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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from ______________to _______________.
1. Commission File Number 1-16187
THE BLUEBOOK INTERNATIONAL HOLDING COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 98-0215787
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
21098 BAKE PARKWAY, SUITE 100, LAKE FOREST, CALIFORNIA 92630-2163
(Address, including zip code, of principal executive offices)
(949) 470-9534
(Registrant's telephone number, including area code)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
The number of shares of the Registrant's Common Stock outstanding as of August
16, 2004 was 34,050,115 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
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THE BLUEBOOK INTERNATIONAL HOLDING COMPANY
QUARTERLY REPORT ON FORM 10-QSB
INDEX
Page
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements .........................................................................2
Condensed Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and
December 31, 2003..............................................................................2
Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2004 and 2003 (Unaudited).......................................................3
Condensed Consolidated Statements of Stockholders' Equity (Deficiency) for the Six Months
Ended June 30, 2004 (Unaudited)................................................................4
Condensed Consolidated Statements of Cash Flows for the Three and Six Months
Ended June 30, 2004 and 2003 (Unaudited).......................................................5
Notes to Condensed Consolidated Financial Statements (Unaudited)...............................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................................................8
ITEM 3. Controls and Procedures.......................................................................16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................................................16
ITEM 2. Changes in Securities.........................................................................16
ITEM 6. Exhibits and Reports on Form 8-K..............................................................17
Signatures............................................................................................................17
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE BLUEBOOK INTERNATIONAL HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
(unaudited)
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,728 $ 44,831
Accounts receivable, net of allowance for doubtful accounts of $4,600
as of June 30, 2004 and December 31, 2003 22,555 26,798
Prepaid expenses and other 26,008 10,000
----------- -----------
TOTAL CURRENT ASSETS 66,291 81,629
----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $169,601 and $148,546 in 2004 and 2003, respectively 77,009 98,064
----------- -----------
OTHER ASSETS
Program development costs, net of accumulated amortization
of $500,457 and $423,759, in 2004 and 2003, respectively 3,963,963 3,777,200
Intangible assets, net of accumulated amortization
of $24,464 and $19,836, in 2004 and 2003, respectively 20,258 24,885
Other assets 5,017 5,017
----------- -----------
TOTAL OTHER ASSETS 3,989,238 3,807,102
----------- -----------
TOTAL ASSETS $ 4,132,538 $ 3,986,795
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,256,178 $ 1,063,013
Note payable 120,000 --
Due to stockholders and related party 759,394 484,688
Deferred revenue 103,349 241,084
Note payable to related party 283,200 205,000
----------- -----------
TOTAL CURRENT LIABILITIES 2,522,121 1,993,785
----------- -----------
OTHER LIABILITIES
Series C Convertible Preferred Stock, $.001 par value, 5,316,704 shares
issued and outstanding, subject to mandatory redemption -- 4,544,680
----------- -----------
TOTAL OTHER LIABILITIES -- 4,544,680
----------- -----------
COMMITMENTS & CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIENCY)
Series B Convertible Preferred Stock, $.0001 par value; 5,000,000 shares
authorized, 2,050 shares issued and outstanding -- --
Common Stock, $.0001 par value; 50,000,000 shares authorized;
34,050,115 and 28,733,411 shares issued and outstanding at June 30, 2004
and December 31, 2003, respectively 3,405 2,873
Additional paid in capital 5,140,885 596,737
Accumulated deficit (3,533,873) (3,151,280)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) 1,610,417 (2,551,670)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 4,132,538 $ 3,986,795
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements
2
THE BLUEBOOK INTERNATIONAL HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
SALES, net $ 132,502 $ 205,091 $ 424,532 $ 321,729
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative expenses 344,891 616,944 686,746 1,211,969
Depreciation and amortization expenses 32,901 61,978 102,381 123,743
------------ ------------ ------------ ------------
Total Operating Expenses 377,792 678,922 789,127 1,335,712
------------ ------------ ------------ ------------
OTHER EXPENSE
Interest expense (11,202) (2,761) (17,998) (4,964)
------------ ------------ ------------ ------------
Total Other Expense (11,202) (2,761) (17,998) (4,964)
------------ ------------ ------------ ------------
NET LOSS $ (256,492) $ (476,592) $ (382,593) $ (1,018,947)
============ ============ ============ ============
Loss per share, basic and diluted $ (0.01) $ (0.02) $ (0.01) $ (0.04)
============ ============ ============ ============
Weighted average number of shares of
common stock outstanding, basic and diluted 32,180,505 28,733,411 30,456,958 28,733,411
============ ============ ============ ============
See Accompanying Notes to Condensed Consolidated Financial Statements
3
THE BLUEBOOK INTERNATIONAL HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE SIX MONTHS PERIOD ENDED JUNE 30, 2004
COMMON STOCK PREFERRED STOCK
-------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ----------------------------------------
Balance, January 1, 2003 28,733,411 $ 2,873 2,050
Net loss in 2003
------------- ------------ ---------- -----------
Balance, December 31, 2003 28,733,411 2,873 2,050 -
Conversion of Series C Preferred Stock 5,316,704 532
Net loss for the six months ended June 30, 2004
------------- ------------ ---------- -----------
------------- ------------ ---------- -----------
Balance, June 30, 2004 (unaudited) 34,050,115 $ 3,405 2,050 $ -
============= ============ ========== ===========
ADDITIONAL ACCUMULATED
PAID IN CAPITAL DEFICIT TOTAL
-----------------------------------------------------
Balance, January 1, 2003 $ 596,737 $ (1,591,151) $ (991,541)
Net loss in 2003 (1,560,129) (1,560,129)
------------------ ---------------- --------------
Balance, December 31, 2003 596,737 (3,151,280) (2,551,670)
Conversion of Series C Preferred Stock 4,544,148 4,544,680
Net loss for the six months ended June 30, 2004 (382,593) (382,593)
------------------ ---------------- --------------
------------------ ---------------- --------------
Balance, June 30, 2004 (unaudited) $ 5,140,885 $ (3,533,873) $1,610,417
================== ================ ==============
See Accompanying Notes to Condensed Consolidated Financial Statements
4
THE BLUEBOOK INTERNATIONAL HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended June 30,
2004 2003
(unaudited) (unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (382,593) $(1,018,947)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities
