UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION
FILE NUMBER ________________________________
THE BLUEBOOK INTERNATIONAL HOLDING COMPANY
------------------------------------------
(Name of small business issuer in its charter)
DELAWARE 98-0215787
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
21098 BAKE PARKWAY, SUITE 100
LAKE FOREST, CALIFORNIA 92630-2163
-----------------------------------------
(Address of principal executive offices)
Issuer's telephone Number: (949) 470-9534
--------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of November 18, 2005, the
issuer had 8,760,221 outstanding shares of Common Stock, par value $.0001 per
share.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements 1
Item 2. Management's Discussion and Analysis or Plan of Operation 10
Item 3. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
SIGNATURES 22
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE BLUEBOOK INTERNATIONAL HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2005 2004
(unaudited)
-------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 19,729 $1,534,313
Accounts receivable,
net of allowance for doubtful accounts of $600
as of September 30, 2005 and $ 4,600 as of December 31, 2004 5,818 6,417
Inventory 17,838 --
Prepaid expenses and other 44,875 34,500
---------- ----------
Total current assets 88,260 1,575,230
---------- ----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $220,961 and $190,408 in 2005 and 2004, respectively 76,493 65,909
---------- ----------
OTHER ASSETS
Program development costs, net of accumulated amortization
of $594,853 and $513,358, in 2005 and 2004, respectively 725,913 690,577
Intangible assets, net of accumulated amortization
of $34,364 and $29,078, in 2005 and 2004, respectively 10,358 15,644
Other assets 5,296 5,296
---------- ----------
Total other assets 741,567 711,517
---------- ----------
TOTAL ASSETS $ 906,320 $2,352,656
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements
2
THE BLUEBOOK INTERNATIONAL HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
SEPTEMBER 30, DECEMBER 31,
2005 2004
(unaudited)
----------------------------------
LIABILITES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 833,738 $ 654,753
Legal fee payable 359,000 415,000
Obligation under capital lease - current portion 19,996 --
Due to stockholders and related parties 329,006 318,068
Deferred revenue 95,004 165,259
Note payable, related party 140,000 --
Notes payable 115,000 115,000
----------- ----------
Total current liabilities 1,891,744 1,668,080
----------- ----------
LONG TERM LIABILITIES
Obligation under capital lease 7,928 --
----------- ----------
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; 150,000,000 shares authorized; 8,760,221 and
8,760,221 shares issued and outstanding as of September 30, 2005 and
December 31, 2004, respectively 875 875
Additional paid in capital
9,679,568 9,679,568
Accumulated deficit
(10,673,795) (8,995,867)
----------- ----------
Total stockholders' equity (deficiency) (993,352) 684,576
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $ 906,320 $2,352,656
=========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements
THE BLUEBOOK INTERNATIONAL HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------
2005 2004 2005 2004
Restated Restated
(unaudited) (unaudited) (unaudited) (unaudited)
-----------------------------------------------------------
SALES, net $ 243,323 $ 96,221 $ 601,146 $ 499,339
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative expenses 563,718 504,489 2,133,942 1,190,435
Program and development costs -- 100,062 -- 286,734
Depreciation and amortization expenses 46,005 42,967 117,335 145,348
------------ ------------ ------------ ------------
Total Operating Expenses 609,723 647,518 2,251,277 1,622,517
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (366,400) (551,297) (1,650,131) (1,123,178)
OTHER EXPENSE
Interest expense (12,924) (11,060) (26,997) (29,058)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (379,324) (562,357) (1,677,128) (1,152,236)
------------ ------------ ------------ ------------
INCOME TAX EXPENSE -- -- 800 800
------------ ------------ ------------ ------------
NET LOSS $ (379,324) $ (562,357) $(1,677,928) $(1,153,036)
============ ============ ============ ============
Weighted average number of shares of
common stock outstanding, basic and diluted 8,760,261 1,708,154 8,760,261 1,578,855
============ ============ ============ ============
Loss per share, basic and diluted $ (0.04) $ (0.33) $ (0.19) $ (0.73)
============ ============ ============ ============
See accompanying Notes to Condensed Consolidated Financial Statements
3
THE BLUEBOOK INTERNATIONAL HOLDING COMPANY AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2005 2004
(unaudited) (unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,677,928) $(1,153,036)
Adjustment to reconcile net loss to net cash used in operating activities
Depreciation and amortization 117,335 145,348
Changes in operating assets and liabilities:
Decrease in Accounts receivable 599 7,001
(Increase) in Inventory (17,838) --
(Increase) in Prepaid expenses and other (10,375) (30,219)
Increase in Accounts payable and accrued expenses 178,985 372,545
(Decrease) in Legal fee payable (56,000) --
Increase in Due to stockholders and related party 10,938 475,298
(Decrease) in Deferred revenue (70,255) (100,391)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,524,539) (283,454)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,535) (6,970)
Software solution development costs (116,833) (125,781)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (119,368) (132,751)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Note payable -- 547,500
Note payable due to related party 140,000 (39,800)
Payments made under a capital lease (10,677) --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 129,323 507,700
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,514,584) 91,495
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 1,534,313 44,831
----------- -----------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 19,729 $ 136,326
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 16,069 $ 17,498
=========== ===========
Taxes $ 5,606 $ 3,671
=========== ===========
Non-cash Investing and Financing Activity
Acquisition of equipment through capital lease obligation $ 38,600 $ --
=========== ===========
Conversion of series C preferred stock to commons stock $ -- $ 4,544,680
=========== ===========
Issuance of stock in settlement of accounts payable $ 83,930 $ --
=========== ===========
Issuance of stock in settlement of notes payable $ -- $ 7,500
=========== ===========
Deferred financing costs in accounts payable $ -- $ 230,000
=========== ===========
See accompanying Notes to Condensed Consolidated Financial Statements
4
THE BLUEBOOK INTERNATIONAL HOLDING COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2005
1. BASIS OF PRESENTATION
The accompanying interim condensed consolidated 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 September 30, 2005, the results of operations for
the three months and nine months ended September 30, 2005 and 2004, and
cash flows for the nine months ended September 30, 2005 and 2004. The
balance sheet as of December 31, 2004 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, 2004,
as filed with the Securities and Exchange Commission on April 15, 2005.
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 nine months ended September 30, 2005 are
not necessarily indicative of the results of operations to be expected for
the full fiscal year ending December 31, 2005.
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.
The Company had a net loss of $1,677,928 and a negative cash flow from
operations of $1,524,539 for the nine months ended September 30, 2005 and
had a net working capital deficiency of $1,803,484 and a stockholders'
deficiency of $993,352 as of September 30, 2005. 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.
