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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-32849
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ACCUPOLL HOLDING CORP.
----------------------
(Exact name of registrant as specified in its charter)
NEVADA 11-2751630
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15101 RED HILL AVE. SUITE # 220, TUSTIN, CA 92780
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 200-4000
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.001 par value per share
Indicate by check mark whether the registrant (1) has 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 [ ]
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the registrant's most recently completed
second fiscal quarter. As of December 31, 2003: $101,215,926.00 (67,477,284
shares at $1.50/ share).
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 180,705,970 shares
of common stock, $.001 par value per share, as of September 24, 2004.
Documents incorporated by reference:
Certain portions of the registrant's definitive proxy statement to be
filed with the Securites and Exchange Commission pursuant to Regulation 14A in
connection with the registrant's 2004 Annual Meeting of Stockholders are
incorporated herein by reference into Part III of this Annual Report on Form
10-K.
TABLE OF CONTENTS
PAGE
PART I
Item 1. BUSINESS.........................................................1
Item 2. PROPERTIES......................................................17
Item 3. LEGAL PROCEEDINGS...............................................17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............18
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES...............18
Item 6. SELECTED FINANCIAL DATA.........................................19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................19
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......25
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................26
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................26
Item 9A. CONTROLS AND PROCEDURES.........................................26
Item 9B. OTHER INFORMATION...............................................26
PART III
Item 10. DIRECTORS AND OFFICERS OF THE REGISTRANT........................26
Item 11. EXECUTIVE COMPENSATION..........................................26
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................26
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................26
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES..........................26
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES......................27
SIGNATURES ................................................................29
PART I
NOTE REGARDING FORWARD LOOKING INFORMATION
Various statements in this Form 10-K and in future filings by us with
the Securities and Exchange Commission, in our press releases and in oral
statements made by or with the approval of authorized personnel constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are based on current
expectations and are indicated by words or phrases such as "anticipate,"
"could," "currently envision," "estimate," "expect," "intend," "may," "project,"
"seeks," "we believe," "will," and similar words or phrases and involve known
and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements to differ materially from any future
results, performance or achievements expressed or implied by those
forward-looking statements. Some of the factors that could affect our financial
performance or cause actual results to differ from our estimates in, or
underlying, such forward-looking statements are set forth under the heading of
"Risk Factors."
These forward-looking statements are based largely on our expectations
and are subject to a number of risks and uncertainties, many of which are beyond
our control. Actual results could differ materially from these forward-looking
statements as a result of the facts described in "Risk Factors." We undertake no
obligation to update publicly or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. In light of these
risks and uncertainties, we cannot assure you that the forward-looking
information contained in this Form 10-K will, in fact, transpire.
ITEM 1. BUSINESS
THE COMPANY
AccuPoll Holding Corp. ("AccuPoll", "we" or "us") seeks to become a
leader in developing and marketing computerized voting machines and their
associated products and services for use in federal, state, local and private
elections.
We have developed a direct recording electronic (DRE) voting system
that provides a voter-verified paper audit trail that is both human and machine
readable. Our system was qualified as meeting federal voting system standards on
March 25, 2004 and we believe that it is currently the only electronic voting
system providing these features that is so qualified. Key benefits of our voting
system include: an intuitive touch screen interface, an audit capability that
includes multiple copies of the electronic records and a voter-verified paper
audit trail (VVPAT) that is both human and machine readable. Additional benefits
include the ability to support multiple languages, to prevent overvotes, to
provide under-vote warnings, the use of software based on open source products
(e.g., Linux) and open standards (e.g., XML, Unicode, Java), and the use of
non-proprietary hardware.
As of September 22, 2004, our DRE voting system was certified by the
states of Alabama, Arkansas, Kentucky, Mississippi, Ohio, South Dakota, Utah and
West Virginia. Currently, we are in the process of applying for certification in
additional states.
Our objective is to protect citizens' right to vote by insuring access,
accuracy, privacy and integrity in the voting process and in so doing to become
the leading provider of polling place electronic voting solutions that are
reliable, accurate, immediate, confidential, secure, easy-to-use and auditable.
Our website address WWW.ACCUPOLL.COM.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, and in accordance therewith file reports, proxy or
information statements and other information with the Securities and Exchange
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of such material can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.20549, at
prescribed rates. In addition, the Commission maintains a web site that contains
reports, proxy and information statements and other information regarding
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registrants that file electronically with the Commission. The address of the
Commission's web site is http://www.sec.gov.
We are in the process of building a section of our website at
WWW.ACCUPOLL.COM to make available our reports that we file with the Securities
and Exchange Commission. Until this section of our website is operational, we
voluntarily provide paper copies of our filings free of charge upon request.
CORPORATE HISTORY
We were incorporated in the State of Nevada on January 30, 1985 with
the name "Kiwi Ventures, Ltd." On November 4, 1985, we changed our name to
"Western International Pizza Corporation" and owned and operated 17 Godfather's
pizza franchise restaurants in Arizona until we ceased those operations in
approximately 1990.
Our current operations began in August 2001 with the formation of
AccuPoll, Inc., a Delaware corporation. On May 20, 2002, we entered into a share
exchange with AccuPoll, Inc. Pursuant to the exchange, all of the outstanding
common stock and warrants of AccuPoll, Inc. were exchanged for our shares. As a
result of the exchange, the stockholders of AccuPoll, Inc. acquired 75,500,000
shares of our common stock, which represented approximately 98.7% of our issued
and outstanding common stock immediately after the exchange. Following the
exchange, we changed our name to "AccuPoll Holding Corp."
RECENT ACQUISITIONS
On June 30, 2004, we entered into an agreement to acquire 100% of the
issued and outstanding capital stock of NTS Data Services, Inc. ("NTS"), a New
York corporation with an address at 1342 Military Road, Niagara Falls, New York
14304 (the "Agreement"). According to the Agreement, upon closing, NTS would
become a wholly-owned subsidiary of AccuPoll. The Agreement is subject to a
number of terms and conditions, including but not limited to satisfactory
completion of due diligence, completion of financing and other conditions as
outlined in the Agreement. As of August 31, 2004 the transaction had not closed
due to certain conditions of the transaction not being met. NTS provided such a
letter to AccuPoll expressing interest not to move forward with the contemplated
transaction.
INDUSTRY BACKGROUND
Elections, especially those in democratic countries, are held under the
auspices of various government systems. Until the 1960's almost all elections
were conducted with manually counted pre-printed paper ballots and
lever-activated mechanical voting machines, commonly known as lever machines.
Lever machines, which are cumbersome to use and consist of hundreds of moving
parts, require significant maintenance and are expensive to warehouse and
transport. This method of voting and recording of votes, in addition to being
inefficient, was susceptible to inaccuracies, significant time delays, other
mechanical difficulties, and in some instances manipulation. In 1964, the
Votomatic punch card voting system was patented. While this system has not been
actively manufactured since the mid 1980s, it remains the most widely used
system in North America. In the early 1980's, optical scan voting systems were
introduced and began to penetrate the election equipment market place on a
relatively small scale. According to a study conducted by the California
Institute of Technology and Massachusetts Institute of Technology, market
penetration for optical scan voting systems grew to slightly over 25% of the
installed voting machine base nationwide as of July 2001.
In recent years, the election industry began to computerize in response
to increased public acceptance and familiarity with using computers. The benefit
of computers is that they offer the opportunity to count ballots accurately and
quickly. Additionally, computer technology has created the potential for more
convenient participation, accessibility for disabled voters to vote
independently and the elimination of pre-printed paper ballots. Service and
support have also become increasingly important components of the newer,
technologically advanced voting systems. While the employment of technology is
becoming more generally accepted, we believe that many voting systems currently
being marketed lag in the application of state-of-the-art computer technology.
To our knowledge, of the voting systems on the market produced and sold
by the four largest voting system vendors (Diebold Election Systems, Sequoia
Voting Systems, Election Systems + Software and Hart InterCivic),
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only Sequoia Voting Systems currently produces a DRE voting system with a
voter-verified paper audit trail. Many of our competitors continue to receive
poor reviews from the academic, information-security and political communities
for inadequate security, deficient software coding standards, inadequate change
management practices, and lack of a voter verified paper audit trail. We believe
that some of these systems continue to operate with non-certified software, and
lack flexible functionality.
DRE voting systems are computer-based systems first and voting
appliances second. Because every computer system is susceptible to programming
bugs and/or possible tampering, we believe that computerized voting systems must
provide for an independent, voter verified record of each voter's intent. We
believe that in order to provide a system that the voter can have confidence in,
we must provide a voter with a voter-verified paper audit trail. Our DRE voting
system provides for both a secure electronic recording of the voting process and
an indelible voter-verified paper-audit trail that satisfies the federal voting
system standards for record-keeping that is maintained independently from the
electronic results.
MARKET OPPORTUNITY
The U.S. presidential election of November 2000 had a significant and
disruptive impact on the nation. According to a report from California Institute
of Technology and Massachusetts Institute of Technology, approximately 1.5
million votes were lost in 2000 because of difficulties in either using voting
equipment or recording the results of those votes. The difficulties experienced
with accuracy and verifiability, particularly with punch card systems, have
generated opportunities for manufacturers of electronic voting systems.
Following the 2000 election, the U.S. Congress enacted the Help America Vote Act
of 2002, or HAVA. HAVA was signed into law by President Bush on October 29,
2002. HAVA expanded the federal government's role in elections through mandates,
standards and funding. The U.S. Congress authorized a total of $3.9 billion to
help states implement HAVA. In 2003, $650 million was disbursed to the states
under HAVA. Of this $650 million, half of the funds were designated to replace
punch card and lever voting machines and the balance could be used by the states
to comply with HAVA's requirements and implement other improvements to the
administration of elections. An additional $3 billion is authorized to help
states fund HAVA's requirements for updating voting systems, allowing disabled
voters to vote independently, providing provisional ballots, creating and
maintaining statewide voter registration lists, training poll workers, and
educating voters. These funds are distributed to states annually over a
three-year period after individual states certify that they have developed a
plan to use the funds to implement HAVA requirements. States are also obligated
to provide a five percent match. Beginning in May 2004, the newly created
Elections Assistance Commission began receiving state certifications, and as
each state's certification is processed, funds will be disbursed. Beginning on
January 1, 2006, HAVA requires that state voting systems:
o Permit the voter to review the votes selected and change or
correct votes before the ballot is cast;
o Notify the voter if he or she casts more than one vote for a
single office and provide an opportunity to correct the ballot;
o Produce a permanent paper record with a manual audit capacity;
o Provide disability access, including nonvisual access for the
blind and visually impaired, in a manner that provides the same
opportunity for access and participation (including privacy and
independence) as for other voters;
o Provide alternative language accessibility; and
o Comply with error rate standards.
Further, each state is required to adopt uniform and non-discriminatory
standards for what constitutes a vote and how it will be counted.
According to the National Association of Secretaries of State there are
approximately 200,000 polling places in the United States, covering 7,000
jurisdictions, with 1.4 million polling place workers supervised by 22,000
election officials. According to surveys conducted by the National Association
of Counties the typical polling place in the United States is currently
configured to contain an average of seven voting stations. On election day, the
100 million voters in the United States use over 1.4 million voting machines
where approximately 60% of the voting sites are currently using antiquated
punch, lever, or paper ballot technologies. These are the same machine types for
which HAVA mandates replacement by 2006. We are targeting these polling places
with our
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touch-screen electronic DRE voting product.
OUR PRODUCTS
The AccuPoll DRE voting system consists of one or more voting stations
that offer voters an "ATM-like" interface, and that prepare and print voter
verified paper records, also known as "Proof of Vote" or "voter verified paper
audit trail," for machine or hand counting. Each in-precinct voting station is
physically connected by means of a local area network to a voting administrative
workstation. The entire in-precinct system is not connected to any network
outside of the polling place during voting hours. The user-friendly touch screen
interface provides the user easy to follow instructions. The system is compact,
sturdy and has an estimated useful life of at least five years.
Once a voter makes his or her choices, a Proof of Vote is printed on
paper by the voting station. The voter can then examine the Proof of Vote for
accuracy before depositing it into a ballot box. If the Proof of Vote does not
accurately reflect the voter's intent, that voter can then notify a polling
place official. The official will then void the electronic ballot and its
corresponding Proof of Vote, and allow the voter to re-vote. Importantly, while
the Proof of Vote is printed, the voter's electronic ballot is stored locally on
the voting station and is also immediately transmitted to the polling place
voting administrative workstation. Thus, when the polling place closes, multiple
redundant copies of the electronic ballots are available in addition to the
paper Proofs of Vote. At no time is the voter's identity associated with either
the electronic ballot or the paper Proof of Vote. Accordingly, each ballot is
securely stored in multiple locations and in forms that can be readily
cross-audited against each of the other ballot representations.
We have based our system software on open standards (JAVA language,
Unicode, and XML for the ballot and behavior specifications). As a result, we
have eliminated the need to deploy proprietary technologies that are expensive
to acquire and maintain and which we believe often lack the flexibility to adapt
quickly to meet changing voting system standards. Our solutions are scalable in
the software and hardware design. Our hardware components are "off the shelf",
and replacement parts, such as printers, are readily available, thereby reducing
maintenance costs and unit downtime.
We have designed our product with both the voter and election
administrator in mind. To our knowledge, we have created the only voting system
that has been qualified as meeting federal voting system standards and that
offers a voter-verified paper audit trail that is both human and machine
readable, and is readily accessible and easily employable by disabled voters.
Examples of our system's disability accommodating functions include a special
tactile keypad to facilitate ease of navigation for the blind, Braille text on
the keypad, audio ballot support in the voter's selected language, recognition
of non-human touch from users with prosthetic limbs, and wheelchair
accessibility. The touch screen function is user-friendly and has been designed
to minimize potential errors. Other notable features include the ability to:
o support multiple languages, both on-screen and in audio (all
languages supported by Java/Unicode);
o alter visual schemes to better enable those with modest visual
impairments, such as color blindness or tunnel vision;
o notify electronically the voting administrator of equipment
malfunction(s);
o spoil an erroneous ballot before the voter deposits his or her
Proof of Vote into the ballot box; the ability to provide full
support for provisional ballots as required by HAVA; and
o record write-in candidates.
Elections officials also enjoy benefits from our system as it
eliminates the need for costly pre-printed paper ballots. The election
tabulation and reporting functions greatly enhance the reliability and accuracy
of the voting process. Furthermore, the non-proprietary hardware ensures greater
inter-operability and ease of repairs or upgrades.
We have entered into a contract for the manufacture of our current
product which is comprised of a printer, touch screen, computer processing unit,
smart card reader, integrated case, power supply and related control software.
The contract requires us to acquire the product exclusively from this
manufacturer unless the manufacturer is unable to produce and deliver on time
our required quantity. We believe that other manufacturers would be available to
manufacture the product should this manufacturer become unavailable. The
manufacturer may change prices upon 60 days prior written notice to us. Unless
sooner terminated, the agreement expires in December 2006. As of September 22,
2004, the manufacturer and its president own 766,000 shares of our common stock.
For a
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discussion of risks with respect to this arrangement, please see "Risk Factors -
Risks Relating to Our Business - We rely on a third-party manufacturer."
BUSINESS STRENGTHS
Our key business strengths are described below:
OUR PRODUCT IS A FEDERALLY QUALIFIED VOTING SYSTEM WITH A VOTER
VERIFIED PAPER AUDIT TRAIL THAT IS BOTH HUMAN AND MACHINE READABLE. On March 25,
2004, the AccuPoll voting system was qualified as being compliant with the 1990
federal voting system standards as to hardware, and the 2002 federal voting
system standards as to software. We believe that our technology is currently
unmatched in its capability to simultaneously produce multiple copies of
electronic ballots (recorded on both the polling place voting administrative
workstation and the local voting station), as well as generate an independent,
voter-verified paper audit trail, which is completely auditable and can be
optically scanned. We believe the ability of our system to provide a fully
auditable paper record of the election is critical, as HAVA requires that any
voting system purchased with federal funds produce a permanent paper record with
a manual audit capacity that will be available as an official record for any
recount. We have submitted an updated version of our DRE voting system to the
Independent Test Authorities (ITAs) for full qualification testing under the
2002 federal voting system standards. We expect to complete full qualification
testing under the 2002 federal voting standards before January 1, 2005.
WE ARE WELL POSITIONED TO TAKE ADVANTAGE OF THE CURRENT MARKETPLACE AND
ENVIRONMENT OF ELECTION REFORM. We believe that we have designed a
technologically advanced electronic voting product that meets the current
federal voting system standards and the requirements of HAVA, as well as
addresses current voting systems' technology deficiencies. We believe that we
are first to market in terms of designing a voting system that complies with
both the requirements of HAVA and the federal voting system standards. Achieving
voting system standards compliance can be a lengthy and arduous process,
typically taking twelve or more months, thereby posing a significant barrier for
competitors. In addition to being qualified under the federal standards, we have
spent the past two years marketing our product to our target customer base and
thus we believe we are well positioned to begin generating sales once the states
begin disbursing their federal funds and we have received the appropriate state
certifications. With the recent availability of $2.35 billion to the states, we
believe that a number of significant purchasing decisions will be made prior to
the end of 2004. As of June 17, 2004, approximately half of the federal funds
have been distributed to the states. The remaining funds are expected to be
distributed once the states complete the necessary requirements. However, the
portion of funds used by a state for acquisition of new voting systems will
depend upon each state's plan and we cannot assure you that states will use this
funding to purchase our product or that states will make purchasing decisions
this year.
WE HAVE RELATIONSHIPS WITH WELL-KNOWN AND ESTABLISHED PARTNERS.
AccuPoll has entered into teaming and reseller agreements with various
established companies that offer election-related services. We have entered into
a teaming agreement with Alternative Resources Corporation (ARC) whereby ARC
will provide deployment and support services for our DRE voting system. In
addition, we have entered into a multi-state reseller agreement with AmCad, LLC
whereby AmCad will assist with the marketing and deployment of our DRE voting
system. We are currently in negotiations with additional well-known, large and
well capitalized marketing partners in other targeted states. However, we cannot
assure you that any of these negotiations will lead to a definitive business
relationship in the future.
OUR EXPERIENCED MANAGEMENT TEAM HAS DEEP KNOWLEDGE OF INFORMATION
TECHNOLOGY. Our senior management collectively has 80 years of experience in the
information technology industry in coding and development marketing. Our
management team has held senior positions at leading information technology
firms, such as MCI Systemhouse and EDS, and has considerable experience in the
process of large-scale systems deployment.
BUSINESS STRATEGY
We plan to leverage our business strengths in order to grow our
operations. The key elements to our business strategy are described below:
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LEVERAGE THE MARKETING STRENGTH AND INFRASTRUCTURE OF OUR PARTNERS. We
believe that the relationships that we are building with our marketing and
reselling partners will help to position us in critical larger markets. We
believe that we will gain enhanced credibility through associating with these
partners. Additionally, we believe that we have the ability to leverage their
resources and networks and in turn be better positioned to sell and deploy
programs into these larger target markets. Our partners are well known,
established companies that have considerable experience in providing technology
solutions and service support in the election process. We will continue to
maintain, and intend to expand, our strategic alliances with these and other
established partners in the election services business. Currently we have chosen
to develop partnering relationships on a state-by-state basis.
EXPAND OUR TARGETED, INDEPENDENT MARKETING STRATEGY TO SMALL- AND
MID-SIZED CUSTOMERS. We have begun a direct marketing approach to reach small-
and mid-sized target markets. We initiated this marketing program by identifying
specific regions and developing a presence by attending trade shows and
conferences, which provides us with opportunities to meet, as well as educate,
our customers. We also market our system by means of our website and have
prepared a web-based virtual voting experience to further enhance the awareness
and understanding of our product. We are building awareness of the AccuPoll
product so as to be well positioned in our target markets as HAVA funding is
disbursed to the states. We are working to obtain all appropriate federal and
local certification with that timing in mind. We intend to grow our direct sales
and marketing force, engage additional lobbyists in our target states, engage
local sales/marketing agents, and build a robust sales support and delivery
organization that will reinforce our sales and marketing activities. The ramp up
in each of these areas is critical to support the upcoming procurement cycle
that will begin following the May 2004 release of federal funds to the states.
MAINTAIN PRODUCT LEADERSHIP. As the developer of the first voting
system with a voter-verified paper audit trail that is both human- and
machine-readable and that is also qualified as compliant with the federal voting
system standards, we believe that our product has the potential to become a
leader in the voting system market. We are firmly committed to ongoing research
and development and standardized product testing to insure that our electronic
voting system continues to be a leading platform in the market. We plan to
design and test new generations of our product with the intent of enhancing
functionality in anticipation of additional government requirements and market
demands (e.g., instant runoff voting).
SELECTIVELY EXPAND INTO RELATED PRODUCT OFFERINGS. When appropriate, we
intend to acquire selectively related businesses that complement our core
product line and expand the range of services that we can offer our customer
base. As we find opportunities that broaden our offerings, we will consider
making additional acquisitions. We believe it is important to complement our
revenue stream by expanding into related products and services where we can
leverage our knowledge and capabilities in electronic voting systems.
EXPAND ADDRESSABLE MARKETS VIA ENTRY INTO FOREIGN VENUES. The standard
election process is universal by nature, and as part of its core technology, the
AccuPoll DRE voting system was designed and implemented as a flexible platform
that can be adapted to meet the needs of various countries. We plan to expand
our international sales effort in Europe, Canada, Asia/Pacific and Latin
America.
REGULATORY MATTERS
We expect that our voting systems will be sold primarily to counties in
the United States and other governmental jurisdictions. In the United States,
our ability to sell our voting system products depends on the qualification of
each product through independent testing for compliance with the federal voting
system standards. In addition, most states require state-level certification
before we may sell our products to local jurisdictions in those states.