Depreciation and amortization 102,382 123,743
Changes in operating assets and liabilities:
Decrease in Accounts receivable 4,243 3,750
Increase in Prepaid expenses and other (16,008) (26,738)
Increase (Decrease) in Accounts payable and accrued expenses 193,165 (107,564)
Increase (Decrease) in Due to stockholders and related party 274,706 (28,177)
Increase (Decrease) in Deferred revenue (137,735) 37,407
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 38,159 (1,016,526)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment -- (56,911)
Program development costs (263,462) (385,903)
Purchase of intangible assets -- (1,500)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (263,462) (444,314)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Note payable 120,000 --
Note payable to related party 78,200 --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 198,200 --
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (27,103) (1,460,840)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 44,831 1,528,773
----------- -----------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 17,728 $ 67,933
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 17,498 $ 4,964
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements
5
THE BLUEBOOK INTERNATIONAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2004
1. BASIS OF PRESENTATION
The accompanying interim condensed financial statements are unaudited, but in
the opinion of management of The Bluebook International Holding Company
(Bluebook or the Company), contain all adjustments, which include normal
recurring adjustments, necessary to present fairly the financial position at
June 30, 2004, the results of operations for the three and six months ended June
30, 2004 and 2003, and cash flows for the three and six months ended June 30,
2004 and 2003. The balance sheet as of December 31, 2003 is derived from the
Company's audited financial statements.
Certain information and footnote disclosures normally included in financial
statements that have been prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although management of
the Company believes that the disclosures contained in these financial
statements are adequate to make the information presented therein not
misleading. For further information, refer to the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2003, as filed with the Securities and Exchange
Commission on May 19, 2004.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The results of operations for the six months ended June 30, 2004 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2004.
Recent Accounting Pronouncements
In January 2003, (as revised in December 2003) The Financial Accounting
Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", an interpretation of Accounting Research Bulletin
("ARB") No. 51, "Consolidated Financial Statements". Interpretation No. 46
addresses consolidation by business enterprises of variable interest entities,
which have one or both of the following characteristics: (i) the equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated support from other parties, which is
provided through other interest that will absorb some or all of the expected
losses of the entity; (ii) the equity investors lack one or more of the
following essential characteristics of a controlling financial interest: the
direct or indirect ability to make decisions about the entities activities
through voting rights or similar rights; or the obligation to absorb the
expected losses of the entity if they occur, which makes it possible for the
entity to finance its activities; the right to receive the expected residual
returns of the entity if they occur, which is the compensation for the risk of
absorbing the expected losses.
Interpretation No. 46, as revised, also requires expanded disclosures by
the primary beneficiary (as defined) of a variable interest entity and by an
enterprise that holds a significant variable interest in a variable interest
entity but is not the primary beneficiary.
Interpretation No. 46, as revised, applies to small business issuers no
later than the end of the first reporting period that ends after December 15,
2004. This effective date includes those entities to which Interpretation 46 had
previously been applied. However, prior to the required application of
Interpretation No. 46, a public entity that is a small business issuer shall
apply Interpretation 46 or this Interpretation to those entities that are
considered to be special-purpose entities no later than as of the end of the
first reporting period that ends after December 15, 2003.
Interpretation No. 46 may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
In December 2002, the Financial Accounting Standards Board issued
Statement No. 148, "Accounting for Stock-Based Compensation-Transaction and
Disclosure - an amendment of FASB Statement No. 123," ("SFAS 148"). SFAS 148
amends FASB Statement No. 123, "Accounting for Stock Based compensation" ("SFAS
123") and provides alternative methods for accounting for a change by
registrants to the fair value method of accounting for stock-based compensation.
Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require
disclosure in the significant accounting policy footnote of both annual and
interim financial statements of the method of accounting for stock based
compensation and the related pro forma disclosures when the intrinsic value
method continues to be used. The statement is effective for fiscal years
beginning after December 15, 2002, and disclosures are effective for the first
fiscal quarter beginning after December 15, 2002. The Company believes the
adoption of this Statement will have no material impact on its financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies under what circumstances a contract with initial investments meets the
characteristics of a derivative and when a derivative contains a financing
component. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The Company does not expect that the adoption of SFAS No.
149 will have a significant effect on the Company's financial statement
presentation or disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 requires that an
issuer classify a financial instrument that is within its scope as a liability
(or an asset in some circumstances) because that financial instrument embodies
an obligation of the issuer. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. SFAS No.
150 is to be implemented by reporting the cumulative effect of a change in
accounting principle for financial instruments created before the issuance date
of SFAS No. 150 and still existing at the beginning of the interim period of
adoption. Restatement is not permitted. The Company does not expect that the
adoption of SFAS No. 150 will have a significant effect on the Company's
financial statement presentation or disclosures.
2. BUSINESS ACTIVITY
The Company was incorporated in Delaware on December 17, 1997. Since the
Company's exchange reorganization and merger, effective as of October 1, 2001,
the principal business of the Company has been developing and selling THE
BLUEBOOK and B.E.S.T. software solutions. THE BLUEBOOK is a book in the form of
both a desk and pocket size book containing the information of the average unit
costs attendant to the cleaning, reconstruction and repair industries. B.E.S.T.
is a software format of THE BLUEBOOK which allows subscribers the option to
retrieve THE BLUEBOOK data and calculate the cost to clean, reconstruct or
repair, then file claims electronically.