The Company's operating cash flows for the nine months ended September 30,
2005 were funded primarily through operations, loans from related parties
and cash existing at December 31, 2004. The Company believes it has
sufficient cash to meet its immediate working capital requirements while
additional operations and development funds will be sought from loans from
officers or principal stockholders of the Company and third party
financing.
The Company has recently taken steps to improve liquidity, including
seeking additional funding and deferment of a portion of the salaries of
its Chief Executive Officer and Chief Operating Officer, and the
consulting fees from a related party. For the quarter ended September 30,
2005 the amount deferred for salaries and consulting fees due to related
parties was $91,740. The total amount outstanding for deferred salaries
and consulting fees as of September 30, 2005 is $329,006. Such deferment
is made on an informal basis based on available working capital. Deferred
balances do not earn interest. If it is not successful in raising
additional capital, it will further reduce operating expenses through
headcount reductions and modify its business model and strategy to
accommodate licensing of its software solutions and databases. Further,
the Company will continue sales of THE BLUEBOOK and delivery of the
B.E.S.T. 7.5 software solution and newer 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. 7.5 and InsureBASE software solutions
from such modifications to its business model or strategy; however, they
may adversely affect the development of any new software solutions. The
Company believes the change in product focus, from delivery of software
solutions on disk to the delivery of web-based software solutions, will
result in future increases in sales over those of prior years.
5
Recent financial accounting standards
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share
Based Payment" ("SFAS 123R"), a revision to SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS 123R supersedes Accounting Principles
Board Opinion No. 25",Accounting for Stock Issued to Employees", and
amends SFAS No. 95, "Statement of Cash Flows." SFAS 123R requires that the
Company measure the cost of employee services received in exchange for
equity awards based on the grant date fair value of the awards. The cost
will be recognized as compensation expense over the vesting period of the
awards. The Company is required to adopt SFAS 123R no later than the
beginning of the first quarter of 2006. Under this method, the Company
will begin recognizing compensation cost for equity-based compensation for
all new or modified grants after the date of adoption. In addition, the
Company will recognize the unvested portion of the grant date fair value
of awards issued prior to adoption based on the fair values previously
calculated for disclosure purposes over the remaining vesting period of
the outstanding options and warrants. The Company is currently evaluating
the potential effect that the adoption of SFAS 123R will have on the
Company's financial statement presentation and disclosures.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets, An Amendment to APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends
Accounting Principles Board Opinion No. 29, "Accounting for Non-monetary
Transactions", to require that exchanges of non-monetary assets be
measured and accounted for at fair value, rather than at carryover basis,
of the assets exchanged. Non-monetary exchanges that lack commercial
substance are exempt from this requirement. SFAS 153 is effective for
non-monetary exchanges entered into in fiscal periods beginning after June
15, 2005. The Company does not routinely enter into non-monetary
exchanges. Accordingly, the Company does not expect that the adoption of
SFAS 153 will have a significant effect on the Company's financial
statement presentation or disclosures.
Business Activities
The Company was incorporated in Delaware on December 18, 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
published in both desk and pocket sized forms containing the information
concerning the average unit costs attendant to the cleaning,
reconstruction and repair industries. The inventory of books is recorded
at the lower of First In First Out (FIFO) cost or market. 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. In the quarter ended June 30,
2005, the Company began delivery of its B.E.S.T. 7.5 software solution.
In the quarter ended June 30, 2005, the Company achieved its first
delivery of its internet based software solution for business, InsureBASE.
In addition, the company completed development of its internet based
consumer software solution, Insure to Value. In the quarter ended
September 30, 2005 the Company began sales of home replacement value data
to consumers through its Insure to Value software solution, a World Wide
Web based software solution. A description of these data solutions
follows.
InsureBASE
InsureBASE is an automated residential property information solution.
Insure BASE is different from other general appraisal software because it
provides information in an automated format in the following four
categories: replacement cost calculation, assessment and financing
history, current market value, and information for comparable neighboring
properties. InsureBASE provides a replacement cost for a residence within
seconds, along with its current market valuation, property
characteristics, and an array of neighborhood and other underwriting
information. The information untilized by InsureBASE is compiled using THE
BLUEBOOK database to estimate the replacement cost of a residential
structure less the cost of the land to help insurers and homeowners
calculate the replacement cost of a single family structure. The
information utilized by InsureBASE is also compiled using the public data
records of First American Real Estate Solutions Company (NYSE: FAF) or
"First American" with whom we have partnered. The public data records of
First American Real Estate Solutions Company include financing history,
assessment, current market value and neighborhood comparables. We combine
the information provided through First American Real Estate Solutions'
public data records with our replacement cost data from the THE BLUEBOOK
database to produce a replacement cost calculation for a residential
structure excluding the land. This replacement cost calculation is used by
insurers, agents, adjusters and others in the insurance industry to
valuate a residential structures replacement cost for insurance purposes.
6
By automating the entry of data fields (e.g., number of bedrooms,
bathrooms, square feet, number of stories, etc.) this system can calculate
replacement cost for residential properties throughout the United States.
InsureBASE is delivered via the Internet to insurers, adjusters, agents
and other related insurance professionals involved in the insurance claims
and underwriting process. We believe that this product can minimize
underinsurance and reduce liability by insuring residential properties to
proper insurance levels covering the insured in the event of a total loss.
ERC reports and LeadBASE reports are the output reports for the InsureBASE
software solution. An ERC value is a field contained in the ETC report.
Each report provides the estimated replacement cost of a residential
structure less the land value. Both reports contain information regarding
the characteristics of the residential structure, such as roof type,
square foot, number of stories, bedrooms and bathrooms, when such
information is available from the Bluebook or First American database or
when such information is provided by the user. A LeadBASE report and an
ERC report contain the same information, however, a LeadBASE report is
provided to insurers through the Company's Insure to Value software on
behalf of customers looking to receive a residential property insurance
quote.
The minimum transaction fee for an ERC value is $1.00. The minimum
transaction fee for a LeadBASE report is $5.50. The Company completed
development of InsureBASE in November of 2004 and is currently marketing
and selling the solution. InsureBASE is sold on a case by case basis and
priced based on the same factors discussed above under B.E.S.T.Net and
B.E.S.T.Central. Our InsureBASE software solution is currently being
marketed. In the nine months ended September 30, 2005 the Company
recognized $195,491in revenue for the delivery of the InsureBase software
solution.
Insure To Value
Insure to Value uses the same software and database as InsureBASE,
however, it does not include the automation of data fields. Insure to
Value can generate a replacement cost, however, the general property
information (e.g., number of bedrooms, bathrooms, square feet, number of
stories, etc.) has to be entered manually by the user. We began marketing
and delivery of the Insure to Value software solution in the third quarter
of 2005. Every time a customer uses Insure to Value, they incur a
transaction fee that can range from $15.95 to $19.95. The Company achieved
first time sales of $1,332 in the three months ended September 30, 2005.
