Income available to common
stockholders-basic earnings per share 56,297 9,140,116 $.01
===========
Effect of Dilutive Securities
Options -- --
Convertible Preferred Series A -- 200,000
Convertible Preferred Series B -- 67,500
---------------- ----------------
Income available to common
stockholders-diluted earnings per share $56,297 9,407,616 $.01
================ ================ ===========
Income (Loss) Shares Per-share
For the Three Months Ended March 31, 2001 (Numerator) (Denominator) Amount
------------------------------------------------- ---------------- ---------------- -----------
Net Loss $(281,207)
Less preferred stock dividends --
----------------
Loss available to common
stockholders-basic earnings per share (281,207) 10,534,026 $(.03)
===========
Effect of Dilutive Securities
Options -- --
Convertible notes payable -- --
Convertible Preferred Series A -- --
Convertible Preferred Series B -- --
Warrants -- --
---------------- ----------------
Loss available to common
54
stockholders-diluted earnings per share $(281,207) 10,534,026 $(.03)
================ ================ ===========
NOTE 4 - STOCK-BASED COMPENSATION
The Stock Incentive Plan (the "Plan") authorizes the issuance of various forms
of stock-based awards including incentive and nonqualified stock options, stock
appreciation rights attached to stock options, and restricted stock awards to
directors, officers and other key employees of the Company. Stock options are
granted at an exercise price as determined by the Board at the time the Option
is granted and shall not be less than the par value of such shares of Common
Stock. Stock options vest quarterly over three years and have a term of ten
years. At March 31, 2001, 7,855,800 shares were available for future issuance
under the Plan.
Effective March 5, 2001, the Company decreased the exercise price of all
outstanding employee options. The value of the original stock option at the
modification date was based on the shorter of (1) its remaining original
expected life or (2) the expected life of the new option. The fair value of the
modified option at the grant date was compared with the value at the date the
old option was repurchased (immediately before its terms were modified). The
excess of the modified option over the old option repurchased is included in the
proforma amounts indicated below.
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock options. Accordingly, no compensation cost has been recognized for
outstanding stock options. Had compensation cost for the Company's outstanding
stock options been determined based on the fair value at the grant date for
those options consistent with SFAS No. 123, the Company's net loss and primary
and diluted earnings per share would have differed as reflected by the pro forma
amounts indicated below:
Net loss:
---------------------
As reported $(281,207)
Proforma $(322,386)
Basic loss per share:
--------------------
As reported $(.03)
Proforma $(.03)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Expected dividend yield 0%
Expected stock price volatility 186%
Risk-free interest rate 6.00%
The weighted average fair value of options granted during 2000 is $.54 per
share.
The following table summarizes information about stock options outstanding at
March 31, 2001.
Number Weighted-Average Weighted
Outstanding Remaining Average
at March 31, Contractual Life Exercise
Range of Exercise Prices 2001 (Years) Price
---------------------------------- -------------- ------------------ --------------
$1.00 to $2.00 1,144,200 9.8 $1.01
55
Activity under the Company's stock option plan is summarized as follows:
Outstanding Options
------------------------------------
Shares Number of Shares Weighted
Average
Available Exercise
for Grant Price
-------------- ------------------ --------------
Balance at December 31, 2000 7,638,800 1,361,200 $3.71
Granted (83,000) 83,000 $1.00
Canceled 300,000 (300,000) $11.00
Exercised -- -- --
-------------- ------------------
Balance at March 31, 2001 7,855,800 1,144,200 $1.01
============== ==================
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
The Company incurred the following non-cash investing and financing activities
during the three months ended March 31, 2001 and 2000, respectively:
2001 2000
--------------- -----------
Common stock and warrants issued for services $ 94,545 --
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of the Company.
The Company maintains a self-insurance program for its employees' health care
costs. The Company is potentially liable for losses on claims up to $10,000 per
claim and $518,500 in total for the year. The Company has third-party insurance
coverage for any losses in excess of such amounts. Self-insurance costs are
accrued based on claims reported as of the balance sheet date as well as an
estimated liability for claims incurred but not reported.
NOTE 7 - RISKS AND UNCERTAINTIES
The Company's future operating results may be affected by a number of factors.
The Company is dependent upon a number of major inventory and intellectual
property suppliers. If a critical supplier had operational problems or ceased
making material available to the Company, operations could be adversely
affected. The Company is also dependent upon a few major customers. If any of
these customers experienced operational problems or ceased placing orders with
the Company, operations could also be adversely affected.
The Company is currently in dispute with The Learning Company over various
provisions of several agreements, including the software license agreement.
Company management believes the amount of the potential loss cannot be
reasonably estimated.
NOTE 8 - GOING CONCERN
56
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has a current period operating
loss, a negative current ratio and is dependent upon financing to continue
operations. As indicated in Note 7, the Company is currently in dispute with The
Learning Company (TLC). Sales to TLC, and subsidiaries, accounted for 41% of
consolidated revenue for the year ended December 31, 2000, and 15% for the three
months ended March 31, 2001. Accounts receivable, net of offsets, relating to
TLC was $2,947,623 as of March 31, 2001. Due to the uncertainty regarding the
timing and amount of ultimate collection, the Company is dependent upon
financing to continue operations. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. It is
management's plan to utilize external funding sources to provide cash necessary
to fund ongoing operations and the Company's business plan. However, the
anticipated offering may not provide proceeds sufficient to fund operations and
meet the needs of the Company's business plans. Management believes collection
of the TLC balance and realization of ongoing revenues would be sufficient to
fund operations and allow the external funding to meet the needs of the
Company's business plans.
57
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of FindEx.com, Inc.:
We have audited the accompanying consolidated balance sheets of FindEx.com, Inc.
as of December 31, 2000 and 1999 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 FindEx.com, Inc. as
of December 31, 2000 and 1999 and the results of its operations and cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 16, the
Company has a current year operating loss, a negative current ratio and is
dependent upon financing to continue operations. These circumstances raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to those matters are also described in Note 16. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ CHISHOLM & ASSOCIATES
- --------------------------
Chisholm & Associates
Salt Lake City, Utah
March 9, 2001
58
FindEx.com, Inc.