The Company has recently completed its development of the InsureBase and Insured
to Value Solutions. These systems are designed to assist the insurance carrier
in calculating premiums for homeowners insurance and identifying and verifying
premiums with existing policyholders for residential properties located in the
United States and Canada. The Company recently began its marketing of these
solutions and has recently sold its first contract of InsureBase. The company is
also working with many other prospects.
Although the development of the Company's B.E.S.T.Net solution is substantially
complete, the Company is currently working on the completion of B.E.S.T.Central
and the tie-in or interface between B.E.S.T.Net and B.E.S.T.Central as well as
the integration of B.E.S.T.7. into B.E.S.T.Central.
6
3. LOSS PER COMMON SHARE
Basic loss per share is calculated by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding during
the year. Diluted loss per share is calculated assuming the issuance of common
shares, if dilutive, resulting from the exercise of stock options and warrants.
As the Company has no outstanding options or warrants, basic and diluted loss
per share are the same for the periods ended June 30, 2004 and 2003.
4. NOTE PAYABLE
On March 31, 2004, the Company entered into a loan agreement for $120,000. The
loan bears interest at the rate of 10% per annum, and is due on April 1, 2005.
Interest is payable on the first of each month. The loan is secured by the
Company's accounts receivable, tax refunds, deposit accounts, and cash and cash
equivalents. If this collateral is insufficient to secure the loan, the loan is
also secured by the shares of the Company's common stock held by the Company's
chief executive officer, Mark A. Josipovich. The loan is subject to certain
preservation of corporate status covenants which the Company was in compliance
with as of June 30, 2004.
5. CAPITAL STOCK
Pursuant to the Settlement Agreement with Cotelligent, on May 6, 2004, the
Company issued 5,316,704 unregistered shares of Common Stock and cancelled
5,316,704 shares of Series C Convertible Redeemable Preferred Stock. As a result
of this conversion, the Company's stockholders' deficiency was reduced by
$4,544,680.
6. RELATED PARTY TRANSACTIONS
The amount due to stockholders and related parties was $759,394 as of June 30,
2004 and $484,688 as of December 31, 2003. The amount due to stockholders as of
June 30, 2004 consists of accrued salaries and consulting fees payable to our
president and chief executive officer, Mark Josipovich, our chief operating
officer, Dan Josipovich, and relatives of the president and chief operating
officer of the Company. Note payable in the amount of $283,200 as of June 30,
2004 is due to a related party and is secured by all the assets of the Company,
bears an interest rate of 8% and is due on January 15, 2005. During the six
months ended June 30, 2004, the Company incurred consulting fees of $75,000 that
were accrued to a relative of the president and chief operating officer of the
Company.
7. CONTINGENCIES
Litigation
As a general matter, the Company is subject to various legal proceedings,
claims, and litigation that arise in the normal course of its business. While
the outcome of these matters is currently not determinable, the Company does not
expect that the ultimate costs to resolve these matters will have a material
adverse effect on its financial position, results of operations, or cash flows.
On February 3, 2003, the Company was named as a defendant in Morris Diamond, et
al. v. The Bluebook International Holding Company, New York Supreme Court,
Monroe County Case No. 1204/03. In the Diamond case, plaintiffs allege that the
Company wrongfully withheld the issuance and delivery of plaintiffs' Company
shares, thereby damaging plaintiffs in the loss of the value of their Company
stock. The Company has no record of any stock ownership for one of the
plaintiffs and, pending discovery, disputes that there is any basis for any
claim against the Company. The Company does not dispute the stock ownership of
the other plaintiffs. After the other plaintiffs presented the Company with lost
stock certificates and representation letters, the other plaintiffs' shares were
reissued to them. The Company is in settlement discussions with all plaintiffs
but will defend this suit fully if it proceeds.
8. GOING CONCERN
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern. However, the Company
had a net loss from operations of $382,593 for the six months ended June 30,
2004 and had a net working capital deficiency of $2,455,830 as of June 30, 2004.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Without realization of additional capital or debt, it would be
unlikely for the Company to continue as a going concern. These financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts, or amounts and classification of
liabilities that might result from this uncertainty.
7
The Company has incurred negative cash flow from operations in recent years. As
of June 30, 2004 the Company had cash of $17,728 and an accumulated deficit of
$3,533,873. The Company's 2004 cash flows were funded primarily through
operations, loans from majority stockholders and cash existing at December 31,
2003. The Company believes it will have sufficient cash to meet its immediate
working capital requirements through December 31, 2004, while additional
operations and development funds are sought from loans from officers or
principal stockholders of the company, third party financing and further
reducing overhead relating to software solutions now finished in development.
The Company has recently taken steps to improve liquidity, including obtaining
additional funding (see Note 9), reduction of its workforce and deferment of a
portion of its Chief Executive Officer's and Chief Operating Officer's salaries.
If it is not successful in raising additional capital, it will further reduce
operating expenses through headcount reductions in restructurings and modify its
business model and strategy to accommodate licensing of its technology and
databases. Further, the Company would continue sales of THE BLUEBOOK and
B.E.S.T. software solutions and recently released InsureBase and Insured to
Value software solutions. The Company does not expect any significant impact on
its sales of THE BLUEBOOK, B.E.S.T.7 and InsureBase software solutions from such
restructurings; however, they may adversely affect the development of any new
software solutions.
9. SUBSEQUENT EVENTS
On August 13, 2004, the Company received $427,500 in financing from an investor.