B.E.S.T.Net and B.E.S.TCentral
B.E.S.T.Net and B.E.S.TCentral are web-based cost estimation and claims
management software solutions that are designed to assist in the
facilitations of insurance claims information in a near paperless
environment. 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.7.5
into B.E.S.T.Central. The Company has not begun sales of B.E.S.T.Net and
B.E.S.TCentral.
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 period. 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 had a loss in the
three and nine month periods ended September 30, 2005 and 2004, basic and
diluted loss per share are the same.
7
2. RELATED PARTY TRANSACTIONS
The amount due to stockholders and related parties was $329,006 as of
September 30, 2005 and $318,068 as of December 31, 2004. The amount due to
stockholders and related parties as of September 30, 2005 consists of
accrued salaries payable to our President and Chief Executive Officer, our
Chief Operating Officer, our account manager who is also the sister of our
President and Chief Executive Officer, and accrued consulting fees payable
to the father of the President and Chief Operating Officer of the Company.
During the nine months ended September 30, 2005 and 2004, the Company
incurred consulting fees of $112,500 that were accrued to the father of
our President and Chief Operating Officer of the Company which are
included in selling and general administrative expenses.
On June 10, 2005 the Company entered into a note payable with the father
of the Company's President and Chief Executive Officer in the amount of
$110,000 that was due and payable on September 15, 2005. The note bears an
interest rate of eight percent (8%) per annum and the one time payment of
a five percent (5%) loan fee equal to $5,500. During the third quarter of
2005 the due date for the note was extended to November 30, 2005. The
extension required a $5,000 fee to be paid at maturity. The fee was
subsequently waived. On September 30, 2005 the Company entered into a
second note payable with the father of the Company's President and Chief
Executive Officer in the amount of $30,000 that is due and payable on
December 31, 2005. The note bears an interest rate of ten percent (10%)
per annum and a one time payment of a five percent (5%) loan fee equal to
$1,500 due at maturity. The loan fee was subsequently waived.
On September 30, 2005 the Company entered into a second note payable with
the father of the Company's President and Chief Executive Officer in the
amount of $30,000 that is due and payable on December 31, 2005. The note
bears an interest rate of ten percent (10%) per annum and a one time
payment of a five percent (5%) loan fee equal to $1,500 due at maturity.
The loan fee was subsequently waived.
3. COMMITMENTS AND CONTINGENCIES
Operating lease
The Company leases office space, certain office equipment and a vehicle
under non-cancelable operating leases expiring through January 2006. Total
rental expense for the leases for the nine months ended September 30, 2005
and 2004 was $52,534 and $32,220 respectively. There were no operating
leases which have initial or remaining non-cancelable lease terms in
excess of one year as of September 30, 2005.
Capital lease
The Company leases certain equipment under a capital lease with monthly
payments of $2,094 per month, including interest at 26.75% per annum. At
September 30, 2005, monthly payments under this lease aggregated $10,676.
Included in property and equipment is $38,600 of equipment under a capital
lease at September 30, 2005. Included in accumulated depreciation is
accumulated amortization of assets under a capital lease of $5,790 at
September 30, 2005.
Litigation
On June 23, 2005, plaintiff, Eric Allison, filed a complaint against
defendants, Christopher Albrick, The Bluebook International Holding
Company and Mark Josipovich, our Chief executive Officer and Chairman,
alleging breach of written contract - promissory note, and foreclosure of
security interest securing the promissory note, in the Superior Court of
the State of California. Plaintiff is seeking, among other things, damages
in an amount not less than $550,000. We are seeking dismissal of these
causes of action against Company and Mark Josipovich. The demurrer is
based upon the uncontested fact that the promissory note and foreclosure
of stock, the causes of action in the law suit, involve only a written
promissory note and related written agreement between defendant
Christopher Albrick and the plaintiff, and not the Company or Mark
Josipovich. While we are unable at this time to predict the outcome of
this litigation, as of this date, the Company believes that the claim is
baseless and without merit. As of this date, we do not believe that this
litigation could reasonably be expected to have a material adverse effect
on our business or financial condition.
8
As a general matter, we are subject to various legal proceedings, claims,
and litigation that arise in the normal course of our business. While the
outcome of these matters is currently not determinable, we do not expect
that the ultimate costs to resolve these matters will have a material
adverse effect on our financial position, results of operations, or cash
flows.
4. NOTE PAYABLE
On March 31, 2004, the Company entered into a loan agreement for $120,000,
of which $115,000 was outstanding as of September 30, 2005. The loan bears
interest at the rate of 10% per annum, and was due June 30, 2005. The loan
is secured by the Company's accounts receivable, tax refunds, deposit
accounts, and cash and cash equivalents. If the collateral securing the
loan is insufficient, the loan is also secured by the shares of the
Company's common stock held by Mark A. Josipovich, our Chairman of the
Board, Chief Executive Officer, President, and Treasurer. The loan
requires that the Company comply with certain covenants, including
preserving our corporate existence, maintaining all rights and permits,
complying with all applicable laws, and maintaining our properties used or
useful in its business. The Company entered into an extension of the loan
agreement, which extended the maturity of the agreement to August 31, 2005
under the same terms as originally agreed upon. On August 31, 2005 the
Company entered into an extension agreement, which extended the maturity
of the agreement to November 23, 2005 under the same terms as originally
agreed upon.
5. RESTATEMENT
In March of 2005, the Company reviewed its capitalized Software Solutions
Development Cost related to its B.E.S.T.Net(TM) and B.E.S.T.Central(TM)
software solutions that were capitalized during 2002 to 2004. The Company
determined that some of these costs previously capitalized did not meet
the requirements for capitalization as they were incurred before the
software product had reached technological feasibility as required by
S.F.A.S. No. 86, as the core programming was not tested until February
2003. This fact was not known at the time of capitalization, and upon a
closer review, the changes have been accounted for as a restatement of the
prior periods. The effect of this restatement on the September 30, 2004
financial statements is as follows:
As previously reported Restated
September
30, 2004
---------- ----------
Program development costs $4,083,528 $ 621,724
Net loss $ 817,784 $1,153,036
Net loss per share,
basic and diluted $ 0.52 $ 0.73
Accumulated deficit $3,969,064 $7,479,386
6. INVENTORY
Inventories are valued on a lower of first-in first-out (FIFO) cost or
market basis. At September 30, 2005 inventories were comprised of books,
which are sold in the normal course of business.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Condensed
Consolidated Financial Statements referred to in this report. This discussion
contains forward-looking statements that involve risks and uncertainties. Such
statements, which include statements concerning future revenue sources and
concentration, selling, general and administrative expenses, research and
development expenses, capital resources and additional financings, are subject
to risks and uncertainties that could cause actual results to differ materially
from those projected.