CONSOLIDATED BALANCE SHEET
December 31, 2000
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................................... $ 21,768
Accounts receivable, less estimated doubtful accounts (Note 3) . 3,884,858
Inventories (Note 4) ........................................... 617,902
Deferred tax assets (Note 8) ................................... 504,998
Other current assets ........................................... 274,847
------------
TOTAL CURRENT ASSETS ............................... 5,304,373
------------
PROPERTY AND EQUIPMENT, net (Note 5) ......................................... 107,126
------------
OTHER ASSETS
Software licenses, net (Note 6) ................................ 4,279,813
Other assets, net .............................................. 11,444
Non-current deferred tax assets (Note 8) ....................... 328,561
------------
TOTAL OTHER ASSETS ................................. 4,619,818
------------
TOTAL ASSETS ....................................... $ 10,031,317
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................... $ 1,188,289
Notes payable (Note 7) ......................................... 749,000
Accrued royalties .............................................. 1,625,427
Income taxes payable (Note 8) .................................. 39,284
Rebates payable ................................................ 215,460
Reserve for technical support charges .......................... 224,500
Reserve for future rebates ..................................... 165,000
Reserve for sales returns ...................................... 284,752
Accrued expenses ............................................... 178,729
License fee payable (Note 6) ................................... 1,026,712
------------
TOTAL CURRENT LIABILITIES .......................... 5,697,153
------------
STOCKHOLDERS' EQUITY (Note 9)
Preferred stock, Series A, $.001 par value, 5,000,000 shares
authorized, 15,000 shares issued and outstanding ... 15
Preferred stock, Series B, $.001 par value, 5,000,000 shares
authorized, 40,000 shares issued and outstanding ... 40
Common stock, $.001 par value, 50,000,000 shares
authorized, 10,509,609 shares issued and outstanding 10,509
Paid-in capital ................................................ 6,486,881
Retained deficit ............................................... (2,163,281)
------------
TOTAL STOCKHOLDERS' EQUITY ......................... 4,334,164
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $ 10,031,317
============
The accompanying notes are an integral part of these financial statements.
59
FindEx.com, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
-----------------------------
2000 1999
----------- -----------
REVENUES, net of reserves and allowances $ 7,154,964 $ 6,513,408
COST OF SALES 2,270,144 1,800,021
----------- -----------
GROSS PROFIT 4,884,820 4,713,387
----------- -----------
OPERATING EXPENSES
Sales 1,653,232 1,039,581
General and administrative 6,489,310 1,561,529
----------- -----------
TOTAL OPERATING EXPENSES 8,142,542 2,601,110
----------- -----------
EARNINGS (LOSS) BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION (3,257,722) 2,112,277
----------- -----------
OTHER INCOME (EXPENSES)
Interest income 10,171 4,405
Other income 2,873 --
Depreciation and amortization (611,525) (285,306)
Interest expense (58,939) (4,024)
----------- -----------
NET OTHER INCOME (EXPENSES) (657,420) (284,925)
----------- -----------
NET INCOME (LOSS) BEFORE INCOME TAXES (3,915,142) 1,827,352
INCOME TAXES (Note 8) 1,561,003 (770,000)
----------- -----------
NET INCOME (LOSS) $(2,354,139) $ 1,057,352
=========== ===========
NET EARNINGS (LOSS) PER SHARE (Note 10)
Basic $ (0.24) $ 0.14
=========== ===========
Diluted $ (0.24) $ 0.13
=========== ===========
WEIGHTED NUMBER OF SHARES OUTSTANDING
Basic 9,790,868 7,785,220
=========== ===========
Diluted 9,790,868 8,052,720
=========== ===========
The accompanying notes are an integral part of these financial statements.
60
FindEx.com, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Retained
----------------- ------------------- Paid-In Earnings
Series A Series B Shares Amount Capital (Deficit) Total
------ ------- --------- ------- ------------ -------------- ------------
Balance, December 31, 1998 $ - $ - 5,157,625 $ 5,157 $ 722,620 $(811,620) $ (83,843)
April 30 Reverse merger & reorganization - - 3,914,687 3,915 (3,915) - -
adjustment for minority stockholders of EJH
Preferred series A shares issued for cash 20 - - - 199,980 - 200,000
Preferred series B shares issued for cash - 68 - - 1,349,932 - 1,350,000
Offering cost - - - - (20,000) - (20,000)
Net Income December 31, 1999 - - - - - 1,057,352 1,057,352
------ ------- --------- ------- ------------ -------------- ------------
Balance, December 31, 1999 20 68 9,072,312 9,072 2,248,617 245,732 2,503,509
Issuance of Common Stock - - 150,000 150 551 - 701
for Acquisition of Reagan Holdings, Inc.
Conversion of preferred stock (5) (28) 233,333 233 - - 200
Preferred Series A common stock dividend - - 695 1 3,496 (3,541) (44)
Preferred Series B common stock dividend - - 17,109 17 51,160 (51,333) (156)
Common stock issued for cash - - 362,500 363 724,637 - 725,000
Offering cost - - 24,375 24 (21,204) - (21,180)
Common stock issued for services - - 649,285 649 3,314,925 - 3,315,574
Common stock warrants issued for services - - - - 106,696 - 106,696
Pre-EJH debt reclassification - - - - 58,003 - 58,003
Net Loss December 31, 2000 - - - - - (2,354,139) (2,354,139)
------ ------- --------- ------- ------------ ------------ ------------
Balance, December 31, 2000 $ 15 $ 40 10,509,609 $10,509 $6,486,881 $ (2,163,281) $4,334,164
====== ======= ========== ======= ============ ============== ============
The accompanying notes are an integral part of these financial statements.
61
FindEx.com, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
------------------------
2000 1999
---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 6,704,383 $ 3,339,109
Cash paid to suppliers and employees (5,725,619) (2,780,097)
Interest paid (1,424) (4,024)
Interest received 4,827 4,405
Income taxes paid (3,272) -
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 978,895 559,393
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received in merger with Reagan Holdings, Inc. 701 -
Cash paid for notes receivable (240,000) -
Acquisition of property and equipment (35,538) (106,400)
Deposits made (250) (859)
Cash paid for software license agreement (2,073,788) (2,035,074)
Website development costs (8,343) -
---------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES (2,357,218) (2,142,333)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 549,000 200,000
Proceeds from issuance of stock 703,819 1,530,000
---------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,252,819 1,730,000
----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (125,504) 147,060
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 147,272 212
---------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,768 $ 147,272
================ ================
RECONCILIATION OF NET INCOME (LOSS) TO CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,354,139) $ 1,057,352
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation & amortization 611,525 285,306
Bad debt expense 18,024 11,000
Stock issued for services 3,422,270 -
Change in assets and liabilities:
(Increase) in accounts receivable (604,174) (3,308,332)
(Increase) in inventories (72,554) (545,348)
(Increase) in prepaid expenses (21,244) (13,603)
Increase in accounts payable 92,729 1,063,417
Increase (decrease) in income taxes payable (730,716) 770,000
Increase (decrease) in deferred taxes (833,559) -
Increase in accrued royalties 870,602 754,825
Increase in other liabilities 580,131 484,776
---------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 978,895 $ 559,393
================ ===============
The accompanying notes are an integral part of these financial statements.