The Company issued a convertible promissory note to the investor in exchange for
the $427,500. The note has a term of one year, bears interest of 10% per annum
and is convertible into common stock of the Company during the five-day period
(but not at any other time) following the purchase of common stock of the
Company by an institutional investor. The number of shares into which the note
may be converted shall be determined by dividing the total amount of
indebtedness on the note as of the date of conversion by the price per share at
which the institutional investor purchases shares of the Company's common stock.
On July 15, 2004, the Company entered into a loan agreement with a related party
in the amount of $30,000 due July 15, 2005 which may be extended at the sole
discretion of the lender and is secured by 200,000 shares of the Company's
common stock. The lender agrees that if at any time prior to the term of this
agreement, or at any time after if extended by the lender, the stock price
reaches $1.00 per share for a period of 30 days, the lender shall offer to the
Company the first right of refusal to purchase all said shares, however, at no
point shall this price be less than $1.00 per share. If after this condition is
met plus 30 days, the lender elects to keep said shares, this loan agreement
will become satisfied and paid in full. In the event the shares of the Company
do not meet $1.00 per share within one year from the effective date of this
agreement, the lender shall be entitle to receive the payment of $30,000 and
keep the number of shares as may be owned by the lender at such time.
There is a pending settlement of outstanding legal costs of approximately
$399,000 in exchange for 1,995,974 shares within 30 days of their request and an
additional 399,195 shares upon closing of the agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Quarterly Report on Form 10-QSB (Quarterly Report) contains forward-looking
statements. These forward-looking statements include predictions regarding our
future:
o revenues and profits;
o customers;
o strategic partners;
o research and development expenses;
o sales and marketing expenses;
o general and administrative expenses;
o liquidity and sufficiency of existing cash;
8
o technology, products and software solutions;
o the outcome of pending or threatened litigation; and
o the effect of recent accounting pronouncements on our financial
condition and results of operations.
You can identify these and other forward-looking statements by the use of words
such as "may," "expects," "anticipates," "believes," "estimates," or the
negative of such terms, or other comparable terminology. Forward-looking
statements also include the assumptions underlying or relating to any of the
foregoing statements.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth below under the heading "Risk Factors." All forward-looking statements
included in this document are based on information available to us on the date
hereof. We assume no obligation to update any forward-looking statements.
The following information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and notes thereto included in Item 1 of this
Quarterly Report, and with Management's Discussion and Analysis and the
Consolidated Financial Statements and notes thereto contained in our Annual
Report on Form 10-KSB filed with the SEC on May 19, 2004.
RESULTS OF OPERATION
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Revenues. Our revenues are derived primarily from sales of our B.E.S.T.
software solutions and THE BLUEBOOK. Net revenues for the three months ended
June 30, 2004 decreased by $72,589 or 35% to $132,502 compared with net revenues
of $205,091 for the three months ended June 30, 2003. The decrease in revenue
resulted from the company having limited cash to spend on marketing. We expect
revenue to increase in the third quarter as we commence sales on our InsureBase
and Insured to Value solutions and continue sales of THE BLUEBOOK and our
B.E.S.T. software solution.
Operating Expenses. Selling, general and administrative expenses decreased
by $272,053 or 44% to $344,891 for the three months ended June 30, 2004 compared
to $616,944 for the three months ended June 30, 2003. This decrease is due
primarily to reduction of workforce, decrease in legal and accounting fees, and
other professional expenses associated with the development and marketing of new
software, preparation of business plan, litigation and our reporting
obligations. We expect selling, general and administrative expenses to increase
in the near future.
Depreciation and Amortization. Depreciation and amortization for the three
months ended June 30, 2004 decreased by $29,077 or 47% to $32,901 compared to
$61,978 for the three months ended June 30, 2003. This decrease was primarily
due to some of the assets were fully amortized in the first quarter 2004.
Interest expense. Interest expense for the three months ended June 30,
2004 increased by $8,441 to $11,202 compared to $2,761 for the three months
ended June 30, 2003. This increase was primarily due to interest on Note payable
to related party.
Net Loss. For the three months ended June 30, 2004, we had a net loss of
$256,492 or $0.01 per share, compared with a net loss of $476,592 or $0.02 per
share for the three months ended June 30, 2003. The decrease in net loss for the
three months ended June 30, 2004 is primarily attributable to the decreased
selling, general and administrative expenses and depreciation and amortization
expenses.
9
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Revenues. Our revenues are derived primarily from sales of our B.E.S.T.
software solutions and THE BLUEBOOK. Net revenues for the six months ended June
30, 2004 increased by $102,803 or 32% to $424,532 compared with net revenues of
$321,729 for the six months ended June 30, 2003. Included in revenue for the six
month period ended June 30, 2004 was $222,761 resulting from change in estimate
for the estimated sales life of B.E.S.T.7. Without the change in estimate,
revenue would have decreased by $47,369. The decrease in revenue resulted from
the company having limited cash to spend on marketing. We expect revenue to
increase in the third quarter as we commence sales on our InsureBase and Insured
to Value solutions and continue sales of THE BLUEBOOK and our B.E.S.T. software
solution.
Operating Expenses. Selling, general and administrative expenses decreased
by $525,223 or 43% to $686,746 for the six months ended June 30, 2004 compared
to $1,211,969 for the six months ended June 30, 2003. This decrease is due
primarily to reduction of workforce, decrease in legal and accounting fees, and
other professional expenses associated with the development and marketing of new
software, preparation of business plan, litigation and our reporting
obligations. We expect selling, general and administrative expenses to increase
in the near future.
Depreciation and Amortization. Depreciation and amortization for the six
months ended June 30, 2004 decreased by $21,362 or 17% to $102,381 compared to
$123,743 for the six months ended June 30, 2003. This increase was primarily due
to amortization of B.E.S.T.7 program development costs.