OVERVIEW
We provide proprietary data, software solutions and services that help
automate, integrate, manage and quicken the underwriting and claims process. Our
underwriting solutions with integrated Bluebook and First American data (as
described below) provide for validation and automation of structure replacement
costs for quoting and validating homeowner insurance premiums in significantly
less time and costs than is common today. These products give insurance writers
greater automation and extend premium quoting and policy fulfillment through new
and existing channels (e.g., banks, mortgage companies, agents, etc.). This
allows users to more easily and cost efficiently reach consumers who need
insurance and maintain accurate premiums for those who are already insured.
Our claims solutions deliver paperless claims information to insurance
personnel and directly to the outside service vendors (e.g., contractors,
inspectors, adjusters, and repair professionals, among others) through our
integrated software solutions. Our claims solutions provide the insurance
carrier with the ability to electronically track and manage claims from the
first report through its completion.
The Company's independent auditors have raised doubt regarding the ability
of the Company to remain as a going concern. The Company had a net loss of
$1,677,928 and a negative cash flow from operations of $1,524,539 for the nine
months ended September 30, 2005 and had a net working capital deficiency of
$1,803,484 and a stockholders' deficiency of $993,352 as of September 30, 2005.
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
The Company's operating cash flows for the nine months ended September 30,
2005 were funded primarily through operations, loans from related parties and
cash existing at December 31, 2004. The Company believes it has sufficient cash
to meet its immediate working capital requirements while additional operations
and development funds will be sought from loans from officers or principal
stockholders of the Company and third party financing.
The Company has recently taken steps to improve liquidity, including
seeking additional funding and deferment of a portion of the salaries of its
Chief Executive Officer and Chief Operating Officer, and the consulting fees of
Daniel E. Josipovich, the father of the Company's Chief Executive Officer. For
the quarter ended September 30, 2005 the amount deferred for salaries and
consulting fees due to related parties was $91,740. The total amount outstanding
for deferred salaries and consulting fees as of September 30, 2005 is $329,006.
Such deferment is made on an informal basis based on available working capital.
Deferred balances do not earn interest. .If it is not successful and raising
additional capital, it will further reduce operating expenses through headcount
reductions in modify its business model and strategy to accommodate licensing of
its software solutions and databases. Further, the Company will continue sales
of THE BLUEBOOK and delivery of the B.E.S.T. 7.5 software solution and newer
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. 7.5 and InsureBASE
software solutions from such modifications to its business model or strategy;
however, they may adversely affect the development of any new software
solutions. The Company believes the change in product focus, from delivery of
software solutions on disk to the delivery of web-based software solutions, will
result in future increases in sales over those of prior years.
SOURCES OF REVENUE
10
We generate revenue through sales of THE BLUEBOOK handbook and delivery of
software estimating solutions. We also generate revenue each time a claim or
underwriting (premium replacement cost) transaction is processed through our
Insure to Value and InsureBASE software solutions. We provide our own
replacement cost data and also integrate data provided by vendors in order to
provide additional services or automation that is often requested as part of the
underwriting process (e.g., homeowner related hazard data, credit, general
public data). When outside data sources are utilized, we are obligated to share
our revenues with these providers as well as with our larger distribution
channel partners, which reduces the percentage of revenues we recognize from
each data record delivered. We have entered into one such arrangement with First
American, which will be on an ongoing basis. First American receives 40% of the
gross revenue when the Company sells our InsureBASE product utilizing First
American's database. Alternatively the Company receives 40% of the gross sales
revenue when First American makes a sale of any of their solutions that
incorporate THE BLUEBOOK database elements. The Company has not recognized
revenue from this relationship yet. As of the end of the third quarter of 2005
First American was completing training its sales staff on the new products. The
Company believes it will recognize revenue from the agreement during the fourth
quarter of 2005. We plan to increase the number of transactions that are
processed through similar agreements that integrate our software solutions into
large distribution channels and insurance carrier and agency management systems.
In addition, the Company will begin generating revenue from the delivery of its
B.E.S.T.NET and B.E.S.T.Central software solutions, once they become marketable.
OUTLOOK FOR OUR BUSINESS
Our revenue growth has been and will continue to be dependent on our
ability to increase the number of licenses that are delivered and transactions
that are processed through our software solutions and our ability to expand the
data solutions and services we provide to the insurance, banking and mortgage
industries. We have recently added six new sales and marketing professionals,
signed recent contracts with insurance carriers, integrated our solutions with a
widely used agency management solution, and completed a joint revenue and share
agreement for InsureBASE with the First American Real Estate Solutions Company
(FAF: NYSE). We believe these efforts will increase the number of transactions
that are processed through our software solutions. Our ability to continue this
growth will depend on our ability to sell our software solutions to insurance
carriers, repair professionals, and larger distribution networks that will
deliver our software solutions.
In addition, we have automated much of our data aggregation process
through the development of DataCentral. This software solution allows us to
significantly reduce the amount of manual effort and costs typically associated
with collecting and maintaining the property replacement database by automating
many of the processes. We enhanced the size of the InsureBASE property database
to nearly 70 million accessible records by combining Bluebook data with access
to external data providers through our software solutions. We continue to work
with several other national data providers for joint distribution opportunities
within the insurance, mortgage and banking industries.
We believe this strategy of centralizing, automating and bringing online
the full capabilities of our data and integrating it with our InsureBASE, Insure
to Value and claims solutions, B.E.S.T.Net and B.E.S.T.Central will expand our
markets and increase utilization of our software solutions. Our target market
and opportunities will be expanded to include those clients that require an
automated delivery and claims information system. We believe our Internet
deliverable and accessible solutions will allow customers easier and more
immediate access to replacement cost information.
OPERATING EXPENSES
Our personnel expenses are our largest expense and consist of salaries,
commissions, benefit plans and other payroll related costs. Our consultants and
personnel increased from 11 to 21 during the first quarter of 2005 and we have
since reduced that to a total 14 consultants and full time personnel as of
September 30, 2005. Additional personnel primarily in the areas of sales and
marketing, administration, and software solution development will be added when
revenue growth and anticipated growth warrant it.
SOFTWARE SOLUTIONS DEVELOPMENT COSTS
11
Software solutions development costs consist of salaries and other costs
of employment of our software solutions development staff as well as outside
consultants. We plan to increase the number of personnel and consultants who are
working to enhance and fully integrate our claims and underwriting software
solutions in order to provide increased deliverability and simplified access to
our current software solutions and data. We expect this increase in personnel
and consultants will result in an increase in our research and development
expenses.