Moreover, local jurisdictions may require vendor qualification and acceptance
level testing. Because we plan to sell our products to government agencies, we
will be subject to laws, regulations and other procedures that govern
procurement and contract implementation by those agencies.
As of September 22, 2004, our DRE voting system was certified by the
states of Alabama, Arkansas, Kentucky, Mississippi, Ohio, South Dakota, Utah and
West Virginia. Currently, we are in the process of applying for certification in
additional states.
Obtaining the necessary qualifications and certifications and complying
with government procurement
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requirements can be time consuming, involve unexpected delays and may be costly.
We are subject to a number of significant risks and uncertainties associated
with government regulation and procurement that could materially and adversely
affect our business. For a description of these risks and uncertainties, please
see "Risk Factors - Risks Relating to Regulation."
ENVIRONMENTAL PROTECTION
Our compliance with federal, state and local laws or regulations, that
govern the discharge of materials into the environment has not had a material
adverse effect upon our capital expenditures, earnings or competitive position
within our markets.
COMPETITION
The market for the manufacture and supply of computerized voting
machines is highly competitive. We anticipate that competition will intensify in
the future. As of June 30, 2004, we believe that our competitors, in
alphabetical order, included:
COMPANY NAME PRODUCT NAME
- ------------ ------------
Advanced Voting Solutions, Inc., a WINvote
private company based in Frisco, Texas
Avante International Technology, Inc., a VOTE-TRAKKER
private company based in Princeton, New
Jersey
Diebold Elections Systems, Inc., (DESI) AccuVote-TS
a subsidiary of Diebold, Inc. based in
McKinney, Texas
Election Systems + Software (ES+S), a IVotronic
private company based in Omaha, Nebraska
Guardian Voting Systems, a subsidiary of ELECTronic 1242
Danaher Controls based in Gurnee,
Illinois
Hart InterCivic, a private company based eSlate
in Austin, Texas
Sequoia Voting Systems, a subsidiary of AVC Edge
De La Rue, plc, based in Oakland,
California
Unilect Corporation, a private company Patriot
based in Dublin, California
We believe that the following are the primary competitive factors in
our market:
o accessibility;
o auditability;
o brand recognition and market penetration;
o customer support and service;
o ease of use;
o government qualification and certification of products;
o price;
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o reliability of services; and
o security.
We believe that we compete favorably with respect to these factors.
However, many of our competitors have significantly greater market penetration,
brand-name recognition, engineering and marketing capabilities and financial,
technological and personnel resources than we do. As a result, they may be able
to develop and expand their customer base more quickly, adapt more swiftly to
new or emerging technologies and changes in customers' requirements, take
advantage of acquisitions and other business opportunities more readily, and
devote greater resources to the marketing and sale of services than we can. Our
competitor's products may offer different features than our products that might
make their products more attractive to some voting administrators. To the extent
that we do not compete successfully with respect to any of the primary
competitive factors in our market, our business may be materially harmed.
RESEARCH AND DEVELOPMENT
We expect that the pace of technological advances in the computer
voting machine industry will rapidly increase. Our ability to compete
successfully is heavily dependent upon our ability to ensure a continuing and
timely flow of competitive products and technology to the marketplace. Our
internal product development efforts are focused on designing and developing
computerized voting machines that adhere to industry standards and incorporate
the technologies and features that we believe are most desired by our customers.
Expenditures for research activities relating to product development
and improvement were approximately $176,000 for the period August 9, 2001
(inception) through June 30, 2004.
We believe that continued strategic investment in product development
is essential for us to become competitive in the markets we serve. Without
significant additional financing, we will be unable to continue development of
our products.
INTELLECTUAL PROPERTY
We rely upon trade secrets, technical know-how and continuing
technological innovation to develop and maintain our competitive position. The
products that we design require a large amount of engineering design and
manufacturing expertise. The majority of these technological capabilities,
however, are not protected by patents or licenses. We rely on the expertise of
our employees and our learned experiences in both design and manufacture of
these products. We have taken steps to protect both our intellectual property
and brand name in the marketplace. We have applied to the United States Patent
and Trademark Office for a systems and method patent with respect to our
electronic voting system that produces an official voter verifiable paper
ballot. We have also filed trademark applications with the United States Patent
and Trademark Office to protect the Accupoll brand name and logo. We are subject
to a number of significant risks and uncertainties associated with our
intellectual property that could materially and adversely affect our business.
For a description of these risks and uncertainties, please see "Risk Factors -
Risks Relating to our Technology."
OUR EMPLOYEES AND CONSULTANTS
As of June 30, 2004, we had 19 and 10, respectively, full-time
employees and consultants. Our employees are not represented by a collective
bargaining organization. We believe our relationship with our employees is good.
RISK FACTORS
BEFORE DECIDING TO INVEST IN US OR TO MAINTAIN OR INCREASE YOUR
INVESTMENT, YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, IN ADDITION
TO OTHER INFORMATION CONTAINED IN THIS REPORT. EACH OF THE FOLLOWING RISKS COULD
CAUSE OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS TO BE
MATERIALLY HARMED. THESE RISKS COULD CAUSE THE TRADING PRICE OF OUR COMMON STOCK
TO DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
8
RISKS RELATING TO OUR BUSINESS
WE HAVE INCURRED SIGNIFICANT LOSSES TO DATE AND MAY NEVER BE PROFITABLE.
We began our current operations on August 9, 2001 and have incurred
significant operating losses during each fiscal period since that date. We had
no revenues during the period from commencement of our voting system operations
through June 30, 2004. Revenues from our wholly owned subsidiary Z Prompt were
$1.7 million from November 1, 2003 through June 30, 2004. At June 30, 2004, we
had an accumulated deficit of approximately $21.2 million from our operations.
We expect that we will incur significant operating losses and negative cash
flows from operations for the foreseeable future. If our losses continue and we
are unable to commercialize, manufacture and market our products successfully,
we may never generate sufficient revenues to achieve profitability or positive
cash flows from operations.
OUR AUDITORS HAVE INCLUDED A GOING CONCERN PARAGRAPH IN THEIR AUDIT REPORT ON
OUR FINANCIAL STATEMENTS FOR OUR FISCAL YEAR ENDED JUNE 30, 2004.
We have prepared our consolidated financial statements for the year
ended June 30, 2004 on a going-concern basis, which contemplates the realization
of assets and satisfaction of liabilities and other commitments in the normal
course of business. However, the report from our independent auditors with
respect to our consolidated financial statements for the year ended June 30,
2004 states that our losses from operations, negative working capital and lack
of operational history, among other factors, raise "substantial doubt" about our
ability to continue as a going concern.
OUR SUBSIDIARY, Z PROMPT, INC. HAS FILED A PETITION FOR RELIEF UNDER CHAPTER 11
OF THE UNITED STATES BANKRUPTCY CODE AND WE MAY LOSE OUR ENTIRE INTEREST IN IT.
On March 23, 2004, our wholly-owned subsidiary, Z prompt, Inc., filed a
petition for relief under Chapter 11 of the United States Bankruptcy Code. Z
prompt continues to conduct business activities as a debtor-in-possession. We
cannot predict the outcome of this proceeding and it involves numerous risks and
uncertainties, such as:
o The appointment of a trustee;
o The ability of creditors to obtain relief from the automatic stay;
o The continued willingness of customers to do business with Z prompt;
o The ability of Z prompt to obtain financing on acceptable terms;
o The outcome of any adversary proceedings that have been or may be
commenced by or against Z prompt;
o The possible conversion of the case to liquidation under Chapter 7 of
the Bankruptcy Code or dismissal of the case;
o The ability to obtain confirmation of a plan of reorganization on
terms acceptable to us; and
o The ability of Z prompt to successfully execute any confirmed plan of
reorganization.
In addition, Z prompt will incur legal and other fees and expenses in
connection with the bankruptcy proceedings and we may be unable to fund these
costs. Z prompt has been our only source of consolidated revenues since November
1, 2003, the date on which the acquisition was recognized for accounting
purposes. If Z prompt is unable to reorganize successfully, we could lose our
entire interest in it.
WE WILL NEED SIGNIFICANT ADDITIONAL FINANCING TO CONTINUE OPERATIONS.
We require substantial additional financing in order to be able to
continue operations. In the past, our capital requirements have been met through
sales of our common stock and convertible notes. We cannot assure you that we
will be able to raise new capital or that sources of capital will be available
to us on terms that we find acceptable. If we are unable to obtain additional
financing on acceptable terms, we will be unable to continue operations.
Moreover, if we raise additional capital through borrowing or other debt
financing, we would incur substantial interest expense. Sales of additional
equity securities or securities convertible into equity securities will
9
result in dilution to our present stockholders.
WE HAVE GENERATED NO REVENUES FROM OUR VOTING SYSTEM PRODUCT, AND AN UNPROVEN
BUSINESS STRATEGY AND HAVE ONLY A LIMITED OPERATING HISTORY FOR YOU TO REVIEW IN
EVALUATING OUR BUSINESS AND PROSPECTS.
At June 30, 2004, we had generated no revenues from the sale of our
voting system products. Our limited operating history makes it difficult to
evaluate our prospects. We cannot assure you that we will be able to achieve
significant sales of our products or maintain product sales.
WE EXPECT THAT OUR OPERATING RESULTS MAY FLUCTUATE SUBSTANTIALLY, WHICH MAY
MATERIALLY AFFECT OUR BUSINESS AND THE MARKET PRICE OF OUR COMMON STOCK.
You should not rely on our period-to-period financial results as an
indication of our future performance. We expect that our operating results will
fluctuate substantially as a result of a number of factors, many of which will
be beyond our control such as the following:
o When our products are qualified as compliant with federal voting
system standards and certified by the states;
o When public agencies schedule procurements of electronic voting
systems and the timing associated with the procurements;
o Delays in the development and introduction of our products;
o Delays in the manufacture and delivery of our products;
o The adoption of new or amended federal voting system standards, state
certification requirements, or other legal mandates applicable to our
products;
o The hiring, retention and utilization of our personnel;
o The financial impacts associated with future business acquisitions, if
any;
o The receipt of additional financing;
o General economic conditions; and
o The occurrence of other events or circumstances described in these
risk factors.
Fluctuations in our operating results could affect the market price of
our stock and could cause the price to decline. As a result, we may be unable to
finance future growth through sales of our equity securities.
IF WE ARE UNABLE TO EXPAND OUR SALES, MARKETING, DISTRIBUTION AND SERVICE
CAPABILITIES OR ENTER INTO AGREEMENTS WITH THIRD PARTIES TO DO SO, WE WILL BE
UNABLE TO SUCCESSFULLY MARKET AND SELL OUR PRODUCTS.
We currently have limited sales, marketing or distribution capabilities
and limited service capabilities. If we are unable to expand these capabilities
either by developing our own sales, marketing, distribution or service
organization or by entering into agreements with others at a competitive cost,
we will be unable to market and successfully sell our products. We plan to enter
into strategic relationships with other companies to provide services relating
to our products, including product roll-out support, election worker education,
help desk, and break/fix support. We cannot assure you that we will be able to
develop and maintain successful relationships on terms acceptable to us. The
failure to do so could materially and adversely affect the marketing and sale of
our products.
WE RELY ON A THIRD PARTY MANUFACTURER. TO THE EXTENT THAT THIS MANUFACTURER
EXPERIENCES FINANCIAL OR OPERATIONAL DIFFICULTIES, OUR BUSINESS COULD BE
INTERRUPTED.
We currently rely, and expect to continue to rely, on a third party to
manufacture our product. Our agreement requires us to acquire the product
exclusively from this manufacturer unless the manufacturer is unable to produce
and deliver on time our required quantity. To the extent that this manufacturer
experiences financial or operational difficulties, our business could be
interrupted. These difficulties could inhibit our ability to provide products in
sufficient quantities with acceptable quality and at an acceptable cost to our
customers. Any disruption in supply of our product from this manufacturer would
cause us to delay delivery to our customers that could lead to a loss of sales
and revenues.
10
WE FACE SUBSTANTIAL COMPETITION AND POTENTIAL COMPETITION FROM OTHERS WHO HAVE
SIGNIFICANTLY GREATER FINANCIAL RESOURCES AND OTHER RESOURCES THAN US.
We expect significant competition from existing competitors and
potential competitors. We may not have the financial resources, technical
expertise, sales and marketing abilities or support capabilities to compete
successfully. Many of our existing competitors have greater market penetration,
brand-name recognition, market presence, engineering and marketing capabilities,
and financial, technological and personnel resources than we do. As a result,
many of our competitors have several significant advantages over us as we seek
to market and sell our products.
OUR FUTURE SUCCESS DEPENDS UPON RETAINING KEY PERSONNEL AND ATTRACTING NEW
EMPLOYEES.
Our future performance depends significantly upon the continued
contributions of both Mr. Dennis Vadura, our chief executive officer, and Mr.
Frank J. Wiebe, our president. The loss of the services of Mr. Vadura or Mr.
Wiebe or any of our senior management or key personnel could materially and
adversely affect our business. We may not be able to retain these employees and
searching for their replacements could divert attention from senior management
and delay our ability to implement our business strategy. All of our senior
management and key employees can terminate his or her relationship with us at
any time.
If we are successful in implementing and developing our business, among
other things, we expect that we will need to increase our workforce.
Accordingly, our future success will likely depend on our ability to attract,
hire, train and retain highly skilled management, technical, sales, marketing
and customer support personnel. Competition for qualified employees is intense
and our financial resources are limited. Consequently, we may not be successful
in attracting, hiring, training and retaining the people we need, which would
impede our ability to implement our business strategy.
WE HAVE ENGAGED IN TRANSACTIONS WITH A COMPANY OWNED BY TWO INDIVIDUALS WHO ARE
ALSO OUR DIRECTORS, OFFICERS AND SHAREHOLDERS.
In April 2002, we entered into a master services agreement with a
company, Web Tools International, Inc., that is owned and operated by Messrs.
Dennis Vadura and Frank Wiebe. Each of these individuals is a director, officer
and shareholder with respect to both us and Web Tools International. The
agreement terminated on March 31, 2004. The financial results of Web Tools
International were consolidated with our results from January 1, 2004 through
March 31, 2004. As of June 30, 2004 we owed Web Tools International $1.5
million.
WE WILL NEED TO CONTINUE TO IMPROVE AND DEVELOP PRODUCTS IN ORDER TO BE
SUCCESSFUL.
We expect that the pace of technological advances in the computer
voting machine industry will rapidly increase. Our ability to compete
successfully is heavily dependent upon our ability to ensure a continuing and
timely flow of competitive products and technology to the marketplace. We cannot
assure you that we will be successful in the timely development of new and
improved technologies.
WE ARE SUBJECT TO CURRENT LITIGATION.
We are defendants in two separate lawsuits. In addition, we may be
subject to litigation in the future. For a description of this litigation,
please see "ITEM 3 - LEGAL PROCEEDINGS."
WE MAY ACQUIRE OTHER BUSINESSES AND OUR BUSINESS COULD BE MATERIALLY AND
ADVERSELY AFFECTED AS A RESULT OF ANY OF THESE ACQUISITIONS.
We are looking for strategic opportunities to grow our product
offerings through acquisitions or strategic investments. In this regard, during
the year ended June 30, 2004, we entered into an agreement to purchase all of
the outstanding shares of Z prompt, Inc. that was recognized for accounting
purposes during our fiscal quarter ended December 31, 2003. In the future, we
may acquire or make strategic investments in other complementary businesses. We
have limited experience in acquiring or investing in other businesses and we may
not be successful in completing, financing, or integrating an acquired business
into our existing operations.
11
Any such acquisitions could involve the dilutive issuance of equity
securities and the incurrence of debt. In addition, the acquisition of Z prompt,
Inc. and future acquisitions may involve numerous additional risks, such as:
o unanticipated costs associated with the acquisition or investment;
o diversion of management time and resources;
o problems in assimilating and integrating the new business operations;
o potential loss of key customers or personnel of an acquired company;
o increased legal and compliance costs; and
o unanticipated liabilities of an acquired company.
Even when an acquired company has already developed and marketed
products, we can not assure you that the products will continue to be
successful, that product enhancements will be made in a timely fashion or that
pre-acquisition due diligence will have identified all possible issues that
might arise with respect to the acquired company or its products and that could
materially and adversely affect us.
RISKS RELATING TO OUR TECHNOLOGY
SHOULD OUR PRODUCTS FAIL TO PERFORM PROPERLY, OUR REPUTATION COULD BE DAMAGED,
WE COULD LOSE SALES AND CUSTOMERS AND WE COULD POTENTIALLY INCUR SIGNIFICANT
LIABILITIES.
Our products incorporate a number of intricate computer software
programs and hardware components that must work seamlessly in order for our
product to function correctly. While we expect our products to perform to
federal voting system standards, we cannot assure you that our product will
function properly at all times. If our system's software programs or hardware
components experience failure or malfunction or are alleged to have failed or
malfunctioned, we are likely to receive significant adverse publicity -
particularly if the failure is alleged to have had an effect on the outcome of
an election. As a result, our reputation could be damaged, we could lose sales
and customers and we could potentially incur liabilities.
SHOULD WE FAIL TO SECURE OR PROTECT OUR INTELLECTUAL PROPERTY RIGHTS,
COMPETITORS MAY BE ABLE TO USE OUR TECHNOLOGIES.
We have applied to the United States Patent and Trademark Office for a
patent with respect to our electronic voting system that produces an official
voter verifiable paper ballot and for trademark registration with respect to the
AccuPoll name and logo. We cannot assure you that a patent will be issued or our
trademarks will be registered. If issued, we cannot assure you that we will be
able to defend or enforce the patent, trademark or other intellectual property
rights that we may have in our products, name or logo. Although we may initiate
litigation to stop infringement, intellectual property litigation is often
expensive and could consume our limited financial resources. Additionally, third
parties may be better able to sustain the costs of litigation. If we are unable
to defend or enforce our rights, other parties may be able to use our
technologies without paying any compensation to us. Furthermore, we cannot
assure you that our competitors will not design around any issued patents, or
improve upon our technology, or that we will be able to detect infringements. If
we are unable to establish, defend or enforce rights to our technology, our
business may be materially damaged.
SHOULD WE SUE TECHNOLOGIES THAT CONFLICT WITH THE RIGHTS OF THIRD PARTIES, OUR
BUSINESS COULD BE MATERIALLY AND ADVERSELY AFFECTED.
Our competitors and others may have or acquire patent or other
intellectual property rights that they could attempt to enforce against us. If
they do so, the following could occur:
o We could be sued and required to defend ourselves in time-consuming
and costly litigation (even if it is ultimately determined that the
claim is without merit);
o We may be adjudged liable for substantial damages for past
infringement, including possible treble damages if it is found that we
have willfully infringed;
o We may be prohibited from selling or licensing our product without a
license which may not be
12
available on commercially acceptable terms, if at all, or that may
require us to pay substantial royalties;
o We may have to redesign our products so that they do not infringe and
such redesign may not be possible or may be costly and time-consuming.
If any of the foregoing occurs, our business is likely to be materially
and adversely affected.
RISKS RELATING TO REGULATION
EACH OF OUR VOTING SYSTEM PRODUCTS MUST MEET QUALIFICATION AND CERTIFICATION
STANDARDS BEFORE WE WILL BE ABLE TO SELL THEM.
In the United States, our ability to sell our voting system products
depends on the qualification of each product through independent testing for
compliance with the federal voting system standards. In addition, most states
require state-level certification before we may sell our products to local
jurisdictions in those states. Moreover, local jurisdictions may require
acceptance level testing. At June 30, 2003, none of our products had been
qualified or certified. In March 2004, our DRE voting system was qualified as
complying with the 1990 federal voting system standards, as to hardware, and
2002 federal voting system standards, as to software, and has been subsequently
certified by the states of Alabama, Arkansas, Kentucky, Mississippi, Ohio, South
Dakota, Utah and West Virginia. We are seeking full qualification of our voting
system under the 2002 federal voting system standards but cannot assure you that
we will obtain that qualification. We cannot assure you that our products will
be certified by additional states. If we are unable to obtain certification in
additional states, we may not be able to generate sufficient revenues to achieve
profitability.
STATE ELECTION OFFICIALS MAY DECERTIFY OUR PRODUCTS.
If certified in a state, our products will be subject to ongoing review
by the state which may withdraw certification. For example, the California
Secretary of State recently issued an order withdrawing certification of certain
of our competitors' products. We cannot assure you that a state will not
withdraw certification of our products on the basis that the product is
defective, obsolete or otherwise unacceptable for use. If certification is
withdrawn, we will not be able to continue to sell the product in the state and
are likely to receive significant adverse publicity. As a result, our reputation
could be materially damaged, causing us to lose sales and customers in other
jurisdictions.
WE EXPECT FEDERAL VOTING SYSTEM STANDARDS, STATE CERTIFICATION AND OTHER LEGAL
REQUIREMENTS PERTAINING TO OUR PRODUCTS TO CHANGE.
The market for computerized voting machines and related equipment for
use in federal, state, local and other elections, is changing as new technical
standards are considered. We expect that federal voting system standards, state
certification and other legal requirements will change. We may not be able to
anticipate new standards or changes to existing standards and we cannot assure
you that our products will comply, or can be modified to comply with, any new or
changed standards or requirements that may be adopted. If our products do not
comply and cannot be modified to comply with new or changed standards or
requirements, we may not be able to sell some or all of our products.
WE MAY NOT BE ABLE TO OBTAIN FEDERAL AND STATE CERTIFICATION OF PRODUCTS IN A
TIMELY MANNER, WHICH COULD DELAY THE MARKETING AND SALES OF OUR PRODUCTS.
Independent testing authorities test and certify our products. There
are a limited number of testing authorities able to test and certify our
products in accordance with federal voting system standards. These companies
also conduct testing and certification for our competitors. Any delays or
disruptions in the services provided by our independent testing authorities is
likely to affect our ability to market and sell our products and could
materially and adversely impact our sales and our ability to achieve
profitability.