62
FindEx.com, Inc.
Notes to Consolidated Financial Statements
December 31, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
FindEx.com, Inc. ("FindEx" or the "Company") was incorporated under the laws of
the State of Delaware on December 26, 1995, as FinSource, Ltd. In April 1999,
the Company merged with FINdex Acquisition Corporation (FAC), a Delaware
corporation, in a stock-for-stock transaction. On April 30, 1999, the Company
was acquired by EJH Entertainment, Inc. (EJH), a Nevada corporation, in a
stock-for-stock transaction and the name of the Company was changed to
FindEx.com, Inc. Both the merger with FAC and the acquisition by EJH were
treated as reorganization mergers with the surviving Company and accounting
history being that of FinSource (the accounting acquirer).
FindEx is a retail, wholesale and Internet supplier of software products to
business and religious organizations and individuals. In July 1999, the Company
completed an exclusive license agreement with Parsons Technology, Inc., a
subsidiary of The Learning Company (TLC), formerly Mattel (MAT) Corporation, for
the Parsons Church Division of Mattel. In so doing, FindEx obtained the
exclusive right to market, sell and continue to develop several Bible study
software products. The Company develops and publishes church and Bible study
software products designed to simplify Biblical research and streamline church
office tasks.
Accounting Method
The Company recognizes income and expenses on the accrual basis of accounting.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries after eliminations.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the accompanying notes. Significant estimates used in the consolidated financial
statements include the estimates of (i) doubtful accounts, sales returns, price
protection and rebates, (ii) provision for income taxes and realizability of the
deferred tax assets, (iii) the life and realization of identifiable intangible
assets, and (iv) provisions for obsolete inventory. The amounts FindEx will
ultimately incur or recover could differ materially from current estimates.
Concentrations
Financial instruments that potentially subject FindEx to concentrations of
credit risk consist of cash and cash equivalents and accounts receivable. FindEx
places its cash and cash equivalents at well-known, quality financial
institutions. At times, cash balances held at financial institutions
63
were in excess of federally insured limits. FindEx sells a majority of its
products to end-users through distributors, Christian book stores, and
telemarketing efforts. Although FindEx attempts to prudently manage and control
accounts receivable and performs ongoing credit evaluations in the normal course
of business, the Company generally requires no collateral on its product sales.
During the years ended December 31, 2000 and 1999, the Company had two major
customers that individually accounted for 10% or more of the annual sales. Sales
to Customer A accounted for 41% and 69%, respectively, and sales to Customer B
accounted for 14% and 0%, respectively, of consolidated revenue for the years
ended December 31, 2000 and 1999. Accounts receivable, net of offsets, relating
to Customer A and Customer B, were $2,867,293 and $426,432 as of December 31,
2000, respectively.
During the years ended December 31, 2000 and 1999, five vendors provided
purchases individually of 10% or more of the total product and material
purchases as follows: Vendor A accounted for 17% and 47%, respectively, Vendor B
accounted for 3% and 14%, respectively, Vendor C accounted for 28% and 12%,
respectively, Vendor D accounted for 13% and 6%, respectively, and Vendor E
accounted for 12% and 0%, respectively. Accounts payable relating to Vendor A,
Vendor B, Vendor C, Vendor D, and Vendor E, were $0, $101,090, $113,860,
$27,646, and $162,081, respectively, as of December 31, 2000.
Royalty Agreements
FindEx has entered into certain agreements whereby it is obligated to pay
royalties for content of software published. FindEx generally pays royalties
based on a percentage of sales on respective products or on a fee per unit sold
basis. The Company expenses software royalties as product costs during the
period in which the related revenues are recorded.
Cash and Cash Equivalents
FindEx considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Inventory
Inventory consists primarily of software media, manuals and related packaging
materials and is recorded at the lower of cost or market value, determined on a
first-in, first-out basis.
Software Development Costs
SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased,
or Otherwise Marketed, provides for the capitalization of certain software
development costs once technological feasibility is established. Capitalized
costs are then amortized on a straight-line basis over the estimated product
life, or on the ratio of current revenues to total projected product revenues,
whichever is greater. Through December 31, 2000, the Company believes its
process for developing software was essentially completed concurrent with the
establishment of technological feasibility, and accordingly, no software
development costs have been capitalized to date. For 2000, research and
development costs incurred and charged to expense were $118,600.
Property and Equipment
64
Property and equipment are recorded at cost. Furniture, fixtures and computer
equipment are depreciated over five years using the straight-line method.
Software is depreciated over three years using the straight-line method.
Expenditures for maintenance, repairs and other renewals of items are charged to
expense when incurred.
Accounting for Long-Lived Assets
The Company reviews property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability is measured by comparison of its carrying amount
to future net cash flows the assets are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair market value.
Property and equipment to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
Revenue Recognition
The Company recognizes revenue from product sales at shipment provided that
collection of the resulting receivable is probable, in accordance with SOP 97-2,
Software Revenue Recognition. Software products are sold separately, without
future performance such as upgrades or maintenance, and are sold with
postcontract customer support (PCS) services. PCS revenue is recognized on
delivery of the software and all associated costs are accrued. The Company
maintains an allowance for potential credit losses and an allowance for
anticipated returns on products sold to distributors, Christian bookstores, and
direct customers. The allowance for sales returns is estimated based on a
calculation of forecast sales to the end-user in relation to estimated current
channel inventory levels.
Cooperative Advertising
Advertising costs are charged to operations as incurred. The Company reimburses
certain qualified customers for a portion of the advertising costs related to
their promotion of the Company's products. The liability for reimbursement is
accrued at the time the advertisement occurs. For 2000 and 1999, cooperative
advertising expense totaled approximately, $206,000, and $63,000, respectively.