RECENT EVENTS
In March of 2005, the Company reviewed its capitalized Software Solutions
Development Cost related to its B.E.S.T.Net(TM) and B.E.S.T.Central(TM) software
solutions that were capitalized during 2002 to 2004. The Company determined that
some of these costs previously capitalized did not meet the requirements for
capitalization as they were incurred before the software product had reached
technological feasibility as required by S.F.A.S. No. 86, as the core
programming was not tested until February 2003. This fact was not known at the
time of capitalization, and upon a closer review, the changes have been
accounted for as a restatement of the prior periods. The effect of this
restatement on the September 30, 2004 financial statements is as follows:
- ------------------------------------------ ---------------------- --------------
As previously reported Restated
September 30, 2004
- ------------------------------------------ ---------------------- --------------
Program development costs $4,083,528 $621,724
- ------------------------------------------ ---------------------- --------------
Net loss $817,784 $1,153,036
- ------------------------------------------ ---------------------- --------------
Net loss per share, basic and diluted $0.52 $0.73
- ------------------------------------------ ---------------------- --------------
Accumulated deficit $3,969,064 $7,479,386
- ------------------------------------------ ---------------------- --------------
On September 30, 2005 the Company entered into a second note payable with
the father of the Company's President and Chief Executive Officer in the amount
of $30,000 that is due and payable on December 31, 2005. The note bears an
interest rate of ten percent (10%) per annum and a one time payment of a five
percent (5%) loan fee equal to $1,500 due at maturity. The loan fee was
subsequently waived.
RESULTS OF OPERATION
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2005 TO THREE MONTHS ENDED
SEPTEMBER 30, 2004
Revenues. Our revenues are derived from sales of our B.E.S.T. software
solutions and THE BLUEBOOK handbook and our InsureBASE replacement value data.
Net revenues for the three months ended September 30, 2005 were $243,323, an
increase of $147,102 or 153% compared with net revenues of $96,221 for the three
months ended September 30, 2004. Revenue from sales of THE BLUEBOOK handbook
were $26,289 for the three months ended September 30, 2005 as compared to
$21,818 for the three months ended September 30, 2004, an increase of $4,471 or
20%. The increase from prior year revenues was related to the increased demand
in the Mid-South because of hurricane damaged homes. Revenues from the delivery
of the B.E.S.T software solutions were $68,229 for the three months ended
September 30, 2005 as compared to $71,236 for the three months ended September
30, 2004, a decrease of $3,007 or 4.2%. The Company recognized revenue of
$142,394 on sales of its InsureBASE software solution during the three months
ended September 30, 2005. In addition, the Company recognized first time revenue
of $1,332 for the sale of data through the Insure to Value product.
Historically, sales of THE BLUEBOOK handbook and our B.E.S.T. estimating
software were the principal sources of our revenues. However, we expect revenues
from our new software solutions, Insure to Value, InsureBASE, B.E.S.T.Net and
B.E.S.T.Central, to become the principal sources of our total revenue.
Although our revenues are currently not concentrated among a relatively
small number of customers, we expect that a significant portion of our future
revenues coming from delivery of our new software solutions, Insure to Value,
InsureBASE, B.E.S.T.Net and B.E.S.T.Central, will come from a relatively smaller
number of customers. In the future, the loss of any one significant customer, or
a decrease in the level of sales to any one significant customer, could harm our
financial condition and results of operations.
Operating Expenses. Selling, general and administrative expenses for the
three months ended September 30, 2005 were $563,718 an increase of $59,229 or
12% compared to $504,489 for the three months ended September 30, 2004.
Increased costs relate to professional fees the Company has incurred in the
preparation of a registration statement covering unregistered common stock
currently outstanding.
12
Selling, general and administrative expenses consist primarily of salaries
and related expenses for personnel engaged in marketing and sales, corporate
executives, professional fees, corporate legal expenses, other corporate
expenses and facilities expenses. We believe that continued investment in sales
and marketing is critical to the success of our strategy to expand relationships
with our strategic partners and existing base of users of our products,
including insurance companies, contractors and service providers to the
insurance and related industries. Our business plan calls for additional
personnel and execution of additional marketing and sales programs. We currently
anticipate that selling, general and administrative expenses in fiscal year 2005
will increase.
Software solution development costs was zero for the three months ended
September 30, 2005, compared to $100,062 for the three months ended September
30, 2004. The company is currently not in the process of developing new software
solutions, but is focused on bringing to market the Insure to Value and
B.E.S.T.Net software solutions.
Depreciation and amortization was $46,005 for the three months ended
September 30, 2005, an increase of $3,038 or 7% compared to $42,967 for the
three months ended September 30, 2004. The increase was primarily due to the
amortization of previously unamortized software solution development costs
related to the InsureBASE programming as the product began selling in the second
quarter.
Interest Expense. Interest expense was $12,924 for the three months ended
September 30, 2005 or an increase of $1,864 from interest expense of $11,060 for
the three months ended September 30, 2004. The increase is the result of higher
average balances for loans to related parties for the three months ended
September 30, 2005 as related to the same period for 2004.
Net Loss. We had a net loss of $379,324 for the three months ended
September 30, 2005, compared to a net loss of $562,357 for the three months
ended September 30, 2004. The decrease in net loss is primarily attributable to
both an increase in sales and a decrease in program and development costs.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2005 TO NINE MONTHS ENDED
SEPTEMBER 30, 2004
Revenues. Our revenues are derived from sales of our B.E.S.T. software
solutions and THE BLUEBOOK and our InsureBASE replacement value data. Net
revenues for the nine months ended September 30, 2005 increased by $101,807 or
20% to $601,146 compared with net revenues of $499,339 for the nine months ended
September 30, 2004. The increase in revenue was related to the revenue from the
sales of InsureBASE replacement value data. The Company is continuing its focus
on the sale of InsureBASE replacement value data, which should result in revenue
growth.
Operating Expenses. Selling, general and administrative expenses increased
by $943,507 or 79% to $2,133,942 for the nine months ended September 30, 2005
compared to $1,190,435 for the nine months ended September 30, 2004. The
increase is related to increased professional service and consulting fees the
Company has incurred in the preparation of a stock registration covering
unregistered common stock currently outstanding and high expenses in the first
quarter of this year for costs associated with new hires and infrastructure
costs.
Software solution development costs was zero for the nine months ended
September 30, 2005, compared to $286,734 for the nine months ended September 30,
2004. The company is currently not in the process of developing new software
solutions, but is focused on bringing to market the Insure to Value and
B.E.S.T.Net software solutions.