IF OUR PRODUCTS ARE NOT ACCEPTED BY FEDERAL, STATE, LOCAL AND FOREIGN
GOVERNMENTS AND VOTERS AS REPLACEMENTS FOR CURRENT VOTING SYSTEMS, WE WILL NOT
BE SUCCESSFUL.
13
Our success depends on the acceptance of our products as replacements
for current voting systems both in the United States and abroad. Even if our
products satisfy applicable qualification and certification requirements, local
governments may elect not to purchase them for a number of reasons, including,
but not limited to, voter acceptance of our technology. In recent years, there
has been significant public controversy regarding the reliability, benefits and
costs of various alternative voting systems, including electronic voting
systems. We have expended a significant amount of our time and financial
resources demonstrating our product capabilities to various state and local
government officials. If our products do not achieve significant market
acceptance among state and local governments, we may not be able to generate
sufficient revenues to achieve profitability. In addition, if foreign
governments do not accept our products, the long-term growth of our business
will be limited.
WE WILL BE SUBJECT TO LAWS, REGULATIONS AND OTHER PROCEDURES WITH RESPECT TO
GOVERNMENT PROCUREMENT.
Because we plan to sell our products to government agencies, we will be
subject to laws, regulations and other procedures that govern procurement and
contract implementation by those agencies. These agencies are likely to impose
vendor qualification requirements, such as requirements with respect to
financial condition, insurance and history. We have limited experience with
government procurement and cannot assure you that we will be able to meet
existing or future procurement laws, regulations and procedures or that we will
be able to qualify as a vendor. Some procurement processes could involve an
extensive period of product evaluation, including evaluation by the public.
Compliance with government procurement and qualification requirements could
significantly delay sales of our products. Delays could also occur due to
protests of bid specifications or challenges to contract awards. If we fail to
comply with an agency's procurement or vendor qualification requirements or
procedures, we will be unable to market and sell our products to that agency.
Government agencies may also impose contractual terms and conditions, such as
warranty, termination and indemnification provisions, that are unfavorable to
us.
OUR COSTS WILL INCREASE AS A RESULT OF NEW AND AMENDED SECURITIES REGULATIONS.
New and amended regulations adopted by the Securities and Exchange
Commission will increase our accounting, legal and compliance costs as these
changes become effective. Additionally, we expect increased accounting, legal
and compliance costs because for periods beginning after June 30, 2003, we will
no longer be subject to the less extensive disclosure requirements applicable to
a "small business issuer" as defined by the Securities and Exchange Commission.
RISKS RELATING TO OUR SECURITIES
SOME HOLDERS OF OUR SECURITIES MAY HAVE THE RIGHT TO RESCIND THEIR PURCHASES.
We have offered and sold a substantial number of shares of common stock
and warrants and options to purchase common stock without registration under the
Securities Act of 1933, as amended, or qualification under state securities
laws. If any offer or sale were not exempt from, or otherwise not subject to,
federal and state registration and qualification requirements, the purchaser
would have a number of remedies, including the right to rescind the purchase.
The Securities Act of 1933, as amended, requires that any claim for rescission
be brought within one year of the violation. We have sold approximately
11,878,000 shares of common stock and warrants and options to purchase shares of
common stock in the United States within one year of June 30, 2004. The time
periods within which claims for rescission must be brought under state
securities laws vary and may be two years or more from the date of the
violation. We have sold approximately 14,170,000 shares of common stock and
warrants and options to purchase shares of common stock in the United States
within two years of June 30, 2004. Further, we cannot assure you that courts
will not apply equitable or other doctrines to extend the period within which
purchasers may bring their claims. The number of warrants and options described
above does not include warrants and options to purchase 3,600,000 shares of
common stock issued within two years of May 31, 2004 to our chief executive
officer, Dennis Vadura and our president, Frank Wiebe and a warrant to purchase
12,400,000 shares of common stock for which the holder has agreed in writing
that it will not assert any right to rescission that it may have. However, we
cannot assure you that this agreement is enforceable.
Should federal or state securities regulators deem it necessary to
bring administrative or legal actions
14
against us based upon a failure to register or qualify, the defense of any
enforcement action is likely to be costly, distracting to our management and if
unsuccessful could result in the imposition of significant penalties. The filing
of a claim for rescission or enforcement action against us or our officers or
directors could materially and adversely impact our stock price, generate
significant adverse publicity that materially affects our sales and materially
impairs our ability to raise capital through future sales of our securities. We
may also incur significant expenses should we determine that it is advisable to
register shares issuable upon exercise of outstanding warrants or options or
upon conversion of outstanding notes.
WE HAVE NOT FILED OR SENT INFORMATION STATEMENTS IN CONNECTION WITH STOCKHOLDER
ACTIONS BY WRITTEN CONSENT.
In 2002, we effected a 1 for 5 reverse split of our issued and
outstanding shares of common stock and filed amendments to Article IV of our
articles of incorporation to provide for a class of preferred stock. Each of
these actions required the approval of our stockholders that we believe was
given by written consent. In connection with these written consents, we did not
file with the Securities and Exchange Commission written information statements
containing the information specified in its proxy rules. Also, we did not send
information statements in advance of the action as required by the proxy rules
of the Securities and Exchange Commission. Accordingly, it is possible that a
stockholder could challenge the validity of these actions and the Securities and
Exchange Commission could take enforcement action against us. The defense of any
challenge or enforcement action is likely to be costly, distracting to our
management and could in the case of an enforcement action result in the
imposition of significant penalties. The filing of a stockholder challenge or an
enforcement action could materially and adversely impact our stock price,
generate significant adverse publicity that materially affects our sales, and
materially impair our ability to raise capital through future sales of our
securities.
SOME OF THE HOLDERS OF OUR COMMON STOCK MAY BE SUBJECT TO DILUTION.
As of June 30, 2004, we had outstanding warrants and options to
purchase 81,369,913 shares of common stock and notes convertible into 48,256,000
shares of common stock. The exercise price of the warrants and options ranges
from $.01 to $1.55 per share and the notes are currently convertible at prices
ranging from $.0625 to $.1224 per share. The number of shares of common stock
issuable upon conversion of certain of the notes may be greater in the future
because the conversion price is the lower of the specified price or 50% of the
average three lowest closing prices for our common stock for the twenty days
immediately preceding the conversion date. The exercise or conversion prices of
these securities are generally substantially lower than our stock price.
Therefore, holders of our common stock and potential investors are subject to
substantial dilution if these securities are exercised or converted. The terms
on which we could obtain additional capital may be adversely affected during the
time that the warrants and options may be exercised or the notes converted.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE OUR STOCK
PRICE TO FALL.
Sales of a substantial number of shares of our common stock in the
public market could cause the market price of our common stock to decline. As of
June 30, 2004, we had 154,347,064 shares of common stock outstanding, of which
approximately 55 million are freely tradable without restriction or further
registration under the Securities Act of 1933, as amended. As of June 30, 2004,
our affiliates held approximately 80 million shares of our common stock, which
are transferable pursuant to Rule 144, as promulgated under the Securities Act
of 1933, as amended. Although we do not believe that our affiliates have any
present intentions to dispose of any shares of common stock owned by them, there
can be no assurance that such intentions will not change in the future. We have
filed a registration statement with the Securities and Exchange Commission on
Form S-8 covering up to 12,000,000 shares of our common stock that are issuable
upon exercise of outstanding warrants. The exercise of those options or
warrants, and the prompt resale of shares of our common stock received, may
result in downward pressure on the price of our common stock.
A DECLINE IN THE PRICE OF OUR COMMON STOCK COULD AFFECT OUR ABILITY TO RAISE
FURTHER WORKING CAPITAL AND ADVERSELY IMPACT OUR ABILITY TO CONTINUE OUR NORMAL
OPERATIONS.
A prolonged decline in the price of our common stock could result in a
reduction in the liquidity of our common stock and a reduction in our ability to
raise capital. Because our operations primarily have been financed through the
sale of equity securities, a decline in the price of our common stock could be
especially detrimental to
15
our liquidity and our operations. We may be forced to reallocate funds from
other planned uses and this would have a significant negative effect on our
business plans and operations, including our ability to develop new products and
continue our current operations. If our stock price declines, there can be no
assurance that we will be able to raise additional capital or generate funds
from operations sufficient to meet our obligations. If we are unable to raise
sufficient capital in the future, we may not have the resources to continue our
normal operations.
OUR COMMON STOCK IS QUOTED ON THE OTC BULLETIN BOARD AND TRADING MAY BE SPORADIC
AND VOLATILE.
Our common stock is quoted on the OTC Bulletin Board. Trading in stock
quoted on the OTC Bulletin Board is often thin and characterized by wide
fluctuations in trading prices, due to many factors that may have little to do
with our operations or business prospects. Moreover, the OTC Bulletin Board is
not a stock exchange, and trading of securities on the OTC Bulletin Board is
often more sporadic than the trading of securities listed on a quotation system
or a stock exchange.
THE PRICE OF OUR COMMON STOCK IS LIKELY TO CONTINUE TO BE VOLATILE AND
STOCKHOLDERS COULD INCUR SUBSTANTIAL LOSSES.
The market price of our common stock has been, and in the future is
likely to be, highly volatile. This volatility could result in substantial
losses for stockholders. Our stock price may fluctuate widely for a number of
reasons, including:
o Media reports and announcements with respect to electronic voting
technology in general or our products or those of our competitors;
o Qualification or certification, or withdrawal of certification, of our
products or those of our competitors;
o Changes in federal voting system standards, state certification
standards or other legal requirements pertaining to our products;
o Litigation initiated by or against us, including litigation pertaining
to patents or other intellectual property rights;
o Dissemination of information about us by others, including on Internet
bulletin boards;
o Changes in our key personnel;
o General economic conditions; and
o The occurrence of other events or circumstances described in these
Risk Factors.
Companies are often sued by investors after periods of stock price
volatility. This type of litigation could be filed against us in the future
which could result in substantial expense and diversion of management's
attention and, if successful, substantial damage awards.
TRADING OF OUR STOCK MAY BE RESTRICTED BY THE SEC'S "PENNY STOCK" REGULATIONS
WHICH MAY LIMIT A STOCKHOLDER'S ABILITY TO BUY AND SELL OUR STOCK.
The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
less than $5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exceptions. Our securities are covered by the penny stock
rules, which impose additional sales practice requirements on broker-dealers who
sell to persons other than established customers and accredited investors. The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document in a form prepared by the Securities and Exchange Commission
that provides information about penny stocks and the nature and level of risks
in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer's confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these
16
rules, the broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure and
suitability requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that is subject to these penny
stock rules. Consequently, these penny stock rules may affect the ability of
broker-dealers to trade our securities. We believe that the penny stock rules
discourage investor interest in and limit the marketability of our common stock.
OUR ARTICLES OF INCORPORATION AUTHORIZE THE BOARD OF DIRECTORS TO ISSUE AND
DESIGNATE THE RIGHTS OF SERIES OF PREFERRED STOCK WITHOUT ACTION BY THE
STOCKHOLDERS.
Our authorized capital stock consists of 600,000,000 shares of common
stock and 80,000 shares of preferred stock. Our board of directors, without any
action by stockholders, is authorized to divide the authorized shares of
preferred stock into series and to designate the rights, qualifications,
preferences, limitations and terms of the shares of any series of preferred
stock, including but not limited to dividend, redemption, voting rights and
preferences. The rights of holders of shares of preferred stock that may be
issued might be superior to the rights granted to the holders of existing shares
of common stock. Further, the ability of our board of directors to designate and
issue series of preferred shares could impede or deter an unsolicited tender
offer or takeover proposal and the issuance of additional shares having
preferential rights could affect adversely the voting power and other rights of
holders of our common stock.
PROVISIONS OF NEVADA LAW COULD DISCOURAGE, DELAY OR PREVENT A MERGER,
ACQUISITION OR OTHER CHANGE IN CONTROL OF US, EVEN IF A CHANGE IN CONTROL WOULD
BENEFIT OUR STOCKHOLDERS.
At any time that we have 200 or more stockholders of record, we will be
subject to Nevada's statutes that prohibit us from engaging in specified
business combinations with "interested stockholders," including beneficial
owners of 10% or more of the voting power of our outstanding shares. Thereafter,
combinations may be permissible only if specified conditions are satisfied.
Nevada law also provides that directors may resist a change or potential change
in control if the directors determine that the change is opposed to, or not in
the best interest of, the corporation. Additionally, Nevada law permits
directors and officers in exercising their respective powers with a view to the
interests of the corporation, to consider: the interests of the corporation's
employees, suppliers, creditors and customers; the economy of the state and the
nation; the interests of community and society; and the long-term as well as
short-term interests of the corporation and its stockholders, including the
possibility that these interests may be best served by the continued
independence of the corporation. Accordingly, these statutory provisions could
discourage potential takeover attempts and could reduce the price that investors
might be willing to pay for shares of our common stock in the future.
ITEM 2. PROPERTIES
We occupy approximately 10,000 square feet of office space located at
15101 Red Hill Ave. Suite # 220, Tustin, California. The cost of the lease is
$1.10 per square foot. Our lease expires on July 31, 2006.
ITEM 3. LEGAL PROCEEDINGS.
In September 2003, we were served with a lawsuit filed in the Supreme
Court of New York, County of New York, by Stern & Co Communications LLC, d/b/a
Stern + Co. Stern alleging that we breached a contract with them by failing to
tender payment in full for services rendered. Stern sought to recover damages in
the amount of $35,000, and a warrant to purchase 36,000 shares of our common
stock. In November 2003, we entered into a stipulated settlement agreement with
Stern. In consideration for a full release of Stern's claims, we granted Stern
15,000 shares of common stock and a warrant to purchase 15,000 shares of common
stock at an exercise price equal to our closing stock price on the date of
issuance.
In December 2003, Paul Musco, the ex-President of our wholly-owned
subsidiary, Z prompt, Inc. filed suit against us and Z prompt in Superior Court
of California, County of Orange, California. The claim alleged breach of
contract, fraud and misrepresentation stemming from our acquisition of, and his
termination of his employment with, Z prompt. Mr. Musco is seeking damages in
excess of $800,000, plus punitive damages. We believe that Mr. Musco breached
his agreements with Z prompt and have filed a cross complaint for breach of
contract, fraud,
17
negligence and breach of fiduciary duty seeking $2,000,000. Mr. Musco has since
filed his own cross-complaint against us, Dennis Vadura, Frank Wiebe and Craig
Hewitt alleging fraud and tortious interference with contract. In addition,
Michael Shockett has joined the suit and filed a cross complaint against us, Z
prompt, Dennis Vadura, Frank Wiebe and Craig Hewitt alleging fraud, tortuous
interference with contract and wrongful termination. Michael Shockett was
terminated from employment with us in April 2004 for cause. Although no
assurance can be given that we will prevail on the merits, we will vigorously
defend these allegations.
In October 2003, a former employee of Z prompt, Nathalie Luu, filed
suit against us and Z prompt in Superior Court of California, County of Orange,
California. The complaint claims wrongful termination, intentional infliction of
emotional distress and retaliatory discharge, based on allegations that the
plaintiff was terminated for reporting to management alleged fraudulent
accounting practices by Z prompt management. The former employee is seeking
$112,000 in monetary damages including loss of wages, plus punitive damages.
This suit is currently in negotiations to be settled for $100,000 to be paid by
the issuance by us of common stock. A settlement would release us and Z prompt
from liability in connection with the suit.
On March 23, 2004, our wholly-owned subsidiary, Z prompt, Inc., filed a
petition for relief under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court, Central District of California. As of June 30,
2004, Z prompt had not filed a proposed Plan of Reorganization.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There was no matter submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our common stock is currently quoted on the Over-The-Counter Bulletin
Board under the symbol ACUP. For the periods indicated, the following table sets
forth the high and low bid prices per share of common stock. The below prices
represent inter-dealer quotations without retail markup, markdown, or commission
and may not necessarily represent actual transactions.
Fiscal 2003
------------ ------------
COMMON STOCK High (1) Low (1)
- ---------------------------------------------------- ------------ ------------
First Quarter Ended September 30, 2003 $2.00 $0.81
Second Quarter Ended December 31, 2003 $1.75 $1.35
Third Quarter Ended March 31, 2004 $3.85 $1.44
Fourth Quarter ended June 30, 2004 $3.57 $0.90
Fiscal 2002
------------ ------------
COMMON STOCK High (1) Low (1)
- ---------------------------------------------------- ------------ ------------
First Quarter Ended September 30, 2002 $1.24 $0.90
Second Quarter Ended December 31, 2002 $1.70 $0.85
Third Quarter Ended March 31, 2003 $1.70 $1.01
Fourth Quarter ended June 30, 2003 $1.14 $0.91
(1) Prices adjusted to reflect a 4 for 1 stock dividend that was effective July
2002.
As of September 24th, 2004, 180,705,970 shares of common stock were
held by approximately 1,817 stockholders of record. Our registrar and transfer
agent is Signature Stock Transfer, Inc., One Preston Park, 2301 Ohio Dr., Suite
100, Plano, Texas 75093; telephone (972) 612-4120.
18
DIVIDEND POLICY
We have not adopted any policy regarding the payment of dividends on
its Common Stock. The Company does not intend to pay any cash dividends on its
Common Stock in the foreseeable future. All cash resources are expected to be
invested in developing the Company's business. There are no restrictions that
materially limit our ability to pay cash dividends.
RECENT SALES OF UNREGISTERED SECURITIES
AccuPoll sold the following unregistered securities during the three
month period ended June 30, 2004 without registration under the Securities Act
of 1933.
In May, 2004 the Company issued 1,960,000 shares of common stock to
three different shareholders, as a result of a net exercise of warrants with a
strike price of $.0625 per share. The Company relied upon Section 4(2) of the
Securities Act as an exemption from registration.
In June, 2004 the Company issued 3,105,262 shares of common stock to
three different shareholders, as a result of a net exercise of warrants with a
strike price of $.0625 per share. The Company relied upon Section 4(2) of the
Securities Act as an exemption from registration.
In June, 2004 the Company issued 2,156,250 shares of common stock as a
result of a convertible debt of $250,000 which was converted at $.1224 per
share. The Company relied upon Section 4(2) of the Securities Act as an
exemption from registration.
ITEM 6. SELECTED FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2004, 2003 AND 2002
- ------------------------------------------------------------------------------------------------------------------------------------
(Restated)
2004 2003 2002
------------ ----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 113,789 $ -- $ 288,675
Accounts receivable, net 254,895 -- --
Note Receivable 50,000
Inventories 168,636 -- --
Deferred acquisition costs -- 144,206
Prepaid expenses -- 2,500 156,000
------------ ----------- -----------
537,320 146,706 494,675
PROPERTY AND EQUIPMENT, net 14,012 -- 411,966
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net 2,544,207 1,403,899 74,376
OTHER ASSETS 26,246 -- 130,000
------------ ----------- -----------
TOTAL ASSETS $ 3,121,785 $ 1,550,605 $ 1,111,017
============ =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,817,284 $ 931,503 $ 401,548
Related party payables 1,228,070 872,940
Deferred revenues 74,628 -- --
Convertible debt 3,304,600 -- (68,750)
Notes payable to related parties 30,000 175,000
Put liability related to warrant issuance 163,760 113,750 --
Liabilities subject to compromise 732,544 --
------------ ----------- -----------
TOTAL LIABILITIES 7,350,886 2,093,193 332,798
------------ ----------- -----------
EQUITY INSTRUMENTS SUBJECT TO RESCISSION 6,200,000 4,377,033 --
------------ ----------- -----------
STOCKHOLDERS' DEFICIT
Convertible Series A preferred stock, $0.01 par value,
80,000 shares authorized, no shares issued and outstanding
(liquidation preference of zero) -- -- --
Common stock, par value of $0.001, 600,000,000 shares
authorized; 158,482,171 and 112,945,963 shares issued and
outstanding at June 30, 2004 and 2003, respectively 158,482 112,946 (12,500)
Capital Stock 173,203
Additional paid-in capital 12,046,817 2,222,580 3,024,096
Accumulated deficit (22,634,400) (7,255,147) (2,406,580)
------------ ----------- -----------
(10,429,101) (4,919,621) 778,219
------------ ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,121,785 $ 1,550,605 $ 1,111,017
============ =========== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUPOLL HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended June 30, 2004 and 2003, and
For The Period From August 9, 2001 (Inception) Through June 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
(Restated)
Year Ended Year Ended Period Ended
June 30, 2004 June 30, 2003 June 30, 2002
------------- ------------- ------------
NET SALES $ 1,508,656 $ -- $ --
COST OF SALES 1,185,797 -- --
------------- ------------- ------------
GROSS PROFIT 322,859 -- --
EXPENSES
General and administrative 6,770,137 3,104,192 904,083
Professional fees 654,276 1,714,475 1,198,622
Interest 4,534,947 29,900 303,875
Loss on disposal of investment 1,200,000 -- --
Impairment of goodwill 2,542,752 -- --
------------- ------------- ------------
15,702,112 4,848,567 2,406,580
------------- ------------- ------------
NET LOSS $ (15,379,253) $ (4,848,567) $ (2,406,580)
============= ============= ============
BASIC AND DILUTED NET LOSS
PER SHARE $ (0.12) $ (0.05) $ (0.04)
============= ============= ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 130,782,481 106,687,447 68,735,272
============= ============= ============
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We are in the business of developing and marketing computerized voting
machines and their associated products and services for use in federal, state,
local and private elections. We have developed a direct recording electronic
(DRE) voting system that provides a voter-verified paper audit trail that is
both human and machine readable. Our system was qualified as meeting the federal
voting system standards on March 25, 2004 and we believe that it is currently
the only electronic voting system providing these features that is so qualified.