Interest expense. Interest expense for the six months ended June 30, 2004
increased by $13,034 to $17,998 compared to $4,964 for the six months ended June
30, 2003. This increase was primarily due to interest on Note payable to related
party.
Net Loss. For the six months ended June 30, 2004, we had a net loss of
$382,593 or $0.01 per share, compared with a net loss of $1,018,947 or $0.04 per
share for the six months ended June 30, 2003. The decrease in net loss for the
six months ended June 30, 2004 is primarily attributable to the increased sales
and decreased selling, general and administrative expenses and depreciation and
amortization.
LIQUIDITY AND CAPITAL RESOURCES
Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. We have incurred negative cash flow from
operations in recent years. As of June 30, 2004, we had cash of $17,728, net
working capital deficiency of $2.4 million and an accumulated deficit of $3.5
million. These factors raise substantial doubt about our ability to continue as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Our 2004 operations and investment activities have been funded primarily
through sales, loan from a related party and cash existing at December 31, 2003.
We have no material commitments for capital expenditures as of June 30, 2004. We
believe that the majority stockholders and their affiliates will be able to
supply funding sufficient for us to operate through fourth quarter 2004.
As a result of the delays in releasing B.E.S.T.Net and B.E.S.T.Central,
revenues from sales of those products and services have been delayed. We believe
that we have sufficient cash to fund our operations through the fourth quarter
of 2004, excluding costs associated with outside vendors to complete the
development of B.E.S.T.Net and B.E.S.T.Central of approximately $125,000. We are
actively seeking to raise additional capital through sales of equity or debt
securities and are optimistic that we will be able to obtain such funding.
However, if we are not successful in raising sufficient additional working
capital, we can reduce operating expenses through reductions in sales and
development personnel and other steps to restructure our operations. Although we
do not expect to incur significant adverse impact on sales and development of
our current products and services from such cost reductions, our development of
additional products and services would likely be adversely affected or suspended
altogether.
10
Our business plan projects positive cash flow from operations and positive
net earnings in fiscal year 2004. If we meet our current development and sales
efforts of InsureBASE, B.E.S.T.Net and B.E.S.T.Central, or if we meet our
projected sales targets of B.E.S.T. and Insure to Value, we believe we will have
sufficient working capital from these sales to fund operations going forward. If
these sales are delayed or fall short of our expectations, we will need to raise
additional capital to meet this shortfall, reduce the number of employees
dedicated to marketing and product development or make other operating cost
reductions. We believe we can remain in operations and cut operating costs;
however, the B.E.S.T.Net, B.E.S.T.Central and future products and marketing
efforts would be adversely affected.
Net cash provided from operating activities was $38,159 during the six
months ended June 30, 2004 and net cash used for operating activities was
$1,016,526 for the same period in 2003. This increase in net cash from operating
activities was primarily due to increase in revenue, decrease in legal and
accounting expenses and decrease in salary expenses.
Net cash flows used in investing activities was $263,462 for the six
months ended June 30, 2004 and $444,314 for the same period in 2003. The
decrease in cash used for investing activities was primarily due to completion
of software solutions and the slowing down of the development of new software
solutions.
Net cash flows provided from financing activities was $198,200 for the six
months ended June 30, 2004 and $0 for the same period in 2003. The increase in
cash provided from financing activities was primarily due to the issuance of a
$120,000 note payable and a further advance of $78,200 from a related party.
On August 13, 2004, we received $427,500 in financing from an investor. We
issued a convertible promissory note to the investor in exchange for the
$427,500. The note has a term of one year, bears interest at 10% per annum and
is convertible into our common stock during the five-day period (but not at any
other time) following the purchase of our common stock of by an institutional
investor. The number of shares into which the note may be converted shall be
determined by dividing the total amount of indebtedness on the note as of the
date of conversion by the price per share at which the institutional investor
purchases shares of our common stock.
On July 15, 2004, we entered into a loan agreement with a related party in the
amount of $30,000 due July 15, 2005 which may be extended at the sole discretion
of the lender and is secured by 200,000 shares of our common stock. The lender
agrees that if at any time prior to the term of this agreement, or at any time
after if extended by the lender, the stock price reaches $1.00 per share for a
period of 30 days, the lender shall offer to us the first right of refusal to
purchase all said shares, however, at no point shall this price be less than
$1.00 per share. If after this condition is met plus 30 days, the lender elects
to keep said shares, this loan agreement will become satisfied and paid in full.
In the event our shares do not meet $1.00 per share within one year from the
effective date of this agreement, the lender shall be entitle to receive the
payment of $30,000 and keep the number of shares as may be owned by the lender
at such time.
On May 6, 2004, pursuant to a settlement agreement with Cotelligent, we
issued 5,316,704 shares of unregistered shares of common stock and canceled
5,316,704 shares of Series C Convertible Redeemable Preferred Stock. As a result
of this conversion, our stockholders deficiency was reduced by $4,544,680.
On March 31, 2004, we entered into a loan agreement for $120,000. The loan
bears interest at the rate of 10% per annum and is due on April 1, 2005.
Interest is payable on the first of each month. The loan is secured by our
accounts receivable, tax refunds, deposit accounts, and cash and cash
equivalents. If this collateral is insufficient to secure the loan, the loan is
also secured by the shares of our common stock held by our chief executive
officer, Mark A. Josipovich.
A related party to our company provided loans to us in the amount of
$38,200 in the second quarter of 2004 and a total of $78,200 during the six
months ended June 30, 2004.