Depreciation and amortization expense was $117,335 for the nine months
ended September 30, 2005, a decrease of $28,013 or 19% from $145,348 for the
nine months ended September 30, 2004. The decrease was primarily due to a change
in the estimated useful life of our B.E.S.T.7 software solutions and because
some assets had become fully depreciated as of December 31, 2004. Previously,
the net book value of B.E.S.T.7 pertaining to the database was amortized over 24
months and the net book value of B.E.S.T.7 pertaining to the software solution
was amortized over 9 months. In December 2004, the Company decided to change the
estimated life of B.E.S.T. 7 such that as of January 1, 2004, the net book value
of B.E.S.T.7 pertaining to the database is amortized over 30 months and the net
book value of B.E.S.T.7 pertaining to the software solution is amortized over 15
months. For the remainder of 2005, we expect our depreciation and amortization
to increase as a result of amortization of our software solutions InsureBASE,
Insure to Value, which began depreciating in the second quarter ended June 30,
2005, and B.E.S.T.Net and B.E.S.T. Central, which we anticipate will start their
depreciable life in the fourth quarter of 2005.
13
Interest Expense. Interest expense was $26,997 for the nine months ended
September 30, 2005 or a decrease of $2,061 from interest expense of $29,058 for
the nine months ended September 30, 2004. The decline is the result of lower
average balances for loans to related parties for the nine months ended
September 30, 2005 as related to the same period for 2004.
Net Loss. For the nine months ended September 30, 2005, we had a net loss
of $1,677,980 or $0.19 per share, compared with a net loss of $1,153,036 or
$0.73 per share for the nine months ended September 30, 2004. The increase in
net loss for the six months ended September 30, 2005 is primarily attributable
to increased selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2005, we had cash of $19,729, a net working capital
deficiency of $1,803,484 and a stockholder' deficiency of $993,352. As of
November19, 2005, the balance of cash was approximately $8,969. We have no
material commitments for capital expenditures as of September 30, 2005. However,
we plan to actively seek additional funding in order to meet our business plan.
Our cash requirements for the next twelve months are expected to be
approximately $2.3 million. Approximately $1.8 million is required to eliminate
the working capital deficit while $500,000 would be required to fund negative
cash flow from operations until the sufficient collections from revenues are
achieved to fund operations. We intend to seek outside debt and/or equity
financing to supplement anticipated cash from operations. We do not currently
have any commitments for such financing and there is no assurance that we will
be successful in obtaining such funds. Any funds received will primarily be
utilized for selling and general administrative expenses, to reduce accrued
professional expense and required hardware infrastructure in connection with new
customer acquisition. We also plan to reduce some company debt obligations. We
also plan to continue to invest in the development of our software solutions in
the normal course of business including the integration of Microsoft's latest
BizTalk release and SQL 2005 with our Insure BASE and B.E.S.T. Central software
solutions. We expect the cost of this integration to be $120,000 and the
timeframe for integration to last through late 2006. Upon further funding, the
Company also plans to hire three additional experienced sales and administrative
executives , a senior sales management executive and a financial management
executive in the first half of the first quarter of 2006.
As of November 19, 2005 our total indebtedness was approximately
$1,854,000.
Our 2005 operations and investment activities have been funded primarily
through the collection of revenue and existing cash as well as borrowings from
related parties. Our 2004 operations and investment activities were funded
primarily through revenue collection and borrowings from related and non-related
parties.
Net cash used in operating activities during the nine months ended
September 30, 2005 was $1,524,539 while the net cash used in operations for the
nine months ended September 30, 2004 was $283,454. The increase in net cash used
in operating activities was primarily due to an increase in selling, general and
administrative expenses.
Net cash used in investing activities was $119,368 for the nine months
ended September 30, 2005 and $132,751 for the nine months ended September 30,
2004. The decrease in cash used for investing activities was primarily due to
completion of software programming in the second quarter of 2005 resulting in no
additional investment in the third quarter of 2005.
Net cash provided by financing activities was $129,323 for the nine months
ended September 30, 2005 and $507,700 for the nine months ended September 30,
2004. The decrease was due to utilizing funds provided in an equity financing
that took place in the fourth quarter of 2004.
On January, 19, 2005 the Company entered into an agreement to settle
certain outstanding legal costs for $415,000. Upon settlement, the Company paid
$50,000, with the remainder payable commencing May 19, 2005 in monthly
installments of $5,000 until the obligation has been paid in full.
14
We had a net loss of $1,677,928 and negative cash flow from operations of
$1,524,539 for the nine months ended September 30, 2005 and a net working
capital deficiency of $1,803,484 and a stockholders' deficiency of $993,352 as
of September 30, 2005. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Without realization of additional
capital, it would be unlikely for the Company to continue as a going concern.
The Company will incur additional software solutions development costs
associated with implementation and deployment of its software solutions and
additional improvements and enhancements to its software solutions during the
course of its business.
Although we expect the customer to reimburse costs associated with the
delivery of our software solutions, in some cases, the terms of reimbursement
may be included as part of the product per transaction fee, monthly payment, at
terms extended up to 120 days or may be included as part of the delivery of the
software solutions. With respect to our B.E.S.T.Central, B.E.S.T.Net and
InsureBASE software solutions, we expect customers to reimburse costs associated
with integration of these software solutions with the customer's current
hardware installed, software customization, deployment of architecture plans,
and outside third party consulting services provided. If we exceed our current
development and software solutions delivery efforts of InsureBASE, B.E.S.T.Net
and B.E.S.T.Central, and if we receive anticipated funds from either the sale of
stock or from increased borrowings, we believe we will have sufficient working
capital from the collection of revenue and financing to fund operations going
forward. However, if these deliveries are delayed or fall short of our
expectations or if we do not receive the necessary funding from the sale of
stock or from increased borrowings, we may need to reduce operating expenses
through reductions in sales and development personnel and take other steps to
restructure our operations. Although we do not expect to incur a significant
adverse impact on sales and development of THE BLUEBOOK and estimating software
solutions, our development of additional products and other services would
likely be adversely affected or suspended altogether from such cost reductions.
Our primary short-term needs for capital are our software solution
development efforts, our sales, marketing and administrative activities, working
capital associated with increased delivery of our software 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 software solutions gain
market acceptance, the extent to which software solutions under development are
successfully developed, the costs and timing of expansion of delivery of
software solutions, marketing, procurement and protections of intellectual
property rights important to our business, and the results of competition.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that
are material to its investors.
COMMITMENTS AND CONTINGENCIES
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist principally of cash and receivables. The Company places its
cash in what it believes to be credit-worthy financial institutions. However,
cash balances have exceeded FDIC insured levels at various times during the
year. The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant risk in cash. The Company's trade
receivables are due from a broad customer base and each individual receivable
amount constitutes a relatively small value.