As of September 22, 2004, our DRE voting system was certified by the states of
Alabama, Arkansas, Kentucky, Mississippi, Ohio, South Dakota, Utah and West
Virginia. Currently, we are in the process of applying for certification in
additional states.
For the fiscal years ended June 30, 2004, 2003 and 2002, we incurred
losses of $13,989,675, $4,848,567 and $2,406,580, respectively. As of June 30,
2004 we had an accumulated deficit of $21,244,822.
SUBSEQUENT EVENTS
In May, 2004 the Company issued 18,406,248 shares of common stock to
seven different shareholders, as a result of a net exercise of warrants with a
strike price of $.0625 per share. The Company relied upon Section 4(2) of the
Securities Act as an exemption from registration.
On September 13, 2004, AccuPoll Holding Corp. completed a private
placement transaction with 11 accredited investors, pursuant to which AccuPoll
sold an aggregate of 3,666,668 shares of common stock, 1,833,338
19
Series A Warrants, 1,833,338 Series B Warrants and 1,833,338 Series C Warrants.
AccuPoll received gross proceeds totaling $1,649,900.10. For each two shares of
common stock, AccuPoll issued investors one A Warrant, one B Warrant and one C
Warrant. Each two shares and three warrants were sold at a price of $0.90. The
private placement was deemed exempt from registration requirements under Rule
506 of Regulation D under the Securities Act of 1933.
J.P. Turner + Company, LLC acted as placement agent for the
transaction. AccuPoll agreed to pay J.P. Turner + Company a cash fee of 8% of
the aggregate purchase price. AccuPoll will also pay J.P. Turner + Company 8% of
the cash proceeds received from the exercise of warrants issued in connection
with the placement. In addition, AccuPoll issued J.P. Turner + Company warrants
to purchase 458,333 shares of common stock, exercisable for five years at an
exercise price of $0.54 per share. Further, J.P. Turner + Company will receive:
(a) one Placement Agent's A Warrant, exercisable at $0.66 per share, for each
eight A Warrants exercised by an investor on a cash basis; (b) one Placement
Agent's B Warrant, exercisable at $1.07 per share, for each eight B Warrants
exercised by an investor on a cash basis; and (c) one Placement Agent's C
Warrant, exercisable at $2.40 per share, for each eight C Warrants exercised by
an investor on a cash basis. All Placement Agent's Warrants are exercisable for
five years after the respective issue dates, are not subject to call and may be
exercised on a cashless basis.
On one occasion, for a period commencing 91 days after the closing
date, but not later than two years after the closing date, upon written request
of the holders of more than 50% of the shares and warrant shares actually issued
upon exercise of warrants, AccuPoll is required to prepare and file with the
Securities and Exchange Commission a registration statement under the Securities
Act of 1933 registering the shares of common stock issued to the investors and
the shares underlying the warrants, including warrant shares issuable upon
exercise of warrants issued to the placement agent (the "Registration
Statement"). The A Warrants expire 150 days from the date the Registration
Statement is declared effective by the Securities and Exchange Commission and
are exercisable at $0.55 per share. The B Warrants expire four years after the
date the Registration Statement is declared effective by the Securities and
Exchange Commission and are exercisable at $0.89 per share. The C Warrants
expire three years after the date the Registration Statement is declared
effective by the Securities and Exchange Commission and are exercisable at $2.00
per share.
AccuPoll may call the warrants beginning 30 trading days after the
effective date of the Registration Statement and ending 30 trading days before
the expiration of the warrants. A call notice may be given by AccuPoll for the A
Warrants only within five trading days after the common stock has had a closing
price as reported for the principal market of $1.10 or higher for 15 consecutive
trading days. A call notice may be given by AccuPoll for the B Warrants only
within five trading days after the common stock has had a closing price as
reported for the principal market of $1.78 or higher for 15 consecutive trading
days. A call notice may be given by AccuPoll for the C Warrants only within five
trading days after the common stock has had a closing price as reported for the
principal market of $2.95 or higher for 15 consecutive trading days.
Beginning September 8, 2004 and until the Registration Statement has
been effective for 150 days, the investors must be given at least ten business
days prior written notice of any proposed sale by AccuPoll of its common stock
or other securities or debt obligations except in connection with (a) employee
stock options or compensation plans, (b) as full or partial consideration in
connection with any merger, consolidation or purchase of substantially all of
the securities or assets of any corporation or other entity, or (c) as has been
described in the reports or other written information filed with the Securities
and Exchange Commission or delivered to the investors prior to the closing date
("Excepted Issuances").
Other than the Excepted Issuances, if at any time until the
Registration Statement has been effective for 150 days, if AccuPoll offers,
issues or agrees to issue any common stock or securities convertible into or
exercisable for shares of common stock (or modify any of the foregoing which may
be outstanding at any time prior to the closing date) to any person or entity at
a price per share or conversion or exercise price per share which shall be less
than $0.45, without the consent of each investor, then AccuPoll is required to
issue, for each such occasion, additional shares of common stock to each
investor so that the average per share purchase price of the shares of common
stock issued to the investor (of only the common stock or warrant shares still
owned by the investor) is equal to such other lower price per share. For
purposes of this issuance and adjustment, the issuance of any security of
AccuPoll carrying the right to convert such security into shares of common stock
or of any warrant, right or option to purchase
20
common stock will result in the issuance of the additional shares of common
stock upon the issuance of such convertible security, warrant, right or option
and again upon any subsequent issuances of shares of common stock upon exercise
of such conversion or purchase rights if such issuance is at a price lower than
$0.45.
The exercise price of the warrants is subject to adjustment in the
event AccuPoll effects a reorganization, consolidation or merger, or transfers
all or substantially all of its properties or assets. Also, until the expiration
date of the warrants, if AccuPoll issues any common stock except for Excepted
Issuances, prior to the complete exercise of the warrants for a consideration
less than the purchase price that would be in effect at the time of such issue,
then the exercise price shall be reduced to such other lower issue price. For
purposes of this adjustment, the issuance of any security or debt instrument of
AccuPoll carrying the right to convert such security or debt instrument into
common stock or of any warrant, right or option to purchase common stock shall
result in an adjustment to the exercise price upon the issuance of the
above-described security, debt instrument, warrant, right, or option.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED JUNE 30, 2004 TO YEAR ENDED JUNE 30, 2003
REVENUES: For the year ended June 30, 2004 we had revenue of approximately $1.5
million. For the year ended 2003 we had no revenue. The increase was caused by
our acquisition of Z prompt.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative
expenses were $3,160,257 for the year ended June 30, 2004 as compared to
$3,104,192 for the year ended June 30, 2003. The increase in general and
administrative expenses is the result of addtional staff.
PROFESSIONAL FEES: Professional fees were $4,264,156 for the year ended
June 30, 2004 as compared to $1,714,475 for the year ended June 30, 2003. The
decrease in professional fees is due to costs of services to develop the ballot
buddy product and non cash expenses related to the issuance of warrants to
consultants.
INTEREST EXPENSE: Interest expense was $4,534,947 for the year ended
June 30, 2004 as compared to $29,900 for the year ended June 30, 2003. The
increase in interest expense is due to non-cash beneficial conversion charges
for equity instruments tied to fun raising.
NET LOSS: For the year ended June 30, 2004, we incurred a net loss of
($15,379,253) and a net loss per share of ($0.12). This compares to a net loss
of $4,848,567 and a net loss per share of $0.05 for the year ended June 30,
2003. The increaed loss is dude to increaed professional fees and interest
expense, the impairment of goodwill totalling $2,542,752 and a loss on the
disposal of an investment totalling $1,200,000, as well as the additional
expenses of our newly acquired subsidiary.
COMPARISON OF YEAR ENDED JUNE 30, 2003 TO YEAR ENDED JUNE 30, 2002
REVENUES: For the years ended June 30, 2003 and 2002 we had no
revenues.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative
expenses increased by approximately 326% to $3,104,192 for the year ended June
30, 2003 from $728,019 for the year ended June 30, 2002. The increase in general
and administrative expenses is the result of addtional staff, and non-cash
expenses related to the issuance of options and warrants to employees and
consultants that are in the money.
PROFESSIONAL FEES: Professional fees were $1,714,475 for the year ended
June 30, 2003 as compared to $1,198,622 for the year ended June 30, 2002. The
increase in professional fees by approximately 43% was due to increse in
development fees of ballot buddy product and increased legal and accounting
expenses.
INTEREST EXPENSE: Interest expense was $29,900 for the year ended June
30, 2003 as compared to $303,875 for the year ended June 30, 2002. The
significant decrease in interest expense less non-cash beneficial conversion for
investments.
RESEARCH AND DEVELOPMENT: Research and development expenses was $0 for
the year ended June 30, 2003 as compared to $176,064 for the year ended June 30,
2002.
NET LOSS: For the year ended June 30, 2003, we incurred a net loss of
$4,848,567 and a net loss per share of $0.05. This compares to a net loss of
$2,406,580 and a net loss per share of $0.04 for the year ended June 30, 2002.
21
LIQUIDITY AND CAPITAL RESOURCES
From August 2001, the date of our inception, through June 30, 2004, we
have raised a total of approximately 9.7 million from the sale of common stock
and convertible notes and other securities.
As of June 30, 2004 we had cash of approximately $117,000 and a working
capital deficiency of ($4,175,101) Our accumulated deficit as of June 30, 2004
was ($21,244,822).
In November 2003, we secured a $5 million dollar revolving credit
facility, in the form of two seven-month convertible notes. The notes bear
interest at an annual rate of 10% and originally matured on June 30, 2004, but
have been extended to December 31, 2004. The notes are convertible on 90 days
written notice by the holders at the lesser of (i) 50% of the average three
lowest closing prices for our common stock for the twenty days immediately
preceding the conversion date or (ii) $.0625 per share. At June 30, 2004, we had
borrowed $2,180,000 under such notes.
We have a convertible debenture with Palisades Holdings, LLC whereby
Palisades Holdings, at its discretion, may provide us loans of up to $1,250,000.
The convertible debenture bears interest at an annual rate of 10% and originally
matured on June 30, 2004, but has been extended to December 31, 2004. The
debenture is convertible on 90 days written notice by Palisades Holdings at the
lesser of (i) 50% of the average three lowest closing prices for our common
stock for the twenty days immediately preceding the conversion date or (ii)
$.0625 per share. At June 30, 2004, we had borrowed $872,000 under such
debenture.
On December 19, 2002 we issued a $165,000 note to an individual
investor. The note bears interest at an annual rate of 8% and is payable upon
demand. At June 30, 2004, the amount of principal and accrued but unpaid
interest under such debenture equaled $0
We have offered and sold a substantial number of shares of common stock
and warrants and options to purchase common stock without registration under the
Securities Act of 1933, as amended, or qualification under state securities
laws. If any offer or sale were not exempt from, or otherwise not subject to,
federal and state registration and qualification requirements, the purchaser
would have a number of remedies, including the right to rescind the purchase.
The Securities Act of 1933, as amended, requires that any claim for rescission
be brought within one year of the violation. We have sold approximately
11,878,000 shares of common stock and warrants and options to purchase shares of
common stock in the United States within one year of June 30, 2004. The time
periods within which claims for rescission must be brought under state
securities laws vary and may be two years or more from the date of the
violation. We have sold approximately 14,170,000 shares of common stock and
warrants and options to purchase shares of common stock in the United States
within two years of June 30, 2004. Further, we cannot assure you that courts
will not apply equitable or other doctrines to extend the period within which
purchasers may bring their claims. The number of warrants and options described
above does not include warrants and options to purchase 3,600,000 shares of
common stock issued within two years of May 31, 2004 to our chief executive
officer, Dennis Vadura and our president, Frank Wiebe and a warrant to purchase
12,400,000 shares of common stock for which the holder has agreed in writing
that it will not assert any right to rescission that it may have. However, we
cannot assure you that this agreement is enforceable.
CAPITAL EXPENDITURES
We anticipate certain capital expenditures related to developing and
testing subsequent versions of the voting system hardware and software. We
estimate such capital expenditures for hardware to be approximately $250,000 and
an additional $250,000 for software over the course of the fiscal year ending
June 30, 2005. We will be reliant on future fund raising in order to pay for
development and testing of these subsequent versions.
GOING CONCERN
Our independent certified public accountants have stated in their audit
report included in this Form 10-K, that we have incurred losses from operations,
negative working capital, and lack of operational history. These conditions,
among others, raise substantial doubt about our ability to continue as a going
concern.
22
INFLATION
Our management believes that inflation has not had a material effect on
our results of operations.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
results of operations, liquidity or capital expenditures.
CONTRACTUAL OBLIGATIONS
As of June 30, 2004, we had the following contractual obligations:
Contractual Obligations Payments due by period
----------------------- ------------------------------------------------------------
Less then More than
Total 1 year 1-3 years 3-5 years 5 years
----------- ---------- --------- --------- ---------
Opearting Lease Obligations
Greenberg Farrow Architecture - Accupoll
- Tustin office Sublease $ 132,000 $ 132,000
Olen Lease - Z Prompt - Irvine Leased facility $ 39,911 $ 39,911
Amarillo Grant - Accupoll - Texas facility $ 250,000 $ 250,000
Long-Term Debt
Z Prompt Bank of America line of Credit $ 225,000 $ 225,000
Notes Payable Accupoll $ 30,000 $ 30,000
Notes Payable Z Prompt $ 171,657 $ 171,657
Covertible Debt $ 3,304,600 $3,304,600
Consulting agreements
National Strategies Inc. $ 60,000 $ 60,000
----------- ---------- --------- --------- ---------
Total $ 4,213,168 $4,081,168 $ 132,000 $ - $ -
BUSINESS TRENDS
There are three business trends evident in the market today that are
material to AccuPoll's operations. The first is the delay in the procurement
cycle until after the November 2004 election. This trend was influenced by two
factors: 1) the delay in the distribution of the federal funds by EAC, and 2)
the upcoming Presidential Election in November 2004. The delay in the
distribution of the federal funds was caused by the delay in nominating and
confirming the EAC Commissioners (scheduled to be completed by April 2003, but
instead was completed in December 2003), and the delay on the part of some
states in meeting all the requirements for the funds to be released by the EAC.
With the delay in funding until June 2004, less than five months before the
November 2004 election, the majority of counties have decided not to risk making
any changes until after the November 2004 election.
The second business trend is the growing momentum of the VVPAT
movement. As of May 2004, eighteen states (Alabama, Alaska, Arizona, California,
Connecticut, Georgia, Illinois, Maine, Maryland, Minnesota, New Hampshire, New
Jersey, New York, Ohio, Vermont, Virginia, West Virginia and Wisconsin) have
either passed or are actively considering legislation that would make it a
requirement for any DRE voting system used in the state to produce a VVPAT. In
another five states (California, Missouri, Oregon, New Hampshire and Nevada),
the Secretary of State has issued a directive mandating VVPAT in the state.
The third business trend is the growing list of states that are
requiring DRE voting systems to be qualified under the 2002 federal voting
system standards. This requirement is primarily focused in states where
electronic voting systems have not been previously used (e.g., Illinois,
Missouri, Iowa and North Carolina).
Overall the net impact of these trends on AccuPoll is positive.
AccuPoll already has a DRE voting system with a VVPAT qualified under the 1990
federal voting system standards. We are currently in the process of testing our
DRE voting system under the 2002 federal voting system standards. We expect to
complete federal qualification testing under the 2002 federal voting system
standards by January 1, 2005. This places AccuPoll in position as one of the few
vendors with a DRE voting system that is federally qualified under the 2002
voting system standards and has a VVPAT in time for the beginning of the
procurement cycle after the November 2004 election. This is especially important
in states like Missouri and Illinois that have not previously authorized DRE
voting systems to be used in the state, but must at a minimum meet the
accessibility requirements under HAVA (i.e.,
23
one DRE voting machine per polling place).
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported in our consolidated financial statements and the
accompanying notes. The amount of assets and liabilities reported on our balance
sheet and the amount of revenues and expenses reported for each of our fiscal
periods are affected by estimates and assumptions, which are used for, but not
limited to, the accounting for equity instruments subject to rescission,
software development costs, estimated allowance for doubtful accounts, the
realizability of our investments in affiliated companies and the valuation of
deferred tax assets. Actual results could differ from these estimates. The
following critical accounting policies are significantly affected by judgments,
assumptions and estimates used in the preparation of the financial statements:
EQUITY INSTRUMENTS SUBJECT TO RESCISSION
We account for common stock and other equity instruments that may be
subject to rescission claims at estimated fair value (based on applicable
measurement criteria) in accordance with (1) the Securities and Exchange
Commission's promulgated accounting rules and interpretive releases, and (2) the
applicable provisions of Statement of Financial Accounting Standards (SFAS) No.
150 and its related interpretations. Under the Securities and Exchange
Commission's interpretation of accounting principles generally accepted in the
United States, reporting such claims outside of stockholders' equity/deficit is
required regardless of how remote the redemption event may be.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
In accordance with SFAS No. 86 "Accounting for the Costs of Computer
Software to be Sold Leased or Otherwise Marketed," we capitalize certain costs
related to the development of new software products or the enhancement of
existing software products for sale or license. These costs are capitalized from
the point in time that technological feasibility has been established, as
evidenced by a working model or detailed working program design to the point in
time that the product is available for general release to customers. Capitalized
development costs will be amortized on a straight-line basis over the estimated
economic lives of the products, beginning with the general product release to
customers. Research and development costs incurred prior to establishing
technological feasibility and costs incurred subsequent to general product
release to customers are charged to expense as incurred. We periodically
evaluate whether events or circumstances have occurred that indicate that the
remaining useful lives of the capitalized software development costs should be
revised or that the remaining balance of such assets may not be recoverable.
At June 30, 2004, we believe that no revisions to the remaining useful
lives or write-down of capitalized software development costs are required. Our
systems were qualified as meeting federal voting system standards in late March
2004. We began amortizing the capitalized software development costs over a
period of thirty-six months beginning April 2004.
STOCK BASED COMPENSATION
We account for stock-based compensation issued to employees using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25 (APB 25), "Accounting for Stock issued to Employees." Under the
intrinsic value based method, compensation expense is the excess, if any, of the
fair value of the stock at the grant date or other measurement date over the
amount an employee must pay to acquire the stock. Compensation expense, if any,
is recognized over the applicable service period, which is usually the vesting
period.
SFAS 123, "Accounting for Stock-Based Compensation," if fully adopted,
changes the method of accounting for employee stock-based compensation plans to
the fair value based method. For stock options and warrants, fair value is
determined using an option pricing model that takes into account the stock price
at the grant date, the exercise price, the expected life of the option or
warrant, stock volatility and the annual rate of quarterly dividends.
Compensation expense, if any, is recognized over the applicable service period,
which is usually the
24
vesting period.
The adoption of the accounting methodology of SFAS 123 is optional and
we have elected to continue accounting for stock-based compensation issued to
employees using APB 25; however, pro forma disclosures, as if we adopted the
cost recognition requirement under SFAS 123, are required to be presented. For
stock-based compensation issued to non-employees, we use the fair value method
of accounting under the provisions of SFAS 123.
Financial Accounting Standards Board (FASB) Interpretation No. 44 (FIN
44), "Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB 25" clarifies the application of APB 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a non compensatory plan, (c) the
accounting consequence for various modifications to the terms of a previously
fixed stock option or award and (d) the accounting for an exchange of stock
compensation awards in a business combination. We believe that we account for
transactions involving stock compensation in accordance with FIN 44.
SFAS 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of SFAS No. 123," provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
CONSOLIDATION OF WEB TOOLS INTERNATIONAL, INC.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB 51". The primary objectives of FIN
No. 46 are to provide guidance on the identification of entities for which
control is achieved through means other than voting rights (variable interest
entities, or VIEs), and how to determine when and which business enterprise
should consolidate the VIE. This new model for consolidation applies to an
entity for which either: (a) the equity investors do not have a controlling
financial interest; or (b) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. In addition, FIN No. 46 requires that both
the primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. As amended in December 2003, the
effective dates of FIN No. 46 for us are as follows: (a) for interests in
special-purpose entities: the first period ended after December 15, 2003; and
(b) for all other types of VIEs: the first period ended after March 15, 2004.
As disclosed in the accompanying notes to our June 30, 2003
consolidated financial statements, we are associated with Web Tools
International, Inc. (WTI) through common ownership; in addition, we are
virtually WTI's only customer for software development services. Based on these
and other factors, we have determined that (1) WTI is a VIE and (2) we are its
primary beneficiary. Therefore, effective January 1, 2004, the accounts of WTI
will be consolidated with those of AccuPoll.
RECENT ACCOUNTING PRONOUNCEMENTS
We continue to assess the effects of recently issued accounting
standards. The impact of all recently adopted and issued accounting standards
has been disclosed in Note 1 of the consolidated financial statements included
in this amended report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in United States interest rates would affect the interest
earned on our cash and cash equivalents. Based on our overall interest rate
exposure at June 30, 2004, a near-term change in interest rates, based on
historical movements, would not materially affect the fair value of interest
rate sensitive instruments. Our debt instruments have fixed interest rates and
terms and, therefore, a significant change in interest rates would not have a
material adverse effect on our financial position or results of operations.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by this Item is attached hereto at
the end of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
that are designed to ensure that information required to be disclosed in our
periodic reports filed under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
We carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures as of June 30, 2004. This
evaluation was carried out under the supervision and with the participation of
our management, including our principal (chief) executive officer and principal
(chief) financial officer. Based upon the evaluation, our principal (chief)
executive officer and principal (chief) financial officer concluded that our
disclosure controls and procedures were of limited effectiveness at the
reasonable assurance level at June 30, 2004.