Any projections of future cash needs and cash flows are subject to
substantial uncertainty. Our primary short-term needs for capital are our
product development efforts, our sales, marketing and administrative activities,
working capital associated with increased sales of our solutions, and capital
expenditures relating to maintaining and developing our operations. Our future
liquidity and capital requirements will depend on numerous factors, including
the extent to which our present and future solutions gain market acceptance, the
extent to which products, solutions or technologies under development are
successfully developed, the costs and timing of expansion of sales, marketing
and manufacturing activities, the cost, the procurement and enforcement of
intellectual property rights important to our business and the results of
competition.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of
operations is based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these Consolidated Financial Statements and related
disclosures requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We evaluate, on an on-going basis, our
estimates and judgments, including those related to the useful life of the
assets and deferred revenue. We base our estimates on historical experience and
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
11
The methods, estimates and judgments we use in applying our most critical
accounting policies have a significant impact on the results that we report in
our Consolidated Financial Statements. The SEC considers an entity's most
critical accounting policies to be those policies that are both most important
to the portrayal of a company's financial condition and results of operations
and those that require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about matters that
are inherently uncertain at the time of estimation. We believe the following
critical accounting policies, among others, require significant judgments and
estimates used in the preparation of our Consolidated Financial Statements:
o Revenue recognition; and
o Computer software to be sold, leased or otherwise marketed
We account for internally developed and purchased software in program
development costs in accordance with Statement of Financial Accounting Standard
No. 86 (SFAS No. 86), "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed." The capitalization of computer software begins
upon the establishment of technological feasibility of the product, which we
have defined as the completion of beta testing of a working product. Costs of
purchased computer software that has no alternative future use is accounted for
in the same manner as the costs incurred to internally develop such software.
Costs of purchased computer software is capitalized and accounted for in
accordance with its use. Capitalized costs include only (1) external direct
costs of material and services consumed in developing or obtaining internal-use
software, and (2) payroll and payroll-related costs for employees who are
directly associated with and who devote time to the internal-use software
project. Capitalization of such costs ceases no later than the point at which
the project is substantially complete and ready for its intended purpose.
Research and development costs and other computer software maintenance
costs related to software development are expensed as incurred. Software
development costs are amortized using the straight-line method over the expected
life of the product.
We regularly review the carrying value of software and development to
determine if there has been an impairment loss that needs to be recognized.
Revenue is recognized when earned. Our revenue recognition policies for
our existing revenues are in compliance with American Institute of Certified
Accountants Statements of Position 97-2 and 98-4, "Software Revenue
Recognition." Revenue from sales of The Bluebook and other ancillary products is
recorded when the products are shipped. Revenue from the sale of a license
agreement is recognized ratably on a straight-line basis over the product's life
cycle. Certain contracts specify separate fees for the software and the ongoing
fees for maintenance and other support. If sufficient verifiable objective
evidence of the fair value of each element of the arrangement exists, the
elements of the contract are unbundled and the revenue for each element is
recognized as appropriate. Revenue received or receivable in advance of
performance of services is deferred and included in deferred revenue.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, (as revised in December 2003) The Financial Accounting
Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", an interpretation of Accounting Research Bulletin
("ARB") No. 51, "Consolidated Financial Statements". Interpretation No. 46
addresses consolidation by business enterprises of variable interest entities,
which have one or both of the following characteristics: (i) the equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated support from other parties, which is
provided through other interest that will absorb some or all of the expected
losses of the entity; (ii) the equity investors lack one or more of the
following essential characteristics of a controlling financial interest: the
direct or indirect ability to make decisions about the entities activities
through voting rights or similar rights; or the obligation to absorb the
expected losses of the entity if they occur, which makes it possible for the
entity to finance its activities; the right to receive the expected residual
returns of the entity if they occur, which is the compensation for the risk of
absorbing the expected losses.
Interpretation No. 46, as revised, also requires expanded disclosures by
the primary beneficiary (as defined) of a variable interest entity and by an
enterprise that holds a significant variable interest in a variable interest
entity but is not the primary beneficiary.
12
Interpretation No. 46, as revised, applies to small business issuers no
later than the end of the first reporting period that ends after December 15,
2004. This effective date includes those entities to which Interpretation 46 had
previously been applied. However, prior to the required application of
Interpretation No. 46, a public entity that is a small business issuer shall
apply Interpretation 46 or this Interpretation to those entities that are
considered to be special-purpose entities no later than as of the end of the
first reporting period that ends after December 15, 2003.
Interpretation No. 46 may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
In December 2002, the Financial Accounting Standards Board issued
Statement No. 148, "Accounting for Stock-Based Compensation-Transaction and
Disclosure - an amendment of FASB Statement No. 123," ("SFAS 148"). SFAS 148
amends FASB Statement No. 123, "Accounting for Stock Based compensation" ("SFAS
123") and provides alternative methods for accounting for a change by
registrants to the fair value method of accounting for stock-based compensation.
Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require
disclosure in the significant accounting policy footnote of both annual and
interim financial statements of the method of accounting for stock based
compensation and the related pro forma disclosures when the intrinsic value
method continues to be used. The statement is effective for fiscal years
beginning after December 15, 2002, and disclosures are effective for the first
fiscal quarter beginning after December 15, 2002. The Company believes the
adoption of this Statement will have no material impact on its financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies under what circumstances a contract with initial investments meets the
characteristics of a derivative and when a derivative contains a financing
component. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The Company does not expect that the adoption of SFAS No.
149 will have a significant effect on the Company's financial statement
presentation or disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 requires that an
issuer classify a financial instrument that is within its scope as a liability
(or an asset in some circumstances) because that financial instrument embodies
an obligation of the issuer. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. SFAS No.