Loan Agreement
15
On March 31, 2004, we entered into a loan agreement for $120,000, of which
$115,000 was outstanding as of September 30, 2005. The loan bears interest at
the rate of 10% per annum, and was due June 30, 2005. On June 30, 2005 the
Company entered into an extension agreement, extending the maturity of the loan
to August 31, 2005. The loan is secured by the Company's accounts receivable,
tax refunds, deposit accounts, and cash and cash equivalents. If the collateral
securing the loan is insufficient, the loan is also secured by the shares of the
Company's common stock held by Mark A. Josipovich, our Chairman of the Board,
Chief Executive Officer, President, and Treasurer. The loan requires that we
comply with certain covenants, including preserving our corporate existence,
maintaining all rights and permits, complying with all applicable laws, and
maintaining our properties used or useful in our business. The Company was in
compliance with these covenants as of November 18, 2005. On August 31, 2005 the
Company entered into an extension agreement, which extended the maturity of the
agreement to November 23, 2005 under the same terms as originally agreed upon,
on June 30, 2005.
On June 10, 2005 the Company entered into a note payable with the father
of the Company's President and Chief Executive Officer in the amount of $110,000
due and payable on September 15, 2005. The note bears an interest rate of eight
percent (8%) per annum and the one time payment of a five percent (5%) loan fee
equal to $5,500. During the third quarter of 2005 the due date for the note was
extended to November 30, 2005. The extension required a $5,000 fee to be paid at
maturity. The fee was subsequently waived. On September 30, 2005 the Company
entered into a second note payable with the father of the Company's President
and Chief Executive Officer in the amount of $30,000 that is due and payable on
December 31, 2005. The note bears an interest rate of ten percent (10%) per
annum and a one time payment of a five percent (5%) loan fee equal to $1,500 due
at maturity. The loan fee was subsequently waived.
License of InsureBASE software solution
On March 7, 2005, we entered into a two-year agreement with Homesite
Insurance Company ("Homesite") pursuant to which we granted Homesite a
non-exclusive and non-transferable license to access via the Internet the
software, information and the user-guide of the InsureBASE software solution.
Homesite agreed to pay Bluebook a transactional fee for every completed
valuation. The agreement expressly provides that Bluebook and Homesite
anticipate a minimum of 100,000 transactions annually. The anticipated minimum
of 100,000 transactions is based on a good faith estimate provided by Homesite.
Homesite will not be required to pay us any annual fee based upon this estimate.
There is no guarantee that Homesite will complete 100,000 transactions annually.
Investors should not place any reliance upon the food faith estimate provided by
Homesite. Accordingly, Homesite will receive a discounted transaction fee in
exchange for this Agreement.
Joint License & Revenue Share Agreement
On March 25, 2005 we entered into a Joint License and Revenue Share
Agreement with First American Real Estate Solutions, L.P. Under the agreement,
Bluebook will integrate its InsureBASE software solution with First American's
detailed property records to bring to the insurance, mortgage and real estate
industries cost effective Estimated Replacement Cost (or ERC) reports and values
for single family residences throughout the United States. First American
granted Bluebook a non-exclusive, non-transferable license during the term of
the agreement to specified software applications, valuation models, information,
images and other services to use in connection with Bluebook's InsureBASE, ERC
Values, ERC Reports and leadBASE software solutions. Bluebook granted First
American a non-exclusive, non-transferable license during the term of the
agreement to sell Bluebook's InsureBASE, ERC Values, ERC Reports and leadBASE
products. In consideration for the rights granted under the agreement, each
party must pay the greater of either: (a) a royalty fee based on the gross
revenue generated from the delivery of any of Bluebook's InsureBASE, ERC Values,
ERC Reports and LeadBASE software solutions which utilize or incorporate First
American's services; or (b) the cumulative monthly total amount of minimum
transaction fees. The agreement has an initial term of two years from March 25,
2005 and will automatically renew for additional successive periods of twelve
months unless sooner terminated. The Company expects to begin recognizing
revenue under the contract late in the fourth quarter of 2005 or early 2006.
CRITICAL ACCOUNTING POLICIES
16
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 Condensed 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
disclosures 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.
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 Condensed 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 Condensed Consolidated
Financial Statements:
Revenue Recognition
Our revenues are from the sale of books, and the delivery of software and
Internet based solutions. The book is a codification of the Company's most
recent information database. Revenue is recorded when the book is shipped.
The Company licenses its software solutions, used in making cost estimates
for residential and light construction. The Company recognizes software revenue
when an agreement has been signed by both parties or other persuasive evidence
of an arrangement exists, the software has been shipped or electronically
delivered, the fees are fixed or determinable, collection of the resulting
receivable is probable and no other significant obligations remain undelivered.
For multiple element arrangements where vendor-specific objective evidence
of fair value exists for all undelivered elements, we account for the delivered
elements in accordance with the "residual method" prescribed by Statement of
Position 98-9. Vendor-specific objective evidence of fair value is based on the
price a customer is required to pay when the element is delivered separately.
The Company enters into arrangements with end users, which may include the sale
of licenses of software, maintenance and services under the arrangement or
various combinations of each element, including the delivery of such elements
separately.
For multiple element arrangements, each element of the arrangement is
analyzed and the Company allocates a portion of the total fee under the
arrangement to the undelivered elements, primarily services and maintenance,
using vendor-specific objective evidence of fair value of the element and the
remaining portion of the fee is allocated to the delivered elements (i.e.,
generally the software solution license), regardless of any separate prices
stated within the contract for each element, under the residual method
prescribed by SOP 98-9. Vendor-specific objective evidence of fair value is
based on the price the customer is required to pay when the element is delivered
separately (i.e., hourly rates charged for consulting services when delivered
separately from a software license and the renewal rate for maintenance
arrangements). Each license agreement offers additional maintenance renewal
periods at a stated price. If vendor-specific objective evidence of fair value
does not exist for the undelivered elements, all revenue is deferred and
recognized ratably over the service period if the undelivered element is
services, or over the period the maintenance is provided if the undelivered
element is maintenance, or until sufficient objective evidence exists or all
elements have been delivered.
License Revenues: Amounts allocated to license revenues under the residual
method are recognized at the time of delivery of the software when vendor
specific objective evidence of fair value exists for the undelivered elements,
if any, and all the other revenue recognition criteria discussed above have been
met. For software versions prior to B.E.S.T 7.5 insufficient vendor specific
objective evidence of the portion attributable to license revenue existed. The
Company estimated that 20% to 25% of the initial purchase price was allocated to
maintenance; the remaining purchase price of the software inclusive of licensing
was deferred and amortized over the expected life of the version. As of June 30,
2005 there was approximately three months of amortization remaining for these
revenues.
17
Services Revenues: Revenues from services are comprised of consulting and
implementation services and, to a limited extent, training. Services are
generally charged on a time-and-materials or fixed fee basis and include a range
of services including installation of off-the-shelf software, data conversion
and building non-complex interfaces to allow the software solutions to operate
in customized environments. Services are generally separable from the other
elements under the arrangement since the performance of the services is not
essential to the functionality (i.e., do not involve significant production,
modification or customization of the software or building complex interfaces) of
any other element of the transaction and are described in the contract such that
the total price of the arrangement would be expected to vary as the result of
the inclusion or exclusion of the services. Revenues for services are recognized
as the services are performed.