There have been no changes in our internal control over financial
reporting during the quarter ended June 30, 2004 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
During the year ended June 30, 2004, we hired additional accounting
personnel to re-evaluate and revise our disclosure controls and procedures and
to implement new disclosure controls and procedures. As part of this plan and
implementation, we are re-evaluating, re-designing, and documenting policies and
procedures, putting those procedures in operation and monitoring the
effectiveness of the procedures.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item will be contained in AccuPoll's Proxy
Statement under the caption "Directors and Executive Officers," and is hereby
incorporated by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item will be contained in AccuPoll's Proxy
Statement under the caption "Executive Compensation," and is hereby incorporated
by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item will be contained in AccuPoll's Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management," and is hereby incorporated by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item will be contained in AccuPoll's Proxy
Statement under the caption "Certain Transactions," and is hereby incorporated
by reference thereto.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this Item will be contained in Accupoll's Proxy
Statement under the caption "Principal Accountant Fees and Services," and is
hereby incorporated by reference thereto.
26
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
2.1 Reorganization Agreement dated April 9, 2003 between AccuPoll
and Z prompt, Inc. (Incorporated by reference from Exhibit 1
to Form 8-K, filed April 23, 2003)
2.2 Agreement and Plan of Reorganization dated June 30, 2004 by
and among AccuPoll Holding Corp., NTSD Acquisition, Inc., NTS
Data Services Corp., NTS Data Services, Inc., Matthew M.
Biondi and John F. Jennings (Incorporated by reference from
Exhibit 10.1 to Form 8-K, filed July 1, 2004).
3.1 Articles of Incorporation dated January 25, 1985 (Incorporated
by reference from Exhibit 3(i) to Form 10-KSB for fiscal year
ended June 30, 2000)
3.2 Amendment to Articles of Incorporation dated November 4, 1985
(Incorporated by reference from Exhibit 3(ii) to Form 10-KSB
for fiscal year ended June 30, 2000)
3.3 Amendment to Articles of Incorporation dated May 23, 2002
(Incorporated by reference from Exhibit 3(iii) to Form 10-KSB
for fiscal year ended June 30, 2000, filed October 7, 2002)
3.4 Bylaws (Incorporated by reference from Exhibit 3(iii) to the
Form 10-KSB for the fiscal year ended June 30, 2002)
4.1 Debenture, dated June 20, 2003 between AccuPoll and Palisades
Holdings, LLC (Incorporated by reference from Exhibit 4.1 to
Form 10-KSB/A for the fiscal year ended June 30, 2003, filed
June 8, 2004)
4.2 Debenture, dated November 20, 2003, by and between AccuPoll
Holding Corp., AccuPoll, Inc. and Hyde Investments, Ltd, as
amended (Incorporated by reference from Exhibit 10.1 to Form
10-Q/A for the quarter ended December 31, 2003, filed June 8,
2004)
4.3 Debenture, dated November 20, 2003, by and between AccuPoll
Holding Corp., AccuPoll, Inc. and Livingston Investments,
Ltd., as amended (Incorporated by reference from Exhibit 10.1
to Form 10-Q/A for the quarter ended December 31, 2003, filed
June 8, 2004)
4.4 Convertible Note, dated July 2003, between AccuPoll and Pan
American Management (Incorporated by reference from Exhibit
10.1 to Form 10-Q/A for the quarter ended September 30, 2003,
filed June 8, 2004)
4.5 Subscription Agreement, dated September 8, 2004 (Incorporated
by reference from Exhibit 4.1 to Form 8-K, filed September 17,
2004)
4.6 Form of Common Stock Purchase Warrant A (Incorporated by
reference from Exhibit 4.2 to Form 8-K, filed September 17,
2004)
4.7 Form of Common Stock Purchase Warrant B (Incorporated by
reference from Exhibit 4.3 to Form 8-K, filed September 17,
2004)
4.8 Form of Common Stock Purchase Warrant C (Incorporated by
reference from Exhibit 4.4 to Form 8-K, filed September 17,
2004)
4.9 Form of Placement Agent Warrant (Incorporated by reference
from Exhibit 4.5 to Form 8-K, filed September 17, 2004)
4.10 Form of Funds Escrow Agreement (Incorporated by reference from
Exhibit 4.6 to Form 8-K, filed September 17, 2004)
9.1 Proxy in favor of Dennis Vadura and Frank Wiebe from Picasso,
LLC (Incorporated by reference from Exhibit 10.9 to the Form
10-KSB for the fiscal year ended June 30, 2002, filed October
7, 2002)
9.2 Proxy in favor of Dennis Vadura and Frank Wiebe from
ViperTrust (Incorporated by reference from Exhibit 10.10 to
the Form 10-KSB for the fiscal year ended June 30, 2002, filed
October 7, 2002)
27
EXHIBIT NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
9.3 Proxy in favor of Dennis Vadura and Frank Wiebe from Aramis
Investment, LLC (Incorporated by reference from Exhibit 9.3 to
Form 10-KSB/A for the fiscal year ended June 30, 2003, filed
June 8, 2004)
9.4 Proxy in favor of Dennis Vadura and Frank Wiebe from The
Glacier Trust (Incorporated by reference from Exhibit 9.4 to
Form 10-KSB/A for the fiscal year ended June 30, 2003, filed
June 8, 2004)
9.5 Proxy in favor of Dennis Vadura and Frank Wiebe from Morpheus
Trust (Incorporated by reference from Exhibit 9.5 to Form
10-KSB/A for the fiscal year ended June 30, 2003, filed June
8, 2004)
10.1 Stock Exchange Agreement dated May 20, 2002, between WIPC and
AccuPoll, Inc., Dennis Vadura and Frank Wiebe (Incorporated by
reference from Exhibit 1 to Form 8-K/A filed May 28, 2002)
10.2 Employment Agreement, dated May 20, 2002, between Dennis
Vadura and AccuPoll (Incorporated by reference from Exhibit
10.2 to Form 10-KSB/A for the fiscal year ended June 30, 2003,
filed June 8, 2004)
10.3 Employment Agreement, dated May 20, 2002, between Frank Wiebe
and AccuPoll (Incorporated by reference from Exhibit 10.2 to
Form 10-KSB/A for the fiscal year ended June 30, 2003, filed
June 8, 2004)
10.4 Indemnification Agreement, between Dennis Vadura and AccuPoll
(Incorporated by reference from Exhibit 10.13 to the Form-KSB
for fiscal year ended June 30, 2002, filed October 7, 2002)
10.5 Indemnification Agreement, between Frank Wiebe and AccuPoll
(Incorporated by reference from Exhibit 10.14 to the Form-KSB
for fiscal year ended June 30, 2002, filed October 7, 2002)
10.6 Master Services Agreement dated April 2002 with Web Tools
International, Inc. (Incorporated by reference from Exhibit
10.7 to Form-KSB for fiscal year ended June 30, 2002, filed
October 7, 2002)
10.7 Consulting Agreement dated April 23, 2002 between AccuPoll and
GCH Capital, Ltd (Incorporated by reference from Exhibit 10.8
to Form-KSB for fiscal year ended June 30, 2002, filed October
7, 2002)
10.8 Consulting Agreement, dated May 29, 20002 between Craig Hewitt
and AccuPoll (Incorporated by reference from Exhibit 10.17 to
the Form-KSB for fiscal year ended June 30, 2002, filed
October 7, 2002)
10.9 AccuPoll 2002 Consultant Compensation Plan (Incorporated by
reference from Exhibit 10 to Form S-8 filed June 11, 2002)
10.10 Exclusive Territory and Compensation Agreement, November 4,
2003, by and between AccuPoll and AmCad, LLC (Incorporated by
reference from Exhibit 10.12 to Form 10-KSB/A for the fiscal
year ended June 30, 2003, filed June 8, 2004)
10.11 Standard Sublease dated July 23, 2003 between Greenberg Farrow
Architecture, Inc. and AccuPoll (Incorporated by reference
from Exhibit 10.14 to Form 10-KSB/A for the fiscal year ended
June 30, 2003, filed June 8, 2004)
10.12 Teaming Agreement dated July 9, 2004 by and between AccuPoll,
Inc. and Alternative Resources Corporation.
10.13 Exclusive Supply Agreement dated December 20, 2001 by and
between Source Technologies, Inc. and Web Tools International,
Inc.
14.1 Code of Ethics
21.1 List of Subsidiaries
31.1 Certification by Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
FINANCIAL STATEMENT SCHEDULES
The information required by this Item is either not applicable, included in the
notes to consolidated financial statements, or is not significant.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ACCUPOLL HOLDING CORP.
Dated: September 28, 2004 By: /s/ Dennis Vadura
-----------------------------------
Dennis Vadura,
Chief Executive Officer and Director
Dated: September 28, 2004 By: /s/ Frank J. Wiebe
-----------------------------------
Frank J. Wiebe,
President, Secretary, Treasurer
and Director
Dated: September 28, 2004 By: /s/ Craig A. Hewitt
-----------------------------------
Craig A. Hewitt,
Chief Financial Officer and Principal
Accounting Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
/s/ Dennis Vadura Chief Executive Officer and Director September 28, 2004
- ----------------------
Dennis Vadura
/s/ Frank J. Wiebe President, Secretary, Treasurer September 28, 2004
- ---------------------- and Director
Frank J. Wiebe
29
/s/ Andrea M. Porcelli Director September 28, 2004
- -----------------------
Andrea M. Porcelli
/s/ Phil Trubey Director September 28, 2004
- ----------------------
Phil Trubey
30
Index to Financial Statements Page
----
Report of Independant Registered Public Accounting Firm.................F-1
Consolidated balance sheets at June 30, 2004 and 2003...................F-2
Consolidated statements of operations for the years ended
June 30, 2004 and 2003 and for the period from August 9, 2001
(Inception) through June 30, 2002.......................................F-3
Consolidated statements of stockholders' deficit for the years
ended June 30, 2004 and 2003 and for the period from August 9, 2001
(Inception) through June 30, 2002.......................................F-4
Consolidated statements of cash flows for the years ended
June 30, 2004 and 2003 and for the period from August 9, 2001
(Inception) through June 30, 2002.......................................F-7
Notes to financial statements...........................................F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
AccuPoll Holding Corp.
We have audited the accompanying consolidated balance sheets of AccuPoll Holding
Corp. and subsidiaries ("the "Company") as of June 30, 2004 and 2003, and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the period from August 9, 2001 (Inception) through June 30, 2002 and
for the years ended June 30, 2004 and 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AccuPoll Holding
Corp. and subsidiaries as of June 30, 2004 and 2003, and the results of their
operations and their cash flows for the period from August 9, 2001 (Inception)
through June 30, 2002 and for the years ended June 30, 2004 and 2003, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
Company has losses from operations through June 30, 2004 and an accumulated
deficit of approximately $22.6 million at that date, negative working capital at
June 30, 2004 approximating $6.8 million and a lack of operational history.
These factors, among others, raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 1. The consolidated financial statements do not include
any adjustments that may result from the outcome of this uncertainty.
As discussed in Note 10 to the accompanying consolidated financial statements,
the Company may be subject to possible rescission claims regarding the sale or
other issuances of certain equity instruments. Accordingly, the June 30, 2003
consolidated balance sheet has been restated to reflect the potential liability
associated with such transactions. As discussed in Note 11, an expense of
$655,000 relating to warrants issued for services that were not provided by the
vendor was recorded during the year ended June 30, 2003. Accordingly, the
consolidated statement of operations for the year then ended has been restated
to reduce the previously reported net loss by $655,000.
/s/ Squar, Milner, Reehl & Williamson, LLP
Newport Beach, California
September 27, 2004
F-1
ACCUPOLL HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2004 and 2003
- --------------------------------------------------------------------------------
2004 2003
(AS RESTATED)
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 113,789 $ --
Accounts receivable, net 254,895 --
Inventories 168,636 --
Deferred acquisition costs -- 144,206
Prepaid expenses -- 2,500
------------ ------------
537,320 146,706
PROPERTY AND EQUIPMENT, net 14,012 --
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net 2,544,207 1,403,899
OTHER ASSETS 26,246 --
------------ ------------
TOTAL ASSETS $ 3,121,785 $ 1,550,605
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,817,284 $ 931,503
Related party payables 1,228,070 872,940
Deferred revenues 74,628 --
Convertible debt 3,304,600 --
Notes payable to related parties 30,000 175,000
Put liability related to warrant issuance 163,760 113,750
Liabilities subject to compromise 732,544 --
------------ ------------
7,350,886 2,093,193
------------ ------------
EQUITY INSTRUMENTS SUBJECT TO RESCISSION 6,200,000 4,377,033
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Convertible Series A preferred stock, $0.01 par value, 80,000 shares
authorized, 0 shares issued and outstanding (liquidation preference of zero) -- --
Common stock, par value of $0.001, 600,000,000 shares
authorized; 158,482,171 and 112,945,963 shares issued and outstanding
at June 30, 2004 and 2003, respectively 158,482 112,946
Additional paid-in capital 12,046,817 2,222,580
Accumulated deficit (22,634,400) (7,255,147)
------------ ------------
(10,429,101) (4,919,621)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,121,785 $ 1,550,605
============ ============
- --------------------------------------------------------------------------------
PAGE F-2 SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
ACCUPOLL HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended June 30, 2004 and 2003, and
For The Period From August 9, 2001 (Inception) Through June 30, 2002
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2002
(As Restated)
------------- ------------- -------------
NET SALES $ 1,508,656 $ -- $ --
COST OF SALES 1,185,797 -- --
------------- ------------- -------------
GROSS PROFIT 322,859 -- --
EXPENSES
General and administrative 3,160,257 3,104,192 904,083
Professional fees 4,264,156 1,714,475 1,198,622
Interest 4,534,947 29,900 303,875
Loss on disposal of investment 1,200,000 -- --
Impairment of goodwill 2,542,752 -- --
------------- ------------- -------------
15,702,112 4,848,567 2,406,580
------------- ------------- -------------
NET LOSS $ (15,379,253) $ (4,848,567) $ (2,406,580)
============= ============= =============
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.12) $ (0.05) $ (0.04)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 130,782,481 106,687,447 68,735,272
============= ============= =============
- --------------------------------------------------------------------------------
PAGE F-3 SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
ACCUPOLL HOLDING CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For The Years Ended June, 30 2004 and 2003 and For The Period From
August 9, 2001 (Inception) Through June 30, 2002
- --------------------------------------------------------------------------------
Common Stock Common Stock Additional Total
-------------------------- Subscription Paid-in Accumulated Stockholder's
Shares Amount Receivable Capital Deficit Deficit
----------- ------------ -------- ------------ ------------ ------------
Balance at August 9, 2001 (Inception) -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock upon formation 61,280,000 61,280 -- (61,280) -- --
Issuance of common stock at $0.08 per
share for the conversion of notes payable,
including accrued interest of $16,375 3,724,292 3,724 -- 300,151 -- 303,875
Issuance of common stock at $0.08
per share for note receivable 612,800 613 -- 49,387 -- 50,000
Proceeds from the issuance of common
stock at $0.08 per share in connection with
the exercise of warrants 3,724,292 3,724 (12,500) 298,744 -- 289,968
Proceeds from the issuance of common stock
at $0.12 per share in connection with the
exercise of warrants 6,177,024 6,177 -- 750,004 -- 756,181
Issuance of common stock in connnection
with the merger with WIPC (including 18,400,000
shares issued to brokers) 18,639,000 18,639 -- (18,639) -- --
Issuance of common stock at $0.06 per share
for services 4,800,000 4,800 -- 295,200 -- 300,000
Issuance of common stock at $0.08 per share
for services 3,840,000 3,840 -- 309,504 -- 313,344
Estimated fair market value of warrants granted
in connection with convertible debt -- -- -- 287,500 -- 287,500
Estimated fair market value of options and
warrants granted for services -- -- -- 813,525 -- 813,525
Equity instruments subject to rescission -- -- -- (1,021,834) -- (1,021,834)
Interest on equity instruments subject
to rescission -- -- -- (12,137) -- (12,137)
Net loss -- -- -- -- (2,406,580) (2,406,580)
----------- ------------ -------- ------------ ------------ ------------
Balance at June 30, 2002 (as restated) 102,797,408 $ 102,797 $(12,500) $ 1,990,125 $ (2,406,580) $ (326,158)
=========== ============ ======== ============ ============ ============
Issuance of common stock at $0.91 for services 6,593 7 -- 5,993 -- 6,000
Issuance of common stock at $1.02 for services 32,862 33 -- 33,486 -- 33,519
Issuance of common stock at $1.04 for services 17,000 17 -- 17,663 -- 17,680
Issuance of common stock at $1.05 for services 207,142 207 -- 217,292 -- 217,499
Issuance of common stock at $1.17 for services 120,000 120 -- 140,280 -- 140,400
Issuance of common stock at $1.18 for services 6,667 7 -- 7,860 -- 7,867
Issuance of common stock at $1.20 for services 30,000 30 -- 35,970 -- 36,000
Issuance of common stock at $1.25 for services 8,500 9 -- 10,616 -- 10,625
Issuance of common stock at $1.40 for services 20,000 20 -- 27,980 -- 28,000
Issuance of common stock at $0.00 per share
in connection with the cashless exercises
of warrants 208,540 209 -- (209) -- --
Proceeds from the issuance of common stock at
$0.06 per share in connection with the exercise
of warrants 911,954 912 -- 56,201 -- 57,113
Proceeds from the issuance of common stock at
$0.08 per share in connection with the exercise
of warrants 245,120 245 -- 19,755 -- 20,000
Proceeds from the issuance of common stock at
$0.12 per share in connection with the exercise
of warrants 2,828,272 2,828 -- 343,113 -- 345,941
Proceeds from the issuance of common stock at
$0.25 per share in connection with the
exercise of warrants 200,000 $ 200 $ -- $ 49,800 $ -- $ 50,000
....continued
- --------------------------------------------------------------------------------
PAGE F-4 SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
....continued
Common Stock Common Stock Additional Total
-------------------------- Subscription Paid-in Accumulated Stockholder's
Shares Amount Receivable Capital Deficit Deficit
----------- ------------ -------- ------------ ------------ ------------
Proceeds from the issuance of common stock at
$0.06 per share for cash 535,445 $ 535 $- $ 32,929 $- $ 33,464
Proceeds from the issuance of common stock at
$0.12 per share for cash 3,642,480 3,642 -- 444,057 -- 447,699
Proceeds from the issuance of common stock at
$0.25 per share for cash 840,000 840 -- 209,160 -- 210,000
Proceeds from the issuance of common stock at
$0.30 per share for cash 52,280 52 -- 15,782 -- 15,834
Proceeds from the issuance of common stock at
$0.40 per share for cash 62,500 63 -- 24,937 -- 25,000
Proceeds from the issuance of common stock at
$0.47 per share for cash 95,200 95 -- 44,940 -- 45,035
Proceeds from the issuance of common stock at
$0.50 per share for cash 50,000 50 -- 24,950 -- 25,000
Proceeds from the issuance of common stock at
$0.95 per share for cash 28,000 28 -- 26,572 -- 26,600
Commissions paid for fund raising activity -- -- -- (281,944) -- (281,944)
Beneficial conversion feature in connection
with the issuance of convertible debt -- -- -- 50,000 -- 50,000
Estimated fair value of warrants granted in
connection with note payable -- -- -- 20,000 -- 20,000
Estimated fair value of warrants granted
for services -- -- -- 1,839,000 -- 1,839,000
Estimated fair value of options granted
for services -- -- -- 273,084 -- 273,084
Liability incurred in connection with the
issuance of warrants -- -- -- (113,750) -- (113,750)
Equtiy instruments subject to rescission -- -- -- (3,185,309) -- (3,185,309)
Interest on equity instruments subject to
rescission -- -- -- (157,753) -- (157,753)
Write off of subscriptions receivable -- -- 12,500 -- -- 12,500
Net loss -- -- -- -- (4,848,567) (4,848,567)
----------- ------------ -------- ------------ ------------ ------------
Balance at June 30, 2003 (as restated) 112,945,963 112,946 $ -- $ 2,222,580 $ (7,255,147) $ (4,919,621)
=========== ============ ======== ============ ============ ============
Common stock issued for cash 6,553,857 6,554 -- 799,518 -- 806,072
Common stock issued for services 35,000 35 -- 34,915 -- 34,950
Proceeds from the issuance of common stock
in connection with the exercise of warrants 20,502,794 20,503 -- 3,778,113 -- 3,798,616
Estimated fair value of warrants
granted for services -- -- -- 786,000 -- 786,000
Liability incurred in connection with the
issuance of warrants -- -- -- (50,010) -- (50,010)
....continued
- --------------------------------------------------------------------------------
PAGE F-5 SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
....continued
Common Stock Common Stock Additional Total
-------------------------- Subscription Paid-in Accumulated Stockholder's
Shares Amount Receivable Capital Deficit Deficit
(As Restated) (As Restated) (As Restated)
----------- ------------ -------- ------------ ------------ ------------
Estimated fair value of warrants granted
in connection with convertible debt -- -- -- 362,800 -- 362,800
Common stock issued in connection with
conversion of convertible debt and
accrued interest 3,881,250 3,881 -- 772,369 -- 776,250
Beneficial conversion feature in connection
with the issuance of convertible debt -- -- -- 3,641,800 -- 3,641,800
Issuance of common stock in connection
with cashless exercise of options 6,030,307 6,030 -- (6,030) -- --
Commissions paid for fund raising activity -- -- -- (277,000) -- (277,000)
Acquisition of Z Prompt 8,533,000 8,533 -- -- 1,804,729 1,813,262
Equtiy instruments subject to rescission -- -- -- (1,500,967) -- (1,500,967)
Interest on equity instruments subject
to rescission -- -- -- (322,000) -- (322,000)
Net loss -- -- -- -- (15,379,253) (15,379,253)
----------- ------------ -------- ------------ ------------ ------------
Balance at June 30, 2004 158,482,171 $ 158,482 $ -- $ 12,046,817 $(22,634,400) $(10,429,101)
=========== ============ ======== ============ ============ ============
- --------------------------------------------------------------------------------
PAGE F-6 SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
ACCUPOLL HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended June 30, 2004 and 2003, and
For The Period From August 9, 2001 (Inception) Through June 30, 2002
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED
Cash flows from operating activities: JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2002
(AS RESTATED)
----------------------------------------------
Net loss $(15,379,253) $ (4,848,567) $ (2,406,580)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 245,408 -- --
Loss on disposal of fixed assets 12,640 -- --
Estimated fair value of warrants granted in
connection with notes payable -- 20,000 287,500
Estimated fair value of options and warrants
granted for services 786 2,112,084 813,525
Estimated fair value of common stock issued
for services 34,950 497,590 327,344
Amortization of estimated fair value of warrants granted
and beneficial conversion feature in connection with
the issuance of convertible notes payable 500,000 -- --
Amortization of beneficial conversion feature in
connectionn with the issuance of subordinated
convertible notes 3,554,600 -- --
Convertible debt issued for services 1,276,000 -- --
Loss on disposal of investment 1,200,000 -- --
Impairment of goodwill 2,542,752 -- --
Accrued interest related to the conversion of notes payable -- -- 16,375
Write off of subscription receivable -- 12,500 --
Write off of prepaid consulting -- 286,000 --
Changes in operating assets and liabilities:
Accounts receivable (209,939) -- --
Inventories (73,300) -- --
Prepaid expenses 2,500 (2,500) --
Other assets 128,996 -- --
Accounts payable and accrued expenses 691,457 755,211 176,292
Related party payables 358,327 10,000 151,020
Deferred revenues (69,220) -- --
------------ ------------ ------------
Net cash used in operating activities (4,398,082) (1,157,682) (634,524)
------------ ------------ ------------
Cash flows from investing activities:
Increase in deferred acquisition costs -- (144,206) --
Purchases of property and equipment (11,135) -- --
Increase in capitalized software development costs (1,371,600) (530,013) (111,966)
Proceeds from related party note receivable -- 300,000 (300,000)
Cash of acquired entity 2,368 -- --
------------ ------------ ------------
Net cash used in investing activities (1,380,367) (374,219) (411,966)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of notes payable to related parties 210,950 175,000 --
Principal payments of notes payable to related parties (195,000) -- --
Proceeds from issuance of convertible debt 1,528,600 50,000 287,500
Borrowings on line-of-credit 20,000 -- --
Proceeds from the issuance of common stock 806,072 546,688 --
Proceeds from issuance of common stock upon exercise of warrants, net 3,512,616 473,054 1,046,149
------------ ------------ ------------
Net cash provided by financing activities 5,892,238 1,244,742 1,333,649
------------ ------------ ------------
Net increase (decrease) in cash 113,789 (287,159) 287,159
Cash at beginning of period -- 287,159 --
------------ ------------ ------------
Cash at end of period $ 113,789 $ -- $ 287,159
============ ============ ============
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest (none paid in cash) $ -- $ -- $ --
Income taxes $ 800 $ 800 $ 800
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND OPERATING ACTIVITIES
See accompanying notes to the consolidated financial statements for additional
information relating to non-cash investing and financing activities concerning
prepaid consulting fees, issuance of common stock related to convertible debt
and warrants, issuance of preferred stock, increase in capitalized software
development costs, beneficial conversion features and related party payables.