Stock-based Compensation
As permitted under SFAS No. 123, Accounting for Stock-based Compensation, the
Company has elected to follow the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, in accounting for stock-based awards to employees
(see Note 11) and, accordingly, does not recognize compensation cost.
Income Taxes
The Company utilizes SFAS No. 109, Accounting for Income Taxes. SFAS No. 109
requires the use of the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.
65
Earnings (Loss) Per Share
The Company follows SFAS 128, Earnings Per Share, to calculate and report basic
and diluted earnings per share (EPS). Basic EPS is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed by giving effect to all
dilutive potential common shares that were outstanding during the period. For
the Company, dilutive potential common shares consist of the incremental common
shares issuable upon the exercise of stock options and warrants for all periods,
convertible notes payable and the incremental common shares issuable upon the
conversion of convertible preferred stock.
In the case of a net loss, it is assumed that no incremental shares would be
issued because they would be anti-dilutive. In addition, certain options and
warrants are considered anti-dilutive because the exercise prices were above the
average market price during the period. Anti-dilutive shares are not included in
the computation of diluted earnings per share, in accordance with SFAS No. 128.
Diluted EPS for the year ended December 31, 1999, has been restated in
conformity with SFAS No. 128.
Comprehensive Income (Loss)
The Company has adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No.
130 establishes standards of reporting and displaying comprehensive income and
its components of net income and "other comprehensive income" in a full set of
general-purpose financial statements. "Other comprehensive income" refers to
revenues, expenses, gains and losses that are not included in net income, but
rather are recorded directly in stockholders' equity. The adoption of this
Statement had no impact on the Company's net income or loss or stockholders'
equity.
Fair Value of Financial Instruments
Unless otherwise indicated, the fair values of all reported assets and
liabilities which represent financial instruments (none of which are held for
trading purposes) approximate the carrying values of such instruments.
Reclassification
Certain amounts in the accompanying 1999 consolidated financial statements have
been reclassified in order to conform to the presentation of the 2000
consolidated financial statements. Net cash provided by operating activities
decreased from $2,915,533 to $559,393 and net cash used by investing activities
decreased from $4,498,473 to $2,142,333 as a result of separating operating
transactions previously offset against cash paid for software license agreement.
NOTE 2 - MERGERS AND ACQUISITIONS
EJH Entertainment, Inc.
On April 30, 1999, EJH Entertainment, Inc. (EJH) (a public company) entered into
an agreement and Plan of Reorganization with FindEx.com, Inc., (FindEx) (a
private company). The agreement provided for the merger of EJH into FindEx to be
treated as a reverse merger, thus making FindEx
66
the accounting survivor. Pursuant to the agreement, EJH issued 5,157,625 shares
of common stock to the shareholders of FindEx for all shares of their company.
Because the historical financial information in these financial statements prior
to the reverse merger (April 30, 1999) is that of the accounting acquirer
(FindEx), a reorganization adjustment has been shown on the books at April 30,
1999, recording the shares held by the minority shareholders of EJH. The
5,157,625 shares issued to the shareholders of FindEx have been shown
retroactively to the beginning of 1998, as though a stock split had occurred.
The management of EJH resigned and the management and Board of FindEx filled the
vacancy. This business combination was accounted for using the purchase method.
EJH had no assets or liabilities and was an inactive public company.
Reagan Holdings, Inc.
On March 7, 2000, the Company acquired Reagan Holdings, Inc., ("Reagan") a
Delaware corporation. The Company issued 150,000 shares of common stock for all
the outstanding stock of Reagan. The purchase was recorded at a value of $701.
Reagan had assets of $701 and no liabilities at December 31, 1999 and was an
inactive public company. The operating history of Reagan is included in the
consolidated numbers of the Company effective January 1, 2000. The acquisition
was recorded using the purchase method of a business combination.
NOTE 3 - ACCOUNTS RECEIVABLE
At December 31, 2000, accounts receivable consisted of the following (see Note 1
- - Concentrations):
Trade receivables $3,906,858
Less: Allowance for doubtful accounts 22,000
--------------
$3,884,858
==============
NOTE 4 - INVENTORIES
At December 31, 2000, inventories consisted of the following:
Finished goods $ 435,180
Raw materials 182,722
--------------
$ 617,902
==============
NOTE 5 - PROPERTY AND EQUIPMENT, net
At December 31, 2000, property and equipment consisted of the following:
Office furniture and fixtures $ 33,287
Office equipment 14,501
Warehouse equipment 28,923
Computer software 16,731
Computer equipment 48,496
--------------
141,938
Less: Accumulated depreciation 34,812
--------------
$107,126
==============
67
NOTE 6 - SOFTWARE LICENSE AGREEMENT
As indicated in Note 1, in July 1999, the Company completed an exclusive license
agreement with Parsons Technology, Inc., a subsidiary of The Learning Company,
for the Parsons Church Division. In so doing, FindEx obtained the exclusive
right to market, sell, and continue to develop several top-selling Bible study
software products including the Zondervan NIV Bible and QuickVerse. The
agreement calls for a non-refundable license fee in the amount of $5,000,000,
payable in installments of: (1) $1,000,000 upon execution of the agreement, (2)
$500,000 on August 1, 1999, (3) $500,000 on September 7, 1999, (4) $1,500,000 on
December 7, 1999, (5) $1,000,000 on March 7, 2000, and (6) $500,000 on June 7,
2000. The agreement carries a ten-year term from the date of execution and also
includes a five-year non-compete provision (see Note 1 - Concentrations and
Notes 15 and 16). The license is amortized over the term using the straight-line
method.
NOTE 7 - NOTES PAYABLE
At December 31, 2000, notes payable consisted of the following:
Note payable to a corporation, due December 14, 2001, with interest at 9%. $ 650,000
Unsecured.
Note payable to a corporation, due November 6, 2001, with interest at 15%.
Secured by accounts receivable and convertible, at the option of the holder,
into 50,000 common shares. 33,000
Note payable to a corporation, due November 6, 2001, with interest at 15%.
Secured by accounts receivable and convertible, at the option of the holder,
into 50,000 common shares. 33,000
Note payable to a corporation, due November 6, 2001, with interest at 15%.