150 is to be implemented by reporting the cumulative effect of a change in
accounting principle for financial instruments created before the issuance date
of SFAS No. 150 and still existing at the beginning of the interim period of
adoption. Restatement is not permitted. The Company does not expect that the
adoption of SFAS No. 150 will have a significant effect on the Company's
financial statement presentation or disclosures.
RISK FACTORS
WE ANTICIPATE FUTURE LOSSES AND MAY NOT BE ABLE TO ACHIEVE SUSTAINED
PROFITABILITY.
We have incurred net losses in recent years and, as of June 30, 2004, we had an
accumulated deficit of $3.5 million. We anticipate that we will continue to
incur additional operating losses in the near term. These losses have resulted
principally from expenses incurred in research and development and from sales
and marketing and general and administrative expenses. Even though we expect to
achieve profitability, we may not be able to sustain or increase profitability
on a quarterly or annual basis. If we cannot achieve or sustain profitability
for an interim period, we may not be able to fund our expected cash needs or
continue our operations.
13
WE ARE NOT GENERATING POSITIVE CASH FLOW FROM OPERATIONS AND MAY NEED
ADDITIONAL CAPITAL AND ANY REQUIRED CAPITAL MAY NOT BE AVAILABLE ON ACCEPTABLE
TERMS OR AT ALL.
We have incurred negative cash flow from operations on an annual basis in
recent years. As of June 30, 2004, our cash on hand may not be sufficient to
fund our operations through 2004. As a result, we may raise additional capital
or pursue alternative strategies.
Our 2004 internal financial projections and strategic plan, indicates that
our available cash, together with cash from operations and additional funding
expected to be available, should be sufficient to fund our operations through
the fourth quarter of 2004 without greater reductions in our workforce. Our 2004
internal financial projections and strategic plan, expects that we will reduce,
but not eliminate, our negative cash flow from operations, primarily through
increased revenue and continued control over operating expenses. However, our
actual results may differ from this plan, and we may be required to consider
alternative strategies. We expect to raise additional funds through one or more
of the following: (1) sale of various products, solutions or marketing rights;
(2) licensing of technology; and (3) sale of equity and debt securities.
Although we recently received $427,500 in financing from an investor, we still
need to raise additional funds. If we cannot raise the additional funds through
these options on acceptable terms or with the necessary timing, management could
also reduce discretionary spending to decrease our cash burn rate and extend the
currently available cash.
Additional capital may not be available on acceptable terms, if at all.
The public markets may remain unreceptive to equity financings, and we may not
be able to obtain additional private equity financing. Furthermore, any
additional equity financing would likely be dilutive to stockholders, and
additional debt financing, if available, may include restrictive covenants which
may limit our currently planned operations and strategies. If adequate funds are
not available, we may be required to curtail our operations significantly and
reduce discretionary spending to extend the currently available cash resources,
or to obtain funds by entering into collaborative agreements or other
arrangements on unfavorable terms, all of which would likely have a material
adverse effect on our business, financial condition and our ability to continue
as a going concern.
FACTORS BEYOND OUR CONTROL MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE,
AND THIS FLUCTUATION COULD CAUSE OUR STOCK PRICE TO DECLINE.
We believe that our future operating results will fluctuate on a quarterly
basis due to a variety of factors, including:
o the introduction of new products or solutions by us or by our
competitors;
o our distribution strategy and our ability to maintain or expand
relationships with our existing user base and strategic partners;
o market acceptance of our current or new products or solutions; and
o competition and pricing pressures from competitive products or
solutions.
We have high operating expenses for personnel, new product development and
marketing. If any of the factors listed above cause our revenues to decline, our
operating results could be substantially harmed.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE, WHICH MAY AFFECT
OUR ABILITY TO RAISE CAPITAL IN THE FUTURE OR MAKE IT DIFFICULT FOR INVESTORS TO
SELL THEIR SHARES.
The securities markets have experienced significant price and volume
fluctuations and the market prices of securities of many public technology
companies have in the past been, and can in the future be expected to be,
especially volatile. Fluctuations in the trading price or liquidity of our
common stock may adversely affect our ability to raise capital through future
equity financings. Factors that may have a significant impact on the market
price and marketability of our common stock include:
o announcements of technological innovations or new products or
solutions by us or by our competitors;
o our operating results;
o developments in our relationships with strategic partners;
o litigation;
o economic and other external factors; and
o general market conditions.
14
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted. If a securities class action suit is filed against us, we would
incur substantial legal fees and our management's attention and resources would
be diverted from operating our business in order to respond to the litigation.
WE DEPEND ON KEY PERSONNEL FOR OUR FUTURE SUCCESS. IF WE LOSE OUR KEY
PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL, WE MAY BE
UNABLE TO ACHIEVE OUR GOALS.
Our future success is substantially dependent on the efforts of our
management team, particularly Mark A. Josipovich, our Chairman and Chief
Executive Officer, and Daniel T. Josipovich, our Chief Operating Officer. The
loss of the services of members of our management may significantly delay or
prevent the achievement of product development and other business objectives.
Because of the specialized technical nature of our business, we depend
substantially on our ability to attract and retain qualified technical
personnel. There is intense competition among technology companies for qualified
personnel in the areas of our activities. Although we have employment agreements
with Mark A. Josipovich and Daniel T. Josipovich, each is an at-will employee,
which means that either party may terminate the employment at any time. If we
lose the services of, or fail to recruit, key technical personnel, the growth of
our business could be substantially impaired. We do not maintain life insurance
for any of our key personnel.
WE HAVE LIMITED RESOURCES TO DEVOTE TO SOFTWARE DEVELOPMENT AND
COMMERCIALIZATION. IF WE ARE NOT ABLE TO DEVOTE ADEQUATE RESOURCES TO SOFTWARE
DEVELOPMENT AND COMMERCIALIZATION, WE MAY NOT BE ABLE TO DEVELOP OUR SOLUTIONS.