- --------------------------------------------------------------------------------
PAGE F-7 SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS
AccuPoll Holding Corporation
Notes to Consolidated Financial Statements
June 30, 2004
Note 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
AccuPoll Holding Corporation, a Nevada corporation (the "parent company"),
principally operates through its wholly owned subsidiary AccuPoll, Inc., which
was incorporated on August 9, 2001 in Delaware. The parent company is engaged in
the design and development of a voting system with an intuitive touch-screen
interface (the "Voting System") that provides a polling place electronic voting
solution that is reliable, accurate, immediate, secure, easy to use,
confidential and auditable. The Voting System has the ability to simultaneously
produce two different electronic audit trails (recorded on both the polling
place administrative work station and the local voting station), in addition to
generating a printed-paper ballot. The parent company completed a reverse
acquisition with a publicly traded company (see Note 2) in May 2002, and its
common stock is quoted on the Over-The-Counter Bulletin Board under the symbol
"ACUP." For financial reporting purposes, the parent company was classified as a
development stage enterprise until November 2003.
Principles of Consolidation
GENERAL
The accompanying consolidated financial statements include the accounts of the
parent company and its wholly-owned subsidiary AccuPoll, Inc. In addition, the
accounts of Z prompt, Inc. ("Z prompt"), a wholly-owned subsidiary, are included
in such financial statements from November 1, 2003. All significant
inter-company balances and transactions have been eliminated in consolidation.
Except where the context requires otherwise, the entities named in the preceding
paragraph are hereinafter collectively referred to as the "Company."
BANKRUPTCY OF Z PROMPT
As discussed in Note 12, Z prompt filed voluntary bankruptcy in March 2004. The
Company is the largest unsecured pre-petition creditor of Z prompt, but is not
presently a member of the unsecured creditors committee that was formed in
connection with the bankruptcy proceedings.
In addition, as described in Note 6, the Company and certain of its officers and
principal stockholders are presently involved in civil litigation with certain
former stockholders and officers of Z prompt. However, management has determined
that it would not be meaningful to de-consolidate the accounts of Z prompt at
this time because the Company expects to re-gain control of this subsidiary
based on the expectation that Z prompt will be able to negotiate a confirmed
reorganization plan and emerge from bankruptcy by approximately March of 2005.
See Note 3 for additional information regarding Z prompt.
VARIABLE INTEREST ENTITY
As further explained below in the "Variable Interest Entity" section of this
note, the accounts of affiliate Web Tools International, Inc. ("WTI") were
consolidated with those of the Company as of January 1, 2004 in accordance with
Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 46. For
reasons discussed in Note 5, WTI was de-consolidated as of April 1, 2004.
Going Concern/Liquidity Considerations
The Company has not generated any revenues from its Voting System operations,
and there is no assurance of any future revenues. The Company will require
substantial additional funding for continuing the development, obtaining
regulatory approval, and commercialization of its product. There is no assurance
that the Company will be able to obtain sufficient additional funds when needed
or that such funds, if available, will be obtainable on terms satisfactory to
the Company.
Management has taken actions to address these matters, which include:
o Retention of experienced management personnel with particular skills
in the commercialization of such products;
o Attainment of technology to develop such products and additional
products; and
o Raising additional funds through the sale of debt and/or equity
securities.
Federal, State and various foreign government regulations govern the sale of the
Company's products. There can be no assurance that the Company will receive the
regulatory approval required to market its proposed products.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
ordinary course of business. The Company has incurred losses through June 30,
2004, has negative working capital at that date of approximately $6.8 million,
and has a lack of operational history which, among other factors,
raise substantial doubt about its ability to continue as a going concern. The
Company intends to fund operations through sales of the Voting System, but there
is no commitment by any entities for the purchase of any of the proposed
products. In the absence of significant sales and profits, the Company may seek
to raise additional funds to meet its working capital requirements through debt
and/or equity financing arrangements. Management believes that such
arrangements, combined with the net proceeds from the transaction described in
Note 18, will be sufficient to fund the Company's capital expenditures, working
capital needs and other cash requirements for the year ending June 30, 2005. The
successful outcome of future activities cannot be determined at this time, and
there is no assurance that, if achieved, the Company will have sufficient funds
to execute its intended business plan or generate positive operating results.
These circumstances, combined with the potential liability described in Note 10,
raise substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Other Risks and Uncertainties
The Company intends to operate in an industry that is subject to intense
competition, government regulation and technological change. The Company's
operations are subject to significant risks and uncertainties including
financial, operational, technological, regulatory and other risks associated
with an emerging business, including the potential risk of business failure.
From time to time, the Company maintains cash balances at certain institutions
in excess of the FDIC limit of $100,000.
Use of Estimates
The Company prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
("GAAP"), which require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, and reported
amounts of revenues and expenses during the reporting period. Significant
estimates made by management include realization of long-lived assets, equity
instruments subject to rescission, valuation of stock options and warrants, and
valuation of deferred tax assets. Actual results could differ from those
estimates.
Software Development Costs
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed,"
the Company capitalizes certain costs related to the development of new software
products or the enhancement of existing software products for sale or license.
These costs are capitalized from the point in time that technological
feasibility has been established, as evidenced by a working model or detailed
working-program design to the point in time that the product is available for
general release to customers. Capitalized software development costs are
amortized on a straight-line basis over the three-year estimated economic life
of the products, beginning (as applicable) with the general product release to
customers or when the Voting System qualified under certain federal standards.
Research and development costs incurred prior to establishing technological
feasibility and costs incurred subsequent to the events described in the
preceding sentence are charged to expense as incurred.
The Company periodically evaluates whether events or circumstances have occurred
that indicate that the remaining useful lives of the capitalized software
development costs should be revised or that the remaining balance of such assets
may not be recoverable. At June 30, 2004, management believes that no revisions
to the remaining useful lives or write-down of capitalized software development
costs are required. The Company began amortizing its capitalized software
development costs in April 2004, following the March 2004 qualification of its
Voting System as complying with certain federal voting system standards; at June
30, 2004, accumulated amortization approximated $ 230,000.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments when it is
practicable to estimate that value. The carrying amount of the Company's
accounts payable and accrued expenses approximates their estimated fair values
due to the short-term maturities of those financial instruments. In the opinion
of management, the fair value of payables to related parties cannot be estimated
without incurring excessive costs; for that reason, the Company has not provided
such disclosure. Other information about related-party liabilities (such as the
carrying amount, the interest rate, and maturity) is provided, where applicable,
elsewhere in these notes to consolidated financial statements.
Stock-based Compensation
The Company accounts for stock-based compensation issued to employees using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Under the
intrinsic value based method, compensation is the excess, if any, of the fair
value of the stock at the grant date (or other measurement date) over the amount
an employee must pay to acquire the stock. Compensation, if any, is recognized
over the applicable service period, which is usually the vesting period.
SFAS No. 123, "Accounting for Stock-Based Compensation," if fully adopted,
changes the method of accounting for employee stock-based compensation to the
fair value based method. In addition, under this pronouncement, the fair value
of options and warrants issued to non-employees is estimated using an option
pricing model that takes into account the stock price at the grant date, the
exercise price, the expected life of the equity instrument, and the annual rate
of quarterly dividends. Compensation expense, if any, is recognized over the
applicable service period, which is usually the vesting period.
FIN No. 44, "Accounting for Certain Transactions Involving Stock Compensation,
an Interpretation of APB 25," clarifies the application of APB 25 for (a) the
definition of "employee" for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) accounting for an exchange of stock
compensation awards in a business combination. Management believes that the
Company accounts for transactions involving stock-based employee compensation in
accordance with FIN No. 44.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of SFAS 123," was issued in December 2002 and is
effective for fiscal years ended after December 15, 2002. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosure in both annual and interim financial statements about (a)
the method of accounting for stock-based employee compensation and (2) the
effect of the method used on reported results.
The adoption of the accounting methodology of SFAS No. 123 is optional for
stock-based emloyee compensation, and the Company has elected to continue
accounting for options issued to employees using APB 25. However, pro forma
disclosures, as if the Company adopted the cost recognition requirements of SFAS
No. 123, are required to be presented.
At June 30, 2004, the Company has no stock-based employee compensation plans;
however, there have been non-plan options granted by the Company to certain
employees. There is no stock-based employee compensation expense reflected in
net loss for fiscal 2004, fiscal 2003, or for the period from August 9, 2001
(Inception) through June 30, 2002 because options granted to employees had an
exercise price equal to or greater than the market value of the underlying
common stock on the grant date. The following table illustrates the effect on
net loss and loss per common share if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation.
PERIODS ENDED JUNE 30,
2004 2003 2002
----------- ----------- -----------
Net loss attributable to common
stockholders * $(15,701,253) $(5,006,567) $(2,418,717)
Add: total stock-based employee
compensation expense determined
under fair value based method
for all awards (1,421,100) (598,230) (68,340)
----------- ----------- -----------
Pro-forma $(17,122,353) $(5,604,797) $(2,487,057)
=========== =========== ===========
Basic and diluted loss per common share:
As reported $ (0.12) $ (0.05) $ (0.04)
=========== =========== ===========
Pro-forma $ (0.13) $ (0.05) $ (0.04)
=========== =========== ===========
* These amounts include interest related to certain equity instruments subject
to rescission (see Note 10).
Beneficial Conversion Feature
The convertible feature of a note payable (see Note 4) provides for a rate of
conversion that is below market value. This feature is normally characterized as
a beneficial conversion feature ("BCF"). Pursuant to Emerging Issues Task Force
("EITF") Issue No. 98-5 ("EITF 98-5"), "Accounting For Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratio," and EITF Issue No. 00-27, "Application of EITF Issue No. 98-5 To Certain
Convertible Instruments," the Company has estimated the fair value of such BCF
to approximate $50,000 for the year ended June 30, 2003 and none for the period
ended June 30, 2002.
Inventories
Inventories are stated at the lower of cost or estimated market, and consist
entirely of finished goods. Cost is determined on a weighted average basis that
approximates the first-in, first-out method. Market is estimated by comparison
with recent purchases or net realizable value. The net realizable value is
estimated based on management's forecast for sales of the Company's products or
services in the ensuing years. The industry in which the Company operates is
characterized by technological advancement and change. Should demand for the
Company's products prove to be significantly less than anticipated, the ultimate
realizable value of the Company's inventory could be substantially less than the
amount shown in the accompanying consolidated balance sheets.
Revenue Recognition
The Company records sales when goods are shipped to the customer or upon the
completion of the service. Amounts received prior to the completion of the
earnings process, such as maintenance contracts paid in advance, are included in
deferred revenues in the accompanying consolidated balance sheets.
The Securities and Exchange Commission (the "SEC") has issued Staff Accounting
Bulletin No. 104 ("SAB 104"), "Revenue Recognition," which outlines the basic
criteria that must be met to recognize revenue and provides guidance for
presentation of revenue and for disclosures related to revenue recognition
policies in financial statements filed with the SEC. Management believes that
the Company's revenue recognition accounting policy conforms to SAB 104.
Indefinite-Life Intangible Assets
Goodwill represents the excess of the purchase price over the estimated fair
value of identifiable net assets acquired. The Company has applied the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," in
accounting for goodwill. SFAS No. 142 requires that goodwill and other
intangible assets that have indefinite lives not be amortized, but instead be
tested at least annually for impairment when events or changes in circumstances
indicate that the asset might be impaired. For indefinite-life intangible
assets, impairment is tested by comparing the carrying value of the asset to the
estimated fair value of the reporting unit to which they are assigned. The
Company recorded an impairment charge approximating $2,543,000 to write-off all
of the goodwill associated with the acquisition of Z Prompt described in Note 3.
Impairment of Long Lived-Assets
The Company periodically evaluates the carrying value of its long-lived assets
under the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets, and supersedes (a) SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and (b) the accounting and reporting provisions of
APB Opinion No. 30 ("Reporting the Effects of the Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions") for the disposal of a segment of a business as previously defined
in that Opinion. SFAS No. 144 also amends Accounting Research Bulletin ("ARB")
No. 51, "Consolidated Financial Statements," to eliminate the exception to
consolidation of a subsidiary when control is likely to be temporary.
SFAS No. 144 requires impairment losses to be recorded on long-lived assets used
in operations, including amortizable intangible assets when indicators of
impairment are present. Indicators of impairment include an economic downturn or
a change in the assessment of
future operations. In the event a condition is identified that may indicate an
impairment issue, an assessment is performed using a variety of methodologies,
including analysis of undiscounted future cash flows, estimates of sales
proceeds and independent appraisals. If such assets are impaired, the expense
recognized is the amount by which the carrying amount of the asset exceeds the
estimated fair value. Assets to be disposed of are reported at the lower of the
carrying value or the estimated fair market value, less cost to sell.
During the quarter ended March 31, 2004, the Company's wholly-owned subsidiary Z
prompt filed bankruptcy (see Note 12). In connection with the bankruptcy filing,
the Company recorded an impairment charge approximating $2,543,000 to write-off
all of the goodwill associated with the acquisition of this subsidiary (see Note
3).
Income Taxes
Deferred income taxes reflect the estimated tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts reported for income tax purposes. The Company records a
valuation allowance for deferred income tax assets when, based on management's
best estimate of taxable income (if any) in the foreseeable future, it is more
likely than not that some portion of the deferred income tax assets may not be
realized.
Advertising
The Company expenses the cost of advertising as incurred. Advertising expense
approximated $170,000, $310,000, and $90,000 for the years ended June 30, 2004
and 2003 and for the period from August 9, 2001 (Inception) through June 30,
2002, respectively.
Research and Development
Certain expenditures for research and development activities relating to product
development and improvement are charged to expense as incurred. Such
expenditures approximated $175,000 for the period August 9, 2001 (Inception)
through June 30, 2002. There were no such expenditures for the years ended June
30, 2004 or 2003.
The Company defers certain costs related to the preliminary activities
associated with the future manufacture of its product, which the Company has
determined have future economic benefit. These costs are amortized over their
expected useful life beginning (as applicable) when the product is available for
general release to customers or when the Voting System has qualified under
certain federal standards. Management periodically reviews and revises, when
necessary, its estimate of the future benefit of these costs and expenses them
if it deems that there is no longer any future benefit. At June 30, 2004 and
2003, capitalized development costs approximated $2,544,000 and $1,400,000,
respectively, consisting primarily of software development costs.
Loss Per Common Share
Under SFAS No. 128, "Earnings per Share," basic earnings per share is computed
by dividing net income available to common shareholders by the weighted-average
number of common shares assumed to be outstanding during the period of
computation. Diluted earnings per common share is computed similar to basic
earnings per common share, except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the
potential common shares had been issued and the additional common shares were
dilutive (approximating xx,xxx,xxx, 31,700,000, and 28,200,000 shares at June
30, 2004, 2003 and 2002, respectively), based on the treasury stock method.
Because the Company has incurred net losses, basic and diluted loss per common
share are equal because additional potential common shares would be
anti-dilutive.
PERIODS ENDED JUNE 30,
2004 2003 2002
----------- ----------- ------------
Net loss, as reported $(15,379,253) $(4,848,567) $(2,406,580)
Interest related to equity
instruments subject to
rescission (322,000) (158,000) (12,137)
----------- ----------- ------------
Net loss available to common
stockholders $(15,701,253) $(5,006,567) $(2,418,717)
=========== =========== ============
Shares used to compute basic and
diluted loss per common share:
Weighted-average common shares 130,704,286 106,687,447 68,735,272
=========== =========== ============
Basic and diluted loss per
common share $ (0.12) $ (0.05) $ (0.04)
=========== =========== ============
Derivative Instruments and Hedging Activities
SFAS No. 133, "Accounting For Derivative Instruments and Hedging Activities" (as
amended by SFAS Nos. 137, 138, 140, 141 and 145), establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities on the
balance sheet at their fair value. The Company has no derivatives or hedging
activities as of June 30, 2004 or June 30, 2003.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes the standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. The adoption of SFAS 130 has not
materially impacted the Company's financial position or results of operations.
Segment Information
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information,"
changed the way public companies report information about segments of their
business in their annual financial statements and requires them to report
selected segment information in their quarterly reports issued to shareholders.
It also requires entity-wide disclosures about the products and services an
entity provides, the foreign countries in which it holds significant assets and
its major customers. At June 30, 2004 and 2003, the Company operates in one
segment, as disclosed in the accompanying consolidated statements of operations.
Variable Interest Entity
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are
to provide guidance on the identification of entities for which control is
achieved through means other than voting rights (variable interest entities, or
"VIEs"), and how to determine when and which business enterprise (if any) should
consolidate the VIE. This new model for consolidation applies to an entity for
which either: (a) the equity investors do not have a controlling financial
interest; or (b) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, FIN No. 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. As amended in December 2003, the effective
dates of FIN No. 46 for the Company are as follows: (a) For interests in
special-purpose entities: the first period ended after December 15, 2003; and
(b) For all other types of VIEs: the first period ended after March 15, 2004.
The Company is associated with WTI through common ownership; in addition, until
April 2004 the Company was a major customer of WTI for software development
services. (WTI derived approximately 75% and 98% of their revenue from services
provided to the Company for the year ended June 30, 2003 and the seven months
ended January 31, 2004, respectively.) Based on these and other factors, the
Company determined that, as of January 1, 2004, (i) WTI is a VIE and (ii) the
Company was its primary beneficiary. Therefore, effective January 1, 2004, the
accounts of WTI were consolidated with those of the Company. For reasons
explained in Note 5, the accounts of WTI were de-consolidated effective April 1,
2004.
Significant Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. This pronouncement is effective for contracts entered into
or modified after June 30, 2003 (with certain exceptions), and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No. 149 did
not have a material impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
is effective for public companies as follows: (i) in November 2003, the FASB
issued FASB Staff Position ("FSP") FAS 150-03 ("FSP 150-3"), which defers
indefinitely (a) the measurement and classification guidance of SFAS No. 150 for
all mandatorily redeemable non-controlling interests in (and issued by)
limited-life consolidated subsidiaries, and (b) SFAS No. 150's measurement
guidance for other types of mandatorily redeemable non-controlling interests,
provided they were created before November 5, 2003; (ii) for financial
instruments entered into or modified after May 31, 2003 that are outside the
scope of FSP 150-3; and (iii) otherwise, at the beginning of the first interim
period beginning after June 15, 2003. The Company adopted SFAS No. 150 on the
aforementioned effective dates. The adoption of this pronouncement did not have
a material impact on the Company's results of operations or financial condition.