Secured by accounts receivable and convertible, at the option of the holder,
into 50,000 common shares. 33,000
--------------
$ 749,000
==============
NOTE 8 - INCOME TAXES
The provision (benefit) for taxes on income for the years ended December 31
consisted of the following:
2000 1999
-------------- --------------
Current:
Federal $(3,272) $3,272
State (341) 42,897
-------------- --------------
(3,613) 46,169
-------------- ---------------
Deferred:
Federal (1,244,013) 564,731
State (313,377) 159,100
-------------- --------------
(1,557,390) 723,831
-------------- --------------
Total tax provision (benefit) $(1,561,003) $770,000
============== ==============
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income
68
tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 2000, are
as follows:
Current Deferred Tax Assets:
Net operating loss carryforward $210,000
Reserve for sales returns 119,596
Reserve for technical support costs 94,290
Reserve for rebates payable 69,300
Other, net 15,714
-------------
-------------
508,900
Valuation allowance for deferred tax assets (3,902)
-------------
-------------
Net Current Deferred Tax Assets 504,998
-------------
Non-Current Deferred Tax Assets:
Software license fees (1,356,382)
Net operating loss carryforward 1,716,391
Other, net (18,490)
-------------
-------------
341,519
Valuation allowance for deferred tax assets (12,958)
-------------
-------------
Net Non-Current Deferred Tax Assets 328,561
-------------
Net Deferred Tax Assets $833,559
=============
The valuation allowance for deferred tax assets was increased by $16,860 during
the year ended December 31, 2000.
At December 31, 2000, the Company has available net operating loss carryforwards
of approximately $5,263,000 for federal income tax purposes that expire in 2020.
The federal carryforwards resulted from losses generated in 1996 through 2000.
The tax benefit of net operating loss carryforwards available for state income
tax purposes was approximately $5,081,000 as of December 31, 2000.
The reconciliation of income tax computed at statutory rates of income tax
benefits is as follows:
Benefit at Federal statutory rate - 34% $(1,295,000)
Nondeductible expenses 2,300
Change in valuation reserves 83,000
License fees (311,000)
Other (40,303)
--------------
Income tax provision $(1,561,003)
==============
NOTE 9 - STOCKHOLDERS' EQUITY
Common Stock
On February 1, 2000, pursuant to a consulting agreement with a company to
provide investor relations services, FindEx issued 120,000 common shares with
36,000 shares vesting immediately and the remaining 84,000 shares vesting
ratably over the twelve-month term of the agreement. The cumulative value based
on the closing price of the common stock on the date of vesting was $555,363. On
November 30, 2000, FindEx entered into a fee agreement with the company to
satisfy a $75,055 debt owed under the terms on the consulting agreement. In
settlement of this debt, FindEx issued 89,285 common shares valued at $.84 per
share.
69
On February 1, 2000, pursuant to a consulting agreement with a company to
provide business development and finance, FindEx issued 250,000 common shares
valued at $8.69 per share.
On March 21, 2000, FindEx issued 150,000 common shares pursuant to the merger
with Reagan Holdings, Inc. (see Note 2).
On April 20, 2000, pursuant to a consulting agreement with a company to provide
corporate development and growth, FindEx issued 50,000 common shares valued at
$3.13 per share.
On May 16, 2000, FindEx entered into a fee agreement with a company to satisfy a
$100,000 debt owed under a business development agreement. In settlement of this
debt, FindEx issued 23,500 common shares valued at $4.26 per share.
On June 16, 2000, in compromise and settlement of a consulting agreement with a
company, FindEx issued 50,000 common shares valued at $3.63 per share. The
company has subsequently claimed that additional shares are due.
In July 2000, FindEx converted 5,000 shares of Preferred Series A into 50,000
common shares and 27,500 shares of Preferred Series B into 183,333 common
shares. In addition, FindEx converted $3,541 unpaid accumulated Preferred Series
A dividends into 695 common shares and $51,133 unpaid accumulated Preferred
Series B dividends into 17,109 common shares.
On August 18, 2000, pursuant to a consulting agreement with a company to provide
business valuation services, FindEx issued 50,000 common shares valued at $1.31
per share.
On December 15, 2000, pursuant to a consulting agreement with an individual for
investor relations services, FindEx issued 12,500 common shares valued at $.81
per share. Terms of the agreement call for monthly compensation of $2,500 plus
12,500 common shares through February 15, 2001, and $5,000 plus 7,000 common
shares thereafter until expiration on December 14, 2001, or earlier termination
as provided in the agreement.
During 2000, FindEx issued 362,500 common shares to investors for cash of
$725,000 pursuant to a stock subscription agreement dated April 28, 2000. As
compensation for this subscription agreement, FindEx issued a total of 24,375
common shares to two individuals at a value of $2.00 per share.
Convertible Preferred Stock (Series A)
The rights, preferences and privileges of the preferred shareholders are as
follows:
Dividends
Holders of Series A Preferred Stock (the Preferred Stock) are entitled to
receive common stock dividends of $.50 per share per annum, in preference to any
payment of cash dividends declared or paid on shares of common stock. Dividends
on Preferred Stock are fully cumulative and are payable as determined by the
Board of Directors. As of December 31, 2000, no dividends have been declared.
Liquidation
Holders of Preferred Stock are entitled to liquidation preferences over common
shareholders to the extent of $10.00 per share of Preferred Stock, plus all
declared but unpaid dividends. If funds are
70
sufficient to make a complete distribution to the preferred shareholders, such
shareholders will share in the distribution of the Company assets on a pro rata
basis in proportion to the aggregate preferential amounts owed each shareholder.
After payment has been made to the preferred shareholders, any remaining assets
and funds are to be distributed equally among the holders of the Common Stock
based upon the number of shares of the Common Stock held by each.
Conversion
Each share of Convertible Preferred Stock shall be convertible at the option of
the holder thereof, at any time prior to the close of business on the date fixed
by the Corporation for redemption or conversion of such shares as herein
provided, into fully paid and nonassessable shares of common stock and such
other securities and property as hereinafter provided, initially at the rate of
10 shares of common stock for each full share of convertible Preferred Stock.
Redemption
At the election of the Board of Directors, the Company may redeem all or part of
the shares of the Preferred Stock (pro rata based upon the total number of
shares of the Preferred Stock held by each holder) by paying in cash a sum per
share equal to $10.00 plus accrued and unpaid dividends per annum.