Our strategy is to develop software solutions addressing claims
management. We believe that our revenue growth and profitability, if any, will
substantially depend upon our ability to:
o improve market acceptance of our current solutions;
o complete development of new solutions; and
o successfully introduce and commercialize new solutions.
We have introduced some of our software solutions only recently and some
of our solutions are still under development. Among our recently introduced
solutions are B.E.S.T.7, InsureBase and Insured to Value. Although development
of our B.E.S.T.Net solution is substantially complete, we currently have under
development B.E.S.T.Central and the tie-in or interface between B.E.S.T.Net,
B.E.S.T.Central and integration of B.E.S.T.7. Because we have limited resources
to devote to products development and commercialization, any delay in the
development of one solution or reallocation of resources to solutions
development efforts that prove unsuccessful may delay or jeopardize the
development of our other product candidates. If we fail to develop new products
and bring them to market, our ability to generate additional revenue will
decrease.
In addition, our solutions may not achieve satisfactory market acceptance,
and we may not successfully commercialize them on a timely basis, or at all. If
our products do not achieve a significant level of market acceptance, demand for
our products will not develop as expected.
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY, WHICH COULD RENDER OUR
PRODUCTS OBSOLETE OR SUBSTANTIALLY LIMIT THE VOLUME OF PRODUCTS THAT WE SELL.
THIS WOULD LIMIT OUR ABILITY TO COMPETE AND ACHIEVE PROFITABILITY.
Our competitors may develop or market technologies or products that are
more effective or commercially attractive than our current or future products or
that would render our technologies and products obsolete. Further, additional
competition could come from new entrants to the claims management market.
Moreover, we may not have the financial resources, technical expertise or
marketing, distribution or support capabilities to compete successfully. If we
fail to compete successfully, our ability to achieve sustained profitability
will be limited.
WE MAY BE UNABLE TO SUCCESSFULLY MARKET AND DISTRIBUTE OUR PRODUCTS AND
IMPLEMENT OUR DISTRIBUTION STRATEGY.
The market for claims management solutions is highly fragmented. We market
and sell our products primarily through the mail, conventions and the Internet.
We may not successfully develop and maintain marketing, distribution or sales
capabilities. If our marketing and distribution strategy is unsuccessful, our
ability to sell our products will be negatively impacted and our revenues will
decrease.
15
WE MAY FACE COSTLY INTELLECTUAL PROPERTY DISPUTES.
Our ability to compete effectively will depend in part on our ability to
develop and maintain proprietary aspects of our technology and either to operate
without infringing the proprietary rights of others or to obtain rights to
technology owned by third parties. We rely on trade secrets, technical know-how
and continuing invention to develop and maintain our competitive position.
Others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets.
We may become subject to intellectual property infringement claims and
litigation. The defense of intellectual property suits, proceedings, and related
legal and administrative proceedings are costly, time-consuming and distracting.
We may also need to pursue litigation to protect trade secrets or know-how owned
by us, or to determine the enforceability, scope and validity of the proprietary
rights of others. Any litigation will result in substantial expense to us and
significant diversion of the efforts of our technical and management personnel.
Any adverse determination in litigation could subject us to significant
liabilities to third parties. Further, as a result of litigation or other
proceedings, we may be required to seek licenses from third parties that may not
be available on commercially reasonable terms, if at all.
ITEM 3. CONTROLS AND PROCEDURES
An evaluation as of the end of the period covered by this report was
carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and Principal Accounting Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer
and Principal Accounting Officer concluded that those disclosure controls and
procedures were adequate to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act are recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms.
There was no change in our internal control over financial reporting
during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 3, 2003, we were named as a defendant in Morris Diamond, et
al. v. The Bluebook International Holding Company, New York Supreme Court,
Monroe County Case No. 1204/03. In the Diamond case, plaintiffs allege that we
wrongfully withheld the issuance and delivery of plaintiffs' shares of our
common stock, thereby damaging plaintiffs in the loss of the value of their
stock. We have no record of any stock ownership for one of the plaintiffs and,
pending discovery, disputes that there is any basis for any claim against us. We
do not dispute the stock ownership of the other plaintiffs. After the other
plaintiffs presented us with lost stock certificates and representation letters,
the other plaintiffs' shares were reissued to them. We are in settlement
discussions with all plaintiffs but will defend this suit fully if it proceeds.
ITEM 2. CHANGES IN SECURITIES
On May 6, 2004, pursuant to a settlement agreement with Cotelligent, we
issued 5,316,704 shares of unregistered shares of common stock and canceled
5,316,704 shares of Series C Convertible Redeemable Preferred Stock. The
5,316,704 shares of common stock were issued upon conversion of the 5,316,704
shares of Series C Convertible Preferred Stock. The 5,316,704 shares of common
stock were not registered under the Securities Act of 1933, as amended ("Act"),
but were issued in reliance upon the exemption from registration provided by
Section 4(2) of the Act, on the basis that the issuance was a transaction not
involving a public offering.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Number Description
------ -----------
31 Certification of Chief Executive Officer and
Principal Accounting Officer of Periodic Report
Pursuant to Rule 13(a)-15(e) or Rule 15d-15(e).
32 Certification of Chief Executive Officer and
Principal Accounting Officer of Periodic Report
Pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-QSB to be signed on its behalf
by the undersigned hereunto duly authorized.
THE BLUEBOOK INTERNATIONAL HOLDING COMPANY
Date: August 23, 2004 By: /s/ Mark A. Josipovich
---------------------------
Mark A. Josipovich, Chief Executive Officer
and Principal Accounting Officer
17