In December 2003, the FASB issued a revision of SFAS No. 132, EMPLOYERS'
DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. This pronouncement
("SFAS No. 132-R") expands employers' disclosures about pension plans and other
post-retirement benefits, but does not change the measurement or recognition of
such plans required by SFAS No. 87, No. 88, or No. 106. SFAS No. 132-R retains
the existing disclosure requirements of SFAS No. 132, and requires certain
additional disclosures about defined benefit post-retirement plans. Except as
described in the following sentence, SFAS No. 132-R is effective for foreign
plans for fiscal years ending after June 15, 2004; after the effective date,
restatement for some of the new disclosures is required for earlier annual
periods. Some of the interim-period disclosures mandated by SFAS No. 132-R (such
as the components of net periodic benefit cost, and certain key assumptions) are
effective for foreign plans for quarters beginning after December 15, 2003;
other interim-period disclosures will not be required for the Company until the
first quarter of 2005. Since the Company does not have any defined benefit
post-retirement plans, the adoption of this pronouncement did not have any
impact on the Company's results of operations or financial condition.
Other significant recent accounting pronouncements issued by the FASB (including
its Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the SEC are discussed elsewhere in these notes to the
consolidated financial statements. In the opinion of management, significant
recent accounting pronouncements did not or will not have a material effect on
the consolidated financial statements, other than FIN No. 46 as discussed above.
Stock Dividend
Effective July 18, 2002, the Company's Board of Directors approved a stock
dividend that was accounted for as a four-for-one stock split. All references
throughout these consolidated financial statements and notes to the number of
shares, per share amounts, stock options, and market prices of the Company's
common stock have been restated to reflect such stock dividend.
Equity Instruments Subject to Rescission
The Company accounts for common stock and other equity instruments that may be
subject to rescission claims at estimated fair value (based on applicable
measurement criteria) in accordance with the SEC's promulgated accounting rules
and interpretive releases. Since equity instruments subject to rescission are
redeemable at the holder's option or upon the occurrence of an uncertain event
not solely within the Company's control, such equity instruments are outside the
scope of SFAS No. 150 and its related interpretations. Under the SEC's
interpretation of GAAP, reporting such claims outside of stockholders' equity
(as "mezzanine equity") is required, regardless of how remote the redemption
event may be.
Restatements and Reclassifications
As previously reported, the accompanying June 30, 2003 consolidated balance
sheet has been restated to reflect equity instruments subject to rescission, and
the financial statements described in Note 11 have been restated as explained
therein. All financial information included in these notes to consolidated
financial statements that relates to the quarters ended September 30, 2003 and
December 31, 2003 reflects (a) the applicable adjustments described in the
amended Form 10-Q's for such periods, and (b) the restatement of the balance
sheets as of those dates to reflect equity instruments subject to rescission. In
addition, all financial information included in these notes to consolidated
financial statements for the first three quarters of fiscal 2003 has been
adjusted as described in Note 9.
As of the effective date of SFAS No. 150 (see above), management reclassified
the June 30, 2003 balance (approximately $114,000) of the put liability related
to warrant issuances from "mezzanine equity" to the liability section of the
Company's consolidated balance sheet.
Certain reclassifications have been made to the 2003 and 2002 financial
statement presentation to conform to the current year's presentation.
NOTE 2 REVERSE ACQUISITION
On May 20, 2002, Western International Pizza Corporation ("WIPC"), a publicly
traded company, entered into a Stock Exchange Agreement (the "Exchange
Agreement") with AccuPoll, Inc ("AccuPoll") in a tax-free share exchange under
Section 368(a)(1)(B) of the Internal Revenue Code. Such transaction was
accounted for as a reorganization. In May 2002, pursuant to a Certificate filed
with the Nevada Secretary of State, WIPC effected a one for 2000 reverse split
of all the outstanding shares of its common stock. Thereafter, in May 2002, WIPC
effected a 1 for 5 reverse stock split of all the outstanding shares of its
common stock. Pursuant to the Exchange Agreement, all of the outstanding common
and preferred stock and outstanding warrants of AccuPoll were exchanged for
shares of WIPC on a 1 for 1.532 basis. By virtue of the reorganization, the
stockholders of AccuPoll acquired 75,500,000 restricted common shares of WIPC.
Management accounted for the reorganization as a capital stock transaction.
Accordingly, the reorganization was reported as a recapitalization of the
Company and AccuPoll is considered the acquirer for accounting purposes. Through
its former stockholders, the Company is deemed the acquirer for accounting
purposes because of (a) its majority ownership of WIPC, (b) its representation
on WIPC's board of directors, and (c) the executive management positions held by
former officers of AccuPoll.
In connection with the reverse acquisition, the Company issued 4.8 million
shares of restricted common stock at $0.06 per share (estimated to be the fair
value of the services rendered) to a broker. The related $300,000 was expensed
during the period ended June 30, 2002.
NOTE 3 PURCHASE OF BUSINESS
On April 9, 2003, the Company entered into an agreement with Z prompt (a
California corporation) to purchase all of the outstanding capital stock of Z
prompt from its stockholders in exchange for 8 million shares of the Company's
restricted common stock. The primary reason for this purchase was to acquire a
nationwide network of qualified computer hardware technicians who could assist
with the maintenance of the AccuPoll Ballot Buddy product - specifically its
integrated printer.
Additionally, the Company was required to settle an outstanding promissory note
of Z prompt in the principal amount of approximately $400,000 that was held by a
former stockholder of Z prompt, in exchange for 533,000 shares of restricted
common stock of the Company. The Company advanced Z Prompt approximately
$144,000 in connection with the acquisition; such
advances were initially recorded as deferred acquisition costs because of the
contingency described in the following paragraph.
The agreement between AccuPoll and the Z prompt stockholders provided that the
transaction could be rescinded by the former Z prompt shareholders if AccuPoll's
electronic voting system was not certified by Wyle Labs by September 30, 2003.
Such certification was obtained on October 31, 2003; accordingly, the Z prompt
acquisition was recorded for accounting purposes in November 2003.
Based on an independent valuation, the estimated fair value of AccuPoll's common
stock issued for the Z prompt acquisition approximated $1.8 million ($0.213 per
common share). Among other factors, the valuation utilized information from
then-recent issuances of the Company's common stock in equity-raising
transactions.
The purchase price was allocated to the business acquired based on the estimated
fair value of the assets acquired and liabilities assumed, as follows:
Assets $ 183,329
Goodwill 2,542,752
Liabilities (912,819)
-----------
$ 1,813,262
===========
The results of operations of Z prompt are included in the accompanying
consolidated financial statements from November 1, 2003. The following pro forma
summary presents condensed consolidated results of operations as if Z prompt had
been acquired as of the beginning of the years ended June 30, 2004 and 2003:
YEAR ENDED JUNE 30
-----------------------------
2004 2003
------------- -------------
Net loss $(14,043,675) $(5,7661,013)
============= =============
Loss per common share $ (0.11) $ (0.05)
============= =============
The above amounts are based upon certain assumptions and estimates, which the
Company believes are reasonable. The pro forma results of operations do not
purport to necessarily be
indicative of the results which would have been obtained had the business
combination occurred as of the beginning of the aforementioned years, or which
may be obtained in fiscal 2005 and thereafter.
See Notes 6 and 12 for additional information related to Z Prompt.
NOTE 4 CONVERTIBLE NOTE PAYABLE
We have a convertible debenture which at the discretion of the convertible
debenture grantor may provide us loans of up to $1,250,000. The convertible
debenture bears interest at an annual rate of 10% and originally matured on June
30, 2004, but has been extended to December 31m 2004. The debenture is
convertible on 90 days written notice by Grantor at the lessor of (i) 50% of the
average three lowest closing prices for our common stock for the twenty days
immediately preceding the conversion date or (ii) $0.625 per share. At June 30,
2004, we had borrowed $872,000 under such debenture. In connection with this
Note, the Company granted a warrant to purchase 6,400,000shares of the Company's
restricted common stock at an exercise price of $0.06 per share. The warrants
vested upon grant and expire in July 2008. The Company recorded the relative
fair value of the warrant and the beneficial conversion feature as a debt
discount in the total amount of approximately $200,000. The discount associated
with the warrants is amortized to interest expense over the term of the July
Note. The discount associated with the beneficial conversion feature was
insignificant, and was recorded as interest expense upon issuance.
In November 2003, the Company granted a warrant to purchase 6 million shares of
the Company's restricted common stock at an exercise price of $0.06 per share in
connection with a deferral of the maturity date of the above existing
convertible instrument to December 2004 and an increase of the available
borrowings to $1,250,000 from its original value of $600,000. The warrants
vested upon grant and expire in October 2008. The Company recorded the relative
fair value of the warrant, which approximated $40,000, as a debt discount which
is being amortized to interest expense over the term of the convertible
debenture.
See Notes 13 and 14 for other convertible notes payable.
NOTE 5 RELATED PARTY TRANSACTIONS
Related Party Payables
Related party payables approximated $1,487,000 and $875,000 at June 30, 2004 and
2003, respectively, which represent expenses incurred by the Company relating to
the management services agreement entered into with WTI (see below). The amounts
bear no interest and are due within thirty days of receipt.
Notes Payable to Related Parties
During the year ended June 30, 2003, the Company borrowed an aggregate of
$165,000 for working capital purposes from a related party. The note calls for
interest at 8% and is due on demand. Per the note agreement, the Company issued
the creditor warrants (with an estimated value of $20,000) to purchase 40,000
shares of restricted common stock of the Company. At June 30, 2004, erthis note
was paid in full.
Master Services Agreement
In April 2002, the Company entered into a Master Services Agreement (the
"Services Agreement") whereby WTI provided substantially all non-production
services related to the Company's Voting System. Under the Services Agreement,
the Company was charged hourly rates for the services of WTI employees who
worked on developing the computer software for the Company's Voting System. In
addition, the Company paid WTI for all reimbursable expenses, as defined in the
Services Agreement. The Company was not charged for the use of the office space
or fixed assets of WTI; overhead-related charges were included in the basic
hourly rates charged by WTI to the Company. All inventions, concepts, know-how,
methodologies, processes, algorithms, techniques, compilations, software and
other works of authorship of any nature created or developed by WTI during the
life of the Services Agreement remain the exclusive property of AccuPoll.
WTI, which was incorporated in 1996, is in the business of software engineering
in various computer languages with an emphasis on Linux/Apache, Sun Solaris, and
Microsoft NT/Win2K platforms. WTI is owned and operated by Dennis Vadura and
Frank Wiebe. Mr. Vadura is the Company' chief executive officer, a director, and
a principal stockholder; Mr. Wiebe is the Company's president and treasurer, a
director, and a principal stockholder (collectively the "controlling
stockholders"). During the years ended June 30, 2004 and 2003, WTI invoiced
approximately $1,450,000 and $1,300,000, respectively, to the Company under the
terms of the Services Agreement, of which approximately $1,487,000 is due and
payable at June 30, 2004.
The Services Agreement expired on March 31, 2004. Since that date, the Company
has not used the services of WTI because the software for the Voting System is
now substantially complete; any additional computer programming that may be
necessary will be provided by Company employees (some of whom are former WTI
employees). At this time, WTI is virtually a dormant entity with just two minor
customers and only a few employees. Although the Company's June 30, 2004 payable
to WTI is a substantial amount (see the preceding paragraph), there is no intent
to pay this liability in the foreseeable future. Given its minimal operations at
this time, management believes that WTI is no longer dependent for its continued
existence upon additional subordinated financial support from the Company or its
controlling stockholders. For these reasons, management has concluded that the
Company is no longer the primary beneficiary of WTI and, therefore, has
de-consolidated the accounts of WTI as of April 1, 2004.
NOTE 6 OTHER COMMITMENTS AND CONTINGENCIES
Consulting Agreements
In April 2002, the Company issued consultants 3,840,000 shares of common stock
at $0.08 per share, valued at $313,344 (based on the market value on the date of
grant), of which $286,000 was included in the consolidated balance sheet as
prepaid consulting fees and $27,344 had been expensed during the period ended
June 30, 2002. The related consulting services were to be provided through April
2004, and the Company was amortizing the prepaid consulting fees over the
service period on a straight-line basis. In addition, the Company granted
warrants to purchase 2 million shares of its restricted common stock at an
exercise price of $0.06 per share, valued at $500,000 (based on the
Black-Scholes pricing model) to such consultants as a non-refundable fee in
exchange for general business consulting services, which the Company recorded in
the accompanying consolidated statement of operations for the period ended June
30, 2002. During the year ended June 30, 2003, the Company determined it was no
longer receiving benefit from the consultant and expensed the remaining $286,000
in the accompanying consolidated statement of operations for the year ended June
30, 2003.
Litigation
Z prompt
In October 2003, a former officer and principal stockholder of Z prompt (the
"plaintiff") filed a lawsuit against the Company and Z prompt (hereinafter
collectively referred to as the "defendants") alleging breach of contract,
conversion, and fraud relating to (a) the plaintiff's employment contract with Z
prompt, (b) the merger agreement described in Note 3, and/or (c) a Z prompt
promissory note (approximately $167,000 plus interest) payable to the plaintiff.
The plaintiff is seeking minimum compensatory damages (including deferred salary
and collection of the promissory note) of approximately $1.6 million, an
unstated amount in excess of $1 million based on the fraud allegation, and
punitive damages according to proof.
In December 2003, the defendants sued the plaintiff in a cross-compliant,
alleging (among other things) breach of good faith/fair dealing covenant, breach
of contract, fraud, misrepresentation, negligence, and breach of fiduciary duty.
The cross-complainants are seeking (a) compensatory damages of approximately
$1,960,000, (b) the rescission of all agreements between the plaintiff and the
defendants (such as the aforementioned merger agreement), (c) the cancellation
of all Company stock currently owned by the plaintiff, and (d) punitive damages
in an unstated amount. This cross-complaint was amended in February 2004 to name
two other former officers/stockholders of Z prompt as additional defendants.
In January of 2004, the plaintiff amended his complaint to name certain
officers/stockholders of the Company as additional defendants, alleging fraud
and interference with contract. This action seeks compensatory damages in excess
of $2 million and punitive damages according to proof.
In June 2004, the bankruptcy court granted the plaintiff relief from the
automatic stay provided by the Bankruptcy Code (see Note 12) regarding the
litigation described above, and the matter
is presently scheduled for trial in Orange County (California) Superior Court in
January 2005. In the same action, Z prompt agreed to withdraw its motion in
bankruptcy court seeking rejection of the executory contracts described above.
Management intends to vigorously defend the October 2003 lawsuit described above
(as amended), and does not believe that the plaintiff's recovery (if any) of
uninsured damages will have a material adverse effect on the Company's
consolidated financial statements.
GENERAL
From time to time, the Company may be involved in various claims, lawsuits or
disputes arising in the normal operations of its business. Other than the matter
described in Note 10, the Company is not currently involved in any such matters
which management believes could have a material adverse effect on the Company's
financial position or results of operations. Exclusive Supply Agreement
In December 2001, the Company entered into an exclusive supply contract expiring
in 2006 with a vendor to manufacture the Voting System product. Per the
agreement, if the supplier is unable to produce and deliver on time the required
quantity of product, the Company may obtain the Voting System product from
another supplier.
Professional
The Company has entered into general consulting/lobbying agreements with various
third parties to provide services related to the marketing and sale of the
Company's product in certain cities; such agreements expire through April 2004.
Pursuant to the agreements, the Company will pay commissions on sales within the
various territories, as defined.
During the year ended June 30, 2003, the Company entered into a Location
Incentives Agreement (the "LIA") with the Amarillo Economic Development
Corporation ("AEDC") to establish the Company's customer service center and
voting machine repair operations in Amarillo, Texas. According to the terms of
the LIA, the AEDC paid the Company $250,000 upon execution of a lease for
facilities in Amarillo. The funds advanced under the LIA are to be used solely
for the operations in Amarillo. If the Company does not meet certain minimum
employment requirements (as defined in the LIA), it will be required to repay
all amounts advanced. The Company has recorded the advance in the accompanying
consolidated balance sheets in accounts payable and accrued expenses. In
connection with the LIA, the Company granted warrants to purchase 250,000 shares
of its restricted common stock at an exercise price of $1.04 per share, valued
at approximately $174,000 based on the Black-Scholes pricing model. The warrants
vested on the grant date, and expire in November 2012.
NOTE 7 STOCKHOLDERS' EQUITY
Preferred Stock
In December 2003, the Company entered into an agreement to issue 8,471 shares of
cumulative convertible Series A Preferred Stock ("Series A") and $1,200,000 of
convertible notes payable (see Note 15) in exchange for 3,325,000 shares of free
trading common stock of Material Technologies, Inc., a publicly traded company
whose common stock is quoted on the Over-The-Counter Bulletin Board under the
symbol "MTNA." In attempting to execute such transaction, the Company's intent
was to gain access to capital markets through the potential sale of MTNA common
stock.
The Company has not filed a certificate of designation with respect to any
series of preferred stock. On May 7, 2004, management entered into an agreement
whereby the Company exchanged the 3,325,000 shares of common stock of Material
Technologies, Inc. for the 8,471 shares of Series A. Accordingly, as of May 7,
2004, no preferred stock was issued or outstanding. However, the Company remains
liable on the $1.2 million convertible note payable.
The accounting adjustment for the transaction described in the preceding
paragraph has been reflected in the accompanying June 30, 2004 consolidated
financial statements of the Company. This adjustment of the Company's financial
statements increased the previously reported net loss for the quarter ended
December 31, 2003 by approximately $1.2 million ($0.01 per common share).
Common Stock
In August 2003, the Company issued 7,000,000 shares of restricted common stock
as collateral for potential loan proceeds approximating $1,650,000 ("Secured
Note"), less applicable commissions. The Secured Note accrues interest at 4.5%,
will require quarterly interest-only payments through maturity, and matures two
years from receipt of proceeds. As of the date of this filing, the Company has
not received any proceeds or paid any related commissions.
During the quarter ended March 31, 2004, the Company issued 13,884,534 shares of
restricted common stock in connection with the exercise of warrants for proceeds
of approximately $2.3 million, net of commissions approximating $400,000.
During the quarter ended March 31, 2004, the Company also issued 1,724,167
shares of restricted common stock in connection with the conversion of a
$500,000 note payable plus accrued interest approximating $17,000.
In May, 2004, the Company issued 1,960,000 shares of common stock to three
different shareholders, as a result of a net exercise of warrants with an
exercise price of $.0625 per share.
In June, 2004, the Company issued 3,105,262 shares of common stock to three
different shareholders, as a result of a net exercise of warrants with an
exercise price of $.0625 per share.
In June, 2004, the Company issued 2,156,250 shares of common stock as a result
of convertible debt of $250,000 which was converted at $.1224 per share.
In July 2004, the Company issued 18,406,248 shares of common stock to seven
different shareholders, as a result of a net exercise of warrants with a strike
price of $.0625 per share. The Company relied upon Section 4(2) of the
Securities Act as an exemption from registration.
Warrants
From time to time, the Company issues warrants pursuant to various consulting
agreements
During the year ended June 30, 2003, the Company granted warrants to purchase
250,000 shares of the Company's restricted common stock at an exercise price of
$0.91 per share valued at $206,000 (based on the Black-Scholes pricing model) to
a consultant for services rendered, which has been expensed in the accompanying
consolidated statement of operations for the year ended June 30, 2003. In
connection with the issuance, the warrant holder may cause the Company to
re-purchase any warrants not previously exercised by the warrant holder on or
after June 2006 for $0.46 per share. Accordingly, a related liability of
$113,750 was recorded in the accompanying June 30, 2003 consolidated balance
sheet, representing the Company's re-purchase liability.
During the quarter ended March 31, 2004, the Company granted warrants to
purchase 375,000 shares of the Company's restricted common stock with exercise
prices ranging from $0.18 to 1.54 per share, valued at approximately $953,000
(based on the Black-Scholes pricing model), to various consultants for services
to be rendered through February 2005. The Company is amortizing such expense
over the term of the related services. As of June 30, 2004, the Company had
amortized approximately $xxx,000 to consulting expense.
During the quarter ended March 31, 2004, the Company granted warrants to
purchase 11,346,180 shares of the Company's restricted common stock with
exercise prices ranging from $0.12 to $1.00 per share. These warrants vested
upon grant, and are exercisable through March 2009. Such warrants were issued in
connection with equity fund-raising activities and, accordingly, no related
expense was reported in the accompanying consolidated financial statements.
Update for fourth qtr. fiscal 2004 activity.
A summary of changes in warrants during each period is presented below:
[Update/change numbers and dates]
Weighted Average
Warrants Exercise Price
----------- ----------------
Balance, August 9, 2001 (Inception) -- $ --
Warrants granted 34,512,804 0.08
Warrants exercised (9,901,316) (0.11)
0.29
Warrants granted 15,340,813
Warrants exercised (4,393,886) (0.11)
Warrants cancelled (3,972,000) (0.25)
---------------- -----------------
Balance, June 30, 2003 31,586,415 $ 0.15
================ =================
Warrants granted 52,681,292 0.48
Warrants exercised (21,067,794) (0.22)
Warrants cancelled - -
---------------- -----------------
Balance, June 30, 2004 63,199,913 $ 0.40
================ =================
Warrants exercisable at June 30, 2004 63,199,913 $ 0.40
================ =================
Per share values at grant date of Weighted Average Weighted Average
warrants issued during fiscal 2004: Fair Value Exercise Price
---------------- -----------------
Less than fair market value $ 0.72 $ 1.55
================ =================
Equal to fair market value $ 0.87 $ 1.54
================ =================
Greater than fair market value $ 1.39 $ 0.25
================ =================
The following table summarizes information related to warrants outstanding at
June 30, 2004:
Warrants Outstanding Warrants Exercisable
------------------------------------------------------------------ -------------------------------------
Weighted Average Weighted Average Weighted Average
Exercise Price Number Remaining Contractual Life Exercise Price Number Exercise Price
- -------------------------------------- -------------------------- ------------------- ------------------ -----------------
$0.01 - $0.08 33,145,366 4.66 $ 0.06 33,145,366 $ 0.06
$0.12 - $0.25 8,828,992 7.59 0.17 8,828,992 0.17
$0.26 - $0.50 4,239,428 5.14 0.36 4,239,428 0.36
$0.75 - $0.90 7,313,157 0.25 0.76 7,313,157 0.76
$1.00 - $1.40 9,672,970 4.63 1.52 9,672,970 1.52
----------------- -------------------------- ------------------- ---------------- -----------------
63,199,913 4.68 $ 0.40 63,199,913 $ 0.40
The following outlines the significant assumptions used to calculate the
estimated fair value information presented utilizing the Black-Scholes pricing
model:
Year Ended Year Ended Period Ended
June 30, 2004 June 30, 2003 June 30, 2002
---------------- --------------- --------------
Discount rate 2.00% 3.50% 3.50%
Volatility 72% - 112% 105% - 170% 0% - 51%
Expected life in years 3 3 1
Expected dividend yield -- -- --
---------------- --------------- --------------
Stock Options
From time to time, the Company issues non-plan stock options pursuant to various
agreements and other compensatory arrangements to employees and third parties.