Voting Rights
The holder of each share of Preferred Stock is not entitled to vote except as
required by law.
Convertible Preferred Stock (Series B)
The rights, preferences and privileges of the preferred shareholders are as
follows:
Dividends
The holders are entitled to receive cash dividends at the rate of $1.60 per
annum per share, and not more, which shall be fully cumulative, shall accrue
without interest from the date of first issuance and shall be payable quarterly
in arrears on March 15, June 15, September 15, and December 15 of each year
commencing September 15, 1999, to holders of record as they appear on the stock
books of the corporation on such record dates, not more than 60 nor less than 10
days preceding the payment dates for such dividends, as are fixed by the Board
of Directors. As of December 31, 2000, no dividends have been declared.
Liquidation
The holders are entitled to a liquidation preference of an amount equal to the
dividends accrued and unpaid, whether or not declared, without interest, and a
sum equal to $20.00 per share, and not more, before any payment shall be made or
any assets distributed to the holders of Common Stock or any other class or
series of the Corporation's capital stock ranking junior as to liquidation
rights to the Convertible Preferred Stock.
Conversion
Each share of convertible Preferred Stock shall be convertible at the option of
the holder thereof, at any time prior to the close of business on the date fixed
by the Corporation for redemption of such share as herein provided, into fully
paid and nonassessable shares of Common Stock and such other securities and
property as hereinafter provided, initially at the rate of one (1) share of
Common Stock for each full share of Convertible Preferred Stock.
71
Redemption
Subject to restrictions, shares of the Series shall be redeemable at the option
of the Corporation at any time at the redemption price of $20.00 per share plus,
in each case, an amount equal to the dividends accrued and unpaid thereon to the
redemption date. The Corporation may not redeem any shares of Preferred Stock
unless the current market value of the Corporation's Common Stock, as defined,
immediately prior to the redemption date is not less than $18.00 per share.
Voting Rights
The holder of each share of Preferred Stock is not entitled to vote, except as
required by law.
Warrants
On April 20, 2000, pursuant to a consulting agreement with a company to provide
corporate development and growth, as mentioned above, FindEx issued warrants to
purchase 100,000 common shares exercisable at $3.00 per share. The warrants are
currently exercisable and expire in April 2001. The fair value of the warrants
is estimated on the date of grant using the Black-Scholes option-pricing model
with the same assumptions indicated in Note 11 below. In association with the
warrants, the Company recognized $106,696 of consulting expense.
NOTE 10 - EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income (loss) by the
weighted average number of common shares and common stock equivalents
outstanding during the year. Common stock equivalents are the net additional
number of shares that would be issuable upon the exercise of the outstanding
common stock options (see Note 11), assuming that the Company reinvested the
proceeds to purchase additional shares at market value.
The following table shows the amounts used in computing earnings per share and
the effect on income (loss) and the average number of shares of dilutive
potential common stock:
For the Year Ended December 31, 1999 Income (Loss) Shares Per-share
(Numerator) (Denominator) Amount
--------------------------------------------- ---------------- ------------------ ------------
Net Income $1,057,352
Less preferred stock dividends --
----------------
Income available to common
stockholders-basic earnings per share 1,057,352 7,785,220 $.14
============
Effect of Dilutive Securities
Options -- --
Convertible Preferred Series A -- 200,000
Convertible Preferred Series B -- 67,500
---------------- ------------------
Income available to common
stockholders-diluted earnings per share $1,057,352 8,052,720 $.13
================ ================== ============
Income (Loss) Shares Per-share
For the Year Ended December 31, 2000 (Numerator) (Denominator) Amount
--------------------------------------------- ---------------- ------------------ ------------
Net Loss $(2,354,139)
Less preferred stock dividends (54,874)
----------------
Loss available to common
stockholders-basic earnings per share (2,409,013) 9,790,868 $(.24)
============
Effect of Dilutive Securities
Options -- --
72
Convertible notes payable -- --
Convertible Preferred Series A -- --
Convertible Preferred Series B -- --
Warrants -- --
---------------- ------------------
Loss available to common
stockholders-diluted earnings per share $(2,409,013) 9,790,868 $(.24)
================ ================== ============
A total of 1,887,450 and 588,000 potentially dilutive securities for the years
ended December 31, 2000 and 1999, respectively, have been excluded from the
computation of diluted earnings per share, as their inclusion would be
anti-dilutive.
NOTE 11 - STOCK-BASED COMPENSATION
The Stock Incentive Plan (the "Plan") authorizes the issuance of various forms
of stock-based awards including incentive and nonqualified stock options, stock
appreciation rights attached to stock options, and restricted stock awards to
directors, officers and other key employees of the Company. Stock options are
granted at an exercise price as determined by the Board at the time the Option
is granted and shall not be less than the par value of such shares of Common
Stock. Stock options vest quarterly over three years and have a term of ten
years. At December 31, 2000, 7,638,800 shares were available for future issuance
under the Plan.
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock options. Accordingly, no compensation cost has been recognized for
outstanding stock options. Had compensation cost for the Company's outstanding
stock options been determined based on the fair value at the grant date for
those options consistent with SFAS No. 123, the Company's net loss and primary
and diluted earnings per share would have differed as reflected by the pro forma
amounts indicated below:
Net loss:
----------------------------------
As reported $(2,354,139)
Proforma $(2,607,878)
Basic loss per share:
----------------------------------
As reported $(0.24)
Proforma $(0.27)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
Expected dividend yield 0%
Expected stock price volatility 78%
Risk-free interest rate 7.00%
The weighted average fair value of options granted during 2000 is $.54 per
share.
The following table summarizes information about stock options outstanding at
December 31, 2000.
73
Weighted-Average Weighted
Remaining Average
Number Outstanding Contractual Exercise
Range of Exercise Prices at December 31, 2000 Life (Years) Price
---------------------------------- --------------------- ---------------- --------------
$1.00 to $2.00 975,000 9.8 $ 1.13
$6.00 to $8.00 60,000 8.6 $ 6.39
$8.01 to $10.00 16,200 8.8 $ 9.21
$10.01 to $12.00 310,000 8.7 $ 11.00
Activity under the Company's stock option plan is summarized as follows:
Outstanding Options
---------------------------------
Shares Number Weighted Average
Available for
Grant of Shares Exercise Price
--------------- ----------- ------------------
Balance at December 31, 1999 8,412,000 588,000 $10.47
Granted (975,000) 975,000 $1.13
Canceled 201,800 (201,800) $10.98
Exercised -- -- --
--------------- -----------
Balance at December 31, 2000 7,638,800 1,361,200 $3.71
=============== ===========
NOTE 12 - RENTAL AND LEASE INFORMATION
The Company leases office space and warehouse facilities under operating leases
with third-parties with terms extending through 2002. The Company is responsible
for all taxes, insurance and utility expenses associated with these leases.