Maintenance Revenues: Maintenance revenues consist primarily of fees for
providing unspecified software upgrades on a when-and-if-available basis and
technical support over a specified term, which is typically twelve months.
Maintenance revenues are typically paid in advance and are recognized on a
straight-line basis over the term of the contract.
Internet based services: Revenue from the delivery of access to data
records are recognized on a per record basis based on the total number of
records searches provided to a customer over a specific period of time. Total
contract price is divided by total maximum searches available under the contract
to derive a per search price to recognize as the customer utilizes searches. At
the end of the contract term the customer forfeits all remaining searches and
the balance of the deferred revenue is recognized.
Software Solutions Development Costs
Software solutions development costs consist of costs to refine and test
software masters, user documentation and training manuals for software solutions
to be sold. These development costs encompass most of our software solutions but
the most significant costs unamortized at September 30, 2005 are for new
Internet based software solutions. Our design costs have been expensed. We hired
outside consultants to do much of the coding and testing in the products
development. Capitalized costs, however, include only (1) external direct costs
of material and services to test and refine the software masters, and (2)
payroll and payroll-related costs for employees who are directly associated with
and who devote time to the completion of the projects coding, testing and
preparation of user information. Capitalization of such costs ceases no later
than the point at which the project is available for general release to
customers. In the second quarter of 2005 we began amortization of the software
solutions development costs for the InsureBASE and Insure to Value software
solutions. Software solutions development costs related to the B.E.S.T.NET and
B.E.S.TCentral software solutions have not been amortized, as these software
solutions have not become marketable.
Software solutions development costs are amortized using the straight-line
method over the expected life of the product (which ranges from three to five
years). We believe this method will best reflect the matching of amortization
with revenues. Reliable estimates of total revenue have not been made. However,
we expect to determine a more reliable estimate of revenue as sales begin and
will use the greater of the straight-line method or the estimated sales method
for amortization.
Research and development costs and other computer software maintenance and
improvement costs related to software development are expensed as incurred.
The carrying value of software and software solutions development costs
are reviewed regularly to determine if there has been an impairment loss that
needs to be recognized.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share
Based Payment" ("SFAS 123R"), a revision to SFAS No. 123, "Accounting for
Stock-Based Compensation". SFAS 123R supercedes Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and amends SFAS No.
95, "Statement of Cash Flows". SFAS 123R requires that the Company measure the
cost of employee services received in exchange for equity awards based on the
grant date fair value of the awards. The cost will be recognized as compensation
expense over the vesting period of the awards. The Company is required to adopt
SFAS 123R no later than the beginning of the first quarter of 2006. Under this
method, the Company will begin recognizing compensation cost for equity-based
compensation for all new or modified grants after the date of adoption. In
addition, the Company will recognize the unvested portion of the grant date fair
value of awards issued prior to adoption based on the fair values previously
calculated for disclosure purposes over the remaining vesting period of the
outstanding options and warrants. The Company is currently evaluating the
potential effect that the adoption of SFAS 123R will have on the Company's
financial statement presentation and disclosures.
18
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets, An Amendment to APB Opinion No. 29" ("SFAS 153"). SFAS 153 amends
Accounting Principles Board Opinion No. 29, "Accounting for Non-monetary
Transactions ", to require that exchanges of non-monetary assets be measured and
accounted for at fair value, rather than at carryover basis, of the assets
exchanged. Non-monetary exchanges that lack commercial substance are exempt from
this requirement. SFAS 153 is effective for non-monetary exchanges entered into
in fiscal periods beginning after June 15, 2005. We do not routinely enter into
non-monetary exchanges. Accordingly, we do not expect that the adoption of SFAS
153 will have a significant effect on our financial statement presentation or
disclosures.
19
ITEM 3. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, we conducted an
evaluation, under the supervision and with the participation of our chief
executive officer and principal financial officer of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities
Exchange Act of 1934). Based upon this evaluation, our chief executive officer
and principal financial officer concluded that our disclosure controls and
procedures are not effective to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms. There has been no change in our internal controls
over financial reporting during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
20
PART II
ITEM 1. LEGAL PROCEEDINGS.
On June 23, 2005, plaintiff, Eric Allison, filed a complaint against
defendants, Christopher Albrick, The Bluebook International Holding Company and
Mark Josipovich, our Chief executive Officer and Chairman, alleging breach of
written contract - promissory note, and foreclosure of security interest
securing the promissory note, in the Superior Court of the State of California.
Plaintiff is seeking, among other things, damages in an amount not less than
$550,000. We are seeking dismissal of these causes of action against Company and
Mark Josipovich. The demurrer is based upon the uncontested fact that the
promissory note and foreclosure of stock, the causes of action in the law suit,
involve only a written promissory note and related written agreement between
defendant Christopher Albrick and the plaintiff, and not the Company or Mark
Josipovich. While we are unable at this time to predict the outcome of this
litigation, as of this date, the Company believes that the claim is baseless and
without merit. As of this date, we do not believe that this litigation could
reasonably be expected to have a material adverse effect on our business or
financial condition.
As a general matter, we are subject to various legal proceedings, claims,
and litigation that arise in the normal course of our business. While the
outcome of these matters is currently not determinable, we do not expect that
the ultimate costs to resolve these matters will have a material adverse effect
on our financial position, results of operations, or cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
On September 30, 2005 the Company entered into a second note payable with
the father of the Company's President and Chief Executive Officer in the amount
of $30,000 that is due and payable on December 31, 2005. The note bears an
interest rate of ten percent (10%) per annum and a one time payment of a five
percent (5%) loan fee equal to $1,500 due at maturity. The loan fee was
subsequently waived..
ITEM 6. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
- --------- ----------------------------------------------------------------------
10.1 Note agreement dated September 30 2005 by and among The Bluebook
International Holding Company as borrowers, and Daniel Josipovich, Sr.
father of the Company's Chief Executive Officer as lender.
31.1 Certification by Chief Executive Officer and Chief Financial Officer,
required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act,
promulgated pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by Chief Executive Officer and Chief Financial Officer,
required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and
Section 1350 of Chapter 63 of Title 18 of the United States Code,
promulgated pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
21
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE BLUEBOOK INTERNATIONAL HOLDING COMPANY
Dated: November 21, 2005 By: /S/ Mark A. Josipovich
------------------------------------------
Mark A. Josipovich
President, Chief Executive Officer,
Principal Financial Officer,
Principal Accounting Officer,
Treasurer and
Chairman of the Board of Directors
22