A summary of changes in stock options during each year is presented below:
Weighted average
Stock Options Exercise Price
----------------- ----------------
Balance, August 9, 2001 (Inception) - $ -
Options granted 6,780,000 0.31
Options exercised - -
Options cancelled - -
----------------- ----------------
Balance, June 30, 2002 6,780,000 0.31
Options granted 5,670,000 0.94
Options exercised - -
Options cancelled - -
----------------- ----------------
Balance, June 30, 2003 12,450,000 $ 0.60
Options granted 600,000 1.54
Options exercised (550,000) 0.51
Options cancelled - -
Balance, June 30, 2004 12,500,000 $ 0.65
================= ================
Options exercisable at June 30, 2004 9,117,500 $ 0.64
================= ================
Per share values at grant date of Weighted Average Weighted Average
optionsissued during fiscal 2004: Fair Value Exercise Price
---------------- ----------------
Less than fair market value N/A N/A
================ ================
Equal to fair market value $ 0.74 $ 1.54
================ ================
Greater than fair market value N/A N/A
================ ================
The following table summarizes information related to options at June 30, 2004:
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------
Weighted Average
Remaining Contractual Weighghted Average Weighted Averagge
Exercise Price Number Life Exercise Price Number Exercise Price
- ------------------------------------ --------------------- ------------------ --------- -----------------
$0.31 6,480,000 7.92 $ 0.31 4,500,000 $ 0.45
$0.91 5,160,000 8.97 0.91 3,982,500 1.21
$1.50 260,000 1.61 1.50 260,000 1.50
$1.54 600,000 8.44 1.54 375,000 0.24
----------- --------------------- ------------------ --------- -----------------
Total 12,500,000 8.25 $ 0.68 9,117,500 $ 0.64
----------- --------------------- ------------------ --------- -----------------
The following outlines the significant assumptions used to calculate the
estimated fair value information presented utilizing the Black-Scholes pricing
model:
Year Ended Year Ended Period Ended
June 30, 2004 June 30, 2003 June 30, 2002
------------- ------------- ----------------
Discount rate 2% 3.50% 3.50%
Volatility 72% 170% 0% - 51%
Expected life in years 3 3 3
Expected dividend yield -- -- --
------------- ------------- ----------------
NOTE 8 INCOME TAX PROVISION
Income tax expense, all current, for the years ended June 30, 2004 and 2003 and
the period from August 9, 2001 (Inception) through June 30, 2002 differed from
the amounts computed by applying the U.S. Federal income tax rate of 34 percent
to the loss before income taxes as a result of the following:
2004 2003 2002
----------- ----------- -----------
Computed "expected" tax benefit $(4,756,000) $(1,649,000) $ (801,000)
Adjustment in income taxes resulting from:
Change in valuation allowance 4,579,400 1,059,000 509,000
Options and warrants issued for services - 832,000 410,400
Other - 800 2,400
State and local income taxes, net of federal (685,000) (242,000) (120,000)
Goodwill Impairment 864,000 - -
----------- ----------- -----------
$ 2,400 $ 800 $ 800
=========== =========== ===========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at June 30, 2004, 2003 and 2002 are presented below:
Deferred tax assets: 2004 2003 2002
----------- ----------- -----------
Net Operating Losses 4,314,000 215,000 121,000
Equity Compensation 1,784,000 1,784,000 456,000
Start-up Costs 1,142,000 1,142,000 309,000
Loss on Investments 480,000 - -
Capitalized research and development 70,000 70,000 70,000
Other 1,000 - -
----------- ----------- -----------
Deferred tax asset 7,791,000 3,211,000 956,000
Less: Valuation Allowance (7,791,000) (3,211,000) (956,000)
----------- ----------- -----------
Net deferred tax asset - - -
=========== =========== ===========
As of June 30, 2004, the Company had tax net operating loss carryforwards
("NOLs") of approximately $10,800,000 available to offset future taxable income
for both Federal and State purposes. The Federal and State carryforwards expire
in varying amounts through 2024. Effective September 11, 2002, pursuant to
California revenue and tax code section 24416.3, no net operating loss deduction
will be allowed for any taxable year beginning on or after January 1, 2002, and
before January 1, 2004. For any suspended losses, the carryover period is
extended by one year for losses incurred in tax years beginning on or after
January 1, 2002, and before January 1, 2003; and by two years for losses
incurred in taxable years beginning before January 1, 2002.
Due to the change in ownership provisions of the Internal Revenue Code Section
382, net operating loss carryforwards for Federal and State income tax reporting
purposes are subject to annual limitations. Should an additional change in
ownership occur, net operating loss carryforwards may be limited as to their use
in future years.
In 2004, 2003 and 2002, the Company concluded that a full valuation allowance
against its net deferred tax assets was appropriate. SFAS 109 requires that a
valuation allowance must be established when it is more likely than not that all
or a portion of deferred tax assets will not be realized. In making such
determination, a review of all available positive and negative evidence must be
considered, including scheduled reversal of deferred tax liabilities, projected
future taxable income, tax planning strategies, and recent financial
performance. The accounting guidance further states that forming a conclusion
that a valuation allowance is not needed is difficult when there is negative
evidence such as cumulative losses in recent years. As a result of the Company's
recent cumulative losses, the Company concluded that a full valuation allowance
should be recorded in 2004, 2003 and 2002.
NOTE 9 SIGNIFICANT FISCAL 2003 FOURTH QUARTER ADJUSTMENTS
In June 2003, the Company recorded an adjustment to capitalize software
development costs of approximately $436,000 that were previously expensed in
earlier fiscal 2003 quarters relating to WTI. The allocation of such costs
incurred from a related party (see Note 5) was adjusted in the fourth quarter of
fiscal 2003. The effect of this adjustment on the first three quarters of fiscal
2003 is summarized below:
QUARTER ENDED
-----------------------------------------
9/30/02 12/31/02 3/31/03
----------- ----------- -----------
Net loss, as previously reported $ (738,639) $(1,683,613) $(1,115,187)
Adjustment described above 162,315 157,725 115,775
----------- ----------- -----------
Net loss, as restated $ (576,324) $(1,528,888) $ (999,412)
=========== =========== ===========
Such adjustment had no effect on the basic/diluted (rounded) loss per common
share for any of the first three quarters of fiscal 2003.
NOTE 10 EQUITY INSTRUMENTS SUBJECT TO RESCISSION
The Company may be subject to possible claims for rescission with respect to the
sale or other issuances of certain common stock, options and warrants. The
accompanying consolidated balance sheets reflect an adjustment for the matter
described below.
Approximately 26,750,000 million shares of the Company's common stock, options
and warrants that were issued or granted in the United States without
registration or qualification under federal or state securities laws during the
two-year period ended June 30, 2004 may be subject to rescission. The fair value
of these securities was estimated based on a combination of (a) the selling
price of the common stock on the dates sold, (b) the price per the agreement for
stock issued in conversion of debt, (c) the fair value of the stock options and
warrants on their grant dates, and (d) an independent valuation. The fair value
of these options and warrants was estimated using the Black-Scholes
option-pricing model. Based on these measurement criteria, the Company's
potential liability directly associated with the aforementioned securities
transactions is estimated to approximate $6.2 million (including interest) at
June 30, 2004 plus legal fees and any fines or penalties that might be assessed
by regulatory agencies.
The potential liability discussed above does not include options to purchase a
total of 3.6 million shares of common stock issued to the Company's president
and to its chief executive officer because these two individuals are also
principal stockholders of the Company; acting together, they have the ability to
control the Company. The estimated fair value of the options described in this
paragraph (excluding interest) approximated $1,360,000 at June 30, 2004.
Management is unable to determine at this time whether any claim for rescission
may be filed against the Company; however, there can be no assurance that such
claims will not be asserted.
In addition, regulatory agencies could launch a formal investigation and/or
institute an enforcement proceeding against the Company.
The ultimate outcome of the matters discussed above is not presently
determinable. Accordingly, management is unable to estimate the liability, if
any, that the Company may incur as a result of such contingencies. Regardless of
how remote a rescission event may be, GAAP as interpreted by the SEC requires
that equity securities subject to rescission be reported outside of the
stockholders' equity section of the balance sheet until the applicable statutes
of limitations have expired. Thus, the Company has reported approximately $6.2
million as "mezzanine equity" in the accompanying June 30, 2004 consolidated
balance sheet.
Approximately 8.5 million shares of the Company's common stock issued in
connection with the acquisition of Z prompt, with an issuance-date estimated
fair value of approximately $1.8 million, have been excluded from the June 30,
2003 mezzanine equity amount, as the acquisition was not recorded until November
2003 for reasons described in Note 3.
NOTE 11 RESTATEMENT OF STATEMENTS OF OPERATIONS
Subsequent to the original issuance of the Company's June 30, 2003 financial
statements, it was determined that consulting services, for which the Company
had granted a warrant to purchase 1 million shares of common stock with an
estimated fair value of $655,000, had not been and will not be performed.
Therefore, the accompanying consolidated statements of operations for the year
ended June 30, 2003 and for the period from Inception through June 30, 2003 have
been restated. The effect of such restatement was to reduce the previously
reported net loss by $655,000 with no effect on (rounded) loss per common share.
12. BANKRUPTCY FILING OF WHOLLY-OWNED SUBSIDIARY Z PROMPT
On March 23, 2004 (the "Petition Date"), Z prompt (or the "Debtor") filed a
voluntary petition for relief (the "Chapter 11 Case") under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Central District of California (the "Bankruptcy
Court"). Since the Petition Date, Z prompt has conducted its business activities
as a debtor-in-possession under the Bankruptcy Code.
As a result of the Chapter 11 Case, the realization of Z prompt's assets and the
liquidation of its liabilities are subject to uncertainty. In the Chapter 11
Case, a substantial portion of the Debtor's liabilities as of the Petition Date
is subject to compromise or other treatment under a confirmed plan of
reorganization. Generally, actions to enforce or otherwise effect repayment of
all pre-Chapter 11 liabilities (as well as any pending litigation, absent a
stipulation to the contrary - see the "Z prompt litigation" section of Note 6)
against the Debtor are stayed while Z prompt operates as a debtor-in-possession
during bankruptcy proceedings. Schedules have been filed by the Debtor with
the Bankruptcy Court setting forth the liabilities (approximately $1 million)
and assets of Z prompt as of the Petition Date based on its unaudited accounting
records. Any differences between amounts reflected in such schedules and claims
filed by creditors will be investigated, and will either be amicably resolved or
adjudicated by the Bankruptcy Court. The ultimate amount and settlement terms of
such liabilities are not presently determinable.
Financial accounting and reporting during a Chapter 11 case are governed by
Statement of Position No. 90-7, FINANCIAL REPORTING BY ENTITIES IN
REORGANIZATION UNDER THE BANKRUPTCY CODE ("SOP No. 90-7"). For financial
reporting purposes, Z prompt's pre-petition liabilities and obligations, which
may be subject to settlement or otherwise dependent on the outcome of the
Chapter 11 case, have been segregated and classified as "liabilities subject to
compromise" in the accompanying June 30, 2004 consolidated balance sheet (see
Note 17). Z prompt did not have any significant reorganization (income or
expense) items during the year ended June 30, 2004. Certain additional
disclosures including (a) claims not subject to reasonable estimation of the
amount to be allowed and (b) any significant difference between reported
interest expense and stated contractual interest will be provided (as required
by SOP No. 90-7) when such amounts are determinable and/or when the related
transactions occur.
Management continues to conduct the business activities of Z prompt under the
supervision of the Bankruptcy Court and, among other things, the Debtor is
granted a 120-day exclusive right to propose a plan of reorganization which must
be approved by the creditors and confirmed by the Bankruptcy Court. In
accordance with the Bankruptcy Code, an automatic stay provides that creditors
of Z prompt and other parties in interest are prevented from seeking repayment
of pre-petition debts. Additionally, unless otherwise approved by the Bankruptcy
Court, the Debtor must refrain from paying any pre-petition indebtedness.
On April 20, 2004, the Bankruptcy Court approved a debtor-in-possession
financing arrangement whereby Z prompt is permitted to obtain credit from
AeroFund Financial, Inc. of no more than $500,000 through the sale and/or
factoring of its post-petition accounts receivable; this credit facility is
collateralized by a security interest in such accounts receivable.
Although legal fees and other administrative expenses to complete Z Prompt's
bankruptcy proceedings may be significant, they are not susceptible of
reasonable estimation at this time. Z prompt could decide to reject some or all
of its lease obligations in the Chapter 11 Case. This action may result in lease
rejection claims pursuant to the Bankruptcy Code; any such claims would be
adjudicated by the Bankruptcy Court.
An important element in successfully reorganizing the Debtor will be the ability
to restructure certain liabilities in order to reduce indebtedness and provide
funding for operations. As part of the process of attempting to reorganize, Z
prompt intends to pursue various financing
alternatives that may be available, although there can be no assurance that the
Debtor will be able to successfully implement any such alternatives. Though Z
prompt intends to make efforts to increase its revenues to improve operations,
it is possible that losses will continue for the foreseeable future and that the
Debtor will require additional funding and financial support from a third party
and/or its parent company. There can be no assurance that any such additional
financing will be available on acceptable terms, that such funds (if available)
would enable Z prompt to continue operating, or that the Debtor will be
successful in increasing its revenues. In addition, there is no assurance that
the creditors and the Bankruptcy Court will approve a reorganization plan that
will allow Z prompt to survive.
The Company's March 23, 2004 receivable from Z prompt (which has been eliminated
in consolidation, and therefore is not included in the Note 18 disclosure) of
approximately $275,000 is subject to compromise in the bankruptcy proceedings.
Condensed financial information of Z prompt as of June 30, 2004 and for the
period from November 1, 2003 (when the acquisition was recorded for accounting
purposes) to June 30, 2004 is presented below.
Z PROMPT INC.
BALANCE SHEETS (Unaudited)
June 30, 2004
- --------------------------------------------------------------------------------
9 MONTHS
ENDED
2004
------------
ASSETS
CURRENT ASSETS
Cash $ 34,010
Accounts receivable, net 254,895
Inventories 20,667
Prepaid expenses (1,242)
------------
309,572
OTHER, net 2,512
------------
TOTAL ASSETS $ 312,084
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 135,355
Loan from parent company 620,395
Deferred revenues 74,628
Loan from Bank of America 225,000
Loans from previous officers 171,657
Liabilities subject to compromise 502,266
------------
TOTAL LIABILITIES 1,729,301
------------
STOCKHOLDERS' DEFICIT (1,417,217)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 312,084
============
Z PROMPT INC.
STATEMENTS OF OPERATIONS (Unaudited)
EIGHT MONTHS ENDED
JUNE 30, 2004
-------------
NET SALES $ 1,508,656
COST OF SALES 1,185,797
-------------
GROSS PROFIT 322,859
EXPENSES
General and administrative 585,761
Salaries and related 279,293
Interest 128,710
Loss on disposal of assets 16,648
Provision for Income Taxes 250
-------------
1,010,662
-------------
NET LOSS $ (687,803)
=============
NOTE 13 SUBORDINATED CONVERTIBLE DEBT
In July 2003, the Company borrowed $500,000 under a subordinated convertible
note payable, (the "Subordinated Convertible Note"), which bears interest at 7%
per annum. All borrowings were due six months from the receipt of proceeds, with
semi-annual interest payments on the outstanding balance. In December 2003, the
Subordinated Convertible Note was converted into 1,666,667 shares of the
Company's restricted common stock at $0.30 per share.
A BCF approximating $500,000 was recorded during the quarter ended September 30,
2003. Such discount was amortized to interest expense during the three months
ended September 30, 2003 as the subordinated convertible note was convertible
upon issuance. The outstanding balance of the Subordinated Convertible Note at
June 30, 2004 was $0. Since the Subordinated Convertible Note was
immediately convertible, the entire BCF was charged to interest expense in the
Company's restated financial statements for the quarter ended September 30,
2003.
NOTE 14 CONVERTIBLE NOTES PAYABLE
In November 2003, we secured a $5 million dollar revolving credit facility, in
the form of two seven-month convertible notes. The notes bear interest at an
annual rate of 10% and originally matured on June 30, 2004, but have been
extended to December 31, 2004. The notes are convertible on 90 days written
notice by the holders at the lesser of (i) 50% of the average three lowest
closing prices for our common for the twenty days immediately preceding the
conversion date or (ii) $.0625 per share. At June 30, 2004, we had borrowed
$2,180,000 under such notes. INcluded in this balance the Company borrowed
$1,200,000 in connection with a proposed transaction with Material Technologies,
Inc. (see Note 7). The Company subsequently un-wound the Material Technologies
Inc. transaction and expensed the $1,200,000 as a loss on the acquisition of the
Material Technologies Inc. shares. The $1,200,000 still remains as a convertible
debt as part of the $2,180,000 owed under such notes.
THE JANUARY 2004 NOTE
In January 2004, the Company borrowed $250,000 under a convertible note payable
(the "January Note"), which bears interest at 7% per annum. All borrowings,
including interest, were due in July 2004. The January Note was convertible into
restricted common stock of the Company at a rate of $0.12 per share, at any time
at the option of the note holder. In June 2004, the January Note was converted
into 2,083,333 shares of the Company's common stock.
A beneficial conversion feature approximating $250,000 was recorded during the
quarter ended March 31, 2004, and was expensed upon issuance of the January Note
based on the immediate conversion feature.
NOTE 15 LINE OF CREDIT
Z prompt had a revolving line of credit agreement (the "Line") with a financial
institution, which bore interest at 5% per annum. A shareholder of the Company,
who is a former majority shareholder of Z prompt, has guaranteed the Line. At
June 30, 2004, the outstanding borrowings under this credit facility totaled
$225,000, which is included in "liabilities subject to compromise" in the
accompanying June 30, 2004 consolidated balance sheet.
NOTE 16 SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Selected quarterly financial data for each of the quarters in the two-year
period ended June 30, 2004 are presented below.
FOR THE QUARTER ENDED
9/30/03 12/31/03 3/31/04 6/30/04
------- -------- ------- -------
Net sales $ -- $ 361,232 $ 620,140 $ 527,284
Gross profit -- 276,263 46,902 (306)
Net loss (1,612,690) (3,626,899) (4,299,770) (5,840,094)
FOR THE QUARTER ENDED
9/30/02 12/31/02 3/31/03 6/30/03
------- -------- ------- -------
Net sales $ -- $ -- $ -- $ --
Gross profit -- -- -- --
Net loss (576,324) (1,525,888) (999,412) (1,746,943)
See Note 9 for additional information.
NOTE 17 LIABILITIES SUBJECT TO COMPROMISE
The March 23, 2004 balances of Z prompt's liabilities that became subject to
compromise on that date (excluding its liability to the parent company) are
approximately as follows:
Accounts payable and accrued expenses $ 340,544
Secured line of credit payable (Note 15) 225,000
Note payable to related party 167,000
---------
Total $ 732,544
=========
NOTE 18 SUBSEQUENT EVENT (Unaudited)
On September 13, 2004, the Company completed a private placement transaction
(the "private transaction") with eleven accredited investors pursuant to which
the Company sold a total of 3,666,668 common shares and 1,833,338 each of Series
A warrants, Series B warrants, and Series C warrants (collectively the "investor
warrants"). Net proceeds from the private transaction approximated $1,518,000.
Upon request of the holders of more than 50% of the issued shares (including the
exercised investor warrants) at any time between mid-December 2004 and September
13, 2006, the Company is obligated to file a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), to register the
common stock sold and the stock underlying both types of warrants issued in the
private transaction. The terms of the investor warrants are as follows:
SERIES A: expire 150 days after the registration statement is declared
effective by the SEC ("effectiveness"), with an exercise price of
$0.55/share;
SERIES B: expire four years after effectiveness, with an exercise price of
$0.89/share; and
SERIES C: expire three years after effectiveness, with an exercise price of
$2.00/share.
During the period from thirty trading days after effectiveness to thirty trading
days before the expiration of the investor warrants, such warrants are callable
if the closing price of the Company's common stock reaches certain minimum
levels for a defined time period. The investor warrants are price-protected
against the issuance of any equity instruments (including securities exercisable
or convertible into common stock) at less than $0.45 per common share.
In addition to the cash fee paid to the placement agent for the initial phase of
the private transaction, the Company (a) issued warrants to the placement agent
to purchase 458,333 shares of common stock exercisable for five years at an
exercise price of $0.54 per share, (b) agreed to pay the placement agent 8% of
the cash proceeds from the exercise of any investor warrants, and (c) will issue
five-year non-callable placement agent warrants when investor warrants are
exercised in multiples of eight. The placement agent warrants have exercise
prices that range from $0.66 to $2.40 per common share. Management has
determined that the private transaction is exempt from the registration
requirements under Rule 506 of Regulation D of the Securities Act.