Lease renewal options are present for a period of one year. Rental expense for
the years ended December 31, 2000 and 1999 amounted to $170,597 and $60,550,
respectively.
At December 31, 2000, the future minimum rental payments required under these
leases are as follows:
2001 $119,958
2002 73,311
------------
$193,269
============
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
The Company incurred the following non-cash investing and financing activities
during the years ended December 31, 2000 and 1999, respectively:
2000 1999
------------- -----------
Common stock and warrants issued for services $3,422,270 --
Common stock dividend 54,874 --
Conversion of preferred stock to common stock 201 --
Common stock issued to acquire Reagan Holdings,
Inc., a Delaware corporation 150 --
74
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of the Company.
The Company maintains a self-insurance program for its employees' health care
costs. The Company is potentially liable for losses on claims up to $10,000 per
claim and $518,500 in total for the year. The Company has third-party insurance
coverage for any losses in excess of such amounts. Self-insurance costs are
accrued based on claims reported as of the balance sheet date as well as an
estimated liability for claims incurred but not reported. All accrued costs had
been paid to the third-party administrator of the program at both December 31,
2000 and 1999.
NOTE 15 - RISKS AND UNCERTAINTIES
The Company's future operating results may be affected by a number of factors.
The Company is dependent upon a number of major inventory and intellectual
property suppliers. If a critical supplier had operational problems or ceased
making material available to the Company, operations could be adversely
affected. The Company is also dependent upon a few major customers. If any of
these customers experienced operational problems or ceased placing orders with
the Company, operations could also be adversely affected.
The Company is currently in dispute with The Learning Company over various
provisions of several agreements, including the software license agreement (see
Note 6). Company management believes the amount of the potential loss cannot be
reasonably estimated.
NOTE 16 - GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has a current year operating loss,
a negative current ratio and is dependent upon financing to continue operations.
As indicated in Note 15, the Company is currently in dispute with The Learning
Company (TLC). Sales to TLC, and subsidiaries, accounted for 41% of consolidated
revenue for 2000. Accounts receivable, net of offsets, relating to TLC was
$2,867,293 as of December 31, 2000. Due to the uncertainty regarding the timing
and amount of ultimate collection, the Company is dependent upon financing to
continue operations. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty. It is management's plan
to utilize external funding sources, as discussed in Note 17, to provide cash
necessary to fund ongoing operations and the Company's business plan. However,
the anticipated offering may not provide proceeds sufficient to fund operations
and meet the needs of the Company's business plans. Management believes
collection of the TLC balance and realization of ongoing revenues would be
sufficient to fund operations and allow the external funding to meet the needs
of the Company's business plans.
NOTE 17 - SUBSEQUENT EVENTS
On March 20, 2001, the Company entered into a Letter of Agreement with an
institutional private equity investor (the "Investor") whereby the Investor
shall execute an irrevocable Investment
75
Agreement for the purchase of Common Stock from FindEx up to an aggregate amount
equal to $15 million over a 36-month period. As compensation, the Investor shall
receive, upon execution of the Agreement, a warrant to purchase 510,000 shares
of FindEx Common Stock exercisable in three increments. In addition, the
Investor may be entitled to additional warrants on each six-month anniversary of
the closing depending on the number of fully diluted shares of the Company then
outstanding or issuable. The consummation of the financing contemplated by the
Letter of Agreement is subject to numerous conditions, including completion of
due diligence by the Investor, the Company's entry into definitive agreements
with the Investor, and the effectiveness with the Securities and Exchange
Commission of a registration statement covering the resale of the shares to be
issued to the Investor, and there can be no assurance that the financing will be
consummated on the term described herein, or at all.
76
TABLE OF CONTENTS
Page
Prospectus Summary........................................................6
The Offering .............................................................7
Risk Factors..............................................................9
Use of Proceeds ........................................................16
Selling Shareholders ...................................................17
Plan of Distribution ...................................................28
Management .............................................................30
Business.................................................................33
Management's Discussion and Analysis and Results of Operations ..........39
Certain Relationships and Related Transactions...........................45
Interest of Named Experts and Counsel ...................................45
Market Information.......................................................45
Dividends Policy.........................................................46
Principal Stockholders...................................................46
Description of Securities................................................47
Indemnification of Officers and Directors and Others.....................48
Transfer Agent...........................................................48
Legal Matters............................................................49
Experts..................................................................49
Additional Information...................................................49
Index to Financial Statements...........................................F-1
77
=====================================================================
29,022,168 Shares
FINDEX.COM, INC.
Common Stock
-----------
PROSPECTUS
-----------
August 1, 2001
=====================================================================
78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification Of Officers And Directors.
Pursuant to our Bylaws, we may indemnify our directors and officers under
certain circumstances against reasonable expenses (including court costs and
attorneys' fees), judgments, penalties, fines, and amounts paid in settlement
actually and reasonably incurred in connection with any action, suit or
proceeding, whether civil, criminal, administrative or investigative, to which
any of them is a party by reason of his being a director, officer, employee, or
agent of our company if it is determined that he acted in accordance with the
applicable standard of conduct set forth in such statutory provisions. Thus, the
indemnification provisions will protect officers and directors from liability
only if the officer or director meets the applicable standard of conduct and we
have the financial ability to honor the indemnity.
ITEM 25. Other Expenses Of Issuance And Distribution.
Expenses payable in connection with the registration and distribution of the
securities being registered hereunder, all of which will be borne by the
Registrant, are as follows:
Registration Fee - Securities and Exchange Commission... $ 500
Printing and Engraving.................................. $ 1,500*
Legal Fees and Expenses................................. $ 47,500*
Accounting Fees......................................... $ 47,500*
Blue Sky Fees and Expenses.............................. $ 3,000*
Total..................................................... $ 100,000*
========
* Estimated
ITEM 26. Recent Sales Of Unregistered Securities.
In April 2000, we entered into a stock subscription agreement with Business
Investor Services, Inc. and issued 362,500 common shares to twenty-nine
accredited investors under Section 506 of Regulation D. The issuance and sale of
these shares was exempt from the registration and prospectus delivery
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act of 1933, or Rule 506 of Regulation D promulgated thereunder, as a
transaction not involving any public offering.
On January 15, 2001, pursuant to a consulting agreement with an individual to
provide investor relations services, we issued 12,500 common shares valued at
$.45 per share.
On February 15, 2001, pursuant to a consulting agreement with an individual to
provide investor relations services, we issued 12,500 common shares valued at
$.42 per share.
On February 19, 2001, in compromise and settlement of a consulting agreement
with Genesis Financial Group, LLC, we issued a warrant to purchase 100,000
common shares exercisable at $.50 per share. The warrant was valued at $.40 per
share.
79
On March 7, 2001, pursuant to an agreement with a law firm to provide corporate
legal services, we issued a warrant to purchase 100,000 common shares
exercisable at $.01 per share. The warrant was valued at $.37 per share.
On March 15, 2001, pursuant to a consulting agreement with an individual to
provide investor relations services, we issued 10,750 common shares valued at
$.68 per share.
On April 15, 2001, pursuant to a consulting agreement with an individual to
provide investor relations services, we issued 10,750 common shares valued at
$.30 per share.
On May 15, 2001, pursuant to a consulting agreement with an individual to
provide investor relations services, we issued 10,750 common shares valued at
$.27 per share.
On June 15, 2001, pursuant to a consulting agreement with an individual to
provide investor relations services, we issued 10,750 common shares valued at
$.23 per share.
On July 17, 2001, pursuant to a consulting agreement with an individual to
provide investor relations services, we issued 10,750 common shares valued at
$.109 per share.
No underwriter was involved in any of the above issuances of securities. All of
the above securities were issued in reliance upon the exemptions set Forth in
Section 4(2) of the Securities Act of 1933, or Rule 506 of Regulation D
promulgated thereunder, as a transaction not involving any public offering.
ITEM 27. Exhibits.
The Exhibits to this registration statement are listed in the Exhibit Index
commencing at page EX-1 hereof.
ITEM 28. Undertakings.
The undersigned registrant hereby undertakes the following:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information in this registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this registration
statement, or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating
80
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bonafide offering
thereof.
(3) To remove from registration by means of a post-effective amendment to
this registration statement any of the securities being registered
which remain unsold at the termination of this offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the General Corporation Law of Nevada, the Articles of
Incorporation, or otherwise, the registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in such Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or person controlling the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or person controlling the registrant in connection with any
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in such Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form SB-2 and has duly caused this registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Omaha, State of Nebraska, on the date below.
Dated: July 25, 2001
FINDEX.COM, INC.
By: /s/ Steven Malone
---------------------
Steven Malone, President
81
POWER OF ATTORNEY
We, the undersigned directors and officers of FindEx.com, Inc., do hereby
constitute and appoint Steven Malone, acting individually, our true and lawful
attorney and agent, to do any and all acts and things in our name and behalf in
our capacities as directors and officers, and to execute any and all instruments
for us and in our names in the capacities indicated below, which said attorney
and agent may deem necessary or advisable to enable said corporation to comply
with the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
registration statement, including specifically, but without limitation, power
and authority to sign for us or any of us in our names and in the capacities
indicated below, any and all amendments (including post-effective amendments)
hereof; and we do hereby ratify and confirm all that the said attorney and agent
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
_/s/ Benjamin Marcovitch___ Chairman of the Board July 25, 2001
- ---------------------------
Benjamin Marcovitch
_/s/ John Kuehne__________ Director July 25, 2001
- --------------------------
John A. Kuehne
_/s/ Henry M. Washington__ Director July 25, 2001
- --------------------------
Henry M. Washington
_/s/_Sheldon H. Becher __ Director July 25, 2001
- -----------------------------
Sheldon H. Becher
_/s/_Steven P. Malone_____ President and Chief Executive Officer July 25, 2001
- --------------------------
Steven P. Malone (principal executive officer)
_/s/ Kirk R. Rowland______ Vice President of Finance July 25, 2001
- --------------------------
Kirk R. Rowland (principal financial and accounting officer)
82
EXHIBIT INDEX
FINDEX.COM, INC.
The following exhibits are included as part of this registration statement,
except those which are identified as having been previously filed with the
Securities and Exchange Commission and which are incorporated by reference to
another registration statement, report or document. References to the "Company"
in this Exhibit Index mean FINDEX.COM, INC., a Nevada corporation.
Exhibit No. Description
3.1 Articles of Incorporation of FindEx.com, Inc., incorporated by
reference to Exhibit 3.1 on Form 8-K filed March 15, 2000.
3.2 By-Laws of FindEx.com, Inc., incorporated by reference to Exhibit 3.2
on Form 8-K filed March 15, 2000.
5.1 Legal opinion of Membrado & Montell, LLP, attorneys at law
10.1 Share Exchange Agreement between FindEx.com, Inc. and the shareholders
of Reagan Holdings Inc., dated March 07, 2000, incorporated by
reference to Exhibit 2.1 on Form 8-K filed March 15, 2000.
10.2 FindEx.com, Inc. 1999 Stock Option Plan.
10.2.1 Employment Agreement between the Company and Steven Malone, dated
June 22, 2000.
10.4 Investment Agreement between FindEx.com, Inc. and Swartz Private
Equity, LLC dated June 6, 2001.
10.5 Warrant to Purchase Our Common Stock Issued in Connection With the
Investment Agreement Between FindEx.com, Inc. and Swartz.
10.6 Registration Rights Agreement issued in connection with the Investment
Agreement Between Findex.com and Swartz.
16.1 Letter regarding change in certifying accountant, incorporated by
reference to Exhibit 16.1 on Form 8-K filed March 15, 2000.
21.1 Share Exchange Agreement between FindEx.com, Inc. and the shareholders
of Reagan Holdings Inc., dated March 07, 2000, incorporated by
reference to Exhibit 2.1 on Form 8-K filed March 15, 2000.
23.1 Consent of Independent Certified Public Accountants - Chisholm &
Associates
23.2 Consent of Membrado & Montell, LLP (contained in Exhibit 5.1)
24.1 Powers of Attorney (included on the signature page to the Registration
Statement)
- ---------------------------